First National Earnings 2018-09-30

FXNC 10Q Quarterly Report

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

Balance Sheet	Income Statement	Cash Flow

10-Q 1 fxnc930201810-q.htm 10-Q Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-23976

(Exact name of registrant as specified in its charter)



Virginia		54-1232965
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

112 West King Street, Strasburg, Virginia		22657
(Address of principal executive offices)		(Zip Code)

(540) 465-9121

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 13, 2018, 4,956,897 shares of common stock, par value $1.25 per share, of the registrant were outstanding.

TABLE OF CONTENTS




		Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	3

	Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017	4

	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017	6

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017	7

	Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2018 and 2017	9

	Notes to Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51

Item 4.	Controls and Procedures	51

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3.	Defaults Upon Senior Securities	52

Item 4.	Mine Safety Disclosures	52

Item 5.	Other Information	52

Item 6.	Exhibits	52

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Balance Sheets

(in thousands, except share and per share data)



	(unaudited) September 30, 2018			December 31, 2017*
Assets
Cash and due from banks	$	11,370		$	11,358
Interest-bearing deposits in banks	10,068			28,628
Securities available for sale, at fair value	102,748			89,255
Securities held to maturity, at amortized cost (fair value, 2018, $42,707; 2017, $47,702)	44,239			48,208
Restricted securities, at cost	1,590			1,570
Loans held for sale	516			438
Loans, net of allowance for loan losses, 2018, $4,801; 2017, $5,326	535,020			516,875
Other real estate owned, net of valuation allowance, 2018, $0; 2017, $0	—			326
Premises and equipment, net	19,557			19,891
Accrued interest receivable	2,138			1,916
Bank owned life insurance	13,894			13,967
Core deposit intangibles, net	571			930
Other assets	4,743			5,748
Total assets	$	746,454		$	739,110

Liabilities and Shareholders’ Equity

Liabilities
Deposits:
Noninterest-bearing demand deposits	$	186,293		$	180,912
Savings and interest-bearing demand deposits	360,988			361,417
Time deposits	119,823			122,651
Total deposits	$	667,104		$	664,980
Subordinated debt	4,961			4,948
Junior subordinated debt	9,279			9,279
Accrued interest payable and other liabilities	1,459			1,749
Total liabilities	$	682,803		$	680,956
Shareholders’ Equity
Preferred stock, par value $1.25 per share; authorized 1,000,000 shares; none issued and outstanding	$	—		$	—
Common stock, par value $1.25 per share; authorized 8,000,000 shares; issued and outstanding, 2018, 4,956,925 shares; 2017, 4,945,702 shares	6,196			6,182
Surplus	7,438			7,260
Retained earnings	52,741			45,670
Accumulated other comprehensive loss, net	(2,724		)	(958		)
Total shareholders’ equity	$	63,651		$	58,154
Total liabilities and shareholders’ equity	$	746,454		$	739,110

*Derived from audited consolidated financial statements.

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Statements of Income (Unaudited)

(in thousands, except per share data)



	Three Months Ended				Nine Months Ended
	September 30, 2018		September 30, 2017		September 30, 2018			September 30, 2017
Interest and Dividend Income
Interest and fees on loans	$	6,917	$	6,138	$	19,768		$	17,717
Interest on deposits in banks	88		92		434			239
Interest and dividends on securities:
Taxable interest	797		637		2,253			1,933
Tax-exempt interest	156		148		457			436
Dividends	23		21		67			62
Total interest and dividend income	$	7,981	$	7,036	$	22,979		$	20,387
Interest Expense
Interest on deposits	$	702	$	446	$	1,957		$	1,234
Interest on subordinated debt	91		91		269			269
Interest on junior subordinated debt	105		79		292			223
Total interest expense	$	898	$	616	$	2,518		$	1,726
Net interest income	$	7,083	$	6,420	$	20,461		$	18,661
Provision for loan losses	—		—		100			—
Net interest income after provision for loan losses	$	7,083	$	6,420	$	20,361		$	18,661
Noninterest Income
Service charges on deposit accounts	$	818	$	760	$	2,364		$	2,250
ATM and check card fees	540		516		1,614			1,544
Wealth management fees	423		359		1,239			1,061
Fees for other customer services	143		131		447			408
Income from bank owned life insurance	107		117		743			312
Net gains on securities available for sale	—		11		—			24
Net gains on sale of loans	39		54		63			121
Other operating income	108		69		408			216
Total noninterest income	$	2,178	$	2,017	$	6,878		$	5,936
Noninterest Expense
Salaries and employee benefits	$	3,371	$	3,221	$	9,981		$	9,585
Occupancy	387		379		1,174			1,094
Equipment	396		400		1,239			1,208
Marketing	123		138		393			410
Supplies	75		81		243			277
Legal and professional fees	229		216		643			658
ATM and check card expense	217		205		631			596
FDIC assessment	78		84		226			240
Bank franchise tax	118		111		351			325
Telecommunications expense	83		95		217			313
Data processing expense	168		153		500			455
Postage expense	42		62		145			197
Amortization expense	108		151		359			480
Other real estate owned expense (income), net	2		—		(20		)	6
Net losses on disposal of premises and equipment	2		—		2			—
Other operating expense	551		511		1,596			1,419
Total noninterest expense	$	5,950	$	5,807	$	17,680		$	17,263

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Statements of Income (Unaudited)

(Continued)

(in thousands, except per share data)



	Three Months Ended				Nine Months Ended
	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Income before income taxes	$	3,311	$	2,630	$	9,559	$	7,334
Income tax expense	635		798		1,745		2,203
Net income	$	2,676	$	1,832	$	7,814	$	5,131
Earnings per common share
Basic	$	0.54	$	0.37	$	1.58	$	1.04
Diluted	$	0.54	$	0.37	$	1.58	$	1.04

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Statements of Comprehensive Income (Unaudited)

(in thousands)



	Three Months Ended						Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
Net income	$	2,676		$	1,832		$	7,814		$	5,131
Other comprehensive (loss) income, net of tax,
Unrealized holding (losses) gains on available for sale securities, net of tax ($139) and ($76) for the three months and ($443) and $321 for the nine months ended September 30, 2018 and 2017, respectively	(521		)	(150		)	(1,667		)	623
Reclassification adjustment for gains included in net income, net of tax $0 and ($4) for the three months and $0 and ($8) for the nine months ended September 30, 2018 and 2017, respectively	—			(7		)	—			(16		)
Pension liability adjustment, net of tax $0 and $0 for the three months and ($27) and $0 for the nine months ended September 30, 2018 and 2017, respectively	—			—			(99		)	—
Total other comprehensive (loss) income	(521		)	(157		)	(1,766		)	607
Total comprehensive income	$	2,155		$	1,675		$	6,048		$	5,738

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)



	Nine Months Ended
	September 30, 2018			September 30, 2017
Cash Flows from Operating Activities
Net income	$	7,814		$	5,131
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment	1,006			1,037
Amortization of core deposit intangibles	359			480
Amortization of debt issuance costs	13			13
Origination of loans held for sale	(3,804		)	(7,298		)
Proceeds from sale of loans held for sale	3,789			7,096
Net gains on sales of loans held for sale	(63		)	(121		)
Provision for loan losses	100			—
Net gains on securities available for sale	—			(24		)
Net gains on sale of other real estate owned	(22		)	—
Increase in cash value of bank owned life insurance	(274		)	(304		)
Accretion of discounts and amortization of premiums on securities, net	420			481
Accretion of premium on time deposits	(64		)	(81		)
Stock-based compensation	170			129
Excess tax benefits on stock-based compensation	(7		)	(14		)
Losses on disposal of premises and equipment	2			—
Deferred income tax expense (benefit)	72			(158		)
Changes in assets and liabilities:
Increase in interest receivable	(222		)	(140		)
Decrease (increase) in other assets	1,384			(136		)
Decrease in accrued expenses and other liabilities	(390		)	(571		)
Net cash provided by operating activities	$	10,283		$	5,520
Cash Flows from Investing Activities
Proceeds from maturities, calls, and principal payments of securities available for sale	$	11,264		$	11,182
Proceeds from maturities, calls, and principal payments of securities held to maturity	3,828			3,863
Purchases of securities available for sale	(27,146		)	(8,860		)
Net purchase of restricted securities	(20		)	(22		)
Purchase of premises and equipment	(689		)	(762		)
Proceeds from sale of premises and equipment	15			—
Proceeds from sale of other real estate owned	416			—
Proceeds from cash value of bank owned life insurance	347			—
Net increase in loans	(18,313		)	(28,660		)
Net cash used in investing activities	$	(30,298	)	$	(23,259	)

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)

(Continued)

(in thousands)



	Nine Months Ended
	September 30, 2018			September 30, 2017
Cash Flows from Financing Activities
Net increase in demand deposits and savings accounts	$	4,952		$	13,087
Net decrease in time deposits	(2,764		)	(2,314		)
Cash dividends paid on common stock, net of reinvestment	(697		)	(484		)
Repurchase of common stock	(24		)	—
Net cash provided by financing activities	$	1,467		$	10,289
Decrease in cash and cash equivalents	$	(18,548	)	$	(7,450	)
Cash and Cash Equivalents
Beginning	$	39,986		$	41,092
Ending	$	21,438		$	33,642
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	2,557		$	1,807
Income Taxes	$	709		$	2,577
Supplemental Disclosures of Noncash Investing and Financing Activities
Unrealized (losses) gains on securities available for sale	$	(2,110	)	$	920
Change in pension liability	$	(126	)	$	—
Transfer from loans to other real estate owned	$	68		$	—
Issuance of common stock, dividend reinvestment plan	$	46		$	35

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(in thousands, except share and per share data)



	Preferred Stock		Common Stock			Surplus			Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance, December 31, 2016	$	—	$	6,162		$	7,093		$	39,756		$	(860	)	$	52,151
Net income	—		—			—			5,131			—			5,131
Other comprehensive income	—		—			—			—			607			607
Cash dividends on common stock ($0.105 per share)	—		—			—			(519		)	—			(519		)
Stock-based compensation	—		—			129			—			—			129
Issuance of 2,389 shares common stock, dividend reinvestment plan	—		3			32			—			—			35
Issuance of 13,264 shares common stock, stock incentive plan	—		16			(16		)	—			—			—
Balance, September 30, 2017	$	—	$	6,181		$	7,238		$	44,368		$	(253	)	$	57,534

	Preferred Stock		Common Stock			Surplus			Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance, December 31, 2017	$	—	$	6,182		$	7,260		$	45,670		$	(958	)	$	58,154
Net income	—		—			—			7,814			—			7,814
Other comprehensive loss	—		—			—			—			(1,766		)	(1,766		)
Cash dividends on common stock ($0.15 per share)	—		—			—			(743		)	—			(743		)
Stock-based compensation	—		—			170			—			—			170
Issuance of 2,351 shares common stock, dividend reinvestment plan	—		3			43			—			—			46
Issuance of 10,189 shares common stock, stock incentive plan	—		12			(12		)	—			—			—
Repurchase of 1,317 shares of common stock, stock incentive plan	—		(1		)	(23		)	—			—			(24		)
Balance, September 30, 2018	$	—	$	6,196		$	7,438		$	52,741		$	(2,724	)	$	63,651

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

Note 1. General

The accompanying unaudited consolidated financial statements of First National Corporation (the Company) and its subsidiary, First Bank (the Bank), have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial positions at September 30, 2018 and December 31, 2017, the statements of income and comprehensive income for the three and nine months ended September 30, 2018 and 2017 and the cash flows and changes in shareholders’ equity for the nine months ended September 30, 2018 and 2017. The statements should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 2017. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

Adoption of ASU No. 2014-09, "Revenue from Contracts with Customers: Topic 606."

On January 1, 2018, the Company adopted ASU No. 2014-09, "Revenue from Contracts with Customers: Topic 606." This ASU revised guidance for the recognition, measurement, and disclosure of revenue from contracts with customers. The original guidance was amended through subsequent accounting standard updates that resulted in technical corrections, improvements, and a one-year deferral of the effective date to January 1, 2018. The guidance, as amended, is applicable to all entities and replaces significant portions of existing industry and transaction-specific revenue recognition rules with a more principles-based recognition model. Most revenue associated with financial instruments, including interest income, loan origination fees, and credit card fees, is outside the scope of the guidance. Gains and losses on investment securities, derivatives, financial guarantees, and sales of financial instruments are similarly excluded from the scope. The guidance is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, and merchant income. The Company adopted this guidance via the modified retrospective approach, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application.

Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the new guidance did not have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company completed its overall assessment of revenue streams and review of related contracts potentially affected by the ASU, including trust and asset management fees, deposit related fees, interchange fees, and merchant income. The Company also completed an evaluation of certain costs related to these revenue streams to determine whether such costs should be presented gross versus net. Based on these assessments, the Company concluded that ASU 2014-09 did not materially change the method in which the Company currently recognizes revenue for these revenue streams. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The FASB made subsequent amendments to Topic 842 in July 2018 through ASU 2018-10 (“Codification Improvements to Topic 842, Leases.”) and ASU 2018-11 (“Leases (Topic 842): Targeted Improvements.”) Among these amendments is the provision in

Notes to Consolidated Financial Statements (Unaudited)

ASU 2018-11 that provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). The Company does not expect the adoption of ASU 2016-02 to have a material impact on its consolidated financial statements. The Company has analyzed its current lease commitments, along with reasonable assumptions to project lease activity in future periods, to measure the potential impact on net income and relevant capital and financial ratios.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. The Company has formed a committee to address the compliance requirements of this ASU and is currently in the process of analyzing gathered data, defining loan pools and segments, and selecting methods for applying the concepts included in this ASU. During 2018, the Company plans to test selected models, build policy and process documentation, and model the impact of the ASU on the capital and strategic plans. This guidance may result in material changes in the Company's accounting for credit losses of financial instruments.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are U.S. Securities and Exchange Commission (SEC) filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company does not expect the adoption of ASU 2017-08 to have a material impact on its consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the impact that ASU 2017-12 will have on its consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” The amendments expand the scope of Topic 718 to include share-based

Notes to Consolidated Financial Statements (Unaudited)

payments issued to non-employees for goods or services, which were previously excluded. The amendments will align the accounting for share-based payments to nonemployees and employees more similarly. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-07 to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.

Note 2. Securities

The Company invests in U.S. agency and mortgage-backed securities, obligations of state and political subdivisions, and corporate debt securities. Amortized costs and fair values of securities at September 30, 2018 and December 31, 2017 were as follows (in thousands):



	September 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Securities available for sale:
U.S. agency and mortgage-backed securities	$	91,126	$	14	$	(3,097	)	$	88,043
Obligations of states and political subdivisions	15,071		25		(391		)	14,705
Total securities available for sale	$	106,197	$	39	$	(3,488	)	$	102,748
Securities held to maturity:
U.S. agency and mortgage-backed securities	$	28,233	$	—	$	(1,208	)	$	27,025
Obligations of states and political subdivisions	14,506		7		(320		)	14,193
Corporate debt securities	1,500		—		(11		)	1,489
Total securities held to maturity	$	44,239	$	7	$	(1,539	)	$	42,707
Total securities	$	150,436	$	46	$	(5,027	)	$	145,455



	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Securities available for sale:
U.S. agency and mortgage-backed securities	$	76,074	$	67	$	(1,337	)	$	74,804
Obligations of states and political subdivisions	14,520		86		(155		)	14,451
Total securities available for sale	$	90,594	$	153	$	(1,492	)	$	89,255
Securities held to maturity:
U.S. agency and mortgage-backed securities	$	32,149	$	—	$	(551	)	$	31,598
Obligations of states and political subdivisions	14,559		74		(45		)	14,588
Corporate debt securities	1,500		16		—			1,516
Total securities held to maturity	$	48,208	$	90	$	(596	)	$	47,702
Total securities	$	138,802	$	243	$	(2,088	)	$	136,957

Notes to Consolidated Financial Statements (Unaudited)

At September 30, 2018 and December 31, 2017, investments in an unrealized loss position that were temporarily impaired were as follows (in thousands):



	September 30, 2018
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)
Securities available for sale:
U.S. agency and mortgage-backed securities	$	55,198	$	(1,315	)	$	31,743	$	(1,782	)	$	86,941	$	(3,097	)
Obligations of states and political subdivisions	8,257		(147		)	3,063		(244		)	11,320		(391		)
Total securities available for sale	$	63,455	$	(1,462	)	$	34,806	$	(2,026	)	$	98,261	$	(3,488	)
Securities held to maturity:
U.S. agency and mortgage-backed securities	$	8,687	$	(334	)	$	18,338	$	(874	)	$	27,025	$	(1,208	)
Obligations of states and political subdivisions	12,452		(309		)	338		(11		)	12,790		(320		)
Corporate debt securities	1,489		(11		)	—		—			1,489		(11		)
Total securities held to maturity	$	22,628	$	(654	)	$	18,676	$	(885	)	$	41,304	$	(1,539	)
Total securities	$	86,083	$	(2,116	)	$	53,482	$	(2,911	)	$	139,565	$	(5,027	)

	December 31, 2017
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)			Fair Value		Unrealized (Loss)
Securities available for sale:
U.S. agency and mortgage-backed securities	$	29,963	$	(286	)	$	30,362	$	(1,051	)	$	60,325	$	(1,337	)
Obligations of states and political subdivisions	4,469		(53		)	1,961		(102		)	6,430		(155		)
Total securities available for sale	$	34,432	$	(339	)	$	32,323	$	(1,153	)	$	66,755	$	(1,492	)
Securities held to maturity:
U.S. agency and mortgage-backed securities	$	18,301	$	(205	)	$	13,297	$	(346	)	$	31,598	$	(551	)
Obligations of states and political subdivisions	6,889		(45		)	—		—			6,889		(45		)
Total securities held to maturity	$	25,190	$	(250	)	$	13,297	$	(346	)	$	38,487	$	(596	)
Total securities	$	59,622	$	(589	)	$	45,620	$	(1,499	)	$	105,242	$	(2,088	)

The tables above provide information about securities that have been in an unrealized loss position for less than twelve consecutive months and securities that have been in an unrealized loss position for twelve consecutive months or more. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Impairment is considered to be other-than-temporary if the Company (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis. Presently, the Company does not intend to sell any of these securities, does not expect to be required to sell these securities, and expects to recover the entire amortized cost of all the securities.

Notes to Consolidated Financial Statements (Unaudited)

At September 30, 2018, there were eighty-six out of ninety U.S. agency and mortgage-backed securities, sixty-six out of eighty-one obligations of states and political subdivisions, and one corporate debt security in an unrealized loss position. One hundred percent of the Company’s investment portfolio is considered investment grade. The weighted-average re-pricing term of the portfolio was 4.9 years at September 30, 2018. At December 31, 2017, there were sixty-eight out of eighty-two U.S. agency and mortgage-backed securities and thirty-nine out of eighty obligations of states and political subdivisions in an unrealized loss position. One hundred percent of the Company’s investment portfolio was considered investment grade at December 31, 2017. The weighted-average re-pricing term of the portfolio was 4.7 years at December 31, 2017. The unrealized losses at September 30, 2018 in the U.S. agency and mortgage-backed securities portfolio, the obligations of states and political subdivisions portfolio, and the corporate debt securities portfolio were related to changes in market interest rates and not credit concerns of the issuers.

The amortized cost and fair value of securities at September 30, 2018 by contractual maturity are shown below (in thousands). Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.



	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within one year	$	1,585	$	1,596	$	629	$	630
Due after one year through five years	7,629		7,532		6,772		6,607
Due after five years through ten years	13,832		13,318		13,560		13,228
Due after ten years	83,151		80,302		23,278		22,242
	$	106,197	$	102,748	$	44,239	$	42,707

Federal Home Loan Bank, Federal Reserve Bank, and Community Bankers’ Bank stock are generally viewed as long-term investments and as restricted securities, which are carried at cost, because there is a minimal market for the stock. Therefore, when evaluating restricted securities for impairment, their value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider these investments to be other-than-temporarily impaired at September 30, 2018, and no impairment has been recognized.

The composition of restricted securities at September 30, 2018 and December 31, 2017 was as follows (in thousands):



	September 30, 2018		December 31, 2017
Federal Home Loan Bank stock	$	665	$	645
Federal Reserve Bank stock	875		875
Community Bankers’ Bank stock	50		50
	$	1,590	$	1,570

Notes to Consolidated Financial Statements (Unaudited)

Note 3. Loans

Loans at September 30, 2018 and December 31, 2017 are summarized as follows (in thousands):



	September 30, 2018			December 31, 2017
Real estate loans:
Construction and land development	$	42,982		$	35,927
Secured by 1-4 family residential	211,938			208,177
Other real estate loans	224,903			222,256
Commercial and industrial loans	42,861			38,763
Consumer and other loans	17,137			17,078
Total loans	$	539,821		$	522,201
Allowance for loan losses	(4,801		)	(5,326		)
Loans, net	$	535,020		$	516,875

Net deferred loan fees included in the above loan categories were $301 thousand at September 30, 2018 and December 31, 2017, respectively. Consumer and other loans included $249 thousand and $232 thousand of demand deposit overdrafts at September 30, 2018 and December 31, 2017, respectively.

Risk characteristics of each loan portfolio class that are considered by the Company include:


•	1-4 family residential mortgage loans carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.

•

Real estate construction and land development loans carry risks that the project may not be finished according to schedule, the project may not be finished according to budget, and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure or other factors unrelated to the project.


•	Other real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because repayment of these loans may be dependent upon the profitability and cash flows of the business or project.


•	Commercial and industrial loans carry risks associated with the successful operation of a business because repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much reliability.

•

Consumer and other loans carry risk associated with the continued creditworthiness of the borrower and the value of the collateral, if any. These loans are typically either unsecured or secured by rapidly depreciating assets such as automobiles. They are also likely to be immediately and adversely affected by job loss, divorce, illness, personal bankruptcy, or other changes in circumstances. Consumer and other loans also include purchased consumer loans which could have been originated outside of the Company's market area.

Notes to Consolidated Financial Statements (Unaudited)

The following tables provide a summary of loan classes and an aging of past due loans as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018
	30-59 Days Past Due		60-89 Days Past Due		> 90 Days Past Due		Total Past Due		Current		Total Loans		Non-accrual Loans		90 Days or More Past Due and Accruing
Real estate loans:
Construction and land development	$	38	$	254	$	428	$	720	$	42,262	$	42,982	$	343	$	86
Secured by 1-4 family residential	1,228		66		464		1,758		210,180		211,938		438		113
Other real estate loans	148		1,800		223		2,171		222,732		224,903		1,760		—
Commercial and industrial	483		225		53		761		42,100		42,861		197		53
Consumer and other loans	76		123		9		208		16,929		17,137		—		9
Total	$	1,973	$	2,468	$	1,177	$	5,618	$	534,203	$	539,821	$	2,738	$	261



	December 31, 2017
	30-59 Days Past Due		60-89 Days Past Due		> 90 Days Past Due		Total Past Due		Current		Total Loans		Non-accrual Loans		90 Days or More Past Due and Accruing
Real estate loans:
Construction and land development	$	986	$	30	$	40	$	1,056	$	34,871	$	35,927	$	269	$	40
Secured by 1-4 family residential	606		203		148		957		207,220		208,177		267		106
Other real estate loans	2,042		170		10		2,222		220,034		222,256		401		10
Commercial and industrial	184		25		—		209		38,554		38,763		—		—
Consumer and other loans	51		49		27		127		16,951		17,078		—		27
Total	$	3,869	$	477	$	225	$	4,571	$	517,630	$	522,201	$	937	$	183

Credit Quality Indicators

As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grading of specified classes of loans. The Company utilizes a risk grading matrix to assign a rating to each of its loans. The loan ratings are summarized into the following categories: pass, special mention, substandard, doubtful and loss. Pass rated loans include all risk rated credits other than those included in special mention, substandard or doubtful. Loans classified as loss are charged-off. Loan officers assign risk grades to loans at origination and as renewals arise. The Bank’s Credit Administration department reviews risk grades for accuracy on a quarterly basis and as credit issues arise. In addition, a certain amount of loans are reviewed each year through the Company’s internal and external loan review process. A description of the general characteristics of the loan grading categories is as follows:

Pass – Loans classified as pass exhibit acceptable operating trends, balance sheet trends, and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower as agreed.

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the Bank’s credit position at some future date.

Notes to Consolidated Financial Statements (Unaudited)

Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The Company considers all doubtful loans to be impaired and places the loan on non-accrual status.

Loss – Loans classified as loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.

The following tables provide an analysis of the credit risk profile of each loan class as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018
	Pass		Special Mention		Substandard		Doubtful		Total
Real estate loans:
Construction and land development	$	41,818	$	481	$	683	$	—	$	42,982
Secured by 1-4 family residential	210,150		1,079		709		—		211,938
Other real estate loans	221,476		1,135		2,292		—		224,903
Commercial and industrial	42,567		23		271		—		42,861
Consumer and other loans	17,137		—		—		—		17,137
Total	$	533,148	$	2,718	$	3,955	$	—	$	539,821

	December 31, 2017
	Pass		Special Mention		Substandard		Doubtful		Total
Real estate loans:
Construction and land development	$	31,553	$	2,268	$	2,106	$	—	$	35,927
Secured by 1-4 family residential	204,166		1,933		2,078		—		208,177
Other real estate loans	215,773		971		5,512		—		222,256
Commercial and industrial	38,606		53		104		—		38,763
Consumer and other loans	17,078		—		—		—		17,078
Total	$	507,176	$	5,225	$	9,800	$	—	$	522,201

Notes to Consolidated Financial Statements (Unaudited)

Note 4. Allowance for Loan Losses

The following tables present, as of September 30, 2018, December 31, 2017 and September 30, 2017, the total allowance for loan losses, the allowance by impairment methodology, and loans by impairment methodology (in thousands):



	September 30, 2018
	Construction and Land Development		Secured by 1-4 Family Residential			Other Real Estate			Commercial and Industrial			Consumer and Other Loans			Total
Allowance for loan losses:
Beginning Balance, December 31, 2017	$	414	$	775		$	2,948		$	418		$	771		$	5,326
Charge-offs	—		(56		)	—			(8		)	(731		)	(795		)
Recoveries	—		11			1			6			152			170
Provision for (recovery of) loan losses	128		(5		)	(677		)	26			628			100
Ending Balance, September 30, 2018	$	542	$	725		$	2,272		$	442		$	820		$	4,801
Ending Balance:
Individually evaluated for impairment	87		20			—			—			—			107
Collectively evaluated for impairment	455		705			2,272			442			820			4,694
Loans:
Ending Balance	$	42,982	$	211,938		$	224,903		$	42,861		$	17,137		$	539,821
Individually evaluated for impairment	343		438			2,029			197			—			3,007
Collectively evaluated for impairment	42,639		211,500			222,874			42,664			17,137			536,814



	December 31, 2017
	Construction and Land Development			Secured by 1-4 Family Residential			Other Real Estate			Commercial and Industrial		Consumer and Other Loans			Total
Allowance for loan losses:
Beginning Balance, December 31, 2016	$	441		$	1,019		$	3,142		$	380	$	339		$	5,321
Charge-offs	—			(126		)	—			—		(607		)	(733		)
Recoveries	11			302			50			10		265			638
Provision for (recovery of) loan losses	(38		)	(420		)	(244		)	28		774			100
Ending Balance, December 31, 2017	$	414		$	775		$	2,948		$	418	$	771		$	5,326
Ending Balance:
Individually evaluated for impairment	—			—			—			—		—			—
Collectively evaluated for impairment	414			775			2,948			418		771			5,326
Loans:
Ending Balance	$	35,927		$	208,177		$	222,256		$	38,763	$	17,078		$	522,201
Individually evaluated for impairment	1,150			1,307			1,289			65		—			3,811
Collectively evaluated for impairment	34,777			206,870			220,967			38,698		17,078			518,390

Notes to Consolidated Financial Statements (Unaudited)



	September 30, 2017
	Construction and Land Development			Secured by 1-4 Family Residential			Other Real Estate		Commercial and Industrial		Consumer and Other Loans			Total
Allowance for loan losses:
Beginning Balance, December 31, 2016	$	441		$	1,019		$	3,142	$	380	$	339		$	5,321
Charge-offs	—			(125		)	—		—		(385		)	(510		)
Recoveries	11			290			50		8		131			490
Provision for (recovery of) loan losses	(17		)

10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31

8-K	2019-01-30	Regulation FD, Exhibits
8-K	2019-01-23	Earnings, Exhibits
8-K	2019-01-23	Earnings, Exhibits
8-K	2018-10-24	Earnings, Exhibits
8-K	2018-08-08	Officers, Amend Bylaw, Exhibits
8-K	2018-07-24	Earnings, Exhibits
8-K	2018-05-08	Shareholder Vote
8-K	2018-04-18	Earnings, Exhibits
8-K	2018-02-20	Officers, Amend Bylaw, Other Events, Exhibits
8-K	2018-01-30	Earnings, Exhibits

SRVA	Sirva
CGND	China Grand Resorts
GDRZF	Gold Reserve
PNTTE	Punto Group
OMTK	Omnitek Engineering
CRMZ	Creditriskmonitor Com
BCTCV	Boston Capital Tax Credit Fund V
GCC	Wisdomtree Continuous Commodity Index Master Fund
DBV	Invesco DB G10 Currency Harvest Fund
CYS	CYS Investments

EX-31.1	exhibit3119302018.htm
EX-31.2	exhibit3129302018.htm
EX-32.1	exhibit3219302018.htm
EX-32.2	exhibit3229302018.htm