First National Earnings 2019-03-31

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 fxnc331201910-q.htm 10-Q Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended March 31, 2019



£	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 S 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 S 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 S

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, par value $1.25 per share	FXNC	The Nasdaq Stock Market LLC

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 9, 2019, 4,963,487 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 March 31, 2019 (unaudited) and December 31, 2018	3

	Consolidated Statements of Income for the three months ended March 31, 2019 and 2018 (unaudited)	4

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018 (unaudited)	6

	Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (unaudited)	7

	Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2019 and 2018 (unaudited)	9

	Notes to Consolidated Financial Statements (unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49

Item 4.	Controls and Procedures	49

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	50

Item 1A.	Risk Factors	50

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 3.	Defaults Upon Senior Securities	50

Item 4.	Mine Safety Disclosures	50

Item 5.	Other Information	50

Item 6.	Exhibits	51

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Balance Sheets

(in thousands, except share and per share data)



	(unaudited) March 31, 2019			December 31, 2018*
Assets
Cash and due from banks	$	10,862		$	13,378
Interest-bearing deposits in banks	31,833			15,240
Securities available for sale, at fair value	121,202			99,857
Securities held to maturity, at amortized cost (fair value, 2019, $19,190; 2018, $42,394)	19,489			43,408
Restricted securities, at cost	1,701			1,688
Loans held for sale	200			419
Loans, net of allowance for loan losses, 2019, $4,946; 2018, $5,009	545,529			537,847
Premises and equipment, net	20,282			20,066
Accrued interest receivable	2,143			2,113
Bank owned life insurance	17,094			13,991
Core deposit intangibles, net	382			472
Other assets	4,361			4,490
Total assets	$	775,078		$	752,969

Liabilities and Shareholders’ Equity

Liabilities
Deposits:
Noninterest-bearing demand deposits	$	189,261		$	181,964
Savings and interest-bearing demand deposits	377,673			369,383
Time deposits	117,290			119,219
Total deposits	$	684,224		$	670,566
Other borrowings	5,000			—
Subordinated debt	4,969			4,965
Junior subordinated debt	9,279			9,279
Accrued interest payable and other liabilities	1,878			1,485
Total liabilities	$	705,350		$	686,295
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, 2019, 4,963,487 shares; 2018, 4,957,694 shares	6,204			6,197
Surplus	7,515			7,471
Retained earnings	56,629			54,814
Accumulated other comprehensive loss, net	(620		)	(1,808		)
Total shareholders’ equity	$	69,728		$	66,674
Total liabilities and shareholders’ equity	$	775,078		$	752,969

*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
	March 31, 2019		March 31, 2018
Interest and Dividend Income
Interest and fees on loans	$	6,996	$	6,305
Interest on deposits in banks	110		160
Interest and dividends on securities:
Taxable interest	737		680
Tax-exempt interest	156		145
Dividends	24		22
Total interest and dividend income	$	8,023	$	7,312
Interest Expense
Interest on deposits	$	922	$	590
Interest on subordinated debt	89		89
Interest on junior subordinated debt	111		86
Interest on other borrowings	2		—
Total interest expense	$	1,124	$	765
Net interest income	$	6,899	$	6,547
Provision for loan losses	—		100
Net interest income after provision for loan losses	$	6,899	$	6,447
Noninterest Income
Service charges on deposit accounts	$	701	$	762
ATM and check card fees	517		519
Wealth management fees	437		407
Fees for other customer services	175		153
Income from bank owned life insurance	103		559
Net gains on sale of loans	22		9
Other operating income	30		224
Total noninterest income	$	1,985	$	2,633
Noninterest Expense
Salaries and employee benefits	$	3,443	$	3,383
Occupancy	438		400
Equipment	420		423
Marketing	141		109
Supplies	73		80
Legal and professional fees	241		191
ATM and check card expense	216		203
FDIC assessment	69		82
Bank franchise tax	130		115
Telecommunications expense	83		36
Data processing expense	173		162
Postage expense	48		61
Amortization expense	90		131
Other real estate owned income, net	—		(23		)
Other operating expense	533		513
Total noninterest expense	$	6,098	$	5,866

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Statements of Income (Unaudited)

(Continued)

(in thousands, except per share data)



	Three Months Ended
	March 31, 2019		March 31, 2018
Income before income taxes	$	2,786	$	3,214
Income tax expense	525		527
Net income	$	2,261	$	2,687
Earnings per common share
Basic	$	0.46	$	0.54
Diluted	$	0.46	$	0.54

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Statements of Comprehensive Income (Unaudited)

(in thousands)



	Three Months Ended
	March 31, 2019			March 31, 2018
Net income	$	2,261		$	2,687
Other comprehensive income (loss), net of tax,
Unrealized holding gains (losses) on available for sale securities, net of tax $407 and ($229), respectively	1,528			(862		)
Unrealized holding losses on securities transferred from held to maturity to available for sale, net of tax ($91) and $0, respectively	(340		)	—
Pension liability adjustment, net of tax $0 and ($27), respectively	—			(99		)
Total other comprehensive income (loss)	1,188			(961		)
Total comprehensive income	$	3,449		$	1,726

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)



	Three Months Ended
	March 31, 2019			March 31, 2018
Cash Flows from Operating Activities
Net income	$	2,261		$	2,687
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment	337			345
Amortization of core deposit intangibles	90			131
Amortization of debt issuance costs	4			4
Origination of loans held for sale	(1,602		)	(192		)
Proceeds from sale of loans held for sale	1,843			571
Net gains on sales of loans held for sale	(22		)	(9		)
Provision for loan losses	—			100
Net gains on sale of other real estate owned	—			(24		)
Increase in cash value of bank owned life insurance	(103		)	(91		)
Accretion of discounts and amortization of premiums on securities, net	138			138
Accretion of premium on time deposits	(16		)	(22		)
Stock-based compensation	43			70
Excess tax benefits on stock-based compensation	(2		)	(7		)
Deferred income tax (benefit) expense	(16		)	37
Changes in assets and liabilities:
(Increase) decrease in interest receivable	(30		)	47
(Increase) decrease in other assets	(170		)	1,394
Increase (decrease) in accrued expenses and other liabilities	394			(743		)
Net cash provided by operating activities	$	3,149		$	4,436
Cash Flows from Investing Activities
Proceeds from maturities, calls, and principal payments of securities available for sale	$	3,990		$	3,052
Proceeds from maturities, calls, and principal payments of securities held to maturity	452			1,368
Purchases of securities available for sale	(502		)	(8,676		)
Net purchase of restricted securities	(13		)	(20		)
Purchase of premises and equipment	(553		)	(287		)
Proceeds from sale of other real estate owned	—			350
Purchase of bank owned life insurance	(3,000		)	—
Proceeds from cash value of bank owned life insurance	—			347
Net (increase) decrease in loans	(7,682		)	1,111
Net cash used in investing activities	$	(7,308	)	$	(2,755	)

See Notes to Consolidated Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)

(Continued)

(in thousands)



	Three Months Ended
	March 31, 2019			March 31, 2018
Cash Flows from Financing Activities
Net increase in demand deposits and savings accounts	$	15,587		$	25,461
Net (decrease) increase in time deposits	(1,913		)	2,406
Net increase in other borrowings	5,000			—
Cash dividends paid on common stock, net of reinvestment	(418		)	(233		)
Repurchase of common stock	(20		)	(24		)
Net cash provided by financing activities	$	18,236		$	27,610
Increase in cash and cash equivalents	$	14,077		$	29,291
Cash and Cash Equivalents
Beginning	$	28,618		$	39,986
Ending	$	42,695		$	69,277
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	1,123		$	779
Supplemental Disclosures of Noncash Investing and Financing Activities
Unrealized gains (losses) on securities available for sale	$	1,935		$	(1,091	)
Unrealized losses on securities transferred from held to maturity to available for sale	$	(431	)	$	—
Fair value of securities transferred from held to maturity to available for sale	$	23,036		$	—
Change in pension liability	$	—		$	(126	)
Issuance of common stock, dividend reinvestment plan	$	28		$	15

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)



	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	—			—			2,687			—			2,687
Other comprehensive loss	—			—			—			(961		)	(961		)
Cash dividends on common stock ($0.05 per share)	—			—			(248		)	—			(248		)
Stock-based compensation	—			70			—			—			70
Issuance of 851 shares common stock, dividend reinvestment plan	1			14			—			—			15
Issuance of 7,339 shares common stock, stock incentive plan	9			(9		)	—			—			—
Repurchase of 1,317 shares of common stock, stock incentive plan	(1		)	(23		)	—			—			(24		)
Balance, March 31, 2018	$	6,191		$	7,312		$	48,109		$	(1,919	)	$	59,693

	Common Stock			Surplus			Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance, December 31, 2018	$	6,197		$	7,471		$	54,814		$	(1,808	)	$	66,674
Net income	—			—			2,261			—			2,261
Other comprehensive income	—			—			—			1,188			1,188
Cash dividends on common stock ($0.09 per share)	—			—			(446		)	—			(446		)
Stock-based compensation	—			43			—			—			43
Issuance of 1,397 shares common stock, dividend reinvestment plan	2			26			—			—			28
Issuance of 5,402 shares common stock, stock incentive plan	7			(7		)	—			—			—
Repurchase of 1,006 shares of common stock, stock incentive plan	(2		)	(18		)	—			—			(20		)
Balance, March 31, 2019	$	6,204		$	7,515		$	56,629		$	(620	)	$	69,728

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 March 31, 2019 and December 31, 2018, the statements of income and comprehensive income for the three months ended March 31, 2019 and 2018 and the cash flows and changes in shareholders’ equity for the three months ended March 31, 2019 and 2018. 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, 2018. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

Adoption of New Accounting Standards

On January 1, 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees are 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. 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 does 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 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 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 adoption of this standard did not have a material effect on the Company's consolidated financial statements. For further information about the Company's leases, see Note 16.

On January 1, 2019, the Company adopted ASU No. 2017-08, "Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” The amendments in ASU 2017-08 shorten the amortization period for certain callable debt securities purchased at a premium. Under the new guidance, premiums on these qualifying callable debt securities are amortized to the earliest call date. Discounts on purchased debt securities continue to be accreted to maturity. The adoption of this standard did not have a material effect on the Company's consolidated financial statements and no cumulative effect adjustment was recorded.

On January 1, 2019, the Company adopted ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The amendments in ASU 2017-12 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 were simplified upon implementation of this updated. The new guidance also provides for a reclassification of certain debt securities from held to maturity to available for sale if the security is eligible to be hedged using the last-of-layer method. Any unrealized gain or loss existing at the time of transfer is recorded in accumulated comprehensive income or loss. As a permitted activity, the reclassification of securities will not taint future held to maturity classification so long as the securities transferred are eligible to be hedged under the last-of-layer method. Accordingly, on January 1, 2019, the Company reclassified eligible held to maturity securities with amortized costs totaling $23.4 million as available for sale. The unrealized loss associated with the reclassified securities totaled $431 thousand and was included in the Company's accumulated other comprehensive loss on the date of reclassification.

Notes to Consolidated Financial Statements (Unaudited)

Recent Accounting Pronouncements

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, which has analyzed gathered data, definined loan pools and segments, and selected methods for applying the concepts included in this ASU. The Company is in the process of testing selected models, building policy and processing documentation, modeling the impact of the ASU on the capital and strategic plans, performing model validation, and finalizing policies and procedures. This guidance may result in material changes in the Company's accounting for credit losses of financial instruments.

Notes to Consolidated Financial Statements (Unaudited)

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 March 31, 2019 and December 31, 2018 were as follows (in thousands):



	March 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Securities available for sale:
U.S. agency and mortgage-backed securities	$	96,345	$	295	$	(1,074	)	$	95,566
Obligations of states and political subdivisions	25,643		153		(160		)	25,636
Total securities available for sale	$	121,988	$	448	$	(1,234	)	$	121,202
Securities held to maturity:
U.S. agency and mortgage-backed securities	$	14,193	$	—	$	(332	)	$	13,861
Obligations of states and political subdivisions	3,796		22		(2		)	3,816
Corporate debt securities	1,500		13		—			1,513
Total securities held to maturity	$	19,489	$	35	$	(334	)	$	19,190
Total securities	$	141,477	$	483	$	(1,568	)	$	140,392



	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Securities available for sale:
U.S. agency and mortgage-backed securities	$	86,944	$	44	$	(2,066	)	$	84,922
Obligations of states and political subdivisions	15,203		31		(299		)	14,935
Total securities available for sale	$	102,147	$	75	$	(2,365	)	$	99,857
Securities held to maturity:
U.S. agency and mortgage-backed securities	$	27,420	$	—	$	(869	)	$	26,551
Obligations of states and political subdivisions	14,488		20		(174		)	14,334
Corporate debt securities	1,500		9		—			1,509
Total securities held to maturity	$	43,408	$	29	$	(1,043	)	$	42,394
Total securities	$	145,555	$	104	$	(3,408	)	$	142,251

Notes to Consolidated Financial Statements (Unaudited)

At March 31, 2019 and December 31, 2018, investments in an unrealized loss position that were temporarily impaired were as follows (in thousands):



	March 31, 2019
	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	$	369	$	(2	)	$	60,381	$	(1,072	)	$	60,750	$	(1,074	)
Obligations of states and political subdivisions	—		—			8,793		(160		)	8,793		(160		)
Total securities available for sale	$	369	$	(2	)	$	69,174	$	(1,232	)	$	69,543	$	(1,234	)
Securities held to maturity:
U.S. agency and mortgage-backed securities	$	—	$	—		$	13,861	$	(332	)	$	13,861	$	(332	)
Obligations of states and political subdivisions	—		—			761		(2		)	761		(2		)
Total securities held to maturity	$	—	$	—		$	14,622	$	(334	)	$	14,622	$	(334	)
Total securities	$	369	$	(2	)	$	83,796	$	(1,566	)	$	84,165	$	(1,568	)

	December 31, 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	$	26,350	$	(215	)	$	49,652	$	(1,851	)	$	76,002	$	(2,066	)
Obligations of states and political subdivisions	3,761		(25		)	5,127		(274		)	8,888		(299		)
Total securities available for sale	$	30,111	$	(240	)	$	54,779	$	(2,125	)	$	84,890	$	(2,365	)
Securities held to maturity:
U.S. agency and mortgage-backed securities	$	—	$	—		$	26,551	$	(869	)	$	26,551	$	(869	)
Obligations of states and political subdivisions	5,326		(37		)	6,115		(137		)	11,441		(174		)
Total securities held to maturity	$	5,326	$	(37	)	$	32,666	$	(1,006	)	$	37,992	$	(1,043	)
Total securities	$	35,437	$	(277	)	$	87,445	$	(3,131	)	$	122,882	$	(3,408	)

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 March 31, 2019, there were sixty-six out of ninety U.S. agency and mortgage-backed securities and twenty-six out of eighty-two obligations of states and political subdivisions 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 4.2 years at March 31, 2019. At December 31, 2018, there were eighty-three out of ninety U.S. agency and mortgage-backed securities and fifty-six out of eighty-two 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, 2018. The weighted-average re-pricing term of the portfolio was 4.6 years at December 31, 2018. The unrealized losses at March 31, 2019 in the U.S. agency and mortgage-backed securities portfolio and the obligations of states and political subdivisions 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 March 31, 2019 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	$	1,836	$	1,844	$	185	$	185
Due after one year through five years	9,009		8,992		4,179		4,159
Due after five years through ten years	27,051		27,048		4,586		4,565
Due after ten years	84,092		83,318		10,539		10,281
	$	121,988	$	121,202	$	19,489	$	19,190

On January 1, 2019, the Company adopted ASU No. 2017-12 and reclassified eligible securities with a fair value of $23.0 million from the held to maturity portfolio to the available for sale portfolio. The unrealized loss associated with the reclassified securities totaled $431 thousand on the date of reclassification. The securities were reclassified to provide the Company with opportunities to maximize asset utilization.

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 March 31, 2019, and no impairment has been recognized.

The composition of restricted securities at March 31, 2019 and December 31, 2018 was as follows (in thousands):



	March 31, 2019		December 31, 2018
Federal Home Loan Bank stock	$	776	$	763
Federal Reserve Bank stock	875		875
Community Bankers’ Bank stock	50		50
	$	1,701	$	1,688

Notes to Consolidated Financial Statements (Unaudited)

Note 3. Loans

Loans at March 31, 2019 and December 31, 2018 are summarized as follows (in thousands):



	March 31, 2019			December 31, 2018
Real estate loans:
Construction and land development	$	48,948		$	45,867
Secured by 1-4 family residential	217,527			215,945
Other real estate loans	221,396			219,553
Commercial and industrial loans	46,045			44,605
Consumer and other loans	16,559			16,886
Total loans	$	550,475		$	542,856
Allowance for loan losses	(4,946		)	(5,009		)
Loans, net	$	545,529		$	537,847

Net deferred loan fees included in the above loan categories were $287 thousand and $274 thousand at March 31, 2019 and December 31, 2018, respectively. Consumer and other loans included $204 thousand and $275 thousand of demand deposit overdrafts at March 31, 2019 and December 31, 2018, 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 March 31, 2019 and December 31, 2018 (in thousands):



	March 31, 2019
	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	$	—	$	—	$	80	$	80	$	48,868	$	48,948	$	398	$	—
Secured by 1-4 family residential	493		—		575		1,068		216,459		217,527		989		115
Other real estate loans	403		—		477		880		220,516		221,396		528		—
Commercial and industrial	54		2		2		58		45,987		46,045		—		2
Consumer and other loans	14		84		16		114		16,445		16,559		—		16
Total	$	964	$	86	$	1,150	$	2,200	$	548,275	$	550,475	$	1,915	$	133



	December 31, 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	$	88	$	80	$	—	$	168	$	45,699	$	45,867	$	327	$	—
Secured by 1-4 family residential	747		393		423		1,563		214,382		215,945		663		—
Other real estate loans	145		36		2,207		2,388		217,165		219,553		1,985		222
Commercial and industrial	—		25		210		235		44,370		44,605		197		13
Consumer and other loans	90		—		—		90		16,796		16,886		—		—
Total	$	1,070	$	534	$	2,840	$	4,444	$	538,412	$	542,856	$	3,172	$	235

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 March 31, 2019 and December 31, 2018 (in thousands):



	March 31, 2019
	Pass		Special Mention		Substandard		Doubtful		Total
Real estate loans:
Construction and land development	$	48,151	$	231	$	566	$	—	$	48,948
Secured by 1-4 family residential	215,492		781		1,254		—		217,527
Other real estate loans	217,298		883		3,215		—		221,396
Commercial and industrial	46,018		15		12		—		46,045
Consumer and other loans	16,559		—		—		—		16,559
Total	$	543,518	$	1,910	$	5,047	$	—	$	550,475

	December 31, 2018
	Pass		Special Mention		Substandard		Doubtful		Total
Real estate loans:
Construction and land development	$	45,054	$	235	$	578	$	—	$	45,867
Secured by 1-4 family residential	214,089		924		932		—		215,945
Other real estate loans	213,681		900		4,972		—		219,553
Commercial and industrial	44,373		19		213		—		44,605
Consumer and other loans	16,886		—		—		—		16,886
Total	$	534,083	$	2,078	$	6,695	$	—	$	542,856

Notes to Consolidated Financial Statements (Unaudited)

Note 4. Allowance for Loan Losses

The following tables present, as of March 31, 2019, December 31, 2018 and March 31, 2018, the total allowance for loan losses, the allowance by impairment methodology, and loans by impairment methodology (in thousands):



	March 31, 2019
	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, 2018	$	561		$	895		$	2,160	$	464	$	929		$	5,009
Charge-offs	—			(49		)	—		—		(179		)	(228		)
Recoveries	50			2			—		2		111			165
Provision for (recovery of) loan losses	(6		)	(82		)	115		26		(53		)	—
Ending Balance, March 31, 2019	$	605		$	766		$	2,275	$	492	$	808		$	4,946
Ending Balance:
Individually evaluated for impairment	71			23			35		—		—			129
Collectively evaluated for impairment	534			743			2,240		492		808			4,817
Loans:
Ending Balance	$	48,948		$	217,527		$	221,396	$	46,045	$	16,559		$	550,475
Individually evaluated for impairment	398			990			787		—		—			2,175
Collectively evaluated for impairment	48,550			216,537			220,609		46,045		16,559			548,300



	December 31, 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	—		(55		)	—			(10		)	(1,104		)	(1,169		)
Recoveries	—		13			5			8			226			252
Provision for (recovery of) loan losses	147		162			(793		)	48			1,036			600
Ending Balance, December 31, 2018	$	561	$	895		$	2,160		$	464		$	929		$	5,009
Ending Balance:
Individually evaluated for impairment	71		172			—			—			—			243
Collectively evaluated for impairment	490		723			2,160			464			929			4,766
Loans:
Ending Balance	$	45,867	$	215,945		$	219,553		$	44,605		$	16,886		$	542,856
Individually evaluated for impairment	327		663			2,249			197			—			3,436
Collectively evaluated for impairment	45,540		215,282			217,304			44,408			16,886			539,420

Notes to Consolidated Financial Statements (Unaudited)



	March 31, 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	—			(2		)	—		(8		)	(196		)	(206		)
Recoveries	—			3			1		1			47			52
Provision for (recovery of) loan losses	(18		)	2			18		40			58			100
Ending Balance, March 31, 2018	$	396		$	778		$	2,967	$	451		$	680		$	5,272
Ending Balance:
Individually evaluated for impairment	—			—			—		—			—			—
Collectively evaluated for impairment	396			778			2,967		451			680			5,272
Loans:
Ending Balance	$	33,941		$	208,338		$	222,352	$	39,253		$	17,052		$	520,936
Individually evaluated for impairment	874			1,332			1,263		61			—			3,530
Collectively evaluated for impairment	33,067			207,006			221,089		39,192			17,052			517,406

Notes to Consolidated Financial Statements (Unaudited)

Impaired loans and the related allowance at March 31, 2019, December 31, 2018 and March 31, 2018, were as follows (in thousands):



	March 31, 2019
	Unpaid Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
Real estate loans:
Construction and land development	$	412	$	—	$	398	$	398	$	71	$	326	$	1
Secured by 1-4 family	1,055		836		154		990		23		661		2
Other real estate loans	792		752		35		787		35		1,329		7
Commercial and industrial	—		—		—		—		—		90		—
Total	$	2,259	$	1,588	$	587	$	2,175	$	129	$	2,406	$	10

	December 31, 2018
	Unpaid Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
Real estate loans:
Construction and land development	$	336	$	—	$	327	$	327	$	71	$	758	$	12
Secured by 1-4 family	720		356		307		663		172

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$20.61	5	$102

10-Q	2019-03-31	Quarter: 2019-03-31
10-K	2018-12-31	Annual: 2018-12-31
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
10-Q	2015-09-30	Quarter: 2015-09-30
10-Q	2015-06-30	Quarter: 2015-06-30
10-Q	2015-03-31	Quarter: 2015-03-31
10-K	2014-12-31	Annual: 2014-12-31
10-Q	2014-09-30	Quarter: 2014-09-30
10-Q	2014-06-30	Quarter: 2014-06-30
10-Q	2014-03-31	Quarter: 2014-03-31
10-K	2013-12-31	Annual: 2013-12-31

8-K	2019-05-09	Shareholder Vote, Regulation FD, Other Events, Exhibits
8-K	2019-04-23	Earnings, Exhibits
8-K	2019-04-16	Other Events, Exhibits
8-K	2019-03-15	Officers, Exhibits
8-K	2019-02-15	Other Events, Exhibits
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

NKE	Nike	130,420
WBK	Westpac Banking	64,930
WTR	Aqua America	8,140
SXT	Sensient Technologies	2,980
GPRO	Gopro	1,020
STML	Stemline Therapeutics	700
RST	Rosetta Stone	627
CDZI	Cadiz	268
NYMX	Nymox Pharmaceutical	109
FNGR	Fingermotion	0

EX-31.1	exhibit3113312019.htm
EX-31.2	exhibit3123312019.htm
EX-32.1	exhibit3213312019.htm
EX-32.2	exhibit3223312019.htm