First National (FXNC) - 2020 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Presents the unaudited consolidated financial information for First National Corporation and its subsidiary Item 1. Financial Statements Presents unaudited consolidated financial statements for First National Corporation and First Bank, including balance sheets, income statements, and cash flow statements, with detailed notes Consolidated Balance Sheets Highlights key assets, liabilities, and equity figures, showing changes between September 30, 2020, and December 31, 2019 Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | Change | Change (%) | | :----------------------------- | :----------- | :----------- | :----- | :--------- | | Total assets | $942,733 | $800,048 | $142,685 | 17.8% | | Cash and due from banks | $13,349 | $9,675 | $3,674 | 37.9% | | Interest-bearing deposits in banks | $108,857 | $36,110 | $72,747 | 201.4% | | Loans, net | $640,591 | $569,412 | $71,179 | 12.5% | | Total liabilities | $860,477 | $722,829 | $137,648 | 19.0% | | Total deposits | $838,395 | $706,442 | $131,953 | 18.7% | | Subordinated debt | $9,987 | $4,983 | $5,004 | 100.4% | | Total shareholders' equity | $82,256 | $77,219 | $5,037 | 6.5% | Consolidated Statements of Income Details net interest income, provision for loan losses, noninterest income/expense, and net income for specified periods Consolidated Statements of Income (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Change | Change (%) | | :-------------------------------- | :------------------------------ | :------------------------------ | :----- | :--------- | | Net interest income | $7,574 | $7,071 | $503 | 7.1% | | Provision for loan losses | $1,500 | $0 | $1,500 | N/A | | Noninterest income | $2,201 | $2,191 | $10 | 0.5% | | Noninterest expense | $6,135 | $6,186 | ($51) | -0.8% | | Net income | $1,754 | $2,493 | ($739) | -29.6% | | Basic EPS | $0.36 | $0.50 | ($0.14)| -28.0% | | Diluted EPS | $0.36 | $0.50 | ($0.14)| -28.0% | | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Change | Change (%) | | :-------------------------------- | :----------------------------- | :----------------------------- | :----- | :--------- | | Net interest income | $22,011 | $20,935 | $1,076 | 5.1% | | Provision for loan losses | $3,200 | $200 | $3,000 | 1500.0% | | Noninterest income | $6,073 | $6,211 | ($138) | -2.2% | | Noninterest expense | $17,892 | $18,514 | ($622) | -3.4% | | Net income | $5,702 | $6,840 | ($1,138)| -16.6% | | Basic EPS | $1.17 | $1.38 | ($0.21)| -15.2% | | Diluted EPS | $1.17 | $1.38 | ($0.21)| -15.2% | Consolidated Statements of Comprehensive Income Presents net income and other comprehensive income components, leading to total comprehensive income for the periods Consolidated Statements of Comprehensive Income (in thousands) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Change | Change (%) | | :-------------------------------- | :------------------------------ | :------------------------------ | :----- | :--------- | | Net income | $1,754 | $2,493 | ($739) | -29.6% | | Total other comprehensive income | $127 | $375 | ($248) | -66.1% | | Total comprehensive income | $1,881 | $2,868 | ($987) | -34.4% | | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Change | Change (%) | | :-------------------------------- | :----------------------------- | :----------------------------- | :----- | :--------- | | Net income | $5,702 | $6,840 | ($1,138)| -16.6% | | Total other comprehensive income | $2,708 | $2,952 | ($244) | -8.3% | | Total comprehensive income | $8,410 | $9,792 | ($1,382)| -14.1% | Consolidated Statements of Cash Flows Summarizes cash flows from operating, investing, and financing activities, showing changes in cash and equivalents Consolidated Statements of Cash Flows (Nine Months Ended Sep 30, in thousands) | Metric | 2020 | 2019 | Change | Change (%) | | :-------------------------------- | :----- | :----- | :----- | :--------- | | Net cash provided by operating activities | $9,078 | $6,894 | $2,184 | 31.7% | | Net cash used in investing activities | ($65,993)| ($18,931)| ($47,062)| 248.6% | | Net cash provided by financing activities | $133,336 | $13,792| $119,544| 866.8% | | Increase in cash and cash equivalents | $76,421| $1,755 | $74,666| 4254.5% | | Ending cash and cash equivalents | $122,206 | $30,373| $91,833| 302.4% | - Net cash used in investing activities significantly increased due to a $74.4 million net increase in loans (vs $28.7 million in 2019) and higher purchases of securities available for sale[19] - Net cash provided by financing activities saw a substantial increase, driven by a $147.9 million net increase in demand deposits and savings accounts (vs $14.5 million in 2019) and $5.0 million in proceeds from subordinated debt[19] Consolidated Statements of Changes in Shareholders' Equity Outlines changes in shareholders' equity, including net income, comprehensive income, dividends, and stock repurchases Changes in Shareholders' Equity (Nine Months Ended Sep 30, 2020, in thousands) | Metric | Amount | | :-------------------------------- | :----- | | Balance, December 31, 2019 | $77,219| | Net income | $5,702 | | Other comprehensive income | $2,708 | | Cash dividends on common stock | ($1,615)| | Stock-based compensation | $254 | | Repurchase of common stock, stock repurchase plan | ($2,071)| | Balance, September 30, 2020 | $82,256| - Total shareholders' equity increased by $5.0 million to $82.3 million at September 30, 2020, primarily driven by net income and a $2.7 million increase in accumulated other comprehensive income, partially offset by $1.6 million in cash dividends and $2.1 million in common stock repurchases[22][231] Notes to Consolidated Financial Statements Provides detailed explanations and disclosures supporting the consolidated financial statements, covering various accounting policies and financial instruments Note 1. General Discusses the impact of the COVID-19 pandemic on the Company's operations, financial performance, and liquidity measures - The COVID-19 pandemic has adversely impacted a broad range of industries, potentially impairing customer financial obligations and creating business continuity issues for the Company[24][26] - Net interest income and noninterest income could decrease, while noninterest expense could increase, due to COVID-19 impacts such as payment deferrals, suspended fees, and worsening asset quality[28][29][30] - The Company suspended stock repurchases and issued $5.0 million in subordinated debt in June 2020 to strengthen liquidity and capital amidst economic uncertainty[33] - Loans participating in the payment deferral program totaled $22.6 million (3% of loan balances) at September 30, 2020, a significant reduction from $182.6 million (28%) at June 30, 2020[36] - The Bank originated $76.6 million of Paycheck Protection Program (PPP) loans, with $73.7 million outstanding at September 30, 2020, and expects most to be forgiven by the SBA[37] - The SEC's amendments to 'accelerated filer' definitions mean the Company expects to no longer be considered an accelerated filer, reducing audit requirements (no external auditor attestation over ICFR)[51] Note 2. Securities Details the Company's securities portfolio, including available-for-sale and held-to-maturity categories, along with unrealized gains and losses Securities Portfolio (Fair Value, in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | Change | Change (%) | | :-------------------------------- | :----------- | :----------- | :----- | :--------- | | Securities available for sale | $117,132 | $120,983 | ($3,851)| -3.2% | | Securities held to maturity | $15,638 | $17,646 | ($2,008)| -11.4% | | Restricted securities | $1,848 | $1,806 | $42 | 2.3% | | Total securities | $134,618 | $140,435 | ($5,817)| -4.1% | Unrealized Gains and Losses (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | Change | Change (%) | | :-------------------------------- | :----------- | :----------- | :----- | :--------- | | Gross Unrealized Gains (AFS) | $4,223 | $1,254 | $2,969 | 236.8% | | Gross Unrealized Losses (AFS) | ($14) | ($339) | $325 | -95.9% | | Gross Unrealized Gains (HTM) | $537 | $99 | $438 | 442.4% | | Gross Unrealized Losses (HTM) | $0 | ($80) | $80 | -100.0% | - 100% of the investment portfolio is considered investment grade. The weighted-average re-pricing term decreased from 3.7 years at December 31, 2019, to 3.1 years at September 30, 2020[59] Note 3. Loans Provides a breakdown of the loan portfolio by type, aging of past due loans, and credit risk profile categories Loan Composition (in thousands) | Loan Type | Sep 30, 2020 | Dec 31, 2019 | Change | Change (%) | | :-------------------------------- | :----------- | :----------- | :----- | :--------- | | Total loans | $648,368 | $574,346 | $74,022| 12.9% | | Construction and land development | $27,472 | $43,164 | ($15,692)| -36.3% | | Secured by 1-4 family residential | $234,198 | $229,438 | $4,760 | 2.1% | | Other real estate loans | $250,319 | $236,555 | $13,764| 5.8% | | Commercial and industrial loans | $125,277 | $50,153 | $75,124| 149.8% | | Consumer and other loans | $11,102 | $15,036 | ($3,934)| -26.2% | | Allowance for loan losses | ($7,777) | ($4,934) | ($2,843)| 57.6% | | Loans, net | $640,591 | $569,412 | $71,179| 12.5% | Aging of Past Due Loans (in thousands) | Past Due Status | Sep 30, 2020 | Dec 31, 2019 | Change | Change (%) | | :-------------------------------- | :----------- | :----------- | :----- | :--------- | | 30-59 Days Past Due | $371 | $2,013 | ($1,642)| -81.6% | | 60-89 Days Past Due | $643 | $571 | $72 | 12.6% | | > 90 Days Past Due | $357 | $561 | ($204) | -36.4% | | Total Past Due | $1,371 | $3,145 | ($1,774)| -56.4% | Credit Risk Profile (in thousands) | Risk Category | Sep 30, 2020 | Dec 31, 2019 | Change | Change (%) | | :-------------------------------- | :----------- | :----------- | :----- | :--------- | | Pass | $637,080 | $563,408 | $73,672| 13.1% | | Special Mention | $510 | $6,069 | ($5,559)| -91.6% | | Substandard | $10,778 | $4,869 | $5,909 | 121.4% | | Doubtful | $0 | $0 | $0 | N/A | Note 4. Allowance for Loan Losses Outlines the activity in the allowance for loan losses, including charge-offs, recoveries, and provisions, and details impaired loans Allowance for Loan Losses Activity (Nine Months Ended Sep 30, in thousands) | Metric | 2020 | 2019 | Change | Change (%) | | :-------------------------------- | :----- | :----- | :----- | :--------- | | Beginning Balance | $4,934 | $5,009 | ($75) | -1.5% | | Charge-offs | ($619) | ($603) | ($16) | 2.7% | | Recoveries | $262 | $306 | ($44) | -14.4% | | Provision for loan losses | $3,200 | $200 | $3,000 | 1500.0% | | Ending Balance | $7,777 | $4,912 | $2,865 | 58.3% | Impaired Loans and Related Allowance (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | Sep 30, 2019 | | :-------------------------------- | :----------- | :----------- | :----------- | | Total Recorded Investment | $6,974 | $1,459 | $1,566 | | Related Allowance | $2,289 | $33 | $74 | - Troubled Debt Restructurings (TDRs) increased significantly to $6.0 million at September 30, 2020, from $360 thousand at December 31, 2019, with all TDRs at September 30, 2020, considered non-performing[76] - Loans participating in the COVID-19 payment deferral program, totaling $22.6 million, were not considered TDRs due to relief provisions of the CARES Act[78] Note 5. Other Real Estate Owned (OREO) States that there was no activity or balances related to Other Real Estate Owned for the reported periods - The Bank had no OREO activity or balances for the nine months ended September 30, 2020, or the year ended December 31, 2019[80] - No expenses applicable to OREO were incurred for the nine months ended September 30, 2020, and 2019[81] Note 6. Other Borrowings Details the Company's unused lines of credit with non-affiliated banks and the Federal Home Loan Bank of Atlanta - The Company had an unused $5.0 million unsecured line of credit at September 30, 2020[82] - The Bank had $226.3 million in unused lines of credit with non-affiliated banks at September 30, 2020, primarily from the Federal Home Loan Bank of Atlanta (FHLB), with no outstanding FHLB borrowings[83] Note 7. Capital Requirements Presents the Bank's regulatory capital ratios, confirming its 'well capitalized' status and compliance with requirements Bank Regulatory Capital Ratios (as of Sep 30, 2020) | Ratio | Actual | Minimum | Well Capitalized | | :-------------------------------- | :----- | :------ | :--------------- | | Total Capital (to Risk-Weighted Assets) | 15.34% | 8.00% | 10.00% | | Tier 1 Capital (to Risk-Weighted Assets) | 14.09% | 6.00% | 8.00% | | Common Equity Tier 1 Capital (to Risk-Weighted Assets) | 14.09% | 4.50% | 6.50% | | Tier 1 Capital (to Average Assets) | 8.67% | 4.00% | 5.00% | - The Bank was categorized as 'well capitalized' by the Federal Reserve Bank as of September 30, 2020, and met all capital adequacy requirements[88][89] - The Bank's capital conservation buffer was 7.34% at September 30, 2020, exceeding the 2.50% requirement[89] Note 8. Subordinated Debt Describes the Company's subordinated term notes, including interest rates, maturity dates, and call provisions - The Company has a $5.0 million subordinated term note due October 1, 2025, bearing a fixed interest rate of 6.75% per annum, callable from January 1, 2021[90] - A new $5.0 million subordinated term note was issued on June 29, 2020, due July 1, 2030, with an initial fixed rate of 5.50% per annum, resetting quarterly to three-month SOFR plus 510 basis points from July 1, 2025, and callable from July 1, 2025[91] - Both notes are unsecured, subordinated obligations, ranking junior to senior indebtedness but senior to junior subordinated debt, preferred stock, and common stock[92] Note 9. Junior Subordinated Debt Details the Company's junior subordinated debt, including LIBOR-indexed floating rates and mandatory redemption dates - The Company has $5.2 million in junior subordinated debt (Trust II) with a LIBOR-indexed floating rate (2.85% at Sep 30, 2020), mandatory redemption June 17, 2034[93] - Another $4.1 million in junior subordinated debt (Trust III) has a LIBOR-indexed floating rate (1.90% at Sep 30, 2020), mandatory redemption October 1, 2036[94] Note 10. Benefit Plans Reports expenses incurred for the Company's 401(k) plan and supplemental executive retirement plans for the periods - The Company's 401(k) plan incurred an expense of $643 thousand for the nine months ended September 30, 2020, up from $631 thousand in 2019[95] - Expense for supplemental executive retirement plans totaled $198 thousand for the nine months ended September 30, 2020, compared to $155 thousand in 2019[97] Note 11. Earnings per Common Share Provides basic and diluted earnings per common share calculations and related net income figures Earnings per Common Share (EPS) | Metric | Sep 30, 2020 (3 months) | Sep 30, 2019 (3 months) | Sep 30, 2020 (9 months) | Sep 30, 2019 (9 months) | | :-------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Net income (in thousands) | $1,754 | $2,493 | $5,702 | $6,840 | | Basic EPS | $0.36 | $0.50 | $1.17 | $1.38 | | Diluted EPS | $0.36 | $0.50 | $1.17 | $1.38 | - Restricted stock units for 9,632 shares were antidilutive for the three months ended September 30, 2020, and thus not included in diluted EPS calculation[100] Note 12. Fair Value Measurements Explains the three-level hierarchy for fair value measurements and presents recurring and nonrecurring fair value balances - The Company categorizes fair value measurements into a three-level hierarchy: Level 1 (quoted active market prices), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[104] Recurring Fair Value Measurements (Sep 30, 2020, in thousands) | Description | Balance | Level 1 | Level 2 | Level 3 | | :-------------------------------- | :-------- | :------ | :------ | :------ | | Securities available for sale | $117,132 | $0 | $117,132 | $0 | | Derivatives - cash flow hedges | $134 | $0 | $134 | $0 | Nonrecurring Fair Value Measurements (Sep 30, 2020, in thousands) | Description | Balance | Level 1 | Level 2 | Level 3 | | :-------------------------------- | :-------- | :------ | :------ | :------ | | Impaired loans, net | $3,572 | $0 | $0 | $3,572 | - For Level 3 impaired loans, $2.2 million were valued by property appraisals (10.00% selling cost) and $1.4 million by present value of cash flows (6.50% discount rate) at September 30, 2020[115] Note 13. Stock Compensation Plans Details the Company's stock incentive plan, compensation expense for stock awards, and restricted stock unit grants - The Company's 2014 Stock Incentive Plan makes available up to 240,000 shares for various stock-based awards[120] - Compensation expense for stock awards totaled $50 thousand for the nine months ended September 30, 2020 (vs $67 thousand in 2019)[122] - 14,457 restricted stock units (RSUs) were granted in Q1 2020, with 9,632 subject to a two-year vesting schedule. Unrecognized pre-tax compensation expense for RSUs was $213 thousand at September 30, 2020[124][125] Note 14. Accumulated Other Comprehensive Income (Loss) Presents the balance and changes in accumulated other comprehensive income (loss), including unrealized gains and reclassification adjustments Accumulated Other Comprehensive Income (Loss) (in thousands) | Metric | Sep 30, 2020 | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------------- | :----------- | :----------- | :----------- | | Balance | $3,432 | $1,144 | ($1,808) | Changes in AOCI (Nine Months Ended Sep 30, 2020, in thousands) | Component | Amount | | :-------------------------------- | :----- | | Unrealized holding gains on securities (net of tax) | $2,632 | | Reclassification adjustment (net of tax) | ($30) | | Change in fair value of cash flow hedges (net of tax) | $106 | | Total change during period | $2,708 | Reclassifications from AOCI to Earnings (Nine Months Ended Sep 30, 2020, in thousands) | Item | Amount | | :-------------------------------- | :----- | | Net securities gains reclassified into earnings | ($38) | | Related income tax expense | $8 |\ | Total reclassifications (net of tax) | ($30) | Note 15. Revenue Recognition Breaks down noninterest income by revenue stream and explains the Company's revenue recognition policies for various services Noninterest Income by Revenue Stream (in thousands) | Revenue Stream | Sep 30, 2020 (3 months) | Sep 30, 2019 (3 months) | Sep 30, 2020 (9 months) | Sep 30, 2019 (9 months) | | :-------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Service charges on deposit accounts | $446 | $757 | $1,475 | $2,173 | | ATM and check card fees | $669 | $586 | $1,738 | $1,676 | | Wealth management fees | $573 | $477 | $1,610 | $1,372 | | Fees for other customer services | $323 | $177 | $767 | $505 | | Total in-scope of Topic 606 | $2,011 | $1,997 | $5,590 | $5,726 | | Total noninterest income | $2,201 | $2,191 | $6,073 | $6,211 | - Revenue recognition policies vary by service: monthly service fees are recognized over time, while overdraft/ATM fees are recognized at a point in time. Interchange and wealth management fees are generally recognized over time or upon completion[131][132][133][134] Note 16. Derivative Financial Instruments Describes the Company's interest rate swap agreements designated as cash flow hedges to manage interest rate risk - On April 21, 2020, the Company entered into two interest rate swap agreements with a total notional amount of $9.0 million to convert variable-rate junior subordinated debt to fixed-rate debt[137][141] - These swaps are designated as cash flow hedges to manage interest rate risk, with changes in fair value reported as a component of other comprehensive income[138] - The cash flow hedges had a fair value of $134 thousand (asset) at September 30, 2020[141] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's perspective on financial condition and results, covering performance analysis, accounting policies, lending, and COVID-19 impacts Cautionary Statement Regarding Forward-Looking Statements Warns that the report contains forward-looking statements subject to risks, including the COVID-19 pandemic and economic conditions - The report contains forward-looking statements subject to significant risks and uncertainties, including the effects of the COVID-19 pandemic, general economic conditions, competition, and regulatory changes[142][144] Executive Overview Provides an overview of First National Corporation's business, primary revenue sources, and key financial impacts of the COVID-19 pandemic - First National Corporation is the bank holding company for First Bank, offering loan, deposit, and wealth management products and services to small/medium businesses, individuals, estates, and local government entities across Virginia[143][145][146] - Net interest income is the primary revenue source (70-80% of total revenue), supplemented by noninterest income from service charges, wealth management, and ATM/check card fees. Salaries and employee benefits are the largest noninterest expense[148][149] - The Bank originated $76.6 million in PPP loans and implemented a loan payment deferral program, which saw participation decrease from $182.6 million (28% of loans) at June 30, 2020, to $22.6 million (3% of loans) at September 30, 2020[151][152] - Net income decreased by $739 thousand (-29.6%) for the three months and $1.1 million (-16.7%) for the nine months ended September 30, 2020, primarily due to a significant increase in the provision for loan losses[155][156][160][161] Non-GAAP Financial Measures Presents key non-GAAP financial measures, including efficiency ratio and net interest margin, with reconciliation to GAAP figures Efficiency Ratio | Metric | Sep 30, 2020 (3 months) | Sep 30, 2019 (3 months) | Sep 30, 2020 (9 months) | Sep 30, 2019 (9 months) | | :-------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Efficiency ratio | 62.35% | 65.65% | 63.04% | 66.93% | Net Interest Margin | Metric | Sep 30, 2020 (3 months) | Sep 30, 2019 (3 months) | Sep 30, 2020 (9 months) | Sep 30, 2019 (9 months) | | :-------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Net interest margin | 3.41% | 3.87% | 3.58% | 3.91% | Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income (in thousands) | Metric | Sep 30, 2020 (3 months) | Sep 30, 2019 (3 months) | Sep 30, 2020 (9 months) | Sep 30, 2019 (9 months) | | :-------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Total net interest income (GAAP) | $7,574 | $7,071 | $22,011 | $20,935 | | Total tax-equivalent net interest income (Non-GAAP) | $7,623 | $7,123 | $22,158 | $21,091 | Critical Accounting Policies Focuses on the allowance for loan losses as a critical accounting policy, detailing its estimation methodology and risk grading - The allowance for loan losses (ALL) is a critical accounting policy, inherently subjective and based on management's periodic review of loan collectability, historical experience, portfolio characteristics, and economic conditions[173][174] - The ALL consists of a specific component for impaired loans (based on discounted cash flows, collateral value, or market price) and a general component for non-impaired loans (based on historical loss experience adjusted for qualitative factors)[177][178] - The Company uses a risk grading matrix (pass, special mention, substandard, doubtful, loss) for loans, with regular reviews by Credit Administration and internal/external loan review processes[68][174] Lending Policies Describes the Bank's loan approval processes, portfolio segmentation, and underwriting considerations for various loan types - Loan approval limits are tiered by officer position, with oversight from the Management Loan Committee and Board Loan Committee, which also approves the Bank's Loan Policy and reviews risk management reports[179][181] - The loan portfolio is segmented into Real Estate (Construction and Land Development, 1-4 Family Residential, Other Real Estate), Commercial and Industrial, and Consumer and Other loans, each with distinct risk characteristics and underwriting considerations[180][233][234][235][236][237] - Construction and land development loans carry risks related to project completion and cost overruns, mitigated by limiting loan amounts, analyzing creditworthiness, and monitoring construction progress[185] - Commercial and industrial loans generally have higher risk due to reliance on business cash flow and less reliable collateral appraisals, while consumer loans are susceptible to individual financial instability and rapid collateral depreciation[189][190] Results of Operations Analyzes changes in net interest income, provision for loan losses, noninterest income, and noninterest expense for the reported periods - Net interest income increased by $503 thousand (+7%) for the three months and $1.1 million (+5%) for the nine months ended September 30, 2020, primarily due to a decrease in interest expense on deposits[194][198] - The net interest margin decreased by 46 basis points to 3.41% for the three months and 33 basis points to 3.58% for the nine months, impacted by lower earning asset yields (PPP loans, increased lower-yielding deposits)[194][197][198][200] - Provision for loan losses increased significantly to $1.5 million for the three months (from $0) and $3.2 million for the nine months (from $200 thousand), driven by increases in both general and specific reserve components due to pandemic impacts[211][215] - Noninterest income saw a slight increase of $10 thousand (+0.5%) for the three months but a decrease of $138 thousand (-2%) for the nine months, primarily due to lower service charges on deposit accounts (overdraft fees) offset by higher ATM/check card and wealth management fees[218][219] - Noninterest expense decreased by $51 thousand (-1%) for the three months and $622 thousand (-3%) for the nine months, mainly from lower salaries and employee benefits (including PPP loan cost deferrals), marketing, and other operating expenses[222][223][224] Financial Condition Examines changes in total assets, liabilities, and shareholders' equity, along with non-performing assets, allowance for loan losses, liquidity, and capital - Total assets increased by $142.7 million to $942.7 million at September 30, 2020, primarily due to a $71.2 million increase in net loans (including $73.7 million in PPP loans) and a $72.7 million increase in interest-bearing deposits in banks[228] - Total liabilities increased by $137.6 million to $860.5 million, driven by a $132.0 million increase in total deposits (noninterest-bearing demand deposits up $67.1 million, savings/interest-bearing demand deposits up $80.8 million) and a $5.0 million increase in subordinated debt[229][230] - Total shareholders' equity increased by $5.0 million to $82.3 million, supported by net income and a $2.7 million increase in accumulated other comprehensive income, partially offset by stock repurchases[231] - Non-performing assets totaled $7.0 million (0.74% of total assets) at September 30, 2020, up from $1.5 million (0.18%) at December 31, 2019, consisting solely of non-accrual loans[247][248] - The allowance for loan losses increased to $7.8 million (1.20% of total loans) at September 30, 2020, from $4.9 million (0.86%) at December 31, 2019. Excluding PPP loans, the ALL was 1.34% of total loans[251] - The Bank maintains sufficient liquidity, with $169.8 million in liquid assets and $226.3 million in non-deposit funding sources available at September 30, 2020[261][262] - The Bank continues to meet all regulatory capital adequacy requirements and was 'well capitalized' at September 30, 2020, with a capital conservation buffer of 7.34%. The stock repurchase plan remained suspended due to pandemic uncertainty[268][269][275] Contractual Obligations States that there have been no material changes to the Company's contractual obligations since the prior annual report - There have been no material changes to the Company's contractual obligations from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2019[276] Off-Balance Sheet Arrangements Details off-balance sheet commitments, including credit extensions, standby letters of credit, and derivative financial instruments Off-Balance Sheet Commitments (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :-------------------------------- | :----------- | :----------- | | Commitments to extend credit | $112,200 | $92,500 | | Standby letters of credit | $10,600 | $11,000 | | Locked-rate mortgage loan commitments | $15,200 | N/A | - The Company uses interest rate swaps with a total notional amount of $9.0 million as cash flow hedges to convert variable-rate junior subordinated debt to fixed rates, with a fair value of $134 thousand (asset) at September 30, 2020[282][283] Item 3. Quantitative and Qualitative Disclosures About Market Risk States that quantitative and qualitative disclosures regarding market risk are not required for the Company - The Company is not required to provide quantitative and qualitative disclosures about market risk[285] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - Disclosure controls and procedures were effective as of September 30, 2020[286] - No material changes in internal control over financial reporting were identified during the Company's last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[287] PART II – OTHER INFORMATION Contains additional disclosures, including legal proceedings, risk factors, and equity sales information Item 1. Legal Proceedings No material pending legal proceedings against the Company, beyond routine litigation incidental to its business - No material pending legal proceedings, other than ordinary routine litigation incidental to the Company's business[289] Item 1A. Risk Factors Highlights significant, uncertain risks from the COVID-19 pandemic and related measures to the Company's business and financial condition - The ongoing COVID-19 pandemic and measures to prevent its spread may adversely affect the Company's business, financial condition, and operations; the extent of such impacts are highly uncertain and difficult to predict[291] - Potential adverse effects include credit losses from borrower financial stress, operational failures, decreased demand for products/services, and heightened levels of cyber and payment fraud[292][296] - The rapidly changing nature of COVID-19 heightens the inherent uncertainty of forecasting future economic conditions and their impact on the Company's loan portfolio, increasing the risk that assumptions for the allowance for loan losses are incorrect[293] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Board authorized a stock repurchase plan for up to $5 million of common stock, with no repurchases made in Q3 2020 - The Board of Directors authorized a stock repurchase plan for up to $5.0 million of outstanding common stock through December 31, 2020[294] - No purchases of common stock were made during the three months ended September 30, 2020, pursuant to the stock repurchase plan[295] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported for the period - No defaults upon senior securities[296] Item 4. Mine Safety Disclosures No mine safety disclosures were reported - No mine safety disclosures[296] Item 5. Other Information No other information was reported in this section - No other information[296] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including CEO/CFO certifications and XBRL formatted financial statements - Includes Certifications of Chief Executive Officer and Chief Financial Officer (Sections 302 and 1350)[297] - Includes XBRL formatted Consolidated Balance Sheets, Statements of Income, Comprehensive Income, Cash Flows, Shareholders' Equity, and Notes to Consolidated Financial Statements[300]