COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, ~~2017~~2020 AND ~~2016~~2019

(dollars and shares in thousands, except per share data)


	Three months ended				Nine months ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Interest and dividend income
Interest and fees on loans	$	12,760	$	13,187	$	38,858	$	38,246
Interest and fees on PCI loans		962		2,333		3,121		4,877
Interest on federal funds sold		—		9		—		14
Interest on deposits in other banks		121		87		231		300
Interest and dividends on securities
Taxable		1,362		1,489		4,000		4,483
Nontaxable		344		355		1,036		1,252
Total interest and dividend income		15,549		17,460		47,246		49,172
Interest expense
Interest on deposits		2,614		3,698		9,215		10,521
Interest on borrowed funds		222		343		720		1,107
Total interest expense		2,836		4,041		9,935		11,628
Net interest income		12,713		13,419		37,311		37,544
Provision for loan losses		—		—		4,200		125
Net interest income after provision for loan losses		12,713		13,419		33,111		37,419
Noninterest income
Service charges and fees		613		758		1,817		2,074
Gain on securities transactions, net		78		50		281		274
Gain on sale of other loans		—		—		11		—
Income on bank owned life insurance		171		181		518		546
Mortgage loan income		228		176		822		338
Other		382		346		974		744
Total noninterest income		1,472		1,511		4,423		3,976
Noninterest expense
Salaries and employee benefits		5,041		5,289		14,806		15,943
Occupancy expenses		815		813		2,420		2,662
Equipment expenses		330		377		1,047		1,152
FDIC assessment		174		4		455		316
Data processing fees		656		594		1,821		1,741
Other real estate expense, net		87		565		89		662
Other operating expenses		1,423		1,588		4,355		4,585
Total noninterest expense		8,526		9,230		24,993		27,061
Income before income taxes		5,659		5,700		12,541		14,334
Income tax expense		1,143		1,087		2,450		2,674
Net income	$	4,516	$	4,613	$	10,091	$	11,660
Net income per share — basic	$	0.20	$	0.21	$	0.45	$	0.52
Net income per share — diluted	$	0.20	$	0.20	$	0.45	$	0.52
Weighted average number of shares outstanding
Basic		22,312		22,303		22,339		22,224
Diluted		22,503		22,561		22,534		22,475

Three months ended Nine months ended
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
Interest and dividend income
Interest and fees on loans $ 10,127 $ 9,156 $ 29,676 $ 26,582
Interest and fees on PCI loans 1,423 1,549 4,355 4,704
Interest on federal funds sold 1 — 1 —
Interest on deposits in other banks 65 22 143 66
Interest and dividends on securities
Taxable 1,171 1,133 3,577 3,528
Nontaxable 602 547 1,805 1,698
Total interest and dividend income 13,389 12,407 39,557 36,578
Interest expense
Interest on deposits 2,053 1,550 5,776 4,638
Interest on borrowed funds 310 354 914 1,091
Total interest expense 2,363 1,904 6,690 5,729
Net interest income 11,026 10,503 32,867 30,849
Provision for loan losses 150 250 150 450
Net interest income after provision for loan losses 10,876 10,253 32,717 30,399
Noninterest income
Service charges on deposit accounts 678 617 2,011 1,785
Gain on securities transactions, net 48 88 180 608
Income on bank owned life insurance 235 238 704 630
Mortgage loan income 59 252 163 599
Other 145 150 448 439
Total noninterest income 1,165 1,345 3,506 4,061
Noninterest expense
Salaries and employee benefits 4,998 4,676 14,566 13,848
Occupancy expenses 857 756 2,329 2,043
Equipment expenses 305 242 849 729
FDIC assessment 185 253 550 756
Data processing fees 501 410 1,466 1,230
Amortization of intangibles 62 477 878 1,430
Other real estate expense (income), net 37 28 98 (89 )
Other operating expenses 1,761 1,436 4,957 4,591
Total noninterest expense 8,706 8,278 25,693 24,538
Income before income taxes 3,335 3,320 10,530 9,922
Income tax expense 919 862 2,687 2,726
Net income $ 2,416 $ 2,458 $ 7,843 $ 7,196
Net income per common share — basic $ 0.11 $ 0.11 $ 0.36 $ 0.33
Net income per common share — diluted $ 0.11 $ 0.11 $ 0.35 $ 0.33
Weighted average number of shares outstanding
Basic 22,041 21,935 22,000 21,902
Diluted 22,542 22,127 22,491 22,105

See accompanying notes to unaudited consolidated financial statements

4

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, ~~2017~~2020 AND ~~2016~~2019

(dollars in thousands)


	Three months ended				Nine months ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Net income	$	4,516	$	4,613	$	10,091	$	11,660

Other comprehensive income:
Unrealized gain on investment securities:
Change in unrealized gain on investment securities		1,735		1,215		5,527		5,818
Tax related to unrealized gain on investment securities		(382)		(267)		(1,215)		(1,279)
Reclassification adjustment for gain on securities sold		(78)		(50)		(281)		(274)
Tax related to realized gain on securities sold		17		11		62		60
Cash flow hedge:
Change in unrealized gain (loss) on cash flow hedge		47		(156)		(639)		(395)
Tax related to cash flow hedge		(10)		34		140		86
Total other comprehensive income		1,329		787		3,594		4,016
Total comprehensive income	$	5,845	$	5,400	$	13,685	$	15,676

Three months ended Nine months ended
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
Net income $ 2,416 $ 2,458 $ 7,843 $ 7,196

Other comprehensive income (loss):
Unrealized gains on investment securities:
Change in unrealized gain (loss) in investment securities 66 (488 ) 2,001 4,710
Tax related to unrealized gain in investment securities (23 ) 166 (692 ) (1,601 )
Reclassification adjustment for gain in securities sold (48 ) (88 ) (180 ) (608 )
Tax related to realized gain in securities sold 17 30 62 206
Defined benefit pension plan:
Tax related to defined benefit pension plan — — 11 —
Cash flow hedge:
Change in unrealized gain (loss) in cash flow hedge 55 286 86 (391 )
Tax related to cash flow hedge (20 ) (97 ) (30 ) 133
Total other comprehensive income (loss) 47 (191 ) 1,258 2,449
Total comprehensive income $ 2,463 $ 2,267 $ 9,101 $ 9,645

See accompanying notes to unaudited consolidated financial statements

5

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, ~~2017~~2020 AND ~~2016~~2019

(dollars and shares in ~~thousands)~~thousands, except per share amounts)


								Accumulated
				Additional		Retained		Other
	Common Stock			Paid in		Earnings		Comprehensive
	Shares	Amount		Capital		(Deficit)		Income (Loss)		Total


Balance June 30, 2019	22,258	$	223	$	149,752	$	(4,529)	$	1,950	$	147,396
Issuance of common stock	7		—		54		—		—		54
Exercise and issuance of employee stock options	70		—		458		—		—		458
Net income	—		—		—		4,613		—		4,613
Dividends of $0.03 per share paid on common stock	—		—		—		(670)		—		(670)
Other comprehensive income	—		—		—		—		787		787
Balance September 30, 2019	22,335	$	223	$	150,264	$	(586)	$	2,737	$	152,638

Balance December 31, 2018	22,132	$	221	$	148,763	$	(10,244)	$	(1,279)	$	137,461
Issuance of common stock	21		—		161		—		—		161
Exercise and issuance of employee stock options	182		2		1,340		—		—		1,342
Net income	—		—		—		11,660		—		11,660
Dividends of $0.09 per share paid on common stock	—		—		—		(2,002)		—		(2,002)
Other comprehensive income	—		—		—		—		4,016		4,016
Balance September 30, 2019	22,335	$	223	$	150,264	$	(586)	$	2,737	$	152,638

Balance June 30, 2020	22,311	$	223	$	150,428	$	5,900	$	4,230	$	160,781
Issuance of common stock	10		—		49		—		—		49
Exercise and issuance of employee stock options	—		—		231		—		—		231
Net income	—		—		—		4,516		—		4,516
Dividends of $0.05 per share paid on common stock	—		—		—		(1,116)		—		(1,116)
Other comprehensive income	—		—		—		—		1,329		1,329
Balance September 30, 2020	22,321	$	223	$	150,708	$	9,300	$	5,559	$	165,790

Balance December 31, 2019	22,423	$	224	$	150,728	$	2,562	$	1,965	$	155,479
Issuance of common stock	25		—		152		—		—		152
Exercise and issuance of employee stock options	4		—		705		—		—		705
Stock purchased under stock repurchase program	(131)		(1)		(877)		—				(878)
Net income	—		—		—		10,091		—		10,091
Dividends of $0.15 per share paid on common stock	—		—		—		(3,353)		—		(3,353)
Other comprehensive income	—		—		—		—		3,594		3,594
Balance September 30, 2020	22,321	$	223	$	150,708	$	9,300	$	5,559	$	165,790

Accumulated
Additional Other
Common Stock Paid in Retained Comprehensive
Shares Amount Capital Deficit Income (Loss) Total

Balance January 1, 2016 21,867 $ 219 $ 145,907 $ (41,050 ) $ (589 ) $ 104,487
Issuance of common stock 28 — 122 — — 122
Exercise and issuance of employee stock options 52 — 475 — — 475
Net income — — — 7,196 — 7,196
Other comprehensive income — — — — 2,449 2,449
Balance September 30, 2016 21,947 $ 219 $ 146,504 $ (33,854 ) $ 1,860 $ 114,729
Balance January 1, 2017 21,960 $ 220 $ 146,667 $ (31,128 ) $ (1,223 ) $ 114,536
Issuance of common stock 21 — 120 — — 120
Exercise and issuance of employee stock options 67 — 666 — — 666
Net income — — — 7,843 — 7,843
Other comprehensive income — — — — 1,258 1,258
Balance September 30, 2017 22,048 $ 220 $ 147,453 $ (23,285 ) $ 35 $ 124,423

See accompanying notes to unaudited consolidated financial statements

6

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, ~~2017~~2020 AND ~~2016~~2019

(dollars in thousands)


	September 30, 2020		September 30, 2019
Operating activities:
Net income	$	10,091	$	11,660
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,379		1,552
Right-of-use lease asset amortization		706		699
Stock-based compensation expense		846		804
Tax benefit of exercised stock options		(6)		(150)
Amortization of purchased loan premium		229		236
Provision for loan losses		4,200		125
Amortization of security premiums and accretion of discounts, net		574		905
Net gain on sale of securities		(281)		(274)
Net gain on sale and valuation of other real estate owned		(23)		(81)
Net gain on sale of loans		(11)		—
Originations of mortgages held for sale		(26,112)		(13,227)
Proceeds from sales of mortgages held for sale		25,462		13,373
Net loss on disposal of premises and equipment		82		—
Increase in bank owned life insurance investment		(518)		(327)
Changes in assets and liabilities:
Increase in other assets		(2,086)		(661)
Decrease in accrued expenses and other liabilities		(1,446)		(117)
Net cash provided by operating activities		13,086		14,517

Investing activities:
Proceeds from sales/calls/maturities/paydowns of available for sale securities		66,171		75,128
Proceeds from calls/maturities/paydowns of held to maturity securities		12,640		3,835
Proceeds from sales of restricted equity securities		1,700		866
Purchase of available for sale securities		(107,834)		(53,589)
Purchase of restricted equity securities		(1,720)		(1,995)
Proceeds from sale of other real estate owned		134		638
Net increase in loans		(115,608)		(42,707)
Principal recoveries of loans previously charged off		453		363
Purchase of premises and equipment, net		(186)		(121)
Purchase small business investment company fund investment		(345)		(875)
Proceeds from sale of loans		632		705
Net cash used in investing activities		(143,963)		(17,752)

Financing activities:
Net increase in deposits		205,894		12,267
Net decrease in federal funds purchased		(23,497)		(19,369)
Net increase in short-term Federal Home Loan Bank borrowings		—		5,000
Proceeds from long-term Federal Home Loan Bank borrowings		40,000		10,137
Payments on long-term Federal Home Loan Bank borrowings		(40,500)		(917)
Proceeds from issuance of common stock		11		698
Cash dividends paid		(3,353)		(2,002)
Repurchase of common stock		(878)		—
Net cash provided by financing activities		177,677		5,814

Net increase in cash and cash equivalents		46,800		2,579

Cash and cash equivalents:
Beginning of the period		28,684		34,219
End of the period	$	75,484	$	36,798

Supplemental disclosures of cash flow information:
Interest paid	$	10,312	$	11,554
Income taxes paid		3,306		2,195
Transfers of loans to other real estate owned		—		4,198
Right-of-use lease assets in exchange for lease liability		—		7,408
Transfers of building premises and equipment to held for sale		—		337

September 30, 2017 September 30, 2016
Operating activities:
Net income $ 7,843 $ 7,196
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and intangibles amortization 2,136 2,571
Stock-based compensation expense 559 426
Tax benefit of exercised stock options (105 ) (50 )
Amortization of purchased loan premium 141 191
Provision for loan losses 150 450
Amortization of security premiums and accretion of discounts, net 1,331 1,307
Net gain on sale of securities (180 ) (608 )
Net gain on sale and valuation of other real estate owned (4 ) (315 )
Originations of mortgages held for sale — (49,185 )
Proceeds from sales of mortgages held for sale — 51,286
Increase in bank owned life insurance investment (572 ) (520 )
Changes in assets and liabilities:
(Increase) decrease in other assets (1,526 ) 334
Increase (decrease) in accrued expenses and other liabilities 400 (227 )
Net cash provided by operating activities 10,173 12,856

Investing activities:
Proceeds from available for sale securities 47,313 96,320
Proceeds from held to maturity securities 660 10,402
Proceeds from equity securities, restricted 1,255 2,890
Purchase of available for sale securities (40,839 ) (43,494 )
Purchase of held to maturity securities (643 ) (19,589 )
Purchase of equity securities, restricted (1,321 ) (3,756 )
Proceeds from sale of other real estate owned 2,118 1,851
Improvements of other real estate, net of insurance proceeds — (34 )
Net increase in loans (49,063 ) (59,519 )
Principal recoveries of loans previously charged off 380 272
Purchase of premises and equipment, net (2,370 ) (1,573 )
Purchase small business investment company fund investment (525 ) (262 )
Purchase of bank owned life insurance investment — (5,000 )
Proceeds from sale of premises and equipment — 145
Net cash used in investing activities (43,035 ) (21,347 )

Financing activities:
Net increase in deposits 41,088 21,805
Net decrease in federal funds purchased (4,714 ) (18,921 )
Net (decrease) increase in Federal Home Loan Bank borrowings (591 ) 13,426
Proceeds from issuance of common stock 227 116
Payments on long-term debt (1,670 ) (2,937 )
Net cash provided by financing activities 34,340 13,489

Net increase in cash and cash equivalents 1,478 4,998

Cash and cash equivalents:
Beginning of the period 21,072 16,969
End of the period $ 22,550 $ 21,967

Supplemental disclosures of cash flow information:
Interest paid $ 6,638 $ 5,787
Income taxes paid 3,320 3,444
Transfer of OREO property 397 947

See accompanying notes to unaudited consolidated financial statements

7

COMMUNITY BANKERS TRUST CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Banking Activities and Significant Accounting Policies

Organization

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 2524 full-service offices, 18 of which are in Virginia and 6 of which are in Maryland. The Bank also operates ~~one~~2 loan production ~~office in Virginia.~~

offices.

The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals, ~~and~~ small businesses and larger commercial companies, including individual and commercial demand and time deposit accounts, commercial and industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products, and ~~safe deposit box facilities.~~cash management services.

Financial Statements

The consolidated statements presented include accounts of the Company and the Bank, its wholly-owned subsidiary. All material intercompany balances and transactions have been eliminated. The statements should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles (GAAP) and to the general practices within the banking industry. The interim financial statements have not been audited; however, in the opinion of management, all adjustments, consisting of normal accruals, were made that are necessary to present fairly the balance sheet of the Company as of September 30, ~~2017,~~2020, the statements of income and comprehensive income and changes in shareholders’ equity for the three and nine months ended September 30, ~~2017,~~2020, and the statements of ~~changes in shareholders’ equity and~~ cash flows for the nine months ended September 30, ~~2017.~~2020. Results for the nine month period ended September 30, ~~2017~~2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~

2020.

The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when either earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that the Company uses. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company’s transactions would be the same, the timing of events that would impact its transactions could change.

In preparing these financial statements, the Company has evaluated subsequent events and transactions for potential recognition or disclosure through the date the financial statements were issued.

~~Certain reclassifications have been made to prior period balances to conform to the current year presentations.~~

Recent Accounting ~~Pronouncements~~

Developments

In ~~March 2017,~~October 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards ~~Update (ASU) 2017-08,~~Codification (ASC) 2020-08, ~~Receivables—~~Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable ~~Fees~~fees and Other Costs ~~(Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.~~ ~~The~~. This ASU ~~shortens the amortization period for certain callable debt securities held at a premium to the earliest call date.~~

~~Under current GAAP, entities normally amortize the premium as~~clarifies that an adjustment of yield over the contractual life of the instrument. Stakeholders have expressed concerns with the current approach on the basis that current GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call onentity should reevaluate whether a callable debt security ~~held at a premium,~~is within the ~~unamortized premium is recorded as a loss in earnings. Further, there is diversity in practice (1) in the amortization period~~scope of ASC paragraph 310-20-35-33 for ~~premiums of callable debt securities, and (2) in how the potential for exercise of a call is factored into current impairment assessments.~~

The ASU shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. However, the amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

~~The amendments are effective for~~each reporting period. For public business entities, the ASU is effective for ~~annual periods~~fiscal years beginning after December 15, ~~2018, including~~2021, and interim periods within those ~~annual periods.~~fiscal years. Early adoption is not permitted. ~~The Company is currently in compliance with this guidance; therefore, its adoption will have no impact~~All entities should apply ASU 2020-08 on ~~its financial statements.~~

~~Also in March 2017, the FASB issued ASU No. 2017-07,~~~~Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~.The amendments apply to all employers, including not-for-profit entities, that offer to their employees defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715,~~Compensation — Retirement Benefits~~.

The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component. The line item or items used in the income statement to present the other components of net benefit cost must be disclosed.

~~The amendments are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted~~a prospective basis as of the beginning of ~~an annual~~the period of adoption for ~~which financial statements (interim~~existing or ~~annual) have not been issued or made available for issuance.~~newly purchased callable debt securities. The Company does not expect the adoption of ~~this guidance~~ASU 2020-08 to have a material impact on its consolidated financial statements.

In March 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provides relief from certain requirements under GAAP. Section 4013 of the CARES Act gives entities temporary relief from the accounting and disclosure requirements for troubled debt restructurings (TDRs) under FASB ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors, in certain situations. Under FASB ASC 310-40, a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Section 4013 of the CARES Act permits the suspension of FASB ASC 310-40 for loan modifications that are made by financial institutions in response to the coronavirus (COVID-19) pandemic if (1) the borrower was not more than 30 days past due as of December 31, 2019, and (2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan. These modifications must be made between March 1, 2020 and the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning COVID–19 declared by the President on March 13, 2020 under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates (the “applicable period”).

In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (the “agencies”), issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The ~~Company does~~agencies noted that there are circumstances in which a loan modification may not ~~offer~~be eligible for non-TDR treatment under Section 4013 of the CARES Act or in which an institution elects not to apply Section 4013. For example, a ~~post retirement benefit plan. As~~loan that is modified after the ~~Company’s pension plan is frozen, no additional service cost will~~end of the applicable period would not be ~~incurred. The remaining components~~eligible under Section 4013. For such loans, the agencies confirmed with the staff of ~~net periodic benefit cost~~the FASB that short-term modifications made on a good faith basis in response to the impact of COVID-19 to borrowers who were current prior to any relief are not ~~expected~~ to be ~~significant. See Note 10 for further details.~~

~~From 2014 to 2016, the FASB issued ASU 2014-09,~~~~Revenue from Contracts with Customers;~~~~ASU 2015-14,~~~~Deferral~~considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of ~~the Effective Date;~~~~ASU 2016-08,~~~~Principal versus Agent Considerations;~~~~ASU 2016-10,~~~~Identifying Performance Obligations and Licensing;~~~~ASU 2016-12,~~~~Narrow-Scope Improvements and Practical Expedients; and~~~~ASU 2016-20,~~~~Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.~~~~These ASUs supersede the revenue recognition requirements~~repayment terms, or other delays in ~~ASC Topic 605,~~~~Revenue Recognition~~, and most industry-specific guidance throughout the Industry Topics of the Codification. The core principle of the ASUs is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASUs may be adopted either retrospectively or on a modified retrospective basis to new contracts and existing contracts, with remaining performance obligations as of the effective date. For public companies, the ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted beginning January 1, 2017.

The Company is evaluating the anticipated effects of these ASUs on its consolidated financial statements and related disclosures. While the guidance will replace most existing revenue recognition guidance in GAAP, the ASUs are not applicable to financial instruments and, therefore, will not impact a majority of the Company’s revenue, including interest income. The Company’s analysis indicates that service charges on deposit accounts and certain components within other noninterest income contain revenue streamspayment that are ~~in scope of these updates; however,~~insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the ~~Company does not expect~~time a ~~material change in the timing or measurement of these revenues.~~modification program is implemented. The ~~updates~~interagency statement was effective immediately.

The CARES Act and interagency statement are expected to have a material impact on the ~~presentation and disclosure related~~Company’s financial statements; however, due to ~~these revenues. The Company will begin to analyze~~ the ~~underlying contracts, as applicable, related to these revenues to determine~~uncertainties regarding the ~~ultimate~~economic effects of COVID-19, this impact ~~of these updates. The Company plans to adopt the standards beginning January 1, 2018 and expects to use the modified retrospective method of adoption.~~cannot be quantified at this time.

Note 2. Securities

Amortized costs and fair values of securities available for sale and held to maturity at September 30, ~~2017~~2020 and December 31, ~~2016~~2019 were as follows(dollars in thousands):


	September 30, 2020
			Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Securities Available for Sale
U.S. Treasury securities	$	12,500	$	—	$	—	$	12,500
U.S. Government agencies		19,942		83		(280)		19,745
State, county and municipal		109,976		6,608		(50)		116,534
Mortgage backed securities		28,086		1,865		—		29,951
Asset backed securities		28,748		373		(135)		28,986
Corporate bonds		25,454		496		(13)		25,937
Total Securities Available for Sale	$	224,706	$	9,425	$	(478)	$	233,653

Securities Held to Maturity
State, county and municipal	$	23,026	$	1,092	$	—	$	24,118
Total Securities Held to Maturity	$	23,026	$	1,092	$	—	$	24,118

September 30, 2017
Gross Unrealized
Amortized Cost Gains Losses Fair Value
Securities Available for Sale
U.S. Treasury issue and other U.S. Gov’t agencies $ 46,919 $ 26 $ (558 ) $ 46,387
U.S. Gov’t sponsored agencies 2,779 — (36 ) 2,743
State, county and municipal 122,318 2,655 (644 ) 124,329
Corporate and other bonds 14,947 142 (67 ) 15,022
Mortgage backed – U.S. Gov’t agencies 5,659 47 (123 ) 5,583
Mortgage backed – U.S. Gov’t sponsored agencies 16,625 16 (258 ) 16,383
Total Securities Available for Sale $ 209,247 $ 2,886 $ (1,686 ) $ 210,447

Securities Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies $ 10,000 $ — $ (78 ) $ 9,922
State, county and municipal 35,965 974 (42 ) 36,897
Mortgage backed – U.S. Gov’t agencies 495 11 — 506
Total Securities Held to Maturity $ 46,460 $ 985 $ (120 ) $ 47,325

9

December 31, 2016
Gross Unrealized
Amortized Cost Gains Losses Fair Value
Securities Available for Sale
U.S. Treasury issue and other U.S. Gov’t agencies $ 58,724 $ 15 $ (763 ) $ 57,976
U.S. Gov’t sponsored agencies 3,452 — (116 ) 3,336
State, county and municipal 121,686 2,247 (1,160 ) 122,773
Corporate and other bonds 15,936 — (433 ) 15,503
Mortgage backed – U.S. Gov’t agencies 3,614 — (119 ) 3,495
Mortgage backed – U.S. Gov’t sponsored agencies 13,330 21 (313 ) 13,038
Total Securities Available for Sale $ 216,742 $ 2,283 $ (2,904 ) $ 216,121

Securities Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies $ 10,000 $ — $ (154 ) $ 9,846
State, county and municipal 35,847 568 (185 ) 36,230
Mortgage backed – U.S. Gov’t agencies 761 21 — 782
Total Securities Held to Maturity $ 46,608 $ 589 $ (339 ) $ 46,858


	December 31, 2019
			Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Securities Available for Sale
U.S. Government agencies	$	22,104	$	51	$	(219)	$	21,936
State, county and municipal		95,467		3,167		(42)		98,592
Mortgage backed securities		48,045		808		(113)		48,740
Asset backed securities		11,637		49		(82)		11,604
Corporate bonds		6,016		84		(3)		6,097
Total Securities Available for Sale	$	183,269	$	4,159	$	(459)	$	186,969

Securities Held to Maturity
U.S. Government agencies	$	10,000	$	—	$	(12)	$	9,988
State, county and municipal		25,733		913		(1)		26,645
Total Securities Held to Maturity	$	35,733	$	913	$	(13)	$	36,633

The amortized cost and fair value of securities at September 30, ~~2017~~2020 by final contractual maturity are shown below. Expected maturities may differ from final contractual maturities because issuers may have the right to call or prepay obligations without any penalties.

	Held to Maturity				Available for Sale
												��
									Held to Maturity				Available for Sale
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	3,202	$	3,221	$	3,684	$	3,740	$	2,941	$	2,960	$	31,603	$	31,763
Due after one year through five years		24,804		25,034		97,802		98,829		14,630		15,403		80,130		82,863
Due after five years through ten years		12,779		13,204		98,364		98,427		5,204		5,467		88,038		93,204
Due after ten years		5,675		5,866		9,397		9,451		251		288		24,935		25,823
Total securities	$	46,460	$	47,325	$	209,247	$	210,447	$	23,026	$	24,118	$	224,706	$	233,653

Proceeds from sales and calls of securities ~~available for sale~~ were ~~$9.1~~$4.6 million and ~~$22.2~~$16.4 million during the three months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively, and ~~$30.1~~$25.2 million and ~~$93.7~~$57.5 million for the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively. Gains and losses on ~~the sale of~~ securities transactions are determined using the specific identification method. Gross realized gains and losses on ~~sales of~~ securities ~~available for sale~~transactions during the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 were as follows (dollars in thousands):

	Three Months Ended						Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016

													Three months ended				Nine months ended
													September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Gross realized gains	$	114		$	191		$	378		$	1,223		$	79	$	87	$	375	$	504
Gross realized losses		(66	)		(103	)		(198	)		(615	)		(1)		(37)		(94)		(230)
Net securities gains	$	48		$	88		$	180		$	608
Net securities gain													$	78	$	50	$	281	$	274

In estimating other than temporary impairment (OTTI) losses, management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and short-term prospects for the issuer, and the intent and ability of management to hold its investment for a period of time to allow a recovery in fair value. There were no0 investments held that had OTTI losses for the three and nine months ended September 30, ~~2017~~2020 and ~~2016.~~2019.

10

The fair value and gross unrealized losses for securities, segregated by the length of time that individual securities have been in a continuous gross unrealized loss position, at September 30, ~~2017~~2020 and December 31, ~~2016~~2019 were as follows (dollars in thousands):


	September 30, 2020
	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. Government agencies	$	2,912	$	(9)	$	8,765	$	(271)	$	11,677	$	(280)
State, county and municipal		4,830		(35)		301		(15)		5,131		(50)
Asset backed securities		12,536		(38)		4,388		(97)		16,924		(135)
Corporate bonds		7,727		(13)		—		—		7,727		(13)
Total	$	28,005	$	(95)	$	13,454	$	(383)	$	41,459	$	(478)

	September 30, 2017
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss

																December 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. Treasury issue and other U.S. Gov’t agencies	$	17,662	$	(225	)	$	21,523	$	(333	)	$	39,185	$	(558	)
U.S. Gov’t sponsored agencies		-		-			2,243		(36	)		2,243		(36	)
U.S. Government agencies																$	6,396	$	(102)	$	8,020	$	(117)	$	14,416	$	(219)
State, county and municipal		18,753		(203	)		8,252		(441	)		27,005		(644	)		7,088		(32)		308		(10)		7,396		(42)
Corporate and other bonds		-		-			6,540		(67	)		6,540		(67	)
Mortgage backed – U.S. Gov’t agencies		1,773		(23	)		1,898		(100	)		3,671		(123	)
Mortgage backed – U.S. Gov’t sponsored agencies		7,482		(99	)		5,066		(159	)		12,548		(258	)
Mortgage backed securities																	11,001		(40)		4,287		(73)		15,288		(113)
Asset backed securities																	4,861		(74)		625		(8)		5,486		(82)
Corporate bonds																	248		(3)		—		—		248		(3)
Total	$	45,670	$	(550	)	$	45,522	$	(1,136	)	$	91,192	$	(1,686	)	$	29,594	$	(251)	$	13,240	$	(208)	$	42,834	$	(459)


Securities Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies	$	9,922	$	(78	)	$	-	$	-		$	9,922	$	(78	)
U.S. Government agencies																$	—	$	—	$	9,988	$	(12)	$	9,988	$	(12)
State, county and municipal		2,423		(12	)		1,256		(30	)		3,679		(42	)		31		—		622		(1)		653		(1)
Total	$	12,345	$	(90	)	$	1,256	$	(30	)	$	13,601	$	(120	)	$	31	$	—	$	10,610	$	(13)	$	10,641	$	(13)

December 31, 2016
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. Treasury issue and other U.S. Gov’t agencies $ 29,756 $ (324 ) $ 25,155 $ (439 ) $ 54,911 $ (763 )
U.S. Gov’t sponsored agencies - - 2,523 (116 ) 2,523 (116 )
State, county and municipal 39,713 (848 ) 3,885 (312 ) 43,598 (1,160 )
Corporate and other bonds 6,864 (103 ) 8,639 (330 ) 15,503 (433 )
Mortgage backed – U.S. Gov’t agencies 1,598 (18 ) 1,897 (101 ) 3,495 (119 )
Mortgage backed – U.S. Gov’t sponsored agencies 9,247 (313 ) - - 9,247 (313 )
Total $ 87,178 $ (1,606 ) $ 42,099 $ (1,298 ) $ 129,277 $ (2,904 )

Securities Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies $ 9,846 $ (154 ) $ - $ - $ 9,846 $ (154 )
State, county and municipal 8,052 (185 ) - - 8,052 (185 )
Total $ 17,898 $ (339 ) $ - $ - $ 17,898 $ (339 )

The unrealized losses (impairments) in the investment portfolio at September 30, ~~2017~~2020 and December 31, ~~2016~~2019 are generally a result of market fluctuations of interest rates that occur daily. The unrealized losses are from ~~119~~53 securities at September 30, ~~2017.~~2020. Of those, ~~107~~32 are investment grade, have U.S. government agency guarantees, or are backed by the full faith and credit of local municipalities throughout the United States. ~~Twelve~~NaN investment grade asset-backed securities comprised of student loan pools, which are 97% U.S. government guaranteed, included in corporate obligations and ~~other bond obligations comprise~~5 corporate bonds make up the remaining securities with unrealized losses at September 30, ~~2017.~~2020. The Company considers the reason for impairment, length of impairment, and ability and intent to hold until the full value is recovered in determining if the impairment is temporary in nature. Based on this analysis, the Company has determined these impairments to be temporary in nature. The Company does not intend to sell, and it is more likely than not that the Company will not be required to sell, these securities until they recover in value or reach maturity.

Market prices are affected by conditions beyond the control of the Company. Investment decisions are made by the management group of the Company and reflect the overall liquidity and strategic asset/liability objectives of the Company. Management analyzes the securities portfolio frequently and manages the portfolio to provide an overall positive impact to the Company’s income statement and balance sheet.

Securities with amortized costs of ~~$65.6~~$49.8 million and ~~$75.8~~$47.3 million at September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively, were pledged to secure public deposits as required or permitted by law. Securities with amortized costs of ~~$3.9~~$5.3 million and ~~$4.4~~$5.8 million at September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively, were pledged to secure lines of credit at the Federal Reserve discount window. At each of September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, there were no0 securities purchased from a single issuer, other than U.S. Treasury ~~issue~~securities and other U.S. Government agencies that comprised more than 10% of the consolidated shareholders’ equity.

11

Note 3. Loans and Related Allowance for Loan Losses

The Company’s loans, net of deferred fees and costs, at September 30, ~~2017~~2020 and December 31, ~~2016~~2019 were comprised of the following (dollars in thousands):


	September 30, 2020				December 31, 2019
	Amount		% of Loans		Amount		% of Loans
Mortgage loans on real estate:
Residential 1‑4 family	$	204,366	17.35	%	$	223,538	21.12	%
Commercial		452,677	38.44			396,858	37.50
Construction and land development		159,766	13.57			146,566	13.85
Second mortgages		6,488	0.55			6,639	0.63
Multifamily		77,787	6.60			72,978	6.90
Agriculture		7,138	0.61			8,346	0.79
Total real estate loans		908,222	77.12			854,925	80.79
Commercial loans		257,362	21.85			191,183	18.06
Consumer installment loans		10,606	0.90			11,163	1.05
All other loans		1,519	0.13			1,052	0.10
Total loans	$	1,177,709	100.00	%	$	1,058,323	100.00	%

September 30, 2017 December 31, 2016
Amount % of Loans Amount % of Loans
Mortgage loans on real estate:
Residential 1-4 family $ 229,745 25.82 % $ 207,863 24.86 %
Commercial 345,759 38.85 339,804 40.63
Construction and land development 102,594 11.53 98,282 11.75
Second mortgages 7,399 0.83 7,911 0.95
Multifamily 53,642 6.03 39,084 4.67
Agriculture 7,588 0.85 7,185 0.86
Total real estate loans 746,727 83.91 700,129 83.72
Commercial loans 136,643 15.35 129,300 15.46
Consumer installment loans 5,331 0.60 5,627 0.67
All other loans 1,279 0.14 1,243 0.15
Total loans $ 889,980 100.00 % $ 836,299 100.00 %

The Company held ~~$16.7~~$11.9 million and ~~$15.8~~$12.7 million in balances of loans guaranteed by the United States Department of Agriculture (USDA), which are included in various categories in the table above, at September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively. As these loans are 100% guaranteed by the USDA, no0 loan loss allowance is required. These loan balances included a purchase premium of ~~$752,000~~$906,000 and ~~$749,000~~$1.0 million at September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively. The purchase premium is amortized as an adjustment of the related loan yield on a straight line basis, which is substantially equivalent to the results obtained using the effective interest method. Any unamortized purchase premium remaining on loans prepaid by the borrower is written off.

During the second and third quarters of 2020, the Company originated loans under the Paycheck Protection Program (PPP) of the Small Business Administration (SBA). These PPP loans totaled $85.1 million at September 30, 2020 and are included in commercial loans. As these loans are 100% guaranteed by the SBA, 0 loan loss allowance is required. The majority of the PPP loans have a two year term; however, most are expected to be forgiven by the SBA as borrowers use the funds for qualified expenses. These loan balances included net fees of $2.0 million at September 30, 2020, which are being amortized as an adjustment of the related loan yield on a straight line basis, which is substantially equivalent to the results obtained using the effective interest method. Any unamortized net fee remaining on loans forgiven or prepaid by the borrower is recorded as income.

At September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, the Company’s allowance for ~~credit~~loan losses was comprised of the following: (i) a specific valuation component calculated in accordance with FASB ASC 310,Receivables,(ii) a general valuation component calculated in accordance with FASB ~~Accounting Standards Codification (ASC)~~ASC 450,Contingencies, based on historical loan loss experience, current economic conditions and other qualitative risk factors, and (iii) an unallocated component to cover uncertainties that could affect management’s estimate of probable losses. Management identified loans subject to impairment in accordance with FASB ASC 310.

12

The following table summarizes information related to impaired loans as of September 30, ~~2017~~2020 and for the three and nine months ended September 30, 2020 (dollars in thousands):

Three months ended Nine months ended
September 30, 2017 September 30, 2017 September 30, 2017
Recorded
Investment⁽¹⁾ Unpaid
Principal
Balance⁽²⁾ Related
Allowance Average
Investment Interest
Recognized Average
Investment Interest
Recognized
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family $ 1,929 $ 2,257 $ — $ 1,935 $ 7 $ 1,941 $ 21
Commercial 3,905 4,510 — 3,802 39 4,582 114
Agriculture — — — 129 — 65 —
Total real estate loans 5,834 6,767 — 5,866 46 6,588 135
Commercial loans 1,248 1,248 — 624 — 612 —
Subtotal impaired loans with no valuation allowance 7,082 8,015 — 6,490 46 7,200 135
With an allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family 2,379 2,831 307 2,373 20 2,426 59
Commercial 2,510 2,920 119 2,653 2 1,580 6
Construction and land development 4,283 5,542 456 4,290 — 4,595 —
Agriculture 66 68 8 33 — 16 —
Total real estate loans 9,238 11,361 890 9,349 22 8,617 65
Commercial loans 1,640 1,923 72 1,570 1 869 3
Consumer installment loans 30 33 4 20 — 91 —
Subtotal impaired loans with a valuation allowance 10,908 13,317 966 10,939 23 9,577 68
Total:
Mortgage loans on real estate:
Residential 1-4 family 4,308 5,088 307 4,308 27 4,367 80
Commercial 6,415 7,430 119 6,455 41 6,162 120
Construction and land development 4,283 5,542 456 4,290 — 4,595 —
Agriculture 66 68 8 162 — 81 —
Total real estate loans 15,072 18,128 890 15,215 68 15,205 200
Commercial loans 2,888 3,171 72 2,194 1 1,481 3
Consumer installment loans 30 33 4 20 — 91 —
Total impaired loans $ 17,990 $ 21,332 $ 966 $ 17,429 $ 69 $ 16,777 $ 203


							Three months ended				Nine months ended
	September 30, 2020						September 30, 2020				September 30, 2020
			Unpaid
	Recorded		Principal		Related		Average		Interest		Average		Interest
	Investment ⁽¹⁾		Balance ⁽²⁾		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family	$	631	$	789	$	—	$	888	$	7	$	1,105	$	22
Commercial		3,501		4,226		—		3,080		34		3,129		101
Construction and land development		—		—		—		—		—		164		—
Multifamily		—		—		—		—		—		616		—
Total real estate loans		4,132		5,015		—		3,968		41		5,014		123
Commercial loans		—		—		—		175		—		88		—
Subtotal impaired loans with no valuation allowance		4,132		5,015		—		4,143		41		5,102		123
With an allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family		2,190		2,621		615		2,156		13		1,923		37
Commercial		217		722		59		152		2		195		6
Construction and land development		572		675		153		847		—		798		—
Agriculture		51		51		14		51		—		26		—
Total real estate loans		3,030		4,069		841		3,206		15		2,942		43
Commercial loans		1,786		1,786		334		1,243		3		1,142		9
Consumer installment loans		19		19		5		15		—		12		—
Subtotal impaired loans with a valuation allowance		4,835		5,874		1,180		4,464		18		4,096		52
Total:
Mortgage loans on real estate:
Residential 1‑4 family		2,821		3,410		615		3,044		20		3,028		59
Commercial		3,718		4,948		59		3,232		36		3,324		107
Construction and land development		572		675		153		847		—		962		—
Multifamily		—		—		—		—		—		616		—
Agriculture		51		51		14		51		—		26		—
Total real estate loans		7,162		9,084		841		7,174		56		7,956		166
Commercial loans		1,786		1,786		334		1,418		3		1,230		9
Consumer installment loans		19		19		5		15		—		12		—
Total impaired loans	$	8,967	$	10,889	$	1,180	$	8,607	$	59	$	9,198	$	175

(1)

The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the ~~investment~~investment.

(2)

The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs or valuation ~~allowances~~allowances.

13

The following table summarizes information related to impaired loans as of December 31, ~~2016~~2019 and for the three and nine months ended September 30, ~~2016~~2019 (dollars in thousands):

Three months ended Nine months ended
December 31, 2016 September 30, 2016 September 30, 2016
Recorded
Investment⁽¹⁾ Unpaid
Principal
Balance⁽²⁾ Related
Allowance Average
Investment Interest
Recognized Average
Investment Interest
Recognized
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family $ 1,704 $ 1,931 $ — $ 2,410 $ 5 $ 2,433 $ 13
Commercial 6,570 7,078 — 4,198 39 4,247 117
Second mortgages — — — 135 — 68 —
Total real estate loans 8,274 9,009 — 6,743 44 6,748 130
Commercial loans 1,200 1,200 — — — — —
Consumer installment loans — — — 122 — 123 —
Subtotal impaired loans with no valuation allowance 9,474 10,209 — 6,865 44 6,871 130
With an allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family 2,621 3,062 283 2,825 15 3,113 46
Commercial 617 1,051 73 475 2 478 6
Construction and land development 5,495 6,746 730 5,694 — 5,098 —
Second mortgages — — — — — 40 —
Total real estate loans 8,733 10,859 1,086 8,994 17 8,729 52
Commercial loans 53 53 7 54 — 40 —
Consumer installment loans 281 285 37 200 1 140 4
Subtotal impaired loans with a valuation allowance 9,067 11,197 1,130 9,248 18 8,909 56
Total:
Mortgage loans on real estate:
Residential 1-4 family 4,325 4,993 283 5,235 20 5,546 59
Commercial 7,187 8,129 73 4,673 41 4,725 123
Construction and land development 5,495 6,746 730 5,694 — 5,098 —
Second mortgages — — — 135 — 108 —
Total real estate loans 17,007 19,868 1,086 15,737 61 15,477 182
Commercial loans 1,253 1,253 7 54 — 40 —
Consumer installment loans 281 285 37 322 1 263 4
Total impaired loans $ 18,541 $ 21,406 $ 1,130 $ 16,113 $ 62 $ 15,780 $ 186


							Three months ended				Nine months ended
	December 31, 2019						September 30, 2019				September 30, 2019
			Unpaid
	Recorded		Principal		Related		Average		Interest		Average		Interest
	Investment ⁽¹⁾		Balance ⁽²⁾		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family	$	1,483	$	1,850	$	—	$	1,514	$	11	$	1,534	$	32
Commercial		3,226		3,966		—		3,308		35		3,372		103
Construction and land development		328		328		—		164		—		82		—
Multifamily		2,463		2,463		—		2,510		—		2,533		—
Total real estate loans		7,500		8,607		—		7,496		46		7,521		135
Subtotal impaired loans with no valuation allowance		7,500		8,607		—		7,496		46		7,521		135
With an allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family		1,498		1,808		380		1,862		12		1,965		36
Commercial		378		876		87		552		2		847		6
Construction and land development		48		147		11		2,084		—		3,210		—
Total real estate loans		1,924		2,831		478		4,498		14		6,022		42
Commercial loans		454		460		105		1,080		4		1,618		13
Consumer installment loans		7		7		1		6		—		5		—
Subtotal impaired loans with a valuation allowance		2,385		3,298		584		5,584		18		7,645		55
Total:
Mortgage loans on real estate:
Residential 1‑4 family		2,981		3,658		380		3,376		23		3,499		68
Commercial		3,604		4,842		87		3,860		37		4,219		109
Construction and land development		376		475		11		2,248		—		3,292		—
Multifamily		2,463		2,463		—		2,510		—		2,533		—
Total real estate loans		9,424		11,438		478		11,994		60		13,543		177
Commercial loans		454		460		105		1,080		4		1,618		13
Consumer installment loans		7		7		1		6		—		5		—
Total impaired loans	$	9,885	$	11,905	$	584	$	13,080	$	64	$	15,166	$	190

(1)

The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the ~~investment~~investment.

(2)

The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs or valuation ~~allowances~~allowances.

Troubled debt restructures ~~and some substandard loans~~ still accruing interest are loans that management expects to ultimately collect all principal and interest due, but not under the terms of the original contract. A reconciliation of impaired loans to nonaccrual loans at September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, is set forth in the table below (dollars in thousands):


	September 30, 2020		December 31, 2019
Nonaccruals	$	4,214	$	5,292
Trouble debt restructure and still accruing		4,753		4,593
Total impaired	$	8,967	$	9,885

September 30, 2017 December 31, 2016
Nonaccruals $ 12,677 $ 10,243
Trouble debt restructure and still accruing 5,313 4,653
Substandard and still accruing — 3,645
Total impaired $ 17,990 $ 18,541

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was an insignificant amount of cash basis income recognized during the three and nine months ended September 30, ~~2017~~2020 and ~~2016.~~2019. For the three months ended September 30, ~~2017~~2020 and ~~2016,~~2019, estimated interest income of ~~$224,000~~$61,000 and ~~$198,000,~~$92,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. For the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, estimated interest income of ~~$550,000~~$152,000 and ~~$588,000,~~$284,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

14

~~There were no loans greater than 90 days past due and still accruing interest at September 30, 2017 and December 31, 2016.~~ Table of Contents

The following tables present an age analysis of past due status of loans by category as of September 30, ~~2017~~2020 and December 31, ~~2016~~2019 (dollars in thousands):


	September 30, 2020
	30‑89 Days		90+ Days Past				Total Past				Total Loans
	Past Due		Due and Accruing		Nonaccrual		Due		Current		Receivable
Mortgage loans on real estate:
Residential 1‑4 family	$	1,279	$	—	$	1,338	$	2,617	$	201,749	$	204,366
Commercial		—		—		764		764		451,913		452,677
Construction and land development		—		—		572		572		159,194		159,766
Second mortgages		227		—		—		227		6,261		6,488
Multifamily		—		—		—		—		77,787		77,787
Agriculture		—		—		51		51		7,087		7,138
Total real estate loans		1,506		—		2,725		4,231		903,991		908,222
Commercial loans		635		—		1,470		2,105		255,257		257,362
Consumer installment loans		20		—		19		39		10,567		10,606
All other loans		—		—		—		—		1,519		1,519
Total loans	$	2,161	$	—	$	4,214	$	6,375	$	1,171,334	$	1,177,709

	September 30, 2017
	30-89 Days Past Due		Nonaccrual		Total Past Due		Current		Total Loans Receivable

											December 31, 2019
											30‑89 Days		90+ Days Past				Total Past				Total Loans
											Past Due		Due and Accruing		Nonaccrual		Due		Current		Receivable
Mortgage loans on real estate:
Residential 1-4 family	$	579	$	2,140	$	2,719	$	227,026	$	229,745
Residential 1‑4 family											$	1,308	$	—	$	1,378	$	2,686	$	220,852	$	223,538
Commercial		—		3,492		3,492		342,267		345,759		552		—		1,006		1,558		395,300		396,858
Construction and land development		—		4,283		4,283		98,311		102,594		166		—		376		542		146,024		146,566
Second mortgages		—		—		—		7,399		7,399		229		—		—		229		6,410		6,639
Multifamily		2,545		—		2,545		51,097		53,642		—		—		2,463		2,463		70,515		72,978
Agriculture		—		66		66		7,522		7,588		—		—		—		—		8,346		8,346
Total real estate loans		3,124		9,981		13,105		733,622		746,727		2,255		—		5,223		7,478		847,447		854,925
Commercial loans		603		2,666		3,269		133,374		136,643		1,085		946		62		2,093		189,090		191,183
Consumer installment loans		17		30		47		5,284		5,331		41		—		7		48		11,115		11,163
All other loans		—		—		—		1,279		1,279		—		—		—		—		1,052		1,052
Total loans	$	3,744	$	12,677	$	16,421	$	873,559	$	889,980	$	3,381	$	946	$	5,292	$	9,619	$	1,048,704	$	1,058,323

December 31, 2016
30-89 Days
Past Due Nonaccrual Total Past
Due Current Total Loans
Receivable
Mortgage loans on real estate:
Residential 1-4 family $ 296 $ 2,893 $ 3,189 $ 204,674 $ 207,863
Commercial — 1,758 1,758 338,046 339,804
Construction and land development 54 5,495 5,549 92,733 98,282
Second mortgages — — — 7,911 7,911
Multifamily — — — 39,084 39,084
Agriculture — — — 7,185 7,185
Total real estate loans 350 10,146 10,496 689,633 700,129
Commercial loans — 53 53 129,247 129,300
Consumer installment loans 3 44 47 5,580 5,627
All other loans — — — 1,243 1,243
Total loans $ 353 $ 10,243 $ 10,596 $ 825,703 $ 836,299

Activity in the allowance for loan losses on loans by segment for the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 is presented in the following tables (dollars in thousands):


	Three Months Ended September 30, 2020
			Provision
	June 30, 2020		Allocation		Charge-offs		Recoveries		September 30, 2020
Mortgage loans on real estate:
Residential 1‑4 family	$	3,495	$	(954)	$	—	$	14	$	2,555
Commercial		4,612		(1,606)		—		5		3,011
Construction and land development		1,342		(254)		—		75		1,163
Second mortgages		45		(9)		—		2		38
Multifamily		499		28		—		—		527
Agriculture		44		7		—		—		51
Total real estate loans		10,037		(2,788)		—		96		7,345
Commercial loans		2,058		(288)		—		19		1,789
Consumer installment loans		110		31		(42)		17		116
All other loans		8		2		—		—		10
Unallocated		25		3,043		—		—		3,068
Total loans	$	12,238	$	—	$	(42)	$	132	$	12,328

Three Months Ended September 30, 2017
June 30, 2017 Provision
Allocation Charge-offs Recoveries September 30, 2017
Mortgage loans on real estate:
Residential 1-4 family $ 3,797 $ (444 ) $ (73 ) $ 15 $ 3,295
Commercial 1,783 897 (457 ) 14 2,237
Construction and land development 1,383 (78 ) (180 ) — 1,125
Second mortgages 33 9 — 2 44
Multifamily 167 566 — — 733
Agriculture 21 (2 ) — — 19
Total real estate loans 7,184 948 (710 ) 31 7,453
Commercial loans 1,457 (193 ) (265 ) 2 1,001
Consumer installment loans 111 26 (86 ) 56 107
All other loans 9 (4 ) — — 5
Unallocated 728 (627 ) — — 101
Total loans $ 9,489 $ 150 $ (1,061 ) $ 89 $ 8,667

15

Three Months Ended September 30, 2016
June 30, 2016 Provision
Allocation Charge-offs Recoveries September 30, 2016
Mortgage loans on real estate:
Residential 1-4 family $ 2,445 $ 739 $ (202 ) $ 13 $ 2,995
Commercial 3,572 (1,057 ) — 21 2,536
Construction and land development 1,577 (154 ) (15 ) 1 1,409
Second mortgages 46 (24 ) — 2 24
Multifamily 293 297 — — 590
Agriculture 25 (9 ) — — 16
Total real estate loans 7,958 (208 ) (217 ) 37 7,570
Commercial loans 1,268 (392 ) — — 876
Consumer installment loans 102 38 (31 ) 7 116
All other loans 10 (3 ) — — 7
Unallocated 96 815 — — 911
Total loans $ 9,434 $ 250 $ (248 ) $ 44 $ 9,480

Nine Months Ended September 30, 2017
December 31, 2016 Provision
Allocation Charge-offs Recoveries September 30, 2017
Mortgage loans on real estate:
Residential 1-4 family $ 2,769 $ 545 $ (111 ) $ 92 $ 3,295
Commercial 1,952 703 (457 ) 39 2,237
Construction and land development 2,195 (939 ) (194 ) 63 1,125
Second mortgages 72 (79 ) — 51 44
Multifamily 260 473 — — 733
Agriculture 15 4 — — 19
Total real estate loans 7,263 707 (762 ) 245 7,453
Commercial loans 602 779 (385 ) 5 1,001
Consumer installment loans 135 51 (209 ) 130 107
All other loans 7 (2 ) — — 5
Unallocated 1,486 (1,385 ) — — 101
Total loans $ 9,493 $ 150 $ (1,356 ) $ 380 $ 8,667


	Three Months Ended September 30, 2019
			Provision
	June 30, 2019		Allocation		Charge-offs		Recoveries		September 30, 2019
Mortgage loans on real estate:
Residential 1‑4 family	$	2,894	$	(35)	$	(144)	$	26	$	2,741
Commercial		2,026		1		—		7		2,034
Construction and land development		1,399		(587)		(200)		18		630
Second mortgages		81		(7)		—		2		76
Multifamily		192		17		—		41		250
Agriculture		32		15		—		—		47
Total real estate loans		6,624		(596)		(344)		94		5,778
Commercial loans		1,999		(229)		(98)		3		1,675
Consumer installment loans		185		32		(134)		53		136
All other loans		8		—		—		—		8
Unallocated		3		793		—		—		796
Total loans	$	8,819	$	—	$	(576)	$	150	$	8,393


	Nine Months Ended September 30, 2020
			Provision
	December 31, 2019		Allocation		Charge-offs		Recoveries		September 30, 2020
Mortgage loans on real estate:
Residential 1‑4 family	$	2,685	$	(173)	$	—	$	43	$	2,555
Commercial		2,196		731		—		84		3,011
Construction and land development		1,044		(40)		—		159		1,163
Second mortgages		79		(45)		—		4		38
Multifamily		248		279		—		—		527
Agriculture		38		13		—		—		51
Total real estate loans		6,290		765		—		290		7,345
Commercial loans		1,980		331		(608)		86		1,789
Consumer installment loans		114		71		(146)		77		116
All other loans		7		3		—		—		10
Unallocated		38		3,030		—		—		3,068
Total loans	$	8,429	$	4,200	$	(754)	$	453	$	12,328


	Nine Months Ended September 30, 2019
			Provision
	December 31, 2018		Allocation		Charge-offs		Recoveries		September 30, 2019
Mortgage loans on real estate:
Residential 1‑4 family	$	2,281	$	394	$	(178)	$	244	$	2,741
Commercial		1,810		430		(277)		71		2,034
Construction and land development		1,161		(390)		(212)		71		630
Second mortgages		20		51		—		5		76
Multifamily		371		(162)		—		41		250
Agriculture		17		30		—		—		47
Total real estate loans		5,660		353		(667)		432		5,778
Commercial loans		1,894		129		(355)		7		1,675
Consumer installment loans		152		116		(234)		102		136
All other loans		12		(4)		—		—		8
Unallocated		1,265		(469)		—		—		796
Total loans	$	8,983	$	125	$	(1,256)	$	541	$	8,393

16

The increase in provision expense reflects the significant increase in commercial real estate and commercial loans classified as special mention due to the inherent economic impact COVID-19 may have on these borrowers. The allowance for loan losses could be further impacted by COVID-19; however, the amount of that impact is not currently estimable.

The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of September 30, ~~2017~~2020 and December 31, ~~2016~~2019 (dollars in thousands):


	September 30, 2020
	Allowance for Loan Losses						Recorded Investment in Loans
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Impairment		Impairment		Total		Impairment		Impairment		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	615	$	1,940	$	2,555	$	2,821	$	201,545	$	204,366
Commercial		59		2,952		3,011		3,718		448,959		452,677
Construction and land development		153		1,010		1,163		572		159,194		159,766
Second mortgages		—		38		38		—		6,488		6,488
Multifamily		—		527		527		—		77,787		77,787
Agriculture		14		37		51		51		7,087		7,138
Total real estate loans		841		6,504		7,345		7,162		901,060		908,222
Commercial loans		334		1,455		1,789		1,786		255,576		257,362
Consumer installment loans		5		111		116		19		10,587		10,606
All other loans		—		10		10		—		1,519		1,519
Unallocated		—		3,068		3,068		—		—		—
Total loans	$	1,180	$	11,148	$	12,328	$	8,967	$	1,168,742	$	1,177,709

September 30, 2017
Allowance for Loan Losses Recorded Investment in Loans
Individually
Evaluated for
Impairment Collectively
Evaluated for
Impairment Total Individually
Evaluated for
Impairment Collectively
Evaluated for
Impairment Total
Mortgage loans on real estate:
Residential 1-4 family $ 307 $ 2,988 $ 3,295 $ 4,308 $ 225,437 $ 229,745
Commercial 119 2,118 2,237 6,415 339,344 345,759
Construction and land development 456 669 1,125 4,283 98,311 102,594
Second mortgages — 44 44 — 7,399 7,399
Multifamily — 733 733 — 53,642 53,642
Agriculture 8 11 19 66 7,522 7,588
Total real estate loans 890 6,563 7,453 15,072 731,655 746,727
Commercial loans 72 929 1,001 2,888 133,755 136,643
Consumer installment loans 4 103 107 30 5,301 5,331
All other loans — 5 5 — 1,279 1,279
Unallocated — �� 101 101 — — —
Total loans $ 966 $ 7,701 $ 8,667 $ 17,990 $ 871,990 $ 889,980

	December 31, 2016
	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total

													December 31, 2019
													Allowance for Loan Losses						Recorded Investment in Loans
													Individually		Collectively				Individually		Collectively
													Evaluated for		Evaluated for				Evaluated for		Evaluated for
													Impairment		Impairment		Total		Impairment		Impairment		Total
Mortgage loans on real estate:
Residential 1-4 family	$	283	$	2,486	$	2,769	$	4,325	$	203,538	$	207,863
Residential 1‑4 family													$	380	$	2,305	$	2,685	$	2,981	$	220,557	$	223,538
Commercial		73		1,879		1,952		7,187		332,617		339,804		87		2,109		2,196		3,604		393,254		396,858
Construction and land development		730		1,465		2,195		5,495		92,787		98,282		11		1,033		1,044		376		146,190		146,566
Second mortgages		—		72		72		—		7,911		7,911		—		79		79		—		6,639		6,639
Multifamily		—		260		260		—		39,084		39,084		—		248		248		2,463		70,515		72,978
Agriculture		—		15		15		—		7,185		7,185		—		38		38		—		8,346		8,346
Total real estate loans		1,086		6,177		7,263		17,007		683,122		700,129		478		5,812		6,290		9,424		845,501		854,925
Commercial loans		7		595		602		1,253		128,047		129,300		105		1,875		1,980		454		190,729		191,183
Consumer installment loans		37		98		135		281		5,346		5,627		1		113		114		7		11,156		11,163
All other loans		—		7		7		—		1,243		1,243		—		7		7		—		1,052		1,052
Unallocated		—		1,486		1,486		—		—		—		—		38		38		—		—		—
Total loans	$	1,130	$	8,363	$	9,493	$	18,541	$	817,758	$	836,299	$	584	$	7,845	$	8,429	$	9,885	$	1,048,438	$	1,058,323

Loans are monitored for credit quality on a recurring basis. These credit quality indicators are defined as follows:

Pass - A pass loan is not adversely classified, as it does not display any of the characteristics for adverse classification. This category includes purchased loans that are 100% guaranteed by U.S. Government agencies of ~~$16.7~~$11.9 million and ~~$15.8~~$12.7 million at September 30, ~~2017~~2020 and December 31, ~~2016, respectively.~~2019, respectively, and PPP loans 100% guaranteed by the SBA of $85.1 million at September 30, 2020.

Special Mention - A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention loans are not adversely classified and do not warrant adverse classification.

17

Table of ~~$248,000.~~Contents

Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard generally have a ~~well defined~~well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful - A doubtful loan has all the weaknesses inherent in a loan classified as substandard with the added characteristics that the weaknesses make collection or liquidation in full, highly questionable and improbable, on the basis of currently existing facts, conditions, and values. The possibility of loss is extremely high.

The following tables present the composition of loans by credit quality indicator at September 30, ~~2017~~2020 and December 31, ~~2016~~2019 (dollars in thousands):


	September 30, 2020
			Special
	Pass		Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	189,923	$	13,104	$	1,339	$	—	$	204,366
Commercial		357,037		93,500		2,140		—		452,677
Construction and land development		158,447		747		572		—		159,766
Second mortgages		5,286		1,202		—		—		6,488
Multifamily		70,964		6,823		—		—		77,787
Agriculture		6,713		374		51		—		7,138
Total real estate loans		788,370		115,750		4,102		—		908,222
Commercial loans		222,378		27,653		7,331		—		257,362
Consumer installment loans		10,537		50		19		—		10,606
All other loans		1,503		16		—		—		1,519
Total loans	$	1,022,788	$	143,469	$	11,452	$	—	$	1,177,709

	September 30, 2017
	Pass		Special Mention		Substandard		Doubtful		Total

											December 31, 2019
													Special
											Pass		Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1-4 family	$	223,878	$	3,638	$	2,229	$	—	$	229,745
Residential 1‑4 family											$	219,210	$	2,964	$	1,364	$	—	$	223,538
Commercial		337,645		3,102		5,012		—		345,759		391,251		3,188		2,419		—		396,858
Construction and land development		98,132		179		4,283		—		102,594		145,782		408		376		—		146,566
Second mortgages		7,292		107		—		—		7,399		6,096		543		—		—		6,639
Multifamily		51,097		—		2,545		—		53,642		70,515		—		2,463		—		72,978
Agriculture		7,115		387		86		—		7,588		8,098		248		—		—		8,346
Total real estate loans		725,159		7,413		14,155		—		746,727		840,952		7,351		6,622		—		854,925
Commercial loans		133,173		769		2,701		—		136,643		185,123		2,770		3,290		—		191,183
Consumer installment loans		5,283		18		30		—		5,331		11,140		16		7		—		11,163
All other loans		1,279		—		—		—		1,279		1,052		—		—		—		1,052
Total loans	$	864,894	$	8,200	$	16,886	$	—	$	889,980	$	1,038,267	$	10,137	$	9,919	$	—	$	1,058,323

December 31, 2016
Pass Special
Mention Substandard Doubtful Total
Mortgage loans on real estate:
Residential 1-4 family $ 199,973 $ 4,612 $ 3,278 $ — $ 207,863
Commercial 330,851 3,168 5,785 — 339,804
Construction and land development 92,556 234 5,492 — 98,282
Second mortgages 7,474 437 — — 7,911
Multifamily 36,474 — 2,610 — 39,084
Agriculture 7,067 118 — — 7,185
Total real estate loans 674,395 8,569 17,165 — 700,129
Commercial loans 122,129 5,879 1,292 — 129,300
Consumer installment loans 5,563 20 44 — 5,627
All other loans 1,243 — — — 1,243
Total loans $ 803,330 $ 14,468 $ 18,501 $ — $ 836,299

In accordance with FASB ~~ASU~~Accounting Standards Update (ASU) 2011-02,Receivables (Topic 310): A ~~Creditor's~~Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, the Company assesses all loan modifications to determine whether they are considered troubled debt restructurings (TDRs) under the guidance. The Company had 2319 and 1725 loans that met the definition of a TDR ~~as of~~at September 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

During the three months ended September 30, 2017, the Company modified two 1-4 family loans that were considered to be TDRs. The Company lowered the interest rate and extended the term for each of the 1-4 family loans, which had a pre- and post-modification balance of $354,000. During the nine months ended September 30, 2017, the Company modified three 1-4 family loans and one agriculture loan that were considered to be TDRs. The Company extended the terms for two of the 1-4 family loans and lowered the interest rate for each of these loans, which had a pre- and post-modification balance of $1.1 million. The Company extended the term for the agriculture loan, which had a pre- and post-modification balance of $258,000.

The Company had no0 loan modifications considered to be TDRs during the three months ended September 30, ~~2016.~~2020. During the nine months ended September 30, ~~2016,~~2020, the Company modified ~~one residential 1-4 family loan and one consumer installment~~1 commercial real estate loan that ~~were~~was considered to be ~~TDRs.~~a TDR. The Company ~~extended~~granted the ~~term for~~borrower six months interest only payment relief and no other changes were made to the ~~residential 1-4 family~~ loan ~~which~~structure. The loan is 100% guaranteed by the USDA and had a pre- and post-modification balance of ~~$81,000 and $97,000, respectively.~~$438,000. The Company ~~extended~~had 0 loan modifications considered to be TDRs during the ~~term~~three and ~~lowered the interest rate for the consumer installment loan, which had a pre- and post-modification balance~~nine months ended September 30, 2019.

18

A loan is considered to be in default if it is 90 days or more past due. There were no0 TDRs that had been restructured during the previous 12 months that resulted in default during ~~either of~~ the three and nine months ended September 30, ~~2017 and 2016.~~

2020. There were 0 TDRs that had been restructured during the previous 12 months that resulted in default during the three months ended September 30, 2019. During the nine months ended September 30, 2019, 1 loan defaulted that had been restructured during the previous 12 months prior to the default. This multifamily real estate loan had a recorded investment of $2.6 million.

In the determination of the allowance for loan losses, management considers TDRs and subsequent defaults in these restructures by reviewing for impairment in accordance with FASB ASC 310-10-35,Receivables, Subsequent Measurement.

At September 30, ~~2017,~~2020, the Company had 1-4 family mortgages in the amount of ~~$147.4~~$92.4 million pledged as collateral to the Federal Home Loan Bank ~~with~~for a ~~lendable collateral value~~total borrowing capacity of ~~$124.0~~$76.7 million.

Note 4. PCI Loans and Related Allowance for Loan Losses

On January 30, 2009, the Company entered into a Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation (FDIC) to assume all of the deposits and certain other liabilities and acquire substantially all assets of Suburban Federal Savings Bank (SFSB). The Company is applying the provisions of FASB ASC 310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality, to all loans acquired in the SFSB transaction (the “PCI loans”). Of the total $198.3 million in loans acquired, $49.1 million met the criteria of FASB ASC 310-30. These loans, consisting mainly of construction loans, were deemed impaired at the acquisition date. The remaining $149.1 million of loans acquired, comprised mainly of residential 1-4 family, were analogized to meet the criteria of FASB ASC 310-30. Analysis of this portfolio revealed that SFSB utilized weak underwriting and documentation standards, which led the Company to believe that significant losses were probable given the economic environment at the time.

As of September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, the outstanding contractual balance of the PCI loans was ~~$73.8~~$46.6 million and ~~$81.1~~$53.2 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in

thousands):

	September 30, 2017					December 31, 2016
	Amount		% of PCI Loans			Amount		% of PCI Loans

											September 30, 2020				December 31, 2019
													% of PCI				% of PCI
											Amount		Loans		Amount		Loans
Mortgage loans on real estate:
Residential 1-4 family	$	40,746		89.65	%	$	46,623		89.72	%
Residential 1‑4 family											$	24,664	90.86	%	$	29,465	90.58	%
Commercial		559		1.23			649		1.25			457	1.68			490	1.51
Construction and land development		1,599		3.52			1,969		3.79			846	3.12			1,172	3.60
Second mortgages		2,289		5.04			2,453		4.72			963	3.55			1,169	3.59
Multifamily		258		0.56			270		0.52			216	0.79			232	0.72
Total real estate loans		45,451		100.00			51,964		100.00			27,146	100.00			32,528	100.00
Total PCI loans	$	45,451		100.00	%	$	51,964		100.00	%	$	27,146	100.00	%	$	32,528	100.00	%

There was no0 activity in the allowance for loan losses on PCI loans for the three and nine months ended September 30, ~~2017~~2020 and ~~2016.~~2019.

The following table presents information on the PCI loans collectively evaluated for impairment in the allowance for loan losses at September 30, ~~2017~~2020 and December 31, ~~2016~~2019 (dollars in thousands):


	September 30, 2020				December 31, 2019
	Allowance		Recorded				Recorded
	for loan		investment in		Allowance for		investment in
	losses		loans		loan losses		loans
Mortgage loans on real estate:
Residential 1‑4 family	$	156	$	24,664	$	156	$	29,465
Commercial		—		457		—		490
Construction and land development		—		846		—		1,172
Second mortgages		—		963		—		1,169
Multifamily		—		216		—		232
Total real estate loans		156		27,146		156		32,528
Total PCI loans	$	156	$	27,146	$	156	$	32,528

September 30, 2017 December 31, 2016
Allowance for
loan losses Recorded
investment in
loans Allowance for
loan losses Recorded
investment in
loans
Mortgage loans on real estate:
Residential 1-4 family $ 200 $ 40,746 $ 200 $ 46,623
Commercial — 559 — 649
Construction and land development — 1,599 — 1,969
Second mortgages — 2,289 — 2,453
Multifamily — 258 — 270
Total real estate loans 200 45,451 200 51,964
Total PCI loans $ 200 $ 45,451 $ 200 $ 51,964

The change in the accretable yield balance for the nine months ended September 30, ~~2017~~2020 and the year ended December 31, ~~2016,~~2019, is as follows (dollars in thousands):



Balance, January 1, 2019	$	38,107
Accretion		(6,010)
Reclassification from nonaccretable difference		1,369
Balance, December 31, 2019	$	33,466
Accretion		(3,110)
Reclassification to nonaccretable difference		(101)
Balance, September 30, 2020	$	30,255

Balance, January 1, 2016 $ 49,128
Accretion (6,206 )
Reclassification from nonaccretable yield 5,433
Balance, December 31, 2016 $ 48,355
Accretion (4,353 )
Reclassification from nonaccretable yield 339
Balance, September 30, 2017 $ 44,341

The PCI loans were not classified as nonperforming assets as of September 30, ~~2017,~~2020, as the loans are accounted for on a pooled basis, and interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all PCI loans.

Note 5. Other Real Estate Owned

The following table presents the balances of other real estate owned at September 30, ~~2017~~2020 and December 31, ~~2016~~2019 (dollars in thousands):


	September 30, 2020		December 31, 2019
Residential 1‑4 family	$	21	$	21
Construction and land development		4,395		4,506
Total other real estate owned	$	4,416	$	4,527

September 30, 2017 December 31, 2016

Residential 1-4 family $ 383 $ 1,276
Commercial 15 643
Construction and land development 2,312 2,508
Total other real estate owned $ 2,710 $ 4,427

At September 30, ~~2017,~~2020, the Company had ~~$3.2 million~~$429,000 in residential 1-4 family loans and PCI loans that were in the process of foreclosure.

20

Note 6. Deposits

The following table provides interest bearing deposit information, by type, ~~as of~~at September 30, ~~2017~~2020 and December 31, ~~2016~~2019 (dollars in thousands):


	September 30, 2020		December 31, 2019
Interest bearing checking	$	201,121	$	—
NOW		—		170,532
MMDA		158,569		120,841
Savings		118,007		96,570
Time deposits less than or equal to $250,000		468,549		477,461
Time deposits over $250,000		141,417		119,460
Total interest bearing deposits	$	1,087,663	$	984,864

September 30, 2017 December 31, 2016

NOW $ 137,559 $ 137,332
MMDA 144,409 111,346
Savings 91,642 90,340
Time deposits less than or equal to $250,000 440,607 440,699
Time deposits over $250,000 118,837 128,690
Total interest bearing deposits $ 933,054 $ 908,407

21Effective January 1, 2020, the Company re-classified all NOW accounts to interest bearing checking accounts, thereby eliminating the seven days withdrawal notification requirement imposed on NOW accounts.

Note 7. Accumulated Other Comprehensive Income ~~(Loss)~~

The following tables present activity net of tax in accumulated other comprehensive income ~~(loss)~~ (AOCI) for the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 (dollars in thousands):


	Three months ended September 30, 2020
	Unrealized		Defined		Gain (Loss) on		Total Other
	Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Securities		Pension Plan		Hedge		Income (Loss)

Beginning balance	$	5,688	$	(886)	$	(572)	$	4,230
Other comprehensive income (loss) before reclassifications		1,353		—		37		1,390
Amounts reclassified from AOCI		(61)		—		—		(61)
Net current period other comprehensive income (loss)		1,292		—		37		1,329
Ending balance	$	6,980	$	(886)	$	(535)	$	5,559

	Three months ended September 30, 2017
	Unrealized Gain (Loss) on Securities			Defined Benefit Pension Plan			Gain (Loss) on Cash Flow Hedge			Total Other Comprehensive Income (Loss)


													Three months ended September 30, 2019
													Unrealized		Defined		Gain (Loss) on		Total Other
													Gain (Loss) on		Benefit		Cash Flow		Comprehensive
													Securities		Pension Plan		Hedge		Income (Loss)

Beginning balance	$	769		$	(756	)	$	(25	)	$	(12	)	$	2,798	$	(857)	$	9	$	1,950
Other comprehensive income (loss) before reclassifications		43			-			35			78			948		—		(122)		826
Amounts reclassified from AOCI		(31	)		-			-			(31	)		(39)		—		—		(39)
Net current period other comprehensive income (loss)		12			-			35			47			909		—		(122)		787
Ending balance	$	781		$	(756	)	$	10		$	35		$	3,707	$	(857)	$	(113)	$	2,737

Three months ended September 30, 2016
Unrealized
Gain (Loss)
on Securities Defined
Benefit
Pension Plan Gain (Loss) on
Cash Flow
Hedge Total Other
Comprehensive
Income (Loss)

Beginning balance $ 3,530 $ (901 ) $ (578 ) $ 2,051
Other comprehensive income (loss) before reclassifications (322 ) - 189 (133 )
Amounts reclassified from AOCI (58 ) - - (58 )
Net current period other comprehensive income (loss) (380 ) - 189 (191 )
Ending balance $ 3,150 $ (901 ) $ (389 ) $ 1,860

Nine months ended September 30, 2017
Unrealized
Gain (Loss)
on Securities Defined
Benefit
Pension Plan Gain (Loss) on
Cash Flow
Hedge Total Other
Comprehensive
Income (Loss)

Beginning balance $ (410 ) $ (767 ) $ (46 ) $ (1,223 )
Other comprehensive income (loss) before reclassifications 1,309 11 56 1,376
Amounts reclassified from AOCI (118 ) - - (118 )
Net current period other comprehensive income (loss) 1,191 11 56 1,258
Ending balance $ 781 $ (756 ) $ 10 $ 35

Nine months ended September 30, 2016
Unrealized
Gain (Loss)
on Securities Defined
Benefit
Pension Plan Gain (Loss) on
Cash Flow
Hedge Total Other
Comprehensive
Income (Loss)

Beginning balance $ 443 $ (901 ) $ (131 ) $ (589 )
Other comprehensive income (loss) before reclassifications 3,109 - (258 ) 2,851
Amounts reclassified from AOCI (402 ) - - (402 )
Net current period other comprehensive income (loss) 2,707 - (258 ) 2,449
Ending balance $ 3,150 $ (901 ) $ (389 ) $ 1,860

21


	Nine months ended September 30, 2020
	Unrealized		Defined		Gain (Loss) on		Total Other
	Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Securities		Pension Plan		Hedge		Income (Loss)

Beginning balance	$	2,887	$	(886)	$	(36)	$	1,965
Other comprehensive income (loss) before reclassifications		4,312		—		(499)		3,813
Amounts reclassified from AOCI		(219)		—		—		(219)
Net current period other comprehensive income (loss)		4,093		—		(499)		3,594
Ending balance	$	6,980	$	(886)	$	(535)	$	5,559


	Nine months ended September 30, 2019
	Unrealized		Defined		Gain (Loss) on		Total Other
	Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Securities		Pension Plan		Hedge		Income (Loss)

Beginning balance	$	(618)	$	(857)	$	196	$	(1,279)
Other comprehensive income (loss) before reclassifications		4,539		—		(309)		4,230
Amounts reclassified from AOCI		(214)		—		—		(214)
Net current period other comprehensive income (loss)		4,325		—		(309)		4,016
Ending balance	$	3,707	$	(857)	$	(113)	$	2,737

The following ~~table presents~~tables present the effects of reclassifications out of AOCI on line items of consolidated income for the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 (dollars in thousands):

Details about AOCI Components Amount Reclassified from AOCI Affected Line Item in the Unaudited
Consolidated Statement of Income)
Three months ended
September 30, 2017 September 30, 2016
Securities available for sale:
Unrealized gains on securities available for sale $ (48 ) $ (88 ) Gain on securities transactions, net
Related tax expense 17 30 Income tax expense
$ (31 ) $ (58 ) Net of tax


												Affected Line Item in the Unaudited Consolidated
Details about AOCI Components	Amount Reclassified from AOCI						Affected Line Item in the Unaudited Consolidated Statement of Income	Amount Reclassified from AOCI				Statement of Income
	Nine months ended
	September 30, 2017			September 30, 2016
								Three months ended
								September 30, 2020		September 30, 2019
Securities available for sale:
Unrealized gains on securities available for sale	$	(180	)	$	(608	)	Gain on securities transactions, net	$	(78)	$	(50)	Gain on securities transactions, net
Related tax expense		62			206		Income tax expense		17		11	Income tax expense
	$	(118	)	$	(402	)	Net of tax
								$	(61)	$	(39)	Net of tax


					Affected Line Item in the Unaudited Consolidated
Details about AOCI Components	Amount Reclassified from AOCI				Statement of Income
	Nine months ended
	September 30, 2020		September 30, 2019
Securities available for sale:
Unrealized gains on securities available for sale	$	(281)	$	(274)	Gain on securities transactions, net
Related tax expense		62		60	Income tax expense
	$	(219)	$	(214)	Net of tax

Note 8. Fair Values of Assets and Liabilities

FASB ASC 820,Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 requires that

22

valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs and also establishes a fair value hierarchy that prioritizes the valuation inputs into three broad levels. The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

~~• Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.~~

• Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3—Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option pricing models, discounted cash flow models and similar techniques.

●

Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.

●

Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

●

Level 3—Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option pricing models, discounted cash flow models and similar techniques.

FASB ASC 825,Financial Instruments, allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has not made any material FASB ASC 825 elections as of September 30, ~~2017.~~2020.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The Company utilizes fair value measurements to record adjustments to certain assets to determine fair value disclosures. Securities available for sale and ~~loans held for sale~~the cash flow hedge are recorded at fair value on a recurring basis. The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis (dollars in thousands):

September 30, 2017
Total Level 1 Level 2 Level 3
Investment securities available for sale
U.S. Treasury issue and other U.S. Gov’t agencies $ 46,387 $ 2,721 $ 43,666 $ -
U.S. Gov’t sponsored agencies 2,743 - 2,743 -
State, county and municipal 124,329 250 124,079 -
Corporate and other bonds 15,022 - 15,022 -
Mortgage backed – U.S. Gov’t agencies 5,583 - 5,583 -
Mortgage backed – U.S. Gov’t sponsored agencies 16,383 1,597 14,786 -
Total investment securities available for sale $ 210,447 $ 4,568 $ 205,879 $ -
Cash flow hedge 17 - 17 -
Total assets at fair value $ 210,464 $ 4,568 $ 205,896 $ -
Total liabilities at fair value $ - $ - $ - $ -


	September 30, 2020
	Total		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. Treasury securities	$	12,500	$	12,500	$	—	$	—
U.S. Government agencies		19,745		—		19,745		—
State, county and municipal		116,534		1,329		115,205		—
Mortgage backed securities		29,951		—		29,951		—
Asset backed securities		28,986		550		28,436		—
Corporate bonds		25,937		750		25,187		—
Total investment securities available for sale		233,653		15,129		218,524		—
Total assets at fair value	$	233,653	$	15,129	$	218,524	$	—
Cash flow hedge liability	$	683		—	$	683		—
Total liabilities at fair value	$	683	$	—	$	683	$	—

December 31, 2016
Total Level 1 Level 2 Level 3
Investment securities available for sale
U.S. Treasury issue and other U.S. Gov’t agencies $ 57,976 $ 11,055 $ 46,921 $ -
U.S. Gov’t sponsored agencies 3,336 952 2,384 -
State, county and municipal 122,773 2,345 120,428 -
Corporate and other bonds 15,503 - 15,503 -
Mortgage backed – U.S. Gov’t agencies 3,495 - 3,495 -
Mortgage backed – U.S. Gov’t sponsored agencies 13,038 - 13,038 -
Total investment securities available for sale 216,121 14,352 201,769 -
Total assets at fair value $ 216,121 $ 14,352 $ 201,769 $ -
Cash flow hedge $ (70 ) $ - $ (70 ) $ -
Total liabilities at fair value $ (70 ) $ - $ (70 ) $ -

23

December 31, 2019


Total

Level 1

Level 2

Level 3
Investment securities available for sale

U.S. Government agencies

$
21,936

$
—

$
21,936

$
—
State, county and municipal

98,592

10,072

88,520

—
Mortgage backed securities

48,740

1,181

47,559

—
Asset backed securities

11,604

—

11,604

—
Corporate bonds

6,097

—

6,097

—
Total investment securities available for sale

186,969

11,253

175,716

—
Total assets at fair value

$
186,969

$
11,253

$
175,716

$
—
Cash flow hedge liability

44

—

$
44

—
Total liabilities at fair value

$
44

$
—

$
44

$
—

Investment securities available for sale

Investment securities available for sale are recorded at fair value each reporting period. Fair value measurement is based upon quoted prices, if available (Level 1). If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions (Level 2).

The Company utilizes a third party vendor to provide fair value data for purposes of determining the fair value of its available for sale securities portfolio. The third party vendor uses a reputable pricing ~~company~~companies for security market data. The third party vendor has controls ~~and edits~~ in place for month-to-month market checks and zero pricing, and a Statement on Standards for Attestation Engagements No. 1618 report is obtained from the third party vendor on an annual basis. The Company makes no adjustments to the pricing service data received for its securities available for sale.

Cash flow hedge

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

24

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company is also required to measure and recognize certain other financial assets at fair value on a nonrecurring basis on the consolidated balance sheet. The following tables present assets measured at fair value on a nonrecurring basis as of September 30, ~~2017~~2020 and December 31, ~~2016~~2019 (dollars in thousands):

	September 30, 2017
	Total		Level 1		Level 2		Level 3

									September 30, 2020
									Total		Level 1		Level 2		Level 3
Impaired loans	$	11,408	$	—	$	4,511	$	6,897	$	3,241	$	—	$	—	$	3,241
Loans held for sale										1,151		—		1,151		—
Bank premises and equipment held for sale										1,589		—		—		1,589
Other real estate owned		2,710		—		1,226		1,484		4,416		—		—		4,416
Total assets at fair value	$	14,118	$	—	$	5,737	$	8,381	$	10,397	$	—	$	1,151	$	9,246
Total liabilities at fair value	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

December 31, 2016
Total Level 1 Level 2 Level 3
Impaired loans $ 9,536 $ — $ 2,168 $ 7,368
Other real estate owned 4,427 — 3,408 1,019
Total assets at fair value $ 13,963 $ — $ 5,576 $ 8,387
Total liabilities at fair value $ — $ — $ — $ —

24

December 31, 2019


Total

Level 1

Level 2

Level 3
Impaired loans

$
3,020

$
—

$
—

$
3,020
Loans held for sale

501

—

501

—
Bank premises and equipment held for sale

1,589

—

—

1,589
Other real estate owned

4,527

—

—

4,527
Total assets at fair value

$
9,637

$
—

$
501

$
9,136
Total liabilities at fair value

$
—

$
—

$
—

$
—

Impaired loans

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310,Receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. At September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, a majority of total impaired loans were evaluated based on the fair value of the collateral. The Company frequently obtains appraisals prepared by external professional appraisers for classified loans greater than $250,000 when the most recent appraisal is greater than 18 months old ~~and/or~~and deemed to be stale or invalid. The Company may also utilize internally prepared estimates that generally result from current market data and actual sales data related to the Company’s collateral. ~~When~~The Company makes adjustments for selling costs estimated at 10%, market deterioration, and any known liens against the ~~fair value of the collateral is based on an observable market price or a current appraised value,~~collateral. Therefore, the Company records ~~the~~ impaired ~~loan within Level 2.~~

The Company may also identify collateral deterioration based on current market sales data, including price and absorption, as well as input from real estate sales professionals and developers, county or city tax assessments, market data and on-site inspections by Company personnel. When management determines that the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loanloans as nonrecurring Level 3. ~~In instances where an appraisal received subsequent~~For the period ended September 30, 2020 and December 31, 2019, weighted average adjustments, calculated based on relative fair value, related to ~~an internally prepared estimate reflects a higher collateral value, management does not revise the carrying amount.~~ impaired loans were 16.4% and 12.8%, respectively.

Impaired loans can also be evaluated for impairment using the present value of expected future cash flows discounted at the loan’s effective interest rate. The measurement of impaired loans using future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest is not a fair value measurement and is therefore excluded from fair value disclosure requirements. Reviews of classified loans are performed by management on a quarterly basis.

Loans held for sale

The carrying amounts of loans held for sale approximate fair value (Level 2).

Bank premises and equipment held for sale

The fair value of bank premises and equipment held for sale was determined using the adjusted appraisal methodology described in the other real estate owned (OREO) asset section below.

Other real estate owned

OREO assets are adjusted to fair value less estimated disposal costs upon transfer of the related loans to OREO, ~~property,~~ establishing a new cost basis. Initial fair value is based on appraised values of the collateral less estimated disposal costs. Subsequent to the transfer, valuations are periodically performed by management based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and the Company’s ability and intent with regard to continued ownership of the properties. The assets are carried at the lower of carrying value or fair value less estimated disposal costs. ~~Fair value is based upon independent market prices, appraised values~~The Company may incur additional write-downs of ~~the collateral or management’s estimation of the value of the collateral. When the~~OREO assets to fair value ~~of the collateral is based on an observable~~less estimated costs to sell if valuations indicate a further deterioration in market ~~price or a current appraised value,~~conditions. As such, the Company records ~~the foreclosed asset within Level 2. When an appraised value is not available or management determines that the~~OREO as a nonrecurring fair value ~~of the collateral is further impaired below the appraised value due to such things~~measurement classified as ~~absorption rates and market conditions, the Company records the foreclosed asset within~~ Level ~~3 of the fair value hierarchy.~~3.

Fair Value of Financial Instruments

FASB ASC 825,Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or

25

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of impaired loans is consistent with the methodology used for the FASB ASC 820 disclosure for assets recorded at fair value on a nonrecurring basis presented above.

nonrecurring basis. FASB ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. Additionally, in accordance with FASB ASU 2016-01, the Company uses the exit price notion, rather than the entry price notion, in calculating fair values of financial instruments not measured at fair value on a recurring basis.

The following reflects the fair value of financial instruments, whether or not ~~measured as such~~recognized on the consolidated balance sheet, at fair valuemeasures by level of valuation assumptions used for those assets. These tables exclude financial instruments for which the carrying value approximates fair value (dollars in thousands):

	September 30, 2017
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3

											September 30, 2020
													Estimated Fair
											Carrying Value		Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	46,460	$	47,325	$	—	$	47,325	$	—	$	23,026	$	24,118	$	—	$	24,118	$	—
Loans, net of allowance		881,313		882,433		—		875,536		6,897		1,165,381		1,174,649		—		—		1,174,649
PCI loans, net of allowance		45,251		52,219		—		—		52,219		26,990		35,188		—		—		35,188


Financial liabilities:
Interest bearing deposits		933,054		933,819		—		933,819		—		1,087,663		1,091,539		—		1,091,539		—
Long-term borrowings		85,420		85,343		—		85,343		—
Borrowings												72,124		73,137		—		73,137		—

	December 31, 2016
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3

											December 31, 2019
													Estimated Fair
											Carrying Value		Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	46,608	$	46,858	$	1,093	$	45,765	$	—	$	35,733	$	36,633	$	—	$	36,633	$	—
Loans, net of allowance		826,806		829,349		—		821,981		7,368		1,049,894		1,041,671		—		—		1,041,671
PCI loans, net of allowance		51,764		57,100		—		—		57,100		32,372		38,982		—		—		38,982


Financial liabilities:
Interest bearing deposits		908,407		909,627		—		909,627		—		984,864		985,853		—		985,853		—
Long-term borrowings		87,681		87,611		—		87,611		—
Borrowings												72,624		72,457		—		72,457		—

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value as of September 30, 2017. The Company applied the provisions of FASB ASC 820 to the fair value measurements of financial instruments not recognized on the consolidated balance sheet at fair value. The provisions requiring the Company to maximize the use of observable inputs and to measure fair value using a notion of exit price were factored into the Company’s selection of inputs into its established valuation techniques.

~~Financial Assets~~

~~Cash and cash equivalents~~

~~The carrying amounts of cash and due from banks, interest bearing bank deposits, and federal funds sold approximate fair value (Level 1).~~

26

~~Securities held to maturity~~

~~For securities held to maturity, fair values are based on quoted market prices or dealer quotes (Level 1 and 2).~~

~~Restricted securities~~

~~The carrying value~~Table of ~~restricted securities approximates their fair value based on the redemption provisions of the respective issuer (Level 2).~~

~~Loans~~

~~PCI loans~~

Fair values for PCI loans are based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, term of loan and whether or not the loans are amortizing. Loans were pooled together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on the rates used at acquisition (which were based on market rates for new originations of comparable loans) adjusted for any material changes in interest rates since acquisition. Increases in cash flow expectations since acquisition resulted in estimated fair value being higher than carrying value. The increase in cash flows is also reflected in a transfer from unaccretable yield to accretable yield as disclosed in Note 4.

~~Accrued interest receivable~~

~~The carrying amounts of accrued interest receivable approximate fair value (Level 2).~~

~~Financial Liabilities~~

~~Noninterest bearing deposits~~

~~The carrying amount of noninterest bearing deposits approximates fair value (Level 2).~~

~~Interest bearing deposits~~

The fair value of NOW accounts, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

~~Federal funds purchased~~

~~The carrying amount of federal funds purchased approximates fair value (Level 2).~~

~~Long-term borrowings~~

The fair values of the Company’s long-term borrowings, such as FHLB advances and long-term debt, are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

27Contents

~~Accrued interest payable~~

~~The carrying amounts of accrued interest payable approximate fair value (Level 2).~~

~~Off-balance sheet financial instruments~~

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The Company’s off-balance sheet commitments are funded at current market rates at the date they are drawn upon. It is management’s opinion that the fair value of these commitments would approximate their carrying value, if drawn upon.

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Note 9. Earnings Per ~~Common~~ Share

Basic earnings per ~~common~~ share (EPS) is computed by dividing net income by the weighted average number of ~~common~~ shares outstanding during the period. Diluted EPS is computed using the weighted average number of ~~common~~ shares outstanding during the period, including the effect of all potentially dilutive ~~common~~ shares outstanding attributable to stock instruments. The following table presents basic and diluted EPS for the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 (dollars and shares in thousands, except per share data):

	Net Income (Numerator)		Weighted Average Common Shares (Denominator)		Per Common Share Amount
For the three months ended September 30, 2017

									Weighted Average
							Net Income		Shares	Per
							(Numerator)		(Denominator)	Share Amount
For the three months September 30, 2020
Basic EPS	$	2,416		22,041	$	0.11	$	4,516	22,312	$	0.20
Effect of dilutive stock awards		—		501		—		—	191		—
Diluted EPS	$	2,416		22,542	$	0.11	$	4,516	22,503	$	0.20

For the three months ended September 30, 2016

For the three months ended September 30, 2019
Basic EPS	$	2,458		21,935	$	0.11	$	4,613	22,303	$	0.21
Effect of dilutive stock awards		—		192		—		—	258		(0.01)
Diluted EPS	$	2,458		22,127	$	0.11	$	4,613	22,561	$	0.20

For the nine months ended September 30, 2017

For the nine months ended September 30, 2020
Basic EPS	$	7,843		22,000	$	0.36	$	10,091	22,339	$	0.45
Effect of dilutive stock awards		—		491		—		—	195		—
Diluted EPS	$	7,843		22,491	$	0.35	$	10,091	22,534	$	0.45

For the nine months ended September 30, 2016

For the nine months ended September 30, 2019
Basic EPS	$	7,196		21,902	$	0.33	$	11,660	22,224	$	0.52
Effect of dilutive stock awards		—		203		—		—	251		—
Diluted EPS	$	7,196		22,105	$	0.33	$	11,660	22,475	$	0.52

~~There~~Antidilutive shares issuable under awards or options of 1.4 million and 253,000 were ~~no antidilutive exclusions~~excluded from the computation of diluted earnings per ~~common~~ share for the three and nine months ended September 30, ~~2017~~2020 and ~~2016.~~2019, respectively.

Note 10. Employee Benefit Plan

The Company adopted the Bank of Essex noncontributory, defined benefit pension plan for all full-time pre-merger Bank of Essex employees over 21 years of age. Benefits are generally based upon years of service and the employees’ compensation. The Company funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act.

The Company ~~has frozen~~froze the plan benefits for all the defined benefit plan participants effective December 31, 2010.

The following table provides the components of net periodic benefit cost for the plan included in salaries and employee benefits in the consolidated statement of income for the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 (dollars in thousands):


	Three months ended				Nine months ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Interest cost	$	33	$	41	$	99	$	122
Expected return on plan assets		(54)		(53)		(161)		(159)
Amortization of prior service cost		1		1		3		3
Recognized net loss due to settlement		—		40		—		93
Recognized net actuarial loss		12		12		36		36
Net periodic (income) expense	$	(8)	$	41	$	(23)	$	95

Three months ended Nine months ended
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
Interest cost $ 39 $ 47 $ 117 $ 142
Expected return on plan assets (70 ) (81 ) (210 ) (244 )
Amortization of prior service cost 1 1 3 3
Recognized net loss due to settlement — 13 — 39
Recognized net actuarial loss 12 91 36 163
Net periodic benefit cost $ (18 ) $ 71 $ (54 ) $ 103

Table of the plan’s service cost and interest cost for the year. The impact of settlement accounting is that a percentage of any outstanding losses that the plan is currently amortizing must be recognized immediately. This percentage is calculated as the ratio of lump sums paid to the total liability for the plan. This amount changes as plan participants retire during the year. The net loss due to settlement to be amortized during 2016 was $52,000 at March 31, 2016, $234,000 at June 30, 2016, and $253,000 at September 30, 2016.Contents

Note 11. Cash Flow Hedge

~~On November 7, 2014, the~~The Company ~~entered into an~~designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate borrowings, such as FHLB borrowings, repurchase agreements, and brokered CDs. The Company had interest rate ~~swap~~swaps designated as cash flow hedges with a total notional ~~amount~~amounts of ~~$30 million.~~$20 million and $10 million at September 30, 2020 and December 31, 2019, respectively. The Company designated the swap as a cash flow hedge intended to protect against the variability in the expected future cash flows on the designated variable rate borrowings. The swap hedges the interest rate risk, wherein the Company will receive an interest rate based on the three month LIBOR from the counterparty and pays an interest rate of 1.69% to the same counterparty calculated on the notional amount for a term of five years. The Company intends to sequentially issue a series of three month fixed rate debt as part of a planned roll-over of short term debt for five years. The forecasted funding will be provided through one of the following wholesale funding sources: a new FHLB advance, a new repurchase agreement, or a pool of brokered CDs, based on whichever market offers the most advantageous pricing at the time that pricing is first initially determined for the effective date of the swap and each reset period thereafter. Each quarter when the Company rolls over the three month debt, it will decide at that time which funding source to use for that quarterly period.

~~The swap was~~swaps were entered into with a counterparty that met the Company’s credit standards, and the ~~agreement contains~~agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the ~~contract~~contracts is not significant. The Company had ~~$390,000~~$770,000 and $180,000 of cash pledged as collateral ~~for each of the periods ended~~at September 30, ~~2017~~2020 and December 31, ~~2016.~~

2019, respectively.

Amounts receivable or payable are recognized as accrued under the terms of the agreements. In accordance with FASB ASC 815,Derivatives and Hedging, the Company has designated the ~~swap~~swaps as a cash flow ~~hedge,~~hedges, with ~~the effective portions of~~ the derivatives’ unrealized gains or losses recorded as a component of other comprehensive income. ~~The ineffective portions of the unrealized gains or losses, if any, would be recorded in other operating expense.~~ The Company has assessed the effectiveness of each hedging relationship by comparing the changes in cash flows on the designated hedged item. The Company’s cash flow hedge was deemed to be highly effective for the three and nine ~~months~~month periods ended September 30, ~~2017~~2020 and ~~2016.~~2019. The Company recorded a fair value liability of ~~the Company’s cash flow hedge was an unrealized gain of $17,000~~$683,000 and $44,000 in other liabilities at September 30, ~~2017,~~2020 and ~~was recorded in other assets. The fair value of the Company’s cash flow hedge was an unrealized loss of $70,000 at~~ December 31, ~~2016, and was recorded in other liabilities.~~2019, respectively. The ~~gain and loss~~net losses were recorded as a component of other comprehensive income net of associated tax effects.

Note 12. Revenue Recognition

30The Company recognizes income in accordance with FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and all subsequent ASUs that modified Topic 606. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of this guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and brokerage fees and commissions. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service charges on deposit accounts

The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Interchange and ATM fees

The Company earns interchange and ATM fees from debit/credit cardholder transactions conducted through the Visa and ATM payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Because the Company acts as an agent and does not control the services rendered to the customers, related costs are netted against the fee income. These costs were included in other operating expenses prior to the adoption of Topic 606.

Brokerage fees and commissions

Brokerage fees and commissions consist of other recurring revenue streams such as commissions from sales of mutual funds and other investments to customers by a third-party service provider and investment advisor fees. The Company receives commissions from the third-party service provider on a monthly basis based upon customer activity for the month.

28

The investment advisor fees are charged to the customer’s account in advance on the first month of the quarter, and the revenue is recognized over the following three-month period.

The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands):

Three months ended

Nine months ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019
Noninterest income

In-scope of Topic 606:

Service charges on deposit accounts

$
315

$
486

$
1,042

$
1,341
Interchange and ATM fees

298

271

775

732
Brokerage fees and commissions

53

67

256

262
Noninterest income (in-scope of Topic 606)

666

824

2,073

2,335
Noninterest income (out-of-scope of Topic 606)

806

687

2,350

1,641
Total noninterest income

$
1,472

$
1,511

$
4,423

$
3,976

Note 13. Leases
The Company accounts for leases in accordance with FASB ASU 2016-02, Leases (Topic 842), as it relates to its non-cancellable operating leases and subleases of bank premises. The Company's leases have lease terms between five years and 20 years, with the longest lease term having an expiration date in 2038. Most of these leases include one or more renewal options for five years or less. At lease commencement, the Company assesses whether it is reasonably certain to exercise a renewal option by considering various economic factors. Options that are reasonably certain of being exercised are factored into the determination of the lease term, and related payments are included in the calculation of the right-of-use asset and lease liability. The Company uses its incremental borrowing rate to calculate the present value of lease payments when the interest rate implicit in a lease is not disclosed. None of the Company’s current leases contain variable lease payment terms. The Company accounts for associated non-lease components separately.
The following table presents operating lease liabilities as of September 30, 2020 and December 31, 2019 (dollars in thousands):

September 30, 2020

December 31, 2019




Gross lease liability

$
8,354

$
9,278
Less: imputed interest

(2,327)

(2,541)
Present value of lease liability

$
6,027

$
6,737

The weighted average remaining lease term and weighted average discount rate for operating leases at September 30, 2020 was 12.2 years and 4.74%, respectively. The weighted average remaining lease term and weighted average discount rate for operating leases at December 31, 2019 was 12.0 years and 4.63%, respectively.

Maturities of the gross operating lease liability at September 30, 2020 are as follows (dollars in thousands):

2020

$
307
2021

1,191
2022

600
2023

630
2024

573
Thereafter

5,053
Total of future payments

$
8,354

29

Operating lease costs and sublease rental income for the three months ended September 30, 2020 were $317,000 and $27,000, respectively. Operating lease costs and sublease rental income for the three months ended September 30, 2019 were $318,000 and $63,000, respectively. Operating lease costs and sublease rental income for the nine months ended September 30, 2020 were $952,000 and $82,000, respectively. Operating lease costs and sublease rental income for the nine months ended September 30, 2019 were $1.1 million and $129,000, respectively.

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

The following discussion and analysis of the financial condition at September 30, ~~2017~~2020 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three and nine months ended September 30, ~~2017~~2020 should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019.

OVERVIEW

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 2524 full-service offices, 18 of which are in Virginia and six of which are in Maryland. The Bank also operates ~~one~~two loan production ~~office in Virginia.~~

offices.

The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals, ~~and~~ small businesses and larger commercial companies, including individual and commercial demand and time deposit accounts, commercial and industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products, and ~~safe deposit box facilities.~~

cash management services.

The Company generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest earning assets outstanding during the period and the interest rates earned thereon. The Company’s cost of funds is a function of the average amount of interest bearing deposits and borrowed money outstanding during the period and the interest rates paid thereon. The mix and product type for both loans and deposits can have a significant effect on the net interest income of the Bank. For the past several years, the Bank’s focus has been on maximizing that mix through branch growth and targeted product types, with lenders and other employees directly involved with customer relationships. Additionally, the quality of the interest earning assets further influences the amount of interest income lost on nonaccrual loans and the amount of additions to the allowance for loan losses. ~~Additionally, the~~

The Bank also earns noninterest income from service charges on deposit accounts and other fee or commission-based services and products, such as insurance, mortgage loans, annuities, and other wealth management products. Other sources of noninterest income can include gains or losses on securities transactions ~~mortgage loan income~~ and income from ~~Bank Owned Life Insurance~~bank owned life insurance (BOLI) policies. The Company’s income is offset by noninterest expense, which consists of salaries and employee benefits, occupancy and equipment costs, data processing fees, professional fees, transactions involving bank-owned property, ~~the amortization of intangible assets~~ and other operational expenses. The provision for loan losses and income taxes may materially affect net income.

CAUTION ABOUT FORWARD-LOOKING STATEMENTS

The Company makes certain forward-looking statements in this report that are subject to risks and uncertainties. These forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, future strategy, and financial and other goals. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import.

These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by factors, including, without limitation, the effects of and changes in the following:

·●

the quality or composition of the Company’s loan or investment portfolios, including collateral values and the repayment abilities of borrowers and issuers;

30

·●

assumptions that underlie the Company’s allowance for loan losses;

·●

general economic and market conditions, either nationally or in the Company’s market areas;

·●

unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as the current COVID-19 pandemic), and of governmental and societal responses to them

●

the interest rate environment;

·●

competitive pressures among banks and financial institutions or from companies outside the banking industry;

·●

real estate values;

·●

the demand for deposit, loan, and investment products and other financial services;

·●

the demand, development and acceptance of new products and services;

·●

the performance of vendors or other parties with which the Company does business;

·●

time and costs associated with de novo branching, acquisitions, dispositions and similar transactions;

·●

the realization of gains and expense savings from acquisitions, dispositions and similar transactions;

·●

assumptions and estimates that underlie the accounting for purchased credit impaired loans;

·●

consumer profiles and spending and savings habits;

·●

levels of fraud in the banking industry;

·●

the level of attempted cyber attacks in the banking industry;

·●

the securities and credit markets;

·●

costs associated with the integration of banking and other internal operations;

·●

the soundness of other financial institutions with which the Company does business;

·●

inflation;

·●

technology; and

·●

legislative and regulatory requirements.

These factors and additional risks and uncertainties are described in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2019 and other reports filed from time to time by the Company with the Securities and Exchange Commission.

Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

31

CRITICAL ACCOUNTING POLICIES

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when either earning income, recognizing an expense, recovering an asset or relieving a liability. For example, the Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that the Company uses. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company’s transactions would be the same, the timing of events that would impact its transactions could change.

The following is a summary of the Company’s critical accounting policies that are highly dependent on estimates, assumptions and judgments.

32

Allowance for Loan Losses on Loans

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance is an amount that management believes is appropriate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. The evaluation also considers the following risk characteristics of each loan portfolio:

·●

Residential 1-4 family mortgage loans include HELOCs and single family investment properties secured by first liens. The carry risks associated with owner-occupied and investment properties are the continued credit-worthiness of the borrower, changes in the value of the collateral, successful property maintenance and collection of rents due from tenants. The Company manages these risks by using specific underwriting policies and procedures and by avoiding concentrations in geographic regions.

·●

Commercial real estate loans, including owner occupied and non-owner occupied mortgages, carry risks associated with the successful operations of the principal business operated on the property securing the loan or the successful operation of the real estate project securing the loan. General market conditions and economic activity may impact the performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by avoiding concentrations to any one business or industry, and by diversifying the lending to various lines of businesses, such as retail, office, office warehouse, industrial and hotel.

·●

Construction and land development loans are generally made to commercial and residential builders/developers for specific construction projects, as well as to consumer borrowers. These carry more risk than real estate term loans due to the dynamics of construction projects, changes in interest rates, the long-term financing market and state and local government regulations. The Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding concentrations to any one business or industry and by diversifying lending to various lines of businesses, in various geographic regions and in various sales or rental price points.

·●

Second mortgages on residential 1-4 family loans carry risk associated with the continued credit-worthiness of the borrower, changes in value of the collateral and a higher risk of loss in the event the collateral is liquidated due to the inferior lien position. The Company manages risk by using specific underwriting policies and procedures.

32

·●

Multifamily loans carry risks associated with the successful operation of the property, general real estate market conditions and economic activity. In addition to using specific underwriting policies and procedures, the Company manages risk by avoiding concentrations to geographic regions and by diversifying the lending to various unit mixes, tenant profiles and rental rates.

·●

Agriculture loans carry risks associated with the successful operation of the business, changes in value of non-real estate collateral that may depreciate over time and inventory that may be affected by weather, biological, price, labor, regulatory and economic factors. The Company manages risks by using specific underwriting policies and procedures, as well as avoiding concentrations to individual borrowers and by diversifying lending to various agricultural lines of business (i.e., crops, cattle, dairy, etc.).

·●

Commercial loans carry risks associated with the successful operation of the business, changes in value of non-real estate collateral that may depreciate over time, accounts receivable whose collectability may change and inventory values that may be subject to various risks including obsolescence. General market conditions and economic activity may also impact the performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by diversifying the lending to various industries and avoids geographic concentrations.

·●

Consumer installment loans carry risks associated with the continued credit-worthiness of the borrower and the value of rapidly depreciating assets or lack thereof. These types of loans are more likely than real estate loans to be quickly and adversely affected by job loss, divorce, illness or personal bankruptcy. The Company manages risk by using specific underwriting policies and procedures for these types of loans.

·●

All other loans generally support the obligations of state and political subdivisions in the U.S. and are not a material source of business for the Company. The loans carry risks associated with the continued credit-worthiness of the obligations and economic activity. The Company manages risk by using specific underwriting policies and procedures for these types of loans.

While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance consists of specific, general and unallocated components. For loans that are also classified as impaired, an allowance is established when the collateral value (or discounted cash flows ~~(or collateral value~~ or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. The unallocated component covers uncertainties that could affect management’s estimate of probable losses.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are ~~collectively~~ evaluated for ~~impairment.~~impairment as a pool. Accordingly, the Company does not separately analyze these individual loans for impairment disclosures.

33

Accounting for Certain Loans Acquired in a Transfer

~~FASB ASC~~Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 310,Receivables, requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances in the initial accounting for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit arrangements are excluded from the scope of FASB ASC 310, which limits the yield that may be accreted to the excess of the undiscounted expected cash flows over the investor’s initial investment in the loan. The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life. Decreases in expected cash flows are recognized as impairments through the allowance for loan losses.

The Company’s acquired loans from the Suburban Federal Savings Bank (SFSB) transaction (the “PCI loans”), subject to FASB ASC Topic 805,Business Combinations, were recorded at fair value and no separate valuation allowance was recorded at the date of acquisition. FASB ASC 310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to loans acquired in a transfer with evidence of deterioration of credit quality for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. The Company is applying the provisions of FASB ASC 310-30 to all loans acquired in the SFSB transaction. The Company has grouped loans together based on common risk characteristics including product type, delinquency status and loan documentation requirements among others.

The PCI loans are subject to the credit review standards described above for loans. If and when credit deterioration occurs subsequent to the date that the loans were acquired, a provision for loan loss for PCI loans will be charged to earnings for the full amount.

The Company has made an estimate of the total cash flows it expects to collect from each pool of loans, which includes undiscounted expected principal and interest. The excess of that amount over the fair value of the pool is referred to as accretable yield. Accretable yield is recognized as interest income on a constant yield basis over the life of the pool. The Company also determines each pool’s contractual principal and contractual interest payments. The excess of that amount over the total cash flows that it expects to collect from the pool is referred to as nonaccretable difference, which is not ~~accreted into income.~~recorded. Judgmental prepayment assumptions are applied to both contractually required payments and cash flows expected to be collected at acquisition. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as an impairment in the current period through the allowance for loan losses. Subsequent increases in expected or actual cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the accretable yield with the amount of periodic accretion adjusted over the remaining life of the pool.

RESULTS OF OPERATIONS

~~Other Real Estate Owned~~Overview

~~Real estate acquired through, or in lieu~~Coming off a strong end to the 2019 year, the Company began the year with good momentum but was disrupted by the coronavirus (COVID-19) pandemic that set off an economic crisis. Specific events that impacted the Company’s financial results for the first nine months of ~~loan foreclosure is held for sale~~2020, and is initially recorded at the fair value at the date of foreclosure net of estimated disposal costs, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by managementwill impact future financial results, include government mandated business closures and ~~the assets are carried at the lower~~stay-at-home orders, which have transformed into some of the carrying amount or the fair value less costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in other operating expenses. Costs to bring a property to salable condition are capitalized up to the fair value of the property while costs to maintain a property in salable condition are expensed as incurred.

~~Income Taxes~~

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in taxhighest unemployment rates ~~and laws.~~

~~Positions taken~~seen in the Company’s ~~tax returns may be subject~~markets. In addition, unprecedented government stimulus programs and the uncertainties regarding how long the mandates will last have contributed to ~~challenge by~~ the taxing authorities upon examination. Uncertain tax positions are initially recognized in the consolidated financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with the tax authority, assuming full knowledgeunpredictability of the position and all relevant facts. The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing. Penalties are recognized in the periodfinancial impacts that the Company ~~claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statement of income.~~may experience. The Company ~~had no interest or penalties during~~is focused on assessing the ~~three~~risks in its loan portfolio and ~~nine months ended September 30, 2017 and 2016. Under FASB ASC 740,~~~~Income Taxes,~~a valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In management’s opinion, based on a three year taxable income projection, tax strategies that would result in potential securities gainsworking with our customers to minimize future losses. See below for additional discussion regarding trends and the potential effects of ~~off-setting deferred tax liabilities, it is more likely than not that the deferred tax assets are realizable.~~COVID-19.

The Company and its subsidiaries are subject to U. S. federal income tax as well as Virginia and Maryland state income tax. All years from 2013 through 2016 are open to examination by the respective tax authorities.

~~RESULTS OF OPERATIONS~~

~~Overview~~

Net income ~~was $2.4 million for~~in the third quarter of ~~2017,~~2020 decreased $97,000 when compared ~~with net~~to the same period in 2019. Net income ~~of $2.5~~was $4.5 million in the third quarter of ~~2016. Earnings~~2020, with earnings per share of $0.20 basic and fully diluted. Net income for the third quarter of 2019 was $4.6 million, with earnings per share of $0.21 basic and $0.20 fully diluted. The decrease in net income was driven by a decrease of $1.9 million in interest income, primarily from a $1.1 million payoff within a loan pool in the PCI portfolio, with no carrying value, and thus resulted in the entire payment being recognized as interest

34

income during the nine months ended September 30, 2019. Additionally, noninterest income declined a nominal $39,000 year over year and income tax expense increased by $56,000. Offsetting these decreases to net income were a decrease of $1.2 million in interest expense and a decrease of $704,000 in noninterest expenses. The decrease in noninterest expenses was mainly the result of a nonperforming loan of $4.0 million that was migrated to other real estate owned (OREO) in the third quarter of 2019. As a part of this transaction, the Bank paid delinquent real estate taxes in the amount of $624,000 on this property.

Net income for the first nine months of 2020 was $10.1 million, or $0.45 per common share, basic and fully diluted. This is a decrease of $1.6 million, or 13.5%, when compared with net income of $11.7 million, or $0.52 basic and diluted ~~were $0.11~~earnings per share, for ~~each~~the first nine months of 2019. The decrease was primarily the result of the ~~three months ended September 30, 2017 and 2016.~~

~~Net income was $7.8~~provision for loan losses of $4.2 million for the first nine months ~~ended September 30, 2017 versus net income~~ of ~~$7.2 million~~2020 compared with $125,000 for the same period in ~~2016. Basic earnings per common share~~2019. The level of provision in 2020 was recorded to reflect the business and market disruptions arising from the COVID-19 pandemic. Also declining on a year-over-year nine month basis was net interest income by $233,000. Offsetting these decreases to net income were ~~$0.36 per share~~a decrease of $2.1 million in noninterest expenses, primarily from a reduction in salaries and ~~$0.33 per share for the nine months ended September 30, 2017~~employee benefits of $1.1 million, due primarily to capitalized internal loan origination costs related to PPP loan volume, an increase of $447,000 in noninterest income, which was driven by an increase of $484,000 in mortgage loan income, and ~~2016, respectively. Fully diluted earnings per common share were $0.35 per share and $0.33 per share for the nine months ended September 30, 2017 and 2016, respectively.~~a decrease of $224,000 in income tax expense.

Net Interest Income

The Company’s operating results depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, including securities and loans, and interest expense incurred on interest bearing liabilities, including deposits and other borrowed funds. Net interest income is affected by changes in the amount and mix of interest earning assets and interest bearing liabilities, referred to as a “volume change.” It is also affected by changes in yields earned on interest earning assets and rates paid on interest bearing deposits and other borrowed funds, referred to as a “rate change.”

Net interest income ~~increased $523,000,~~decreased $706,000, or ~~5.0%~~5.3%, from the third quarter of ~~2016~~2019 to the third quarter of 2017 and was $11.0 million. The yield on earning assets of 4.51% in the third quarter of 2017 was a slight increase from 4.50% in the third quarter of 2016. Yield on loans increased from 4.54% to 4.62%, and volume considerations increased the average balance by $68.5 million, or 8.5%. Interest income on loans was $10.1 million, an increase of $971,000 over third quarter 20162020. Net interest income ~~of $9.2 million. Interest on PCI loans~~ was ~~$1.4~~$12.7 million in the third quarter of ~~2017,~~2020 compared with $13.4 million for the same period in 2019. Interest and dividend income decreased $1.9 million, or 10.9%, over this time period. In the third quarter of 2019, a $1.1 million payoff was received within a loan pool in the PCI portfolio, with no carrying value, which resulted in the entire payment being recognized as interest income. Interest and fees on loans decreased by $427,000, or 3.2%, driven by a decrease ~~of $126,000 year over year. The return~~in rate. Interest and fees on PCI loans, ~~increased over this time frame, from 11.32% to 11.76%. Income on securities of $1.8~~affected by the $1.1 million payoff previously noted, decreased by $1.4 million and was $962,000 in the third quarter of ~~2017 represented an increase~~2020. Securities income decreased by $138,000, and interest on deposits in other banks increased by $34,000.

The average balance of ~~$93,000~~the loan portfolio, excluding PCI loans, increased by $131.9 million, year over year and averaged $1.169 billion for the third quarter of 2020. The PCI portfolio declined $6.5 million during the year-over-year comparison period. The average balance of total earning assets increased $184.7 million, or 13.9%, from the third quarter of 2019 to the third quarter of 2020. The yield on earning assets decreased from 5.23% in the third quarter of 2019, boosted by the $1.1 million PCI payment, to 4.09% in the third quarter of 2020. The yield on earning assets was the culmination of decreases in the yield on all loans, from 5.74% in the third quarter of 2019 to 4.55% in the third quarter of 2020, in the tax-equivalent yield on securities, from 3.17% in the third quarter of 2019 to 2.89% in the third quarter of 2020, and in the yield on interest bearing bank balances, from 2.58% to 0.68% year over year. Income on interest bearing bank balances increased $34,000 as a result of an increase of ~~$15.2~~$57.1 million in the average balance ~~of securities. The tax-equivalent yield on securities was 3.10%~~ in the third quarter of ~~each of 2017 and 2016.~~2020 as compared with the same period one year ago.

Interest expense ~~increased $459,000,~~decreased $1.2 million, or ~~24.1%~~29.8%, when comparing the third quarter of ~~2017~~2020 and the third quarter of ~~2016.~~2019. Interest expense on deposits ~~increased $503,000,~~decreased $1.1 million, or ~~32.5%~~29.3%, as the cost declined from 1.45% in the third quarter of 2019 to 0.96% for the same period in 2020. The average balance of interest bearing deposits increased ~~$103.4~~$70.0 million, or ~~12.4%~~6.9%. ~~Overall,~~This growth was from non-maturity deposit sources. First, there was an increase of $45.8 million, or 29.5%, in the ~~Bank’s cost~~average balance of interest bearing ~~liabilities increased from 0.79%~~checking accounts, which averaged $201.0 million in the third quarter of ~~2016 to 0.92% in the third quarter of 2017. While average interest bearing deposit costs increased from 0.74% in the third quarter of 2016 to 0.87% in the third quarter of 2017,~~2020. Additionally, there was ~~a decline~~an increase of ~~$34.1~~$43.9 million in the average balance of savings and money market accounts from the third quarter of 2019 to the same period in 2020. Offsetting these increases was a decrease in the average balance of time deposits of $19.8 million, to $612.8 million for the third quarter of 2020. FHLB ~~advances,~~and other borrowings ~~and long-term debt. Management is shifting~~benefited from ~~wholesale funding sources to retail deposits. The~~

35

a decrease in cost ~~of FHLB advances for the Bank increased~~ from ~~1.05%~~1.99% in the third quarter of ~~2016~~2019 to ~~1.57%~~1.19% in the third quarter of ~~2017. The lower average balance~~2020. All of ~~FHLB advances, coupled with~~ the ~~higher rate, resulted in a $13,000~~above contributed to the reduction of interest expense for interest-bearing liabilities by $1.2 million despite an increase in the average amount outstanding of $77.4 million. The amount of liquidity in the banking system, along with lower interest ~~expense, year-over-year.~~

~~The tax equivalent net~~rates and a shift in deposit balances decreased the cost of interest ~~margin decreased 8 basis points,~~bearing liabilities from ~~3.82%~~1.49% in the third quarter of ~~2016~~2019 to ~~3.74%~~0.97% in the third quarter of ~~2017.~~2020

The tax-equivalent net interest margin decreased 67 basis points, from 4.02% in the third quarter of 2019 to 3.35% in the third quarter of 2020. Likewise, the interest spread decreased from ~~3.71%~~3.74% to ~~3.59%~~3.12% over the same time period. The decrease in the margin was precipitated by ~~an increase~~a greater decrease in the yield on earning assets of ~~16.5%~~114 basis points compared with a decline in the cost of interest bearing ~~labilities.~~liabilities of 52 basis points.

~~For the first nine months of 2017, net~~Net interest income ~~increased $2.0~~was $37.3 million ~~or 6.5%, and was $32.9 million. The tax-equivalent yield on earning assets was 4.55%~~ for the first nine months of ~~2017 compared with 4.52%~~2020. This is a slight decrease of $233,000, or 0.6%, from net interest income of $37.5 million for the first nine months of ~~2016.~~2019. Interest and dividend income declined by $1.9 million over this time frame. Interest and dividend income was impacted by volume increases offset by a decline in yield. First, there was an increase of $612,000, or 1.6%, in interest and fees on loans, which increased as a result of ~~$29.7~~growth of $111.0 million, ~~was an increase~~or 10.9%, in the average balance of ~~$3.1 million compared with $26.6 million~~loans in 2020 over 2019. The yield on loans declined from 5.03% for the first nine months of 2019 to 4.59% for the same period in ~~2016.~~2020. A portion of this decrease is attributable to the addition of $85.1 million in PPP loans net of fees during the second and third quarters of 2020 at a rate of 1.00%. Interest and fees on PCI loans declined ~~$349,000 over~~by $1.8 million, or 36.0%. Part of this ~~same time frame. Securities income increased $156,000~~decline is related to payoffs within charged-off loan pools within the PCI portfolio. The yield on the PCI portfolio was 13.71% for the first nine months of ~~2017~~2020 compared with 17.70% for the same period in 2019. Interest on deposits in other banks declined by $69,000. Interest and dividends on securities declined by $699,000 in the first nine months of 2020 compared with the same period in ~~2016.~~2019. The yield on earning assets was 4.38% for the first nine months of 2020, a decline of 64 basis points from 5.02% in the first nine months of 2019. The yield on total loans, which includes PCI loans and PPP loans, declined from 5.48% for the first nine months of 2019 to 4.83% for the same period in 2020. The return on interest bearing bank balances declined from 2.55% to 0.66%, while the tax-equivalent yield on the securities portfolio ~~was 3.14%~~declined from 3.25% for the first nine months of ~~2017 compared with 3.11% for the same time frame in 2016.~~

Interest expense of $6.7 million represented an increase of $961,000, or 16.8%, in the first nine months of 2017 compared with the same period in 2016. Total average interest bearing liabilities increased 6.2%, or $58.7 million, as loan growth has also been funded by an increase of $21.1 million, or 18.9%, in the average balance noninterest bearing deposits.

~~The tax equivalent net interest margin was 3.80%~~2019 to 2.95% for the first nine months of ~~2017 compared with 3.82%~~2020.

Interest expense of $9.9 million for the first nine months of ~~2016. The net~~2020 was a decrease of $1.7 million, or 14.6%, from interest ~~spread was 3.66%~~expense of $11.6 million for the first nine months of ~~2017 versus 3.72%~~2019. The cost of interest bearing liabilities decreased from 1.44% for the first nine months of ~~2016.~~2019 to 1.17% for the same period in 2020. Interest on deposits decreased $1.3 million due to a decline in the rate paid from 1.39% for the first nine months of 2019 to 1.16% for the first nine months of 2020. Over the next 12 months, $480.7 million in certificates of deposit, or 78.8% of total certificates, will reprice, and these certificates were paying a weighted average rate of 1.28% at September 30, 2020. The average balance of interest bearing liabilities increased over this time frame by $45.7 million. Short term borrowing expense decreased by $60,000, and the cost of FHLB and other borrowings decreased by $327,000, or 32.0%, as the rate paid decreased from 2.09% for the first nine months of 2019 to 1.30% for the first nine months of 2020.

The changes noted to interest income and interest expense led to a decline in the net interest margin from 3.84% for the first nine months of 2019 to 3.48% for the same period in 2020. The interest spread also declined over this time frame from 3.58% in 2019 to 3.21% in 2020. Excluding PPP loans from the net interest margin calculation would have resulted in a margin of 3.49% for the first nine months of 2020 compared with the actual margin of 3.48%. The yield on the loan portfolio would have been 4.68% excluding PPP loans versus the actual yield of 4.59% with PPP loans, and the yield on earning assets would have been 4.44% without PPP loans as opposed to the actual yield of 4.38% that included PPP loans.

36

The following tables set forth, for each category of interest-earning assets and interest bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid for the three and nine months ended September 30, ~~2017~~2020 and ~~2016.~~2019. The ~~table~~tables also ~~sets~~set forth the average rate paid on total interest bearing liabilities, and the net interest margin on average total interest earning assets for the same periods. Except as indicated in the footnotes, no tax equivalent adjustments were made and all average balances are daily average balances. Any nonaccruing loans have been included in the tables, as loans carrying a zero yield.


	Three months ended September 30, 2020						Three months ended September 30, 2019
					Average						Average
	Average		Interest		Rates		Average		Interest		Rates
	Balance		Income/		Earned/		Balance		Income/		Earned/
(Dollars in thousands)	Sheet		Expense		Paid		Sheet		Expense		Paid
ASSETS:
Loans	$	1,169,330	$	12,760	4.33	%	$	1,037,433	$	13,187	5.04	%
PCI loans		28,480		962	13.21			34,999		2,333	26.07
Total loans		1,197,810		13,722	4.55			1,072,432		15,520	5.74
Interest bearing bank balances		70,590		121	0.68			13,454		87	2.58
Federal funds sold		127		—	0.07			1,795		9	2.08
Securities (taxable)		198,296		1,362	2.75			195,401		1,489	3.05
Securities (tax exempt) ⁽¹⁾		50,551		435	3.44			49,616		450	3.63
Total earning assets		1,517,374		15,640	4.09			1,332,698		17,555	5.23
Allowance for loan losses		(12,424)						(8,872)
Non-earning assets		108,772						101,129
Total assets	$	1,613,722					$	1,424,955

LIABILITIES AND SHAREHOLDERS’ EQUITY

Demand - interest bearing	$	200,995		112	0.22		$	155,208		85	0.22
Savings and money market		268,350		241	0.36			224,401		330	0.58
Time deposits		612,848		2,261	1.46			632,625		3,283	2.06
Total interest bearing deposits		1,082,193		2,614	0.96			1,012,234		3,698	1.45
Short-term borrowings		1,611		1	0.21			4,409		28	2.53
FHLB and other borrowings		72,285		221	1.19			62,079		315	1.99
Total interest bearing liabilities		1,156,089		2,836	0.97			1,078,722		4,041	1.49
Noninterest bearing deposits		281,026						181,249
Other liabilities		12,980						14,246
Total liabilities		1,450,095						1,274,217
Shareholders’ equity		163,627						150,738

Total liabilities and shareholders’ equity	$	1,613,722					$	1,424,955
Net interest earnings			$	12,804					$	13,514
Interest spread					3.12	%					3.74	%
Net interest margin					3.35	%					4.02	%

Tax equivalent adjustment:
Securities			$	91					$	95

~~NET INTEREST MARGIN ANALYSIS~~

~~AVERAGE BALANCE SHEETS~~

~~(Dollars in thousands)~~

Three months ended September 30, 2017 Three months ended September 30, 2016
Average Average
Average Interest Rates Average Interest Rates
Balance Income/ Earned/ Balance Income/ Earned/
Sheet Expense Paid Sheet Expense Paid
ASSETS:
Loans $ 869,501 $ 10,127 4.62 % $ 801,017 $ 9,156 4.54 %
Purchased credit impaired (PCI) loans 47,358 1,423 11.76 54,301 1,549 11.32
Total loans 916,859 11,550 5.00 855,318 10,705 4.97
Interest bearing bank balances 18,333 65 1.40 9,876 22 0.88
Federal funds sold 105 1 1.21 14 - 0.50
Securities (taxable) 182,703 1,171 2.56 172,591 1,133 2.63
Securities (tax exempt)⁽¹⁾ 86,106 912 4.24 81,007 829 4.09
Total earning assets 1,204,106 13,699 4.51 1,118,806 12,689 4.50
Allowance for loan losses (9,523 ) (9,861 )
Non-earning assets 89,935 87,419
Total assets $ 1,284,518 $ 1,196,364

LIABILITIES AND SHAREHOLDERS' EQUITY

Demand - interest bearing $ 280,253 284 0.40 $ 234,828 156 0.26
Savings 90,774 60 0.26 86,327 58 0.27
Time deposits 567,800 1,709 1.19 514,312 1,336 1.03
Total deposits 938,827 2,053 0.87 835,467 1,550 0.74
Short-term borrowings 381 2 1.67 2,731 6 0.93
FHLB and other borrowings 77,617 308 1.57 111,757 295 1.05
Long-term debt - - - 3,795 53 5.50
Total interest bearing liabilities 1,016,825 2,363 0.92 953,750 1,904 0.79
Noninterest bearing deposits 138,330 122,571
Other liabilities 5,395 5,753
Total liabilities 1,160,550 1,082,074
Shareholders' equity 123,968 114,290

Total liabilities and shareholders' equity $ 1,284,518 $ 1,196,364
Net interest earnings $ 11,336 $ 10,785
Interest spread 3.59 % 3.71 %
Net interest margin 3.74 % 3.82 %

Tax equivalent adjustment:
Securities $ 310 $ 282

(1)Income and yields are reported on a tax equivalent basis assuming a federal tax rate of ~~34%~~21%.

37

~~NET INTEREST MARGIN ANALYSIS~~

~~AVERAGE BALANCE SHEETS~~

~~(Dollars in thousands)~~

Nine months ended September 30, 2017 Nine months ended September 30, 2016
Average Average
Average Interest Rates Average Interest Rates
Balance Income/ Earned/ Balance Income/ Earned/
Sheet Expense Paid Sheet Expense Paid
ASSETS:
Loans $ 856,465 $ 29,676 4.63 % $ 776,491 $ 26,582 4.56 %
Purchased credit impaired (PCI) loans 49,117 4,355 11.69 55,974 4,704 11.20
Total loans 905,582 34,031 5.02 832,465 31,286 5.01
Interest bearing bank balances 15,597 143 1.22 11,065 66 0.80
Federal funds sold 97 1 1.08 5 - 0.50
Securities (taxable) 182,724 3,577 2.61 178,700 3,528 2.63
Securities (tax exempt)⁽¹⁾ 85,607 2,735 4.26 82,750 2,573 4.15
Total earning assets 1,189,607 40,487 4.55 1,104,985 37,453 4.52
Allowance for loan losses (9,647 ) (9,985 )
Non-earning assets 89,261 84,712
Total assets $ 1,269,221 $ 1,179,712

LIABILITIES AND SHAREHOLDERS' EQUITY

Demand - interest bearing $ 253,638 579 0.31 $ 233,186 481 0.27
Savings 91,473 181 0.27 84,661 176 0.28
Time deposits 580,346 5,016 1.16 520,306 3,981 1.02
Total deposits 925,457 5,776 0.83 838,153 4,638 0.74
Short-term borrowings 994 9 1.21 2,313 14 0.85
FHLB and other borrowings 84,072 905 1.44 106,571 903 1.13
Long-term debt - - - 4,771 174 4.80
Total interest bearing liabilities 1,010,523 6,690 0.89 951,808 5,729 0.80
Noninterest bearing deposits 132,868 111,751
Other liabilities 5,487 5,297
Total liabilities 1,148,878 1,068,856
Shareholders' equity 120,343 110,856

Total liabilities and shareholders' equity $ 1,269,221 $ 1,179,712
Net interest earnings $ 33,797 $ 31,724
Interest spread 3.66 % 3.72 %
Net interest margin 3.80 % 3.82 %

Tax equivalent adjustment:
Securities $ 930 $ 875

~~(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate~~Table of ~~34%.~~

38Contents


	Nine months ended September 30, 2020						Nine months ended September 30, 2019
					Average						Average
	Average		Interest		Rates		Average		Interest		Rates
	Balance		Income/		Earned/		Balance		Income/		Earned/
(Dollars in thousands)	Sheet		Expense		Paid		Sheet		Expense		Paid
ASSETS:
Loans	$	1,127,002	$	38,858	4.59	%	$	1,016,041	$	38,246	5.03	%
PCI loans		29,917		3,121	13.71			36,321		4,877	17.70
Total loans		1,156,919		41,979	4.83			1,052,362		43,123	5.48
Interest bearing bank balances		46,620		231	0.66			15,752		300	2.55
Federal funds sold		159		—	0.36			890		14	2.17
Securities (taxable)		190,035		4,000	2.81			190,433		4,483	3.14
Securities (tax exempt) ⁽¹⁾		50,192		1,311	3.48			58,577		1,585	3.61
Total earning assets		1,443,925		47,521	4.38			1,318,014		49,505	5.02
Allowance for loan losses		(11,023)						(8,925)
Non-earning assets		108,056						100,221
Total assets	$	1,540,958					$	1,409,310

LIABILITIES AND SHAREHOLDERS’ EQUITY

Demand - interest bearing	$	184,415		304	0.22		$	156,335		258	0.22
Savings and money market		243,311		749	0.41			220,868		930	0.56
Time deposits		629,598		8,162	1.73			634,434		9,333	1.97
Total interest bearing deposits		1,057,324		9,215	1.16			1,011,637		10,521	1.39
Short-term borrowings		2,038		24	1.57			4,072		84	2.77
FHLB and other borrowings		70,263		696	1.30			64,686		1,023	2.09
Total interest bearing liabilities		1,129,625		9,935	1.17			1,080,395		11,628	1.44
Noninterest bearing deposits		237,198						170,919
Other liabilities		13,849						12,809
Total liabilities		1,380,672						1,264,123
Shareholders’ equity		160,286						145,187

Total liabilities and shareholders’ equity	$	1,540,958					$	1,409,310
Net interest earnings			$	37,586					$	37,877
Interest spread					3.21	%					3.58	%
Net interest margin					3.48	%					3.84	%

Tax equivalent adjustment:
Securities			$	275					$	333

(1)

Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 21%.

Provision for Loan Losses

Management actively monitors the Company’s asset quality and provides specific loss provisions when necessary. Provisions for loan losses are charged to income to bring the total allowance for loan losses to a level deemed appropriate by management of the Company based on such factors as historical credit loss experience, industry diversification of the commercial loan portfolio, the amount of nonperforming loans and related collateral, the volume growth and composition of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay and the value of collateral, the evaluation of the loan portfolio through the internal loan review function and other relevant factors. SeeAllowance for Loan Losses on Loans in the Critical Accounting Policies section above for further discussion.

Loans are charged-off against the allowance for loan losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for loan losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the initial determinations.

Management also actively monitors its PCI loan portfolio for impairment and necessary loan loss provisions. Provisions for these loans may be necessary due to a change in expected cash flows or an increase in expected losses within a pool of loans.

38

The Company ~~recorded~~records a ~~$150,000~~separate provision for loan losses ~~during~~for its loan portfolio, excluding PCI loans, and the ~~three and nine months ended September 30, 2017.~~PCI loan portfolio. There was no provision for loan losses on the ~~PCI~~ loan portfolio, ~~during~~excluding PCI loans, in the ~~three~~third quarter of either 2020 or 2019. There was a provision for loan losses on the loan portfolio, excluding PCI loans, of $4.2 million and $125,000 for the nine months ended September 30, ~~2017~~2020 and ~~2016.~~ 2019, respectively.

The ~~Company~~provision recorded during the first nine months of 2020 was due to the heightened risks associated with the loan portfolio that resulted from the economic impact of the rapidly evolving effects of the COVID-19 stay-at-home orders, business shut-downs and increased unemployment. The Company’s lenders reviewed each loan within the portfolio to identify those borrowers that management believed to be possibly impacted by the current state of the economy. Loans identified with increased risk were aggregated by loan type. This analysis indicated a risk grade migration in a number of loan categories that led to a heightened risk level in the loan portfolio. The impact of the loans’ risk grade migration was applied to the allowance for loan loss calculation, which led to the provision for loan losses for each of the first two quarters of 2020. The Company determined that no provision was necessary for the third quarter of 2020 after a similar analysis and review process for the quarter.

Due to the COVID-19 pandemic, the Company is closely monitoring loan concentrations in various “at risk areas” that it has deemed most likely to be affected by the stay-at-home orders and lack of general business activity, including a lack of travel in our geographic territory. As of September 30, 2020, the Company identified the following categories of borrowers as being potentially at risk:


Category	% of Total Loans
Consumer	15.7	%
Lessors of commercial properties	18.1
Lessors of residential properties	12.3
Hotels and other lodging	5.5
Medical and care services	4.2
Food service & drinking	2.2
Retail stores	1.4
Personal services	1.1

The Company is working with borrowers who have currently expressed a need for relief due to the effects of COVID-19. The Company granted relief in the ~~amount~~form of ~~$250,000~~various types of payment concessions, including interest only for up to six months or payment deferrals up to the same time frame for loans with outstanding balances of $164.1 million at September 30, 2020. In accordance with current regulatory guidance, none of these loans were deemed to be TDRs, as they were all current under their terms as of December 31, 2019.

The Company is also helping its customers and ~~$450,000~~communities by participating in the PPP. As of September 30, 2020, the Company originated 793 loans totaling $85.1 million net of fees, with the median size for all loans made being approximately $31,500. As these loans are 100% guaranteed by the SBA, no allowance for loan losses is required.

With respect to the PCI portfolio, due to the stable nature of its performance and its declining balances over time as the portfolio amortizes, no provision was taken during either of the three ~~and~~or nine months ended September 30, ~~2016. The $150,000 provision for loan losses in the third quarter of 2017 was to provide the required level of reserve needed when considering the existing loan portfolio~~2020 and recent charge-off activity of $972,000 and to support loan growth during the quarter. The provision for loan losses booked for the three and nine months ended September 30, 2016 supported general reserves following loan growth of $63.1 million during the year.2019. Additional discussion of loan quality is presented below.

~~There were~~The loan portfolio, excluding PCI loans, had net ~~charge-offs~~recoveries of ~~$972,000~~$90,000 in the third quarter of ~~2017,~~2020, compared with net charge-offs of ~~$204,000~~$426,000 in the third quarter of ~~2016.~~2019. Total charge-offs were ~~$1.1 million~~$42,000 for the third quarter of ~~2017~~2020 compared with ~~$248,000~~$576,000 in the third quarter of ~~2016.~~2019. Recoveries of previously charged-off loans were ~~$89,000~~$132,000 for the third quarter of ~~2017~~2020 compared with ~~$44,000~~$150,000 in the third quarter of ~~2016.~~2019.

~~There were~~The loan portfolio, excluding PCI loans, had net charge-offs of ~~$976,000~~$301,000 for the nine months ended September 30, ~~2017,~~2020, compared with net charge-offs of ~~$529,000~~$715,000 in the same period of 2019. Total charge-offs were $754,000 for the nine months ended September 30, ~~2016. Total charge-offs~~2020, compared with $1.3 million in the same period of 2019. Recoveries of previously charged-off loans were ~~$1.4~~$453,000 for the nine months ended September 30, 2020, compared with $541,000 in the same period of 2019.

39

Noninterest Income

Noninterest income of $1.5 million in the third quarter of 2020 was a decrease of $39,000, or 2.6%, below the third quarter of 2019. Service charges on deposit accounts of $613,000 in the third quarter of 2020 decreased by $145,000, or 19.1%, year over year, due to reduced transaction volumes during the COVID-19 pandemic. Income on bank owned life insurance was $171,000 in the third quarter of 2020, a decrease of $10,000 year over year. Offsetting these decreases to noninterest income was an increase in mortgage loan income, which was $228,000 in the third quarter of 2020 compared with $176,000 in the third quarter of 2019. Other noninterest income was $382,000 in the third quarter of 2020 compared with $346,000 in the third quarter of 2019, an increase of $36,000. Gains on securities transactions of $78,000 in the third quarter of 2020 were an increase of $28,000 compared with the same quarter in 2019.

Noninterest income was $4.4 million for the first nine months of 2020, an increase of $447,000, or 11.2%, over noninterest income of $4.0 million for the first nine months of 2019. Mortgage loan income was $822,000 for the first nine months of 2020, an increase of $484,000 over the same period in 2019. This increase was created by continuity among the mortgage team, coupled with attractive rates and increased referrals within the Bank. Other noninterest income was $974,000 for the first nine months of 2020, an increase of $230,000 over the same period in 2019. The increase was primarily the result from 2020 activity that included a $64,000 gain on the extinguishment of a FHLB borrowing combined with a $261,000 increase in swap fee income. These items were partially offset by a decrease of $120,000 from non-recurring insurance proceeds received in 2019. Gain on sale of loans was $11,000 for the first nine months of 2020 compared with none for the same period in 2019. Offsetting these increases to noninterest income were a decline of $257,000 in service charges and fees, resulting from reduced transaction volumes created by the COVID-19 pandemic stay-at-home orders, and a decrease of $28,000 in income on bank owned life insurance.

Noninterest Expense

Noninterest expenses were $8.5 million for the third quarter of 2020. This is a decrease of $704,000 from noninterest expenses of $9.2 million for the third quarter of 2019. The primary reason for the decline resulted from a decrease in other real estate expenses, net, which were $87,000 in the third quarter of 2020 compared with $565,000 for the same period in 2019. In addition, loan migration to OREO resulted in the Bank paying $624,000 in real estate taxes during the third quarter of 2019. Salaries and employee benefits declined $248,000, or 4.7%. Also decreasing for the period were other operating expenses, which decreased $165,000, and equipment expense, which was $47,000 lower. Offsetting these decreases were increases of $170,000 in FDIC assessment mainly due to a $165,000 assessment credit received by the FDIC in 2019, and $62,000 in data processing expenses.

Noninterest expenses were $25.0 million for the nine months ended September 30, ~~2017 compared with $801,000~~2020, a decrease of $2.1 million, or 7.6%, year over year. Other real estate expenses, net were $89,000 for the first nine months ~~ended September 30, 2016. Recoveries~~ of ~~previously charged-off loans were $380,000 for~~2020 and decreased by $573,000 versus the ~~nine months ended September 30, 2017 compared with $272,000 for the nine months ended September 30, 2016.~~

~~Noninterest Income~~

~~Noninterest income decreased $180,000, or 13.4%, from~~same period in 2019. In the third quarter of ~~2016~~2019, a nonperforming loan was migrated to OREO and as part of the process the Bank paid $624,000 in real estate taxes on the property. Salaries and employee benefits declined $1.1 million, or 7.1%. In addition to the ~~third quarter~~internal loan costs relating to the origination of ~~2017. Mortgage loan income~~PPP loans, the closure of two branch offices in 2019 have positively affected salaries as well as other expense categories in 2020, namely occupancy and equipment expenses. Occupancy expenses were $242,000 lower, equipment expenses were $105,000 lower, and other operating expenses decreased ~~$193,000. Gains on securities transactions~~$230,000. FDIC assessment was $455,000 for the first nine months of 2020 and increased $139,000 over the same period in 2019 reflecting the $165,000 credit noted above. Data processing fees were ~~$48,000 in the third quarter of 2017, as compared with $88,000 in the third quarter of 2016, a decrease of $40,000. Offsetting these decreases was an increase of $61,000 in service charge income.~~

~~Noninterest income was $3.5~~$1.8 million for the first nine months of ~~2017~~2020, an increase of $80,000 when compared with ~~$4.1~~the same period in 2019.

Income Taxes

Income tax expense was $1.1 million for the third quarter of 2020, compared with income tax expense of $1.1 million for the third quarter of 2019. For the first nine months of 2020, income tax expense was $2.5 million compared with $2.7 million for the first nine months of ~~2016, a decrease~~2019. The effective tax rate for the third quarter of ~~$555,000, or 13.7%. Mortgage loan income decreased $436,000, from $599,000 in~~2020 was 20.2% compared with 19.1% for the third quarter of 2019. For the first nine months of ~~2016 to $163,000~~2020, the effective tax rate was 19.5% compared with 18.7% for the same period in ~~2017.~~2019. The ~~Company discontinued~~increase in the effective tax rate in 2020 compared with 2019 is the result of a ~~wholesale mortgage operation~~lower level of tax-free municipal bond interest income.

40

FINANCIAL CONDITION

General

Total assets increased $191.4 million, or 13.4%, to $1.622 billion at September 30, 2020 when compared to December 31, 2019. Total loans, excluding PCI loans, were $1.178 billion at September 30, 2020, increasing $119.4 million, or 11.3%, from year end 2019. Total PCI loans were $27.1 million at September 30, 2020 versus $32.5 million at December 31, 2019.

Loans net of fees that the ~~end~~Bank originated under the PPP grew $1.6 million during the third quarter and were $85.1 million at September 30, 2020. There were PPP loans of $83.5 million outstanding at June 30, 2020. All of these balances are included in commercial loans. As a result of the economic conditions that existed during the second and third quarters of 2020, commercial loans, excluding PPP loans, declined by $18.9 million from December 31, 2019. Commercial loan balances, excluding PPP balances, declined by $7.2 million during the third quarter of ~~2016~~2020. Commercial real estate loans, the largest category of loans at $452.7 million, or 38.4% of gross loans outstanding, increased $8.8 million, or 2.0%, during the third quarter of 2020. This category has increased $55.8 million, or 14.1%, year to date and ~~shifted to a platform that requires lower overhead but has equivalent~~$59.6 million, or ~~better net revenue potential. Securities gains~~15.2%, year over year. Construction and land development loans, totaling $159.8 million, grew by $8.2 million, or 5.4%, during the third quarter of ~~$180,000 in~~2020, by $13.2 million since year end 2019 and by $28.8 million, or 22.0%, since September 30, 2019. Residential 1 – 4 family loans declined during the ~~first three quarters~~third quarter of ~~2017 compared with $608,000 for~~2020 by $1.4 million and ended the ~~same~~ period ~~in 2016. Securities were sold during 2016 to fund a portion~~at $204.4 million, or 17.4% of the ~~Bank’s loan growth, while in 2017 much of the loan growth has been funded with deposit balance growth. Offsetting these decreases for~~portfolio. This category declined by $19.2 million during the first nine months of ~~2017 compared~~2020 and $17.6 million since September 30, 2019.

The Company’s securities portfolio, excluding restricted equity securities, increased $34.0 million since year end 2019 to $256.7 million at September 30, 2020. U.S. Treasury issues increased by $12.5 million during the first nine months of 2020 as excess liquidity was invested short-term in very liquid and low risk instruments. Corporate securities with balances, at fair value, of $25.9 million at September 30, 2020, increased by $19.8 million during the ~~same period in 2016 were increases~~nine month period. State, county and municipal securities, the largest investment category at $139.6 million at September 30, 2020, increased by $15.2 million during the first nine months of ~~$226,000 in service charges on deposit accounts, $74,000 in income on bank owned life insurance~~2020. Asset backed securities, consisting of student loan pools 97% guaranteed by the U.S. Government, increased by $17.4 million during the first nine months of 2020 and ~~$9,000 in other noninterest income.~~

~~Noninterest Expense~~

Noninterest expenses increased $428,000, or 5.2%, when comparing the third quarter of 2017 to the same period in 2016. Other operating expenses increased $325,000. Salaries and employee benefits increased $322,000, occupancy expenses increased $101,000, and data processing expenses increased $91,000.totaled $29.0 million at September 30, 2020. Offsetting these increases was a decrease ~~year-over-year~~ of ~~$415,000~~$18.8 million in ~~amortization~~mortgage backed securities and a decline of ~~intangibles.~~$12.2 million in balances held in U.S. Government agency bonds. The ~~Bank has opened two new branches since~~Company actively manages the ~~end of~~portfolio to improve its liquidity and maximize the ~~2016 comparison period. While~~return within the increases in noninterest expenses in the third quarter of 2017 compared with the same period in 2016 are primarily a reflection of the branch expansion activity that has occurred in 2016 and 2017, credit expenses also increased $190,000 year over year.desired risk profile.

Noninterest expenses were $25.7 million for the first nine months of 2017, as compared with $24.5 million for the same period in 2016. This is an increase of $1.2 million, or 4.7%. Salaries and employee benefits increased $718,000, or 5.2%, in the first nine months of 2017 compared with the same period in 2016. Other operating expenses increased $366,000 over the comparison period. Occupancy expenses increased $286,000, data processing fees increased $236,000, other real estate expenses increased $187,000 and equipment expenses increased $120,000. Offsetting these increases were decreases in amortization of intangibles, which declined $552,000, and FDIC assessment, which declined $206,000. The increases in noninterest expenses in the first nine months of 2017 compared with the same period in 2016 are primarily a reflection of the branch expansion activity that has occurred in 2016 and 2017. The Bank has opened four new branches over the course of 2016 and 2017. Credit expenses also increased $137,000 from the first nine months of 2016 to the same period in 2017.

~~Income Taxes~~

Income tax expense was $919,000 for the three months ended September 30, 2017 compared with an income tax expense of $862,000 for the third quarter of 2016. The effective tax rate was 27.6% for the third quarter of 2017 compared with 26.0% for the third quarter of 2016. For the nine months ended September 30, 2017, income tax expense of $2.7 million represented an effective tax rate of 25.5%. For the nine months ended September 30, 2016, income tax expense was $2.7 million, or an effective rate of 27.5%. The lower rate in 2017 was primarily the result of the exercise of stock options by employees, which reduced income tax expense, as required by a recently adopted GAAP standard.

~~FINANCIAL CONDITION~~

~~General~~

Total assets increased $44.3 million, or 3.5%, to $1.294 billion at September 30, 2017 as compared with $1.250 billion at December 31, 2016. Total loans were $890.0 million at September 30, 2017, increasing $53.7 million, or 6.4%, from year end 2016. Total PCI loans were $45.5 million at September 30, 2017 versus $52.0 million at December 31, 2016.

During the first nine months of 2017, residential 1-4 family loans grew $21.9 million, or 10.5%. Of this amount, $15.7 million was a pool of in-market mortgages purchased in late third quarter of 2017. Multifamily loans grew $14.6 million, or 37.2%, commercial loans grew $7.3 million, or 5.7%, commercial mortgage loans on real estate grew $6.0 million, or 1.8%, and construction and land development loans grew $4.3 million, or 4.4%.

The Company’s securities portfolio, excluding equity securities, declined $5.8 million, or 2.2%, from $262.7 million at December 31, 2016 to $256.9 million at September 30, 2017. Net realized gains of $180,000 were recognized during the first nine months of 2017 through sales and call activity, as compared with $608,000 recognized during the first nine months of 2016. The decline in the volume of securities was a strategic decision by management to fund strong loan growth with securities sales. Also, there were normal securities amortization, call activity, sales and maturities.

The Company is required to account for the effect of ~~market~~ changes in the fair value of securities ~~available-for-sale~~available for sale (AFS) under FASB ASC 320,Investments – Debt and Equity Securities. The ~~market~~fair value of the AFS portfolio was ~~$210.4~~$233.7 million at September 30, ~~2017~~2020 and ~~$216.1~~$187.0 million at December 31, ~~2016.~~2019. At September 30, ~~2017,~~2020, the Company had a net unrealized gain on the AFS portfolio of ~~$1.2~~$8.9 million compared with a net unrealized ~~loss~~gain of ~~$621,000~~$3.7 million at December 31, ~~2016.~~2019. Municipal securities comprised ~~59.1%~~49.9% of the total AFS portfolio at September 30, ~~2017.~~2020. These securities exhibit more price volatility in a changing interest rate environment because of their longer weighted average life, as compared to other categories contained within the rest of the portfolio.

The Company had cash and cash equivalents of ~~$22.6 million and $21.1~~$75.5 million at September 30, ~~2017 and December 31, 2016, respectively. There were federal funds sold~~2020 compared with $28.7 million at year end 2019, an increase of ~~$144,000 at~~$46.8 million. The majority of this category growth occurred in interest bearing bank balances, $45.1 million during the nine months ended September 30, ~~2017~~2020, as large amounts of liquidity have been funneled into the banking system through the facilitation of PPP loans by the banking industry and ~~federal funds purchased of $4.7 million at December 31, 2016.~~stimulus checks issued by the U.S. Treasury under the CARES Act.

Interest bearing deposits at September 30, ~~2017~~2020 were ~~$933.1 million,~~$1.088 billion, an increase of ~~$24.6~~$102.8 million, or ~~2.7%~~10.4%, from ~~$908.4 million at~~ December 31, ~~2016. MMDA balances have increased $33.1~~2019. Interest bearing checking accounts (formerly NOW accounts) of $201.1 million grew by $5.7 million, or ~~29.7%~~2.9%, during ~~2017,~~ the ~~result~~third quarter of ~~promotions at new branches. This growth has enabled management to allow brokered deposit balances of $38.9 million to mature~~2020 and ~~run-off. As a result, time deposits over $250,000 declined $9.9~~grew $30.6 million, or ~~7.7%.~~

~~FHLB advances~~17.9%, since year end 2019 and $53.5 million, or 36.2%, since September 30, 2019. Money market deposit accounts were ~~$81.3~~$158.6 million at September 30, ~~2017, compared with $81.9~~2020 and grew $10.5 million, at December 31, 2016. Long term debt was $0 at September 30, 2017 and $1.7 million at December 31, 2016. This borrowing, initially in the amount of $10.7 million, was obtained in April 2014, and the proceeds were used to redeem the Company’s then remaining outstanding TARP preferred stock. The Company fully paid this debtor 7.1%, during the ~~first~~third quarter of ~~2017.~~

~~Shareholders’ equity was $124.4 million at September 30, 2017~~2020 and ~~$114.5 million at December 31, 2016. Shareholders’ equity increased $9.9~~$37.7 million, or ~~8.6%~~31.2%, from year end 2016 due to an increase of $1.3 million in other comprehensive income related to net unrealized gains related to the investment portfolio and cash flow hedge, an increase of $786,000 in additional paid in capital and net income of $7.8 million induring the first nine months of ~~2017.~~2020. Savings accounts totaled $118.0 million at September 30, 2020 and grew $9.4 million during the third quarter and $21.4 million for the first nine months of 2020. Strong growth in these non-maturity categories for both the quarter and year has

41

allowed the Bank to react to lower interest rates through proactive repricing in certificates of deposit, the highest costing deposit category. As a result, there has been tepid growth in time deposits over $250,000, which grew by $1.4 million in the third quarter of 2020. Time deposits less than or equal to $250,000 declined $24.2 million in the third quarter of 2020. Time deposit balances combined were 56.1% of interest bearing deposits at September 30, 2020, a decline from 60.6% at December 31, 2019. The growth in interest bearing checking accounts, money market accounts and savings accounts, as well as in noninterest bearing deposits, was $192.9 million during the first nine months of 2020. A portion of this growth was associated with the $85.1 million in PPP loans originated and held at September 30, 2020 and stimulus checks issued under the CARES Act, as well as previously postponed business activity that resulted from the COVID-19 stay-at-home orders. Certificates of deposit in relation to total deposits declined from 51.3% at December 31, 2019 to 44.5% at September 30, 2020.

FHLB borrowings were $68.0 million at September 30, 2020, compared with $68.5 million at December 31, 2019. The stable level of FHLB borrowings during 2020 has been due to the FHLB swiftly responding to the March 16, 2020 rate cut of 1.50% to the discount rate by repricing advances downward to ensure low cost liquidity for the banking system. As a result, the Bank has found this level of borrowing to be a stable source of low cost funding. There were Federal funds purchased of $940,000 at September 30, 2020, down from $24.4 million at December 31, 2019.

Shareholders’ equity was $165.8 million at September 30, 2020, or 10.2% of total assets, compared with $155.5 million, or 10.9% of total assets, at December 31, 2019. Shareholders’ equity at September 30, 2019 was $152.6 million, or 10.7% of total assets. On January 22, 2020, the Company announced a share repurchase program of up to 1,000,000 shares of its common stock. During the first nine months of 2020, the Company repurchased 130,800 shares of common stock at a total cost of $885,665.

Asset Quality – excluding PCI loans

The allowance for loan losses represents management’s estimate of the amount appropriate to provide for probable losses inherent in the loan portfolio.

Loan quality is continually monitored, and the Company’s management has established an allowance for loan losses that it believes is appropriate for the risks inherent in the loan portfolio. Among other factors, management considers the Company’s historical loss experience, the size and composition of the loan portfolio, the value and appropriateness of collateral and guarantors, nonperforming loans and current and anticipated economic conditions. There are additional risks of future loan losses, which cannot be precisely quantified nor attributed to particular loans or classes of loans. Because those risks include general economic trends, as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determination as to appropriateness, which may take into account such factors as the methodology used to calculate the allowance and size of the allowance in comparison to peer companies identified by regulatory agencies. SeeAllowance for Loan Losses on Loans in the Critical Accounting Policies section above for further discussion.

The Company maintains a list of loans that have potential weaknesses and thus may need special attention. This loan list is used to monitor such loans and is used in the determination of the appropriateness of the allowance for loan losses. Nonperforming assets totaled ~~$15.4~~$8.6 million at September 30, ~~2017~~2020 and net charge-offs were ~~$976,000~~$301,000 for the nine months ended September 30, ~~2017.~~2020. This compares with nonperforming assets of ~~$14.7~~$10.8 million and net charge-offs of ~~$516,000 at and~~$879,000 for the year ended December 31, ~~2016.~~2019.

~~Nonperforming~~Nonaccrual loans were ~~$12.7~~$4.2 million at September 30, ~~2017,~~2020, a ~~$2.4~~$1.1 million ~~increase~~decrease from ~~$10.2~~$5.3 million at December 31, ~~2016.~~2019. The ~~$2.4~~$1.1 million ~~increase~~decrease in ~~nonperforming~~nonaccrual loans since December 31, ~~2016~~2019 was the net result of ~~$7.0~~$5.1 million in additions to ~~nonperforming~~nonaccrual loans and ~~$4.6~~$6.2 million in reductions. The increase related mainly to one construction and land development relationship totaling $1.4 million and three commercial loans totaling $2.4 million. With respect to the reductions in ~~nonperforming~~nonaccrual loans, ~~$1.1 million~~$277,000 were payments to existing credits, ~~$1.2~~$619,000 were charge-offs, $4.9 million were ~~charge-offs, $926,000 were loans~~paid off, including $1.9 million of the additions noted above, and $415,000 returned to accruing ~~status, $23,000 were loans transferred to OREO, and $1.4 million paid off.~~

status.

The allowance for loan losses, excluding PCI, equaled ~~68.37%~~292.6% of nonaccrual loans at September 30, ~~2017~~2020 compared with ~~92.68%~~159.3% at December 31, ~~2016.~~2019. The ratio of nonperforming assets to loans and OREO ~~continued to decline.~~decreased 28 basis points. The

42

ratio was ~~1.72%~~0.73% at September 30, ~~2017~~2020 versus ~~1.74%~~1.01% at December 31, ~~2016.~~

2019, which was driven primarily by the decrease in nonperforming loans and increase in total loans primarily from PPP loan originations.

The allowance for loan losses ~~for each of the periods presented~~ includes an amount that ~~could not~~cannot be related to individual types of loans, and ~~thus~~this is referred to as the unallocated ~~portion~~component of the allowance. The Company recognizes the inherent imprecision in the estimates of losses due to various uncertainties and variability related to the factors used. Specifically, the provision of ~~$450,000~~$4.2 million taken ~~during~~for the ~~year~~nine months ended ~~2016~~September 30, 2020 primarily due to ~~loan growth~~risk grade deterioration of the portfolio related to COVID-19 resulted in an elevated unallocated amount of ~~$1.5~~$3.1 million at ~~December 31, 2016.~~September 30, 2020. Several factors ~~justified~~justify the maintenance of this unallocated amount including an unusually low level of delinquencies at December 31, 2016, which the Company believed was unsustainable over the next several quarters and was not reflective of the Company’s experience, as well as the fact that the Company believed the allowance as reported was indicative of the credit risks of the loan portfolio at December 31, 2016. During 2017, delinquencies increased $3.4 million, net charge-offs were $976,000, nonaccrual loans increased $2.4 million and the Company took a provision of $150,000, all of which contributed to the reduction of the unallocated amount to $101,000 at September 30, 2017.amount:

-

There was a significant decrease in delinquencies at September 30, 2020 driving the reduction in the calculated allowance. Given the uncertainty of the current economic environment in relation to COVID-19, delinquencies could increase dramatically over the next several quarters. While the Company currently does not believe any of its COVID-19 related modifications rise to the level of a TDR under the current guidance, the true test will be during the next quarter or even the first quarter of 2021 when the modification periods expire and the economic impacts of COVID-19 become more evident.

-

Coverage ratios at September 30, 2020 relating to the allowance to loans, as noted in the table below, are in line with peers and are consistent for the Company with prior periods which have proven to be adequate and produce provisions and allowances for loan losses that are directionally consistent with the credit quality of the loan portfolio. This is an indication that the allowance, in the aggregate, is reasonably stated when considering total loans as well as loans with some doubt regarding ultimate collectability.

-

The Company feels that, if the portfolio continues to show improvement and the calculation continues to yield a significant unallocated component, it will make adjustments as considered appropriate after observing a longer, more substantiated time horizon.

In accordance with GAAP, an individual loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due in accordance with contractual terms of the loan agreement. The Company considers all troubled debt restructures and nonaccrual loans to be impaired loans. In addition, the Company reviews all substandard and doubtful loans that are not on nonaccrual status, as well as loans with other risk characteristics, pursuant to and specifically for compliance with the accounting definition of impairment as described above. These impaired loans have been determined through analysis, appraisals, or other methods used by management.

See Note 3 to the Company’s financial statements for information related to the allowance for loan losses. At September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, total impaired loans, excluding PCI loans, equaled ~~$18.0~~$9.0 million and ~~$18.5~~$9.9 million, respectively.

43

The following table sets forth selected asset quality data, excluding PCI loans, and ratios for the dates indicated (dollars in thousands):


	September 30, 2020			December 31, 2019
Nonaccrual loans	$	4,214		$	5,292
Loans past due 90 days and accruing interest		—			946
Total nonperforming loans		4,214			6,238
OREO		4,416			4,527
Total nonperforming assets	$	8,630		$	10,765

Accruing troubled debt restructure loans	$	4,753		$	4,593

Balances
Specific reserve on impaired loans		1,180			584
General reserve related to unimpaired loans		11,148			7,845
Total allowance for loan losses		12,328			8,429

Average loans during the year, net of unearned income		1,127,002			1,023,861

Impaired loans		8,967			9,885
Non-impaired loans		1,168,742			1,048,438
Total loans, net of unearned income		1,177,709			1,058,323

Ratios
Allowance for loan losses to loans		1.05	%		0.80	%
Allowance for loan losses to nonaccrual loans		292.55			159.28
General reserve to non-impaired loans		0.95			0.75
Nonaccrual loans to loans		0.36			0.50
Nonperforming assets to loans and OREO		0.73			1.01
Net charge-offs to average loans		0.04			0.09

September 30, 2017 December 31, 2016
Nonaccrual loans $ 12,677 $ 10,243
Loans past due 90 days and accruing interest — —
Total nonperforming loans 12,677 10,243
OREO 2,710 4,427
Total nonperforming assets $ 15,387 $ 14,670

Accruing troubled debt restructure loans $ 5,313 $ 4,653

Balances
Specific reserve on impaired loans 965 1,130
General reserve related to unimpaired loans 7,702 8,363
Total allowance for loan losses 8,667 9,493
Average loans during the year, net of unearned income 856,465 787,245

Impaired loans 17,990 18,541
Non-impaired loans 871,990 817,758
Total loans, net of unearned income 889,980 836,299

Ratios
Allowance for loan losses to loans 0.97 % 1.14 %
Allowance for loan losses to nonperforming loans 68.37 92.68
Allowance for loan losses to nonaccrual loans 68.37 92.68
General reserve to non-impaired loans 0.88 1.02
Nonaccrual loans to loans 1.42 1.22
Nonperforming assets to loans and OREO 1.72 1.74
Net charge-offs to average loans 0.15 0.07

The Company grants troubled debt restructures (TDR) and other various loan workouts whereby an existing loan may be restructured into multiple new loans. At September 30, 2017, the Company had 23 loans that met the definition of a TDR, which are loans that for reasons related to the debtor’s financial difficulties have been restructured on terms and conditions that would otherwise not be offered or granted. Six of these loans were restructured using multiple new loans. The aggregated outstanding principal of all TDR loans at September 30, 2017 was $7.0 million, of which $1.7 million were classified as nonaccrual.

The primary benefit of the restructured multiple loan workout strategy is to maximize the potential return by restructuring the loan into a “good loan” (the A loan) and a “bad loan” (the B loan). The impact on interest is positive because the Bank is collecting interest on the A loan rather than potentially not collecting interest on the entire original loan structure. The A loan is underwritten pursuant to the Bank’s standard requirements and graded accordingly. The B loan is classified as either “doubtful” or ��loss”. An impairment analysis is performed on the B loan and, based on its results, all or a portion of the B loan is charged-off or a specific loan loss reserve is established.

The Company does not modify its nonaccrual policies in this arrangement, and the A loan and the B loan stand on their own terms. At inception, this structure meets the definition of a TDR. If the loan is on nonaccrual at the time of restructure, the A loan is held on nonaccrual until six consecutive payments have been received, at which time it may be put back on an accrual status. The B loan is placed on nonaccrual. Under the terms of each loan, the borrower’s payment is contractually due.

A further breakout of nonaccrual loans, excluding PCI loans, at September 30, ~~2017~~2020 and December 31, ~~2016~~2019 is below (dollars in thousands):


	September 30, 2020		December 31, 2019
Mortgage loans on real estate:
Residential 1‑4 family	$	1,338	$	1,378
Commercial		764		1,006
Construction and land development		572		376
Multifamily		—		2,463
Agriculture		51		—
Total real estate loans		2,725		5,223
Commercial loans		1,470		62
Consumer installment loans		19		7
Total loans	$	4,214	$	5,292

September 30, 2017 December 31, 2016
Mortgage loans on real estate:
Residential 1-4 family $ 2,140 $ 2,893
Commercial 3,492 1,758
Construction and land development 4,283 5,495
Agriculture 66 —
Total real estate loans 9,981 10,146
Commercial loans 2,666 53
Consumer installment loans 30 44
Total loans $ 12,677 $ 10,243

At September 30, 2017, the Company had six construction and land development credit relationships in nonaccrual status. The borrowers for all of these relationships are residential land developers. All of the relationships are secured by the real estate to be developed and are in the Company’s central Virginia market. The total amount of the credit exposure outstanding at September 30, 2017 was $4.3 million. These loans have either been charged-down or sufficiently reserved against to equal the current expected realizable value.

The total amount of the allowance for loan losses attributed to all six relationships was $456,000 at September 30, 2017, or 10.64% of the total credit exposure outstanding. The Company establishes its reserves as described above in~~Allowance for Loan Losses on Loans~~ in the Critical Accounting Policies section. In conjunction with the impairment analysis the Company performs as part of its allowance methodology, the Company ordered appraisals for all loans with balances in excess of $250,000 unless there existed an appraisal that was not older than 18 months and/or deemed to be invalid. The Company uses a ratio analysis for balances less than $250,000. The Company maintains detailed analysis and other information for its allowance methodology, both for internal purposes and for review by its regulators.

Asset Quality – PCI loans

Loans accounted for under FASB ASC 310-30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans.

The PCI loans are subject to credit review standards for loans. If and when credit deterioration occurs subsequent to the date that they were acquired, a provision for credit loss for PCI loans will be charged to earnings for the full amount. The Company makes an estimate of the total cash flows that it expects to collect from a pool of PCI loans, which ~~include~~ includes

44

Table of ~~1.25%.~~Contents

undiscounted expected principal and interest. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as ~~impairment~~impairments in the current period through the allowance for loan losses. Subsequent increases in expected cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the yield over the remaining life of the pool.

Capital Requirements

The determination of capital adequacy depends upon a number of factors, such as asset quality, liquidity, earnings, growth trends and economic conditions. The Company seeks to maintain a strong capital base exceeding regulatory minimums for well capitalized institutions to support its growth and expansion plans, provide stability to current operations and promote public confidence in the Company.

Current repurchase activity under the Company’s stock repurchase program was suspended effective April 2, 2020. The sole reason for this suspension was due to the uncertainties surrounding COVID-19. On October 29, 2020, the Company announced the recommencement of this programfor the repurchase of up to 200,000 shares of its common stock through January 2021. Shares of common stock may be purchased under the program periodically in privately negotiated transactions or in open market transactions at prevailing market prices, and pursuant to a trading plan in accordance with applicable securities laws. The Company continues to place a heightened emphasis on capital and liquidity to safeguard shareholders, its balance sheet and the needs of its customers.

Management believes that the Company possesses strong capital and liquidity. The actions taken with regard to capital and liquidity as a result of the pandemic were put into effect to safeguard these areas of strength.

Effective September 2018, the Federal Reserve raised the total consolidated asset limit in the Small Bank Holding Company Policy Statement from $1 billion to $3 billion, thereby eliminating the Company’s consolidated capital reporting requirements. Therefore, the Company only reports capital information at the Bank level.

Under the final rule on Enhanced Regulatory Capital Standards, commonly referred to as Basel III and which became effective January 1, 2015, the federal banking regulators have defined four tests for assessing the capital strength and adequacy of banks, based on ~~three~~four definitions of capital. “Common equity tier 1 capital” is defined as common equity, retained earnings, and accumulated other comprehensive income (AOCI), less certain intangibles. “Tier 1 capital” is defined as common equity tier 1 capital plus qualifying perpetual preferred stock, tier 1 minority interests, and grandfathered trust preferred securities. “Tier 2 capital” is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock, non-tier 1 minority interests and a limited amount of the allowance for loan ~~loss allowance.~~losses. “Total capital” is defined as tier 1 capital plus tier 2 capital. Four risk-based capital ratios are computed using the above capital definitions, total assets and risk-weighted assets, and the ratios are measured against regulatory minimums to ascertain adequacy. All assets and off-balance sheet risk items are grouped into categories according to degree of risk and assigned a risk-weighting and the resulting total is risk-weighted assets. “Common equity tier 1 capital ratio” is common equity tier 1 capital divided by risk-weighted assets. “Tier 1 risk-based capital ratio” is tier 1 capital divided by risk-weighted assets. “Total risk-based capital ratio” is total capital divided by risk-weighted assets. The ~~leverage ratio~~“leverage ratio” is tier 1 capital divided by total average assets.

The ~~Company’s~~Bank’s ratio of total risk-based capital was ~~13.4%~~13.9% at each of September 30, ~~2017 compared with 13.2% at~~2020 and December 31, ~~2016.~~2019. The tier 1 risk-based capital ratio was ~~12.6%~~12.9% at September 30, ~~2017~~2020 and ~~12.2%~~13.2% at December 31, ~~2016.~~2019. The ~~Company’s~~Bank’s tier 1 leverage ratio was ~~10.0%~~10.2% at September 30, ~~2017~~2020 and ~~9.6%~~11.0% at December 31, ~~2016.~~2019. All capital ratios exceed regulatory minimums to be considered well capitalized. BASEL III introduced the common equity tier 1 capital ratio, which was ~~12.2%~~12.9% at September 30, ~~2017~~2020 and ~~11.8%~~13.2% at December 31, ~~2016.~~

2019.

Under Basel III, a capital conservation buffer of 2.5% above the minimum risk-based capital thresholds was established. Dividend and executive compensation restrictions begin if the ~~Company~~Bank does not maintain the full amount of the buffer. ~~The capital conservation buffer will be phased in between January 1, 2016 and January 1, 2019.~~ At September 30, ~~2017,~~2020, the ~~Company~~Bank had a capital conservation buffer of ~~5.4%, well above the 2017 required buffer~~5.9%.

45

Liquidity

Liquidity represents the Company’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest bearing deposits with banks, federal funds sold and certain investment securities. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

The Company’s results of operations are significantly affected by its ability to manage effectively the interest rate sensitivity and maturity of its interest earning assets and interest bearing liabilities. A summary of the Company’s liquid assets at September 30, ~~2017~~2020 and December 31, ~~2016~~2019 was as follows (dollars in thousands):


	September 30, 2020			December 31, 2019
Cash and due from banks	$	18,689		$	16,976
Interest bearing bank deposits		56,795			11,708
Available for sale securities, at fair value, unpledged		198,581			157,225
Total liquid assets	$	274,065		$	185,909

Deposits and other liabilities	$	1,456,447		$	1,275,361
Ratio of liquid assets to deposits and other liabilities		18.82	%		14.58	%

September 30, 2017 December 31, 2016
Cash and due from banks $ 9,750 $ 13,828
Interest bearing bank deposits 12,656 7,244
Federal funds sold 144 —
Available for sale securities, at fair value, unpledged 175,776 170,898
Total liquid assets $ 198,326 $ 191,970

Deposits and other liabilities $ 1,169,707 $ 1,135,280
Ratio of liquid assets to deposits and other liabilities 16.96 % 16.91 %

44

The Company maintains unsecured lines of credit of varying amounts with correspondent banks to facilitate short-term liquidity needs. The Company has a total of $55 million in this type of facility in the aggregate at September 30, 2020.

Off-Balance Sheet Arrangements and Contractual Obligations

A summary of the contract amount of the Company’s exposure to off-balance sheet and balance sheet risk as of September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, is as follows (dollars in thousands):


	September 30, 2020		December 31, 2019
Commitments with off-balance sheet risk:
Commitments to extend credit	$	244,625	$	210,086
Standby letters of credit		11,890		15,155
Total commitments with off-balance sheet risks	$	256,515	$	225,241

September 30, 2017 December 31, 2016
Commitments with off-balance sheet risk:
Commitments to extend credit $ 153,330 $ 134,517
Standby letters of credit 6,636 7,151
Total commitments with off-balance sheet risks $ 159,966 $ 141,668

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may be drawn upon only to the total extent to which the Company is committed.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. The Company holds certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.

46

~~On November 7, 2014, the~~

The Company ~~entered into an interest~~designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate ~~swap~~borrowings, such as FHLB borrowings, repurchase agreements, and brokered CDs. The Company had cash flow hedges with a total notional ~~amount~~amounts of $30 million. The Company designated the swap as a cash flow hedge intended to protect against the variability in the expected future cash flows on the designated variable rate borrowings. The swap hedges the interest rate risk, wherein the Company will receive an interest rate based on the three month LIBOR from the counterparty$20 million and pays an interest rate of 1.69% to the same counterparty calculated on the notional amount for a term of five years. The Company intends to sequentially issue a series of three month fixed rate debt as part of a planned roll-over of short term debt for five years. The forecasted funding will be provided through one of the following wholesale funding sources: a new FHLB advance, a new repurchase agreement, or a pool of brokered CDs, based on whichever market offers the most advantageous pricing at the time that pricing is first initially determined for the effective date of the swap and each reset period thereafter. Each quarter when the Company rolls over the three month debt, it will decide at that time which funding source to use for that quarterly period.

~~The fair value of the Company’s cash flow hedge was an unrealized gain and an unrealized loss of $17,000 and $70,000~~$10 million at September 30, ~~2017~~2020 and December 31, ~~2016, respectively, which was~~2019, respectively. The Company recorded a fair value liability of $683,000 and $44,000 in other ~~assets~~liabilities, at September 30, 2020 and ~~other liabilities,~~December 31, 2019, respectively. The Company’s cash flow ~~hedge is~~hedges are deemed to be highly effective. Therefore, the ~~gain and loss was~~net losses were recorded as a component of other comprehensive income ~~recorded~~ in the Company’s ~~Consolidated Statements~~consolidated statements of ~~Comprehensive Income.~~comprehensive income.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company’s primary market risk exposure is interest rate risk. The ongoing monitoring and management of interest rate risk is an important component of the Company’s asset/liability management process, which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out asset/liability management policies to the Asset/Liability Committee (ALCO) of the Bank. In this capacity, ALCO develops guidelines and strategies that govern the Company’s asset/liability management related activities, based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends.

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change, affecting net interest income, the primary component of the Company’s earnings. ALCO uses the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While ALCO routinely monitors simulated net interest income sensitivity over various periods, it also employs additional tools to monitor potential longer-term interest rate risk.

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s balance sheet. The simulation model is prepared and results are analyzed at least quarterly. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth, given a 400 basis point upward shift and a 400 basis point downward shift in interest rates. The downward shift of 300 or 400 basis points is included in the analysis, although less meaningful in the current rate environment, because all results are monitored regardless of likelihood. A parallel shift in rates over a 12-month period is assumed.

The following table represents the change to net interest income given interest rate shocks up and down 100, 200, 300 and 400 basis points at September 30, ~~2017~~2020 (dollars in thousands):


	September 30, 2020
	%	$
Change in Yield curve
+400 bp	13.0	6,740
+300 bp	9.3	4,811
+200 bp	5.4	2,814
+100 bp	2.2	1,135
most likely	—	—
‑100 bp	(0.1)	(60)
‑200 bp	(0.1)	(71)
‑300 bp	(0.1)	(73)
‑400 bp	(0.1)	(73)

September 30, 2017
% $
Change in Yield curve
+400 bp 0.2 91
+300 bp 0.2 90
+200 bp 0.2 70
+100 bp 0.1 45
most likely — —
-100 bp (0.4 ) (171 )
-200 bp (2.3 ) (1,015 )
-300 bp (2.5 ) (1,081 )
-400 bp (2.5 ) (1,085 )

At September 30, ~~2017,~~2020, the Company’s interest rate risk model indicated that, in a rising rate environment of 400 basis points over a 12 month period, net interest income could increase by ~~0.2%~~13.0%. For the same time period, the interest rate risk model indicated that in a declining rate environment of 400 basis points, net interest income could decrease by ~~2.5%~~0.1%. While these percentages are subjective based upon assumptions used within the model, management believes the balance sheet is appropriately balanced with acceptable risk to changes in interest rates.

47

The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, including the nature and timing of interest rate levels such as yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances about the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to factors such as prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change, caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in response to, or in anticipation of, changes in interest rates.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q, the Company’s management, with the participation of the Company’s chief executive officer and ~~its~~ chief financial officer ~~(“the Certifying~~(the “Certifying Officers”), conducted evaluations of the Company’s disclosure controls and procedures. As defined under Section 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the ~~SEC’s~~ rules and ~~forms.~~forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

Based on this evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Exchange Act and the rules and regulations promulgated under it.

Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Certifying Officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting. Furthermore, the Company has seen no effect on internal control over financial reporting related to its change to a mostly remote workforce due to COVID-19.

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company, including its subsidiaries, is a party or of which the property of the Company is subject.

48

Item 1A.Risk Factors

~~As of the date of this report, there were~~There are no material changes to any of the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019 (Part I, Item 1A), other than the addition of the risk factor relating to the COVID-19 pandemic as set forth below.

Our business, financial condition, liquidity, capital and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.

The coronavirus (COVID-19) pandemic, including measures that governmental authorities have taken to manage the public health effects of the pandemic, has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity, capital and results of operations. These measures, together with voluntary changes in consumer behavior, have led to a substantial decrease in economic activity and a dramatic increase in unemployment. We cannot predict at this time the extent to which COVID-19 will continue to negatively affect us. The extent of any continued or future adverse effects of COVID-19 will depend on future developments, which are highly uncertain and outside our control, including the scope and duration of the pandemic, the direct and indirect impact of the pandemic on our employees, customers and service providers, as well as other market participants, and additional actions taken by governmental authorities and other third parties in response to the pandemic.

We are prioritizing the safety of our customers and employees and have limited our branch activity to drive-through services or in-branch appointments. In addition, most of our employees are working remotely. If these measures are not effective in serving our customers or affect the productivity of our employees, they may lead to significant disruptions in our business operations.

Many of our third-party service providers have also been, and may further be, affected by the same factors that affect us and that, in turn, increase their own risks of business disruption or may otherwise affect their ability to perform under the terms of any agreements with us or provide essential services. As a result, our operational and other risks are generally expected to increase until the pandemic subsides.

We are offering varying levels of credit relief to borrowers who are experiencing financial hardships related to COVID-19, including interest only payment concessions and payment deferrals. In addition, we are a certified and qualified SBA lender and assisted our customers with their applications under the PPP. These assistance efforts may adversely affect our revenue and results of operations. These government programs are complex, and our participation may lead to governmental and regulatory scrutiny, negative publicity and damage to our reputation. In addition, if these assistance efforts are not effective in mitigating the effects of COVID-19 on borrowers, we may experience higher rates of default and increased credit losses in future periods.

Certain concentrations where we have credit exposure, including commercial and residential lessors, hotels, medical service providers and restaurants, have experienced significant operational challenges as a result of COVID-19. These negative effects may cause our commercial customers to be unable to pay their loans as they come due or decrease the value of collateral, which we expect would cause significant increases in our credit losses.

Our earnings and cash flows are dependent to a large degree on net interest income. Net interest income is significantly affected by market rates of interest. Significant reductions to the federal funds rate have led to a decrease in the rates and yields on U.S. Treasury securities. If interest rates are reduced further in response to COVID-19, we expect that our net interest income will decline, perhaps significantly. The overall effect of lower interest rates cannot be predicted at this time and depends on future actions that the Federal Reserve may take to increase or reduce the targeted federal funds rate in response to COVID-19, and resulting economic conditions.

The effects of COVID-19 on economic and market conditions have increased demands on our liquidity as we meet our customers’ and clients’ needs. We suspended repurchases for a period of time under our stock repurchase program to preserve capital and liquidity in order to support our customers and employees and, although we have no current plans to reduce or suspend our common stock dividend, we will continue to exercise prudent capital management and monitor the business environment.

49

Governmental authorities have taken unprecedented measures to stabilize the markets and support economic growth. The success of these measures is unknown and they may not be sufficient to address the negative effects of COVID-19 or avert severe and prolonged reductions in economic activity.

Other negative effects of the COVID-19 pandemic that may impact our business, financial condition, liquidity, capital and results of operations cannot be predicted at this time, but it is likely that we will continue to be adversely affected until the pandemic subsides and the economy begins to recover. Further, COVID-19 may also have the effect of heightening many of the other risks described in our Annual Report on Form 10-K for the year ended December 31, 2019. Even after the pandemic subsides, it is possible that our markets continue to experience a prolonged recession, which we expect would materially and adversely affect our business, financial condition, liquidity, capital and results of operations.

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

(c) Purchases of Equity Securities by the Company

~~None.~~

The Company did not purchase any shares of its common stock during the quarter ended September 30, 2020.

Effective January 22, 2020, the Company’s Board of Directors authorized a share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Exchange Act. The Company purchased 130,800 shares under the program during the first two quarters of 2020 before suspending activity under it effective April 2, 2020. On October 26, 2020, the Company authorized the recommencement of the programfor the repurchase of up to 200,000 shares of its common stock through January 2021.

Item 3.Defaults upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable

Item 5.Other Information

None.

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Item 6.Exhibits

Exhibit No.		Description
31.1		Rule 13a-14(a)/15d-14(a) Certification for Chief Executive Officer*
31.2		Rule 13a-14(a)/15d-14(a) Certification for Chief Financial Officer*
32.1		Section 1350 Certifications*
101		Interactive Data File with respect to the following materials from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, ~~2017~~2020 formatted in Inline Extensible Business Reporting Language ~~(XBRL)~~(iXBRL): (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements*
104		CoverPage Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*

Filed herewith.

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