UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q


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

	For the quarterly period ended ~~June 30, 2020~~March 31, 2021

or

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

	For the transition period from to

Commission File Number: 001-32590

COMMUNITY BANKERS TRUST CORPORATION

(Exact name of registrant as specified in its charter)


Virginia	20-2652949
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

9954 Mayland Drive, Suite 2100
Richmond, Virginia	23233
(Address of principal executive offices)	(Zip Code)
(804) 934-9999 (Registrant’s telephone number, including area code)

n/a (Former name, former address and former fiscal year, if changed since last report)

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


Title of each class	Trading Symbol	Name of each exchange on which registered:
Common Stock, $0.01 par value	ESXB	The NASDAQ Stock Market, LLC

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

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

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


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒
~~Non-accelerated filer~~	☐	Smaller reporting company	☒
		Emerging growth company	☐

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

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

At ~~June 30, 2020,~~March 31, 2021, there were ~~22,311,357~~22,219,926 shares of the Company’s common stock outstanding.

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

TABLE OF CONTENTS

FORM 10-Q

~~June 30, 2020~~March 31, 2021

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements	3
Unaudited Consolidated Balance Sheets	3
Unaudited Consolidated Statements of Income	4
Unaudited Consolidated Statements of Comprehensive Income	5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity	6
Unaudited Consolidated Statements of Cash Flows	7
Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2927
Item 3. Quantitative and Qualitative Disclosures About Market Risk	4541
Item 4. Controls and Procedures	4642
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	4643
Item 1A. Risk Factors	4643
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4843
Item 3. Defaults upon Senior Securities	4844
Item 4. Mine Safety Disclosures	4844
Item 5. Other Information	4844
Item 6. Exhibits	4844
SIGNATURES	4945

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

AS OF ~~JUNE 30, 2020~~MARCH 31, 2021 AND DECEMBER 31, ~~2019~~2020

(dollars in thousands, except share data)


	June 30, 2020		December 31, 2019 *		March 31, 2021		December 31, 2020*
ASSETS
Cash and due from banks	$	20,530	$	16,976	$	20,836	$	17,845
Interest bearing bank deposits		64,796		11,708		74,337		45,118
Federal funds sold						234		222
Total cash and cash equivalents		85,326		28,684		95,407		63,185

Securities available for sale, at fair value		226,867		186,969		273,126		271,347
Securities held to maturity, at cost (fair value of $25,282 and $36,633, respectively)		24,169		35,733
Securities held to maturity, at cost (fair value of $21,190 and $22,257, respectively)						20,271		21,176
Equity securities, restricted, at cost		8,875		8,855		8,049		8,436
Total securities		259,911		231,557		301,446		300,959

Loans held for sale		396		501

Loans		1,165,310		1,058,323		1,202,723		1,182,362
Purchased credit impaired (PCI) loans		29,507		32,528		22,465		24,040
Total loans		1,194,817		1,090,851		1,225,188		1,206,402
Allowance for loan losses (loans of $12,238 and $8,429, respectively; PCI loans of $156 and $156, respectively)		(12,394)		(8,585)
Allowance for loan losses (loans of $10,828 and $12,340, respectively; PCI loans of $156 and $156, respectively)						(10,984)		(12,496)
Net loans		1,182,423		1,082,266		1,214,204		1,193,906
				��
Bank premises and equipment, net		28,713		29,472		27,582		27,897
Bank premises and equipment held for sale		1,589		1,589		1,507		1,507
Right-of-use lease assets		5,999		6,472		5,292		5,530
Other real estate owned		4,486		4,527		4,313		4,361
Bank owned life insurance		29,687		29,340		30,195		30,029
Other assets		16,474		16,432		18,862		17,435
Total assets	$	1,615,004	$	1,430,840	$	1,698,808	$	1,644,809

LIABILITIES
Deposits:
Noninterest bearing	$	278,780	$	178,584	$	333,910	$	298,901
Interest bearing		1,084,869		984,864		1,105,385		1,099,800
Total deposits		1,363,649		1,163,448		1,439,295		1,398,701

Federal funds purchased		3,268		24,437
Federal Home Loan Bank borrowings		68,167		68,500		67,667		57,833
Trust preferred capital notes		4,124		4,124		4,124		4,124
Lease liabilities		6,264		6,737		5,545		5,787
Other liabilities		8,751		8,115		9,701		8,710
Total liabilities		1,454,223		1,275,361		1,526,332		1,475,155

SHAREHOLDERS’ EQUITY
Common stock (200,000,000 shares authorized, $0.01 par value; 22,311,357 and 22,422,621 shares issued and outstanding, respectively)		223		224
Common stock (200,000,000 shares authorized $0.01 par value; 22,219,926 and 22,200,929 shares issued and outstanding, respectively)						222		222
Additional paid in capital		150,428		150,728		150,039		149,822
Retained earnings		5,900		2,562		18,729		13,419
Accumulated other comprehensive income		4,230		1,965		3,486		6,191
Total shareholders’ equity		160,781		155,479		172,476		169,654
Total liabilities and shareholders’ equity	$	1,615,004	$	1,430,840	$	1,698,808	$	1,644,809

*	Derived from audited consolidated financial statements

See accompanying notes to unaudited consolidated financial statements

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE ~~AND SIX~~ MONTHS ENDED ~~JUNE 30,~~MARCH 31, 2021 AND 2020 ~~AND 2019~~

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


	Three months ended				Six months ended				Three months ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019		March 31, 2021		March 31, 2020
Interest and dividend income
Interest and fees on loans	$	13,012	$	12,640	$	26,098	$	25,059	$	13,150	$	13,086
Interest and fees on PCI loans		1,062		1,251		2,159		2,544		856		1,097
Interest on federal funds sold		—		5		—		5
Interest on deposits in other banks		41		117		110		213		60		69
Interest and dividends on securities
Taxable		1,287		1,472		2,638		2,994		1,467		1,351
Nontaxable		349		421		692		897		327		343
Total interest and dividend income		15,751		15,906		31,697		31,712		15,860		15,946
Interest expense
Interest on deposits		3,182		3,589		6,601		6,823		1,565		3,419
Interest on borrowed funds		209		317		498		764		217		289
Total interest expense		3,391		3,906		7,099		7,587		1,782		3,708
Net interest income		12,360		12,000		24,598		24,125		14,078		12,238
Provision for loan losses		900		125		4,200		125
Net interest income after provision for loan losses		11,460		11,875		20,398		24,000
(Recovery of) provision for loan losses										(1,400)		3,300
Net interest income after (recovery of) provision for loan losses										15,478		8,938
Noninterest income
Service charges and fees		532		707		1,204		1,316		679		672
Gain on securities transactions, net		242		238		203		224
Gain (loss) on securities transactions, net										16		(39)
Gain on sale of other loans		—		—		11		—		—		11
Income on bank owned life insurance		173		184		347		365		166		174
Mortgage loan income		373		100		594		162		320		221
Other		296		222		592		398		447		296
Total noninterest income		1,616		1,451		2,951		2,465		1,628		1,335
Noninterest expense
Salaries and employee benefits		4,613		5,273		9,765		10,654		5,208		5,152
Occupancy expenses		778		919		1,605		1,849		836		827
Equipment expenses		345		394		717		775		288		372
FDIC assessment		156		162		281		312		212		125
Data processing fees		573		579		1,165		1,147		608		592
Other real estate (income) expense, net		(4)		105		2		97
Other real estate expense, net										11		6
Other operating expenses		1,412		1,559		2,932		2,997		1,592		1,520
Total noninterest expense		7,873		8,991		16,467		17,831		8,755		8,594
Income before income taxes		5,203		4,335		6,882		8,634		8,351		1,679
Income tax expense		1,043		791		1,307		1,587		1,708		264
Net income	$	4,160	$	3,544	$	5,575	$	7,047	$	6,643	$	1,415
Net income per share — basic	$	0.19	$	0.16	$	0.25	$	0.32	$	0.30	$	0.06
Net income per share — diluted	$	0.18	$	0.16	$	0.25	$	0.31	$	0.30	$	0.06
Weighted average number of shares outstanding
Basic		22,304		22,228		22,352		22,185		22,201		22,400
Diluted		22,508		22,433		22,550		22,432		22,416		22,591

See accompanying notes to unaudited consolidated financial statements

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE ~~AND SIX~~ MONTHS ENDED ~~JUNE 30,~~MARCH 31, 2021 AND 2020 ~~AND 2019~~

(dollars in thousands)



	Three months ended				Six months ended				Three months ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019		March 31, 2021		March 31, 2020
Net income	$	4,160	$	3,544	$	5,575	$	7,047	$	6,643	$	1,415

Other comprehensive income:
Unrealized gain on investment securities:
Change in unrealized gain on investment securities		3,010		2,399		3,792		4,603
Tax related to unrealized gain on investment securities		(661)		(527)		(833)		(1,012)
Reclassification adjustment for gain on securities sold		(242)		(238)		(203)		(224)
Tax related to realized gain on securities sold		54		52		45		49
Other comprehensive (loss) income :
Unrealized (loss) gain on investment securities:
Change in unrealized (loss) gain on investment securities										(3,635)		782
Tax related to unrealized loss (gain) on investment securities										799		(172)
Reclassification adjustment for (gain) loss on securities sold										(16)		39
Tax related to realized gain (loss) on securities sold										4		(9)
Cash flow hedge:
Change in unrealized loss on cash flow hedge		(129)		(145)		(686)		(239)
Change in unrealized gain (loss) on cash flow hedge										182		(557)
Tax related to cash flow hedge		28		32		150		52		(39)		122
Total other comprehensive income		2,060		1,573		2,265		3,229
Total other comprehensive (loss) income										(2,705)		205
Total comprehensive income	$	6,220	$	5,117	$	7,840	$	10,276	$	3,938	$	1,620

See accompanying notes to unaudited consolidated financial statements

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE ~~AND SIX~~ MONTHS ENDED ~~JUNE 30,~~MARCH 31, 2021 AND 2020 ~~AND 2019~~

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


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


Balance March 31, 2019	22,169	$	222	$	149,115	$	(7,406)	$	377	$	142,308
Issuance of common stock	8		—		53		—		—		53
Exercise and issuance of employee stock options	81		1		584		—		—		585
Net income	—		—		—		3,544		—		3,544
Dividends of $0.03 per share paid on common stock	—		—		—		(667)		—		(667)
Other comprehensive income	—		—		—		—		1,573		1,573
Balance June 30, 2019	22,258	$	223	$	149,752	$	(4,529)	$	1,950	$	147,396

Balance December 31, 2018	22,132	$	221	$	148,763	$	(10,244)	$	(1,279)	$	137,461
Issuance of common stock	14		—		107		—		—		107
Exercise and issuance of employee stock options	112		2		882		—		—		884
Net income	—		—		—		7,047		—		7,047
Dividends of $0.06 per share paid on common stock	—		—		—		(1,332)		—		(1,332)
Other comprehensive income	—		—		—		—		3,229		3,229
Balance June 30, 2019	22,258	$	223	$	149,752	$	(4,529)	$	1,950	$	147,396

Balance March 31, 2020	22,317	$	223	$	150,219	$	2,856	$	2,170	$	155,468
Issuance of common stock	9		—		49		—		—		49
Exercise and issuance of employee stock options	—		—		232		—		—		232
Stock purchased under stock repurchase program	(15)		—		(72)		—				(72)
Net income	—		—		—		4,160		—		4,160
Dividends of $0.05 share paid on common stock	—		—		—		(1,116)		—		(1,116)
Other comprehensive income	—		—		—		—		2,060		2,060
Balance June 30, 2020	22,311	$	223	$	150,428	$	5,900	$	4,230	$	160,781
												Shares	Amount		Earnings		Earnings		Income		Total
Balance December 31, 2019	22,423	$	224	$	150,728	$	2,562	$	1,965	$	155,479	22,423	$	224	$	150,728	$	2,562	$	1,965	$	155,479
Issuance of common stock	15		—		103		—		—		103	6		—		54		—		—		54
Exercise and issuance of employee stock options	4		—		474		—		—		474	4		—		242		—		—		242
Stock purchased under stock repurchase program	(131)		(1)		(877)		—				(878)	(116)		(1)		(805)		—		—		(806)
Net income	—		—		—		5,575		—		5,575	—		—		—		1,415		—		1,415
Dividends of $0.10 per share paid on common stock	—		—		—		(2,237)		—		(2,237)
Dividends paid on common stock ($0.05 per share)												—		—		—		(1,121)		—		(1,121)
Other comprehensive income	—		—		—		—		2,265		2,265	—		—		—		—		205		205
Balance June 30, 2020	22,311	$	223	$	150,428	$	5,900	$	4,230	$	160,781
Balance March 31, 2020												22,317	$	223	$	150,219	$	2,856	$	2,170	$	155,468

Balance December 31, 2020												22,201	$	222	$	149,822	$	13,419	$	6,191	$	169,654
Issuance of common stock												7		—		54		—		—		54
Exercise and issuance of employee stock options												33		—		309		—		—		309
Stock purchased under stock repurchase program												(21)		—		(146)		—				(146)
Net income												—		—		—		6,643		—		6,643
Dividends paid on common stock ($0.06 per share)												—		—		—		(1,333)		—		(1,333)
Other comprehensive loss												—		—		—		—		(2,705)		(2,705)
Balance March 31, 2021												22,220	$	222	$	150,039	$	18,729	$	3,486	$	172,476

See accompanying notes to unaudited consolidated financial statements

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE ~~SIX~~THREE MONTHS ENDED ~~JUNE 30,~~MARCH 31, 2021 AND 2020 ~~AND 2019~~

(dollars in thousands)


	June 30, 2020		June 30, 2019		March 31, 2021		March 31, 2020
Operating activities:
Net income	$	5,575	$	7,047	$	6,643	$	1,415
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		939		1,061		432		483
Leased asset amortization		473		464
Right-of-use lease asset amortization						238		238
Stock-based compensation expense		566		536		311		285
Tax benefit of exercised stock options		(6)		(83)		(43)		(6)
Amortization of purchased loan premium		194		191		28		160
Provision for loan losses		4,200		125
(Recovery of) provision for loan losses						(1,400)		3,300
Amortization of security premiums and accretion of discounts, net		413		623		159		233
Net gain on sale of securities		(203)		(224)
Net (gain) loss on sale of securities						(16)		39
Net gain on sale and valuation of other real estate owned		(6)		(37)		(1)		(6)
Net loss on disposal of premises and equipment						1		—
Net gain on sale of loans		(11)		—		—		(11)
Originations of mortgages held for sale		(23,625)		(4,827)		—		(8,668)
Proceeds from sales of mortgages held for sale		23,730		4,334		—		6,699
Increase in bank owned life insurance investment		(347)		(365)		(166)		(174)
Changes in assets and liabilities:
Increase in other assets		(334)		(1,486)
Decrease in accrued expenses and other liabilities		(518)		(304)
(Increase) decrease in other assets						(713)		174
Increase (decrease) in accrued expenses and other liabilities						1,024		(846)
Net cash provided by operating activities		11,040		7,055		6,497		3,315

Investing activities:
Proceeds from sales/calls/maturities/paydowns of available for sale securities		34,653		46,366		31,524		9,893
Proceeds from calls/maturities/paydowns of held to maturity securities		11,520		1,700		895		11,065
Proceeds from sales of restricted equity securities		1,700		866		805		1,700
Purchase of available for sale securities		(71,128)		(47,525)		(37,087)		(25,069)
Purchase of restricted equity securities		(1,720)		(784)		(418)		(1,302)
Proceeds from sale of other real estate owned		47		544		49		27
Net increase in loans		(105,493)		(29,947)		(19,060)		(19,527)
Principal recoveries of loans previously charged off		321		213		134		184
Purchase of premises and equipment, net		(180)		(270)		(118)		(76)
Purchase small business investment company fund investment		(345)		(525)		—		(250)
Proceeds from sale of loans		632		705		—		632
Net cash used in investing activities		(129,993)		(28,657)		(23,276)		(22,723)

Financing activities:
Net increase in deposits		200,201		51,233		40,594		57,610
Net decrease in federal funds purchased		(21,169)		(19,440)		—		(24,437)
Net decrease in short-term Federal Home Loan Bank borrowings		—		(10,000)
Net increase in short-term Federal Home Loan Bank borrowings						10,000		(10,000)
Proceeds from long-term Federal Home Loan Bank borrowings		40,000		—		—		40,000
Payments on long-term Federal Home Loan Bank borrowings		(40,333)		(751)		(166)		(40,167)
Proceeds from issuance of common stock		11		455		52		11
Cash dividends paid		(2,237)		(1,332)		(1,333)		(1,121)
Repurchase of common stock		(878)		—		(146)		(806)
Net cash provided by financing activities		175,595		20,165		49,001		21,090

Net increase (decrease) in cash and cash equivalents		56,642		(1,437)
Net increase in cash and cash equivalents						32,222		1,682

Cash and cash equivalents:
Beginning of the period		28,684		34,219		63,185		28,684
End of the period	$	85,326	$	32,782	$	95,407	$	30,366

Supplemental disclosures of cash flow information:
Interest paid	$	7,284	$	7,469	$	2,072	$	3,689
Income taxes paid		—		1,285
Transfers of loans to other real estate owned		—		392
Right-of-use lease assets in exchange for lease liability		—		7,408

See accompanying notes to unaudited consolidated financial statements

Table of Contents

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 24 full-service offices, 18 of which are in Virginia and 6 of which are in Maryland. The Bank also operates 2 loan production offices.

The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals, 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 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, ~~2019.~~2020. 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 ~~June 30, 2020,~~March 31, 2021, the statements of income, ~~and~~ comprehensive income, ~~and~~ changes in shareholders’ equity ~~for the three~~ and ~~six months ended June 30, 2020, and the statements of~~ cash flows for the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021. Results for the ~~six~~three month period ended ~~June 30, 2020~~March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2020.~~2021.

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.

~~Recent Accounting Developments~~

In March 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 the coronavirus (COVID-19) pandemic. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 310-40, ~~Receivables – Troubled Debt Restructurings by Creditors~~, a restructuring of debt constitutes a troubled debt restructuring (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. The agencies confirmed with the staff of 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 to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less

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than 30 days past due on their contractual payments as of December 31, 2019. This interagency guidance is expected to have a material impact on the Company’s financial statements; however, due to the uncertainties regarding the economic effects of COVID-19, this impact cannot be quantified at this time.

Note 2. Securities

Amortized costs and fair values of securities available for sale and held to maturity at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were as follows (~~dollars~~(dollars in thousands):


	June 30, 2020								March 31, 2021
			Gross Unrealized								Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value
Securities Available for Sale
U.S. Treasury securities	$	21,750	$	—	$	(1)	$	21,749	$	7,805	$	—	$	(1)	$	7,804
U.S. Government agencies		20,700		99		(518)		20,281		36,178		120		(175)		36,123
State, county and municipal		103,963		5,732		(26)		109,669		120,720		5,018		(1,127)		124,611
Mortgage backed securities		30,391		1,855		(3)		32,243		31,144		1,303		(173)		32,274
Asset backed securities		23,467		110		(427)		23,150		45,842		934		(64)		46,712
Corporate bonds		19,306		475		(6)		19,775		25,144		548		(90)		25,602
Total Securities Available for Sale	$	219,577	$	8,271	$	(981)	$	226,867
Total securities available for sale									$	266,833	$	7,923	$	(1,630)	$	273,126

Securities Held to Maturity
State, county and municipal	$	24,169	$	1,113	$	—	$	25,282	$	20,271		919		—		21,190
Total Securities Held to Maturity	$	24,169	$	1,113	$	—	$	25,282
Total securities held to maturity									$	20,271	$	919	$	—	$	21,190


	December 31, 2019								December 31, 2020
			Gross Unrealized								Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value
Securities Available for Sale
U.S. Treasury securities									$	23,500	$	—	$	(1)	$	23,499
U.S. Government agencies	$	22,104	$	51	$	(219)	$	21,936		25,880		114		(141)		25,853
State, county and municipal		95,467		3,167		(42)		98,592		118,612		7,172		(64)		125,720
Mortgage backed securities		48,045		808		(113)		48,740		30,434		1,756		(1)		32,189
Asset backed securities		11,637		49		(82)		11,604		36,841		704		(57)		37,488
Corporate bonds		6,016		84		(3)		6,097		26,136		480		(18)		26,598
Total Securities Available for Sale	$	183,269	$	4,159	$	(459)	$	186,969
Total securities available for sale									$	261,403	$	10,226	$	(282)	$	271,347

Securities Held to Maturity
U.S. Government agencies	$	10,000	$	—	$	(12)	$	9,988
State, county and municipal		25,733		913		(1)		26,645	$	21,176	$	1,081	$	—	$	22,257
Total Securities Held to Maturity	$	35,733	$	913	$	(13)	$	36,633
Total securities held to maturity									$	21,176	$	1,081	$	—	$	22,257

The amortized cost and fair value of securities at ~~June 30, 2020~~March 31, 2021 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	$	2,713	$	2,733	$	37,627	$	37,790	$	3,431	$	3,474	$	17,276	$	17,478
Due after one year through five years		15,429		16,216		73,790		75,941		12,034		12,682		108,786		111,808
Due after five years through ten years		5,776		6,044		84,317		88,756		4,554		4,750		111,287		114,147
Due after ten years		251		289		23,843		24,380		252		284		29,484		29,693
Total securities	$	24,169	$	25,282	$	219,577	$	226,867	$	20,271	$	21,190	$	266,833	$	273,126

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Proceeds from sales and calls of securities were ~~$14.4~~$3.8 million and ~~$24.3~~$6.2 million during the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $20.6 million and $41.1 million for the six months ended June 30, 2020 and 2019,~~ respectively. Gains and losses on securities transactions are determined using the specific identification method. Gross realized gains and losses on securities transactions during the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ were as follows (dollars in thousands):

Three months ended

Six months ended


June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019
Gross realized gains

$
267

$
364

$
296

$
417
Gross realized losses

(25)

(126)

(93)

(193)
Net securities gain

$
242

$
238

$
203

$
224


	March 31, 2021		March 31, 2020
Gross realized gains	$	16	$	29
Gross realized losses		—		(68)
Net securities gain	$	16	$	(39)

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 0 investments held that had OTTI losses for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020.

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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were as follows (dollars in thousands):


	June 30, 2020												March 31, 2021
	Less than 12 Months				12 Months or More				Total				Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities Available for Sale
U.S. Treasury securities	$	21,749	$	(1)	$	—	$	—	$	21,749	$	(1)	$	7,804		(1)	$	—	$	—	$	7,804		(1)
U.S. Government agencies		3,210		(103)		7,381		(415)		10,591		(518)		14,300		(69)		5,069		(106)		19,369		(175)
State, county and municipal		1,111		(13)		304		(13)		1,415		(26)		28,045		(1,094)		417		(33)		28,462		(1,127)
Mortgage backed securities		1,454		(2)		268		(1)		1,722		(3)		9,175		(173)		—		—		9,175		(173)
Asset backed securities		12,270		(277)		4,059		(150)		16,329		(427)		19,093		(61)		532		(3)		19,625		(64)
Corporate bonds		719		(6)		—		—		719		(6)		5,251		(90)	—	—		—		5,251		(90)
Total	$	40,513	$	(402)	$	12,012	$	(579)	$	52,525	$	(981)	$	83,668	$	(1,488)	$	6,018	$	(142)	$	89,686	$	(1,630)


	December 31, 2019												December 31, 2020
	Less than 12 Months				12 Months or More				Total				Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities Available for Sale
U.S. Treasury securities													$	23,499	$	(1)	$	—	$	—	$	23,499	$	(1)
U.S. Government agencies	$	6,396	$	(102)	$	8,020	$	(117)	$	14,416	$	(219)		6,726		(25)		8,266		(116)		14,992		(141)
State, county and municipal		7,088		(32)		308		(10)		7,396		(42)		6,203		(49)		301		(15)		6,504		(64)
Mortgage backed securities		11,001		(40)		4,287		(73)		15,288		(113)		118		(1)		—		—		118		(1)
Asset backed securities		4,861		(74)		625		(8)		5,486		(82)		12,427		(8)		4,410		(49)		16,837		(57)
Corporate bonds		248		(3)		—		—		248		(3)		7,216		(18)		—		—		7,216		(18)
Total	$	29,594	$	(251)	$	13,240	$	(208)	$	42,834	$	(459)	$	56,189	$	(102)	$	12,977	$	(180)	$	69,166	$	(282)

Securities Held to Maturity
U.S. Government agencies	$	—	$	—	$	9,988	$	(12)	$	9,988	$	(12)
State, county and municipal		31		—		622		(1)		653		(1)
Total	$	31	$	—	$	10,610	$	(13)	$	10,641	$	(13)

The unrealized losses (impairments) in the investment portfolio at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 are generally a result of market fluctuations of interest rates that occur daily. The unrealized losses are from 4687 securities at ~~June 30, 2020.~~March 31, 2021. Of those, 2873 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. NaN investment grade asset-backed securities comprised of student loan pools, which are 97% U.S. government guaranteed, included in corporate obligations and 17 corporate

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~~bond~~ bonds make up the remaining securities with unrealized losses at ~~June 30, 2020.~~March 31, 2021. 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

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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 ~~$45.1~~$52.5 million and ~~$47.3~~$52.2 million at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, were pledged to secure public deposits as required or permitted by law. Securities with amortized costs of ~~$5.7~~$4.7 million and ~~$5.8~~$5.0 million at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, were pledged to secure lines of credit at the Federal Reserve discount window. At each of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, there were 0 securities purchased from a single issuer, other than U.S. Treasury securities and other U.S. Government agencies that comprised more than 10% of the consolidated shareholders’ equity.

Note 3. Loans and Related Allowance for Loan Losses

The Company’s loans, net of deferred fees and costs, at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were comprised of the following (dollars in thousands):


	June 30, 2020				December 31, 2019				March 31, 2021				December 31, 2020
	Amount		% of Loans		Amount		% of Loans		Amount		% of Loans		Amount		% of Loans
Mortgage loans on real estate:
Residential 1‑4 family	$	205,787	17.66	%	$	223,538	21.12	%	$	184,286	15.32	%	$	197,228	16.68	%
Commercial		443,923	38.09			396,858	37.50			504,846	41.98			474,856	40.16
Construction and land development		151,529	13.00			146,566	13.85			161,825	13.45			182,277	15.42
Second mortgages		6,136	0.53			6,639	0.63			6,526	0.54			6,360	0.54
Multifamily		76,587	6.57			72,978	6.90			87,624	7.29			78,158	6.61
Agriculture		7,122	0.61			8,346	0.79			7,947	0.66			6,662	0.56
Total real estate loans		891,084	76.46			854,925	80.79			953,054	79.24			945,541	79.97
Commercial loans		262,955	22.57			191,183	18.06			239,782	19.94			225,386	19.06
Consumer installment loans		10,257	0.88			11,163	1.05			8,595	0.71			9,996	0.85
All other loans		1,014	0.09			1,052	0.10			1,292	0.11			1,439	0.12
Total loans	$	1,165,310	100.00	%	$	1,058,323	100.00	%	$	1,202,723	100.00	%	$	1,182,362	100.00	%

The Company held ~~$12.0~~$10.6 million and ~~$12.7~~$10.7 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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. As these loans are 100% guaranteed by the USDA, 0 loan loss allowance is required. These loan balances included a purchase premium of ~~$940,000~~$776,000 and ~~$1.0~~$804,000 million at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, 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 quarter of 2020, the~~The Company originated loans under the Paycheck Protection Program (PPP) of the Small Business Administration (SBA). These PPP loans totaled ~~$83.5~~$67.7 million and $49.3 million at ~~June 30,~~March 31, 2021 and December 31, 2020, respectively, 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~~five 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 $2.3 million and $920,000 at ~~June 30,~~March 31, 2021 and December 31, 2020, respectively, 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 March 31, 2021 and December 31, 2020, the Company’s allowance for loan losses was comprised of the following: (i) a specific valuation component calculated in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 310, Receivables, (ii) a general valuation component calculated in accordance

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~~At June 30, 2020 and December 31, 2019, the Company’s allowance for 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 ASC 450, Contingencies, based on historical loan loss experience, current economic conditions and other qualitative risk factors, and (iii) an unallocated component to cover imprecision in the model and uncertainties that could affect management’s estimate of probable losses. Management identified loans subject to impairment in accordance with FASB ASC 310.

The following table summarizes information related to impaired loans ~~as of~~at and for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 (dollars in thousands):


							Three months ended				Six months ended										Three months ended
	June 30, 2020						June 30, 2020				June 30, 2020				March 31, 2021						March 31, 2021
			Unpaid														Unpaid
	Recorded		Principal		Related		Average		Interest		Average		Interest		Recorded		Principal		Related		Average			Interest
	Investment ⁽¹⁾		Balance ⁽²⁾		Allowance		Investment		Recognized		Investment		Recognized		Investment ⁽¹⁾		Balance ⁽²⁾		Allowance		Investment			Recognized
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family	$	1,145	$	1,501	$	—	$	1,152	$	10	$	1,263	$	21	$	308	$	412	$	—	$	466		$	3
Commercial		3,534		4,247		—		3,114		34		3,151		68		3,421		4,174		—		3,002			33
Construction and land development		—		—		—		164		—		219		—
Multifamily		—		—		—		—		—		821		—
Total real estate loans		4,679		5,748		—		4,430		44		5,454		89		3,729		4,586		—		3,468			36
Commercial loans		350		964		—		175		—		117		—
Subtotal impaired loans with no valuation allowance		5,029		6,712		—		4,605		44		5,571		89		3,729		4,586		—		3,468			36
With an allowance recorded:																							��
Mortgage loans on real estate:
Residential 1‑4 family		2,123		2,541		574		2,003		11		1,834		22		2,253		2,645		660		2,226			11
Commercial		86		555		23		92		2		187		4		191		582		55		196			—
Construction and land development		1,122		1,224		315		1,286		—		873		—		5		113		2		25			—
Agriculture		51		51		13		26		—		17		—		45		47		13		45			—
Total real estate loans		3,382		4,371		925		3,407		13		2,911		26		2,494		3,387		730		2,492			11
Commercial loans		700		700		184		1,164		3		928		7		1,462		1,474		385		2,005			1
Consumer installment loans		12		12		3		11		—		10		—		12		12		3		15			—
Subtotal impaired loans with a valuation allowance		4,094		5,083		1,112		4,582		16		3,849		33		3,968		4,873		1,118		4,512			12
Total:
Mortgage loans on real estate:
Residential 1‑4 family		3,268		4,042		574		3,155		21		3,097		43		2,561		3,057		660		2,692			14
Commercial		3,620		4,802		23		3,206		36		3,338		72		3,612		4,756		55		3,198			33
Construction and land development		1,122		1,224		315		1,450		—		1,092		—		5		113		2		25			—
Multifamily		—		—		—		—		—		821		—
Agriculture		51		51		13		26		—		17		—		45		47		13		45			—
Total real estate loans		8,061		10,119		925		7,837		57		8,365		115		6,223		7,973		730		5,960			47
Commercial loans		1,050		1,664		184		1,339		3		1,045		7		1,462		1,474		385		2,005			1
Consumer installment loans		12		12		3		11		—		10		—		12		12		3		15			—
Total impaired loans	$	9,123	$	11,795	$	1,112	$	9,187	$	60	$	9,420	$	122	$	7,697	$	9,459	$	1,118	$	7,980		$	48

(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.

(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.

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The following table summarizes information related to impaired loans as of December 31, ~~2019~~2020 and for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2021 (dollars in thousands):


							Three months ended				Six months ended										Three months ended
	December 31, 2019						June 30, 2019				June 30, 2019				December 31, 2020						March 31, 2020
			Unpaid														Unpaid
	Recorded		Principal		Related		Average		Interest		Average		Interest		Recorded		Principal		Related		Average		Interest
	Investment ⁽¹⁾		Balance ⁽²⁾		Allowance		Investment		Recognized		Investment		Recognized		Investment ⁽¹⁾		Balance ⁽²⁾		Allowance		Investment		Recognized
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family	$	1,483	$	1,850	$	—	$	1,534	$	11	$	1,543	$	21	$	624	$	787	$	—	$	1,322	$	10
Commercial		3,226		3,966		—		3,349		35		3,400		69		3,458		4,198		—		3,179		34
Construction and land development		328		328		—		—		—		—		—		—		—		—		328		—
Multifamily		2,463		2,463		—		2,539		—		2,546		—						—		1,231		—
Total real estate loans		7,500		8,607		—		7,422		46		7,489		90		4,082		4,985		—		6,060		44
Subtotal impaired loans with no valuation allowance		7,500		8,607		—		7,422		46		7,489		90		4,082		4,985		—		6,060		44
With an allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family		1,498		1,808		380		2,133		12		2,133		24		2,200		2,573		640		1,690		11
Commercial		378		876		87		722		2		998		4		200		715		57		238		2
Construction and land development		48		147		11		4,096		—		4,254		—		44		149		12		749		—
Agriculture																45		46		13		—		—
Total real estate loans		1,924		2,831		478		6,951		14		7,385		28		2,489		3,483		722		2,677		13
Commercial loans		454		460		105		1,822		5		1,875		9		2,549		2,549		437		1,042		4
Consumer installment loans		7		7		1		6		—		4		—		19		19		6		9		—
Subtotal impaired loans with a valuation allowance		2,385		3,298		584		8,779		19		9,264		37		5,057		6,051		1,165		3,728		17
Total:
Mortgage loans on real estate:
Residential 1‑4 family		2,981		3,658		380		3,667		23		3,676		45		2,824		3,360		640		3,012		21
Commercial		3,604		4,842		87		4,071		37		4,398		73		3,658		4,913		57		3,417		36
Construction and land development		376		475		11		4,096		—		4,254		—		44		149		12		1,077		—
Multifamily		2,463		2,463		—		2,539		—		2,546		—		—		—		—		1,231		—
Agriculture																45		46		13		—		—
Total real estate loans		9,424		11,438		478		14,373		60		14,874		118		6,571		8,468		722		8,737		57
Commercial loans		454		460		105		1,822		5		1,875		9		2,549		2,549		437		1,042		4
Consumer installment loans		7		7		1		6		—		4		—		19		19		6		9		—
Total impaired loans	$	9,885	$	11,905	$	584	$	16,201	$	65	$	16,753	$	127	$	9,139	$	11,036	$	1,165	$	9,788	$	61

(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.

(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.

Troubled debt restructures 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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, is set forth in the table below (dollars in thousands):


	June 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Nonaccruals	$	4,225	$	5,292	$	3,496	$	4,460
Trouble debt restructure and still accruing		4,898		4,593		4,201		4,679
Total impaired	$	9,123	$	9,885	$	7,697	$	9,139

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was $103,000 in cash basis income recognized during the three months ended March 31, 2021. There was an insignificant amount of cash basis income recognized during the three ~~and six~~ months ended ~~June 30, 2020 and 2019.~~March 31, 2020. For the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ estimated interest income of ~~$100,000~~$50,000 and ~~$196,000,~~$97,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. For the six months ended June 30, 2020 and 2019, estimated interest income of $168,000 and $410,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

Table of Contents

The following tables present an age analysis of past due status of loans by category as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (dollars in thousands):


	June 30, 2020												March 31, 2021
	30‑89 Days		90+ Days Past				Total Past				Total Loans		30‑89 Days		90+ Days Past				Total Past				Total Loans
	Past Due		Due and Accruing		Nonaccrual		Due		Current		Receivable		Past Due		Due and Accruing		Nonaccrual		Due		Current		Receivable
Mortgage loans on real estate:
Residential 1‑4 family	$	1,999	$	—	$	1,697	$	3,696	$	202,091	$	205,787	$	704	$	33	$	1,422	$	2,159	$	182,127	$	184,286
Commercial		230		—		636		866		443,057		443,923		—		—		711		711		504,135		504,846
Construction and land development		—		—		1,122		1,122		150,407		151,529		83		—		5		88		161,737		161,825
Second mortgages		229		—		—		229		5,907		6,136		229		—		—		229		6,297		6,526
Multifamily		—		—		—		—		76,587		76,587		—		—		—		—		87,624		87,624
Agriculture		—		—		51		51		7,071		7,122		—		—		45		45		7,902		7,947
Total real estate loans		2,458		—		3,506		5,964		885,120		891,084		1,016		33		2,183		3,232		949,822		953,054
Commercial loans		362		—		707		1,069		261,886		262,955		216		—		1,301		1,517		238,265		239,782
Consumer installment loans		21		—		12		33		10,224		10,257		39		—		12		51		8,544		8,595
All other loans		—		—		—		—		1,014		1,014		—		—		—		—		1,292		1,292
Total loans	$	2,841	$	—	$	4,225	$	7,066	$	1,158,244	$	1,165,310	$	1,271	$	33	$	3,496	$	4,800	$	1,197,923	$	1,202,723


	December 31, 2019												December 31, 2020
	30‑89 Days		90+ Days Past				Total Past				Total Loans		30‑89 Days		90+ Days Past				Total Past				Total Loans
	Past Due		Due and Accruing		Nonaccrual		Due		Current		Receivable		Past Due		Due and Accruing		Nonaccrual		Due		Current		Receivable
Mortgage loans on real estate:
Residential 1‑4 family	$	1,308	$	—	$	1,378	$	2,686	$	220,852	$	223,538	$	1,324	$	33	$	1,357	$	2,714	$	194,514	$	197,228
Commercial		552		—		1,006		1,558		395,300		396,858		438		—		730		1,168		473,688		474,856
Construction and land development		166		—		376		542		146,024		146,566		157		—		44		201		182,076		182,277
Second mortgages		229		—		—		229		6,410		6,639		227		—		—		227		6,133		6,360
Multifamily		—		—		2,463		2,463		70,515		72,978		—		—		—		—		78,158		78,158
Agriculture		—		—		—		—		8,346		8,346		—		—		45		45		6,617		6,662
Total real estate loans		2,255		—		5,223		7,478		847,447		854,925		2,146		33		2,176		4,355		941,186		945,541
Commercial loans		1,085		946		62		2,093		189,090		191,183		60		—		2,264		2,324		223,062		225,386
Consumer installment loans		41		—		7		48		11,115		11,163		—		12		20		32		9,964		9,996
All other loans		—		—		—		—		1,052		1,052		—		—		—		—		1,439		1,439
Total loans	$	3,381	$	946	$	5,292	$	9,619	$	1,048,704	$	1,058,323	$	2,206	$	45	$	4,460	$	6,711	$	1,175,651	$	1,182,362

Activity in the allowance for loan losses on loans by segment for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ is presented in the following tables (dollars in thousands):


	Three Months Ended June 30, 2020										Three Months Ended March 31, 2021
			Provision										Provision
	March 31, 2020		Allocation		Charge-offs		Recoveries		June 30, 2020		December 31, 2020		Allocation		Charge-offs		Recoveries		March 31, 2021
Mortgage loans on real estate:
Residential 1‑4 family	$	2,935	$	547	$	—	$	13	$	3,495	$	2,638	$	(772)	$	—	$	38	$	1,904
Commercial		4,240		337		—		35		4,612		4,568		(1,059)		—		3		3,512
Construction and land development		1,354		(13)		—		1		1,342		2,545		(758)		—		20		1,807
Second mortgages		70		(26)		—		1		45		18		(7)		—		8		19
Multifamily		267		232		—		—		499		508		(201)		—		—		307
Agriculture		45		(1)		—		—		44		40		19		—		—		59
Total real estate loans		8,911		1,076		—		50		10,037		10,317		(2,778)		—		69		7,608
Commercial loans		2,546		37		(589)		64		2,058		1,897		379		(167)		24		2,133
Consumer installment loans		111		5		(29)		23		110		119		86		(79)		41		167
All other loans		8		—		—		—		8		7		—		—		—		7
Unallocated		243		(218)		—		—		25		—		913		—		—		913
Total loans	$	11,819	$	900	$	(618)	$	137	$	12,238	$	12,340	$	(1,400)	$	(246)	$	134	$	10,828

Table of Contents


	Three Months Ended June 30, 2019										Three Months Ended March 31, 2020
			Provision										Provision
	March 31, 2019		Allocation		Charge-offs		Recoveries		June 30, 2019		December 31, 2019		Allocation		Charge-offs		Recoveries		March 31, 2020
Mortgage loans on real estate:
Residential 1‑4 family	$	3,339	$	(426)	$	(34)	$	15	$	2,894	$	2,685	$	234	$	—	$	16	$	2,935
Commercial		1,508		461		—		57		2,026		2,196		2,000		—		44		4,240
Construction and land development		1,210		154		—		35		1,399		1,044		227		—		83		1,354
Second mortgages		62		18		—		1		81		79		(10)		—		1		70
Multifamily		361		(169)		—		—		192		248		19		—		—		267
Agriculture		23		(23)		—		—		—		38		7		—		—		45
Total real estate loans		6,503		15		(34)		108		6,592		6,290		2,477		—		144		8,911
Commercial loans		1,958		86		(28)		2		2,018		1,980		582		(19)		3		2,546
Consumer installment loans		188		12		(40)		25		185		114		35		(75)		37		111
All other loans		6		15		—		—		21		7		1		—		—		8
Unallocated		6		(3)		—		—		3		38		205		—		—		243
Total loans	$	8,661	$	125	$	(102)	$	135	$	8,819	$	8,429	$	3,300	$	(94)	$	184	$	11,819

Six Months Ended June 30, 2020

Provision

December 31, 2019

Allocation

Charge-offs

Recoveries

June 30, 2020
Mortgage loans on real estate:










Residential 1‑4 family

$
2,685

$
781

$
—

$
29

$
3,495
Commercial

2,196

2,337

—

79

4,612
Construction and land development

1,044

214

—

84

1,342
Second mortgages

79

(36)

—

2

45
Multifamily

248

251

—

—

499
Agriculture

38

6

—

—

44
Total real estate loans

6,290

3,553

—

194

10,037
Commercial loans

1,980

619

(608)

67

2,058
Consumer installment loans

114

40

(104)

60

110
All other loans

7

1

—

—

8
Unallocated

38

(13)

—

—

25
Total loans

$
8,429

$
4,200

$
(712)

$
321

$
12,238

The increase in provision expense for the three months ended March 31, 2020 reflected the significant increase in commercial real estate and commercial loans classified as special mention due to the inherent economic impact COVID-19 was expected to have on these borrowers. The subsequent recovery of loan loss provision for the three months ended March 31, 2021 reflected a more stable economic climate in the first quarter of 2021 compared with each quarter in 2020. This is evidenced by the level of charge-offs and delinquencies, which have remained relatively low. Also, the majority of loans that were granted COVID-19 related payment relief have resumed normal payments. The allowance for loan losses could be further impacted by COVID-19; however, the amount of that impact is not currently estimable.

Six Months Ended June 30, 2019

Provision


December 31, 2018

Allocation

Charge-offs

Recoveries

June 30, 2019
Mortgage loans on real estate:











Residential 1‑4 family

$
2,281

$
429

$
(34)

$
218

$
2,894
Commercial

1,810

429

(277)

64

2,026
Construction and land development

1,161

197

(12)

53

1,399
Second mortgages

20

58

—

3

81
Multifamily

371

(179)

—

—

192
Agriculture

17

(17)

—

—

—
Total real estate loans

5,660

917

(323)

338

6,592
Commercial loans

1,894

377

(257)

4

2,018
Consumer installment loans

152

84

(100)

49

185
All other loans

12

9

—

—

21
Unallocated

1,265

(1,262)

—

—

3
Total loans

$
8,983

$
125

$
(680)

$
391

$
8,819

The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of March 31, 2021 and December 31, 2020 (dollars in thousands):


	March 31, 2021
	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	$	660	$	1,244	$	1,904	$	2,561	$	181,725	$	184,286
Commercial		55		3,457		3,512		3,612		501,234		504,846
Construction and land development		2		1,805		1,807		5		161,820		161,825
Second mortgages		—		19		19		—		6,526		6,526
Multifamily		—		307		307		—		87,624		87,624
Agriculture		13		70		83		45		7,902		7,947
Total real estate loans		730		6,902		7,632		6,223		946,831		953,054
Commercial loans		385		1,724		2,109		1,462		238,320		239,782
Consumer installment loans		3		164		167		12		8,583		8,595
All other loans		—		7		7		—		1,292		1,292
Unallocated		—		913		913		—		—		—
Total loans	$	1,118	$	9,710	$	10,828	$	7,697	$	1,195,026	$	1,202,723

Table of Contents

The increase in provision expense reflects the significant increase in commercial real estate and commercial loans classified as special mention due to the possible 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 June 30, 2020 and December 31, 2019 (dollars in thousands):~~

June 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

$
574

$
2,921

$
3,495

$
3,268

$
202,519

$
205,787
Commercial

23

4,589

4,612

3,620

440,303

443,923
Construction and land development

315

1,027

1,342

1,122

150,407

151,529
Second mortgages

—

45

45

—

6,136

6,136
Multifamily

—

499

499

—

76,587

76,587
Agriculture

13

31

44

51

7,071

7,122
Total real estate loans

925

9,112

10,037

8,061

883,023

891,084
Commercial loans

184

1,874

2,058

1,050

261,905

262,955
Consumer installment loans

3

107

110

12

10,245

10,257
All other loans

—

8

8

—

1,014

1,014
Unallocated

—

25

25

—

—

—
Total loans

$
1,112

$
11,126

$
12,238

$
9,123

$
1,156,187

$
1,165,310


	December 31, 2019												December 31, 2020
	Allowance for Loan Losses						Recorded Investment in Loans						Allowance for Loan Losses						Recorded Investment in Loans
	Individually		Collectively				Individually		Collectively				Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for				Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Impairment		Impairment		Total		Impairment		Impairment		Total		Impairment		Impairment		Total		Impairment		Impairment		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	380	$	2,305	$	2,685	$	2,981	$	220,557	$	223,538	$	640	$	1,998	$	2,638	$	2,824	$	194,404	$	197,228
Commercial		87		2,109		2,196		3,604		393,254		396,858		57		4,511		4,568		3,658		471,198		474,856
Construction and land development		11		1,033		1,044		376		146,190		146,566		12		2,533		2,545		44		182,233		182,277
Second mortgages		—		79		79		—		6,639		6,639		—		18		18		—		6,360		6,360
Multifamily		—		248		248		2,463		70,515		72,978		—		508		508		—		78,158		78,158
Agriculture		—		38		38		—		8,346		8,346		13		27		40		45		6,617		6,662
Total real estate loans		478		5,812		6,290		9,424		845,501		854,925		722		9,595		10,317		6,571		938,970		945,541
Commercial loans		105		1,875		1,980		454		190,729		191,183		437		1,460		1,897		2,549		222,837		225,386
Consumer installment loans		1		113		114		7		11,156		11,163		6		113		119		19		9,977		9,996
All other loans		—		7		7		—		1,052		1,052		—		7		7		—		1,439		1,439
Unallocated		—		38		38		—		—		—		—		—		—		—		—		—
Total loans	$	584	$	7,845	$	8,429	$	9,885	$	1,048,438	$	1,058,323	$	1,165	$	11,175	$	12,340	$	9,139	$	1,173,223	$	1,182,362

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 ~~$12.0~~$10.6 million and ~~$12.7~~$10.7 million at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, and PPP loans 100% guaranteed by the SBA of ~~$83.5~~$67.7 million and $49.3 million at ~~June 30, 2020.~~March 31, 2021 and December 31, 2020, respectively.

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.

~~Table of 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 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.

Table of Contents

The following tables present the composition of loans by credit quality indicator at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (dollars in thousands):


	June 30, 2020										March 31, 2021
			Special										Special
	Pass		Mention		Substandard		Doubtful		Total		Pass		Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	191,802	$	12,544	$	1,441	$	—	$	205,787	$	177,591	$	5,280	$	1,415	$	—	$	184,286
Commercial		318,456		123,432		2,035		—		443,923		459,805		44,330		711		—		504,846
Construction and land development		148,857		1,550		1,122		—		151,529		149,809		12,011		5		—		161,825
Second mortgages		5,156		980		—		—		6,136		5,903		623		—		—		6,526
Multifamily		69,930		6,657		—		—		76,587		86,539		1,085		—		—		87,624
Agriculture		6,653		418		51		—		7,122		6,491		34		1,422		—		7,947
Total real estate loans		740,854		145,581		4,649		—		891,084		886,138		63,363		3,553		—		953,054
Commercial loans		216,060		41,394		5,501		—		262,955		217,059		14,739		7,984		—		239,782
Consumer installment loans		10,198		47		12		—		10,257		8,569		14		12		—		8,595
All other loans		998		16		—		—		1,014		1,277		15		—		—		1,292
Total loans	$	968,110	$	187,038	$	10,162	$	—	$	1,165,310	$	1,113,043	$	78,131	$	11,549	$	—	$	1,202,723


	December 31, 2019										December 31, 2020
			Special										Special
	Pass		Mention		Substandard		Doubtful		Total		Pass		Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	219,210	$	2,964	$	1,364	$	—	$	223,538	$	189,617	$	6,253	$	1,358	$	—	$	197,228
Commercial		391,251		3,188		2,419		—		396,858		433,748		39,001		2,107		—		474,856
Construction and land development		145,782		408		376		—		146,566		173,668		8,565		44		—		182,277
Second mortgages		6,096		543		—		—		6,639		5,495		865		—		—		6,360
Multifamily		70,515		—		2,463		—		72,978		71,923		6,235		—		—		78,158
Agriculture		8,098		248		—		—		8,346		6,208		409		45		—		6,662
Total real estate loans		840,952		7,351		6,622		—		854,925		880,659		61,328		3,554		—		945,541
Commercial loans		185,123		2,770		3,290		—		191,183		199,762		17,843		7,781		—		225,386
Consumer installment loans		11,140		16		7		—		11,163		9,959		18		19		—		9,996
All other loans		1,052		—		—		—		1,052		1,424		15		—		—		1,439
Total loans	$	1,038,267	$	10,137	$	9,919	$	—	$	1,058,323	$	1,091,804	$	79,204	$	11,354	$	—	$	1,182,362

In accordance with FASB Accounting Standards Update (ASU) 2011-02, Receivables (Topic 310): A 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 ~~19 and 25~~18 loans that met the definition of a TDR at ~~June 30, 2020~~each of March 31, 2021 and ~~2019, respectively.~~2020.

During the three and six months ended June 30, 2020, the Company modified 1 commercial real estate loan that was considered to be a TDR. The Company granted the borrower six months interest only payment relief and no other changes were made to the loan structure. The loan is 100% guaranteed by the USDA and had a pre- and post-modification balance of $438,000. The Company had 0 loan modifications considered to be TDRs during the three ~~and six~~ months ended ~~June 30, 2019.~~March 31, 2021 and 2020.

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A loan is considered to be in default if it is 90 days or more past due. There were 0 TDRs that had been restructured during the previous 12 months that resulted in default during the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020. There were 0 TDRs that had been restructured during the previous 12 months that resulted in default during the three months ended June 30, 2019. During the six months ended June 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 ~~June 30, 2020,~~March 31, 2021, the Company had 1-4 family mortgages in the amount of ~~$94.2~~$78.0 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of ~~$77.4~~$65.7 million.

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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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the outstanding contractual balance of the PCI loans was ~~$49.2~~$41.1 million and ~~$53.2~~$43.2 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in

thousands):

June 30, 2020

December 31, 2019




% of PCI



% of PCI

Amount

Loans

Amount

Loans

Mortgage loans on real estate:

Residential 1‑4 family

$
26,531

89.91
%
$
29,465

90.58
%
Commercial

470

1.59

490

1.51

Construction and land development

1,127

3.82

1,172

3.60

Second mortgages

1,156

3.92

1,169

3.59

Multifamily

223

0.76

232

0.72

Total real estate loans

29,507

100.00

32,528

100.00

Total PCI loans

$
29,507

100.00
%
$
32,528

100.00
%


	March 31, 2021				December 31, 2020
			% of PCI				% of PCI
	Amount		Loans		Amount		Loans
Mortgage loans on real estate:
Residential 1‑4 family	$	20,251	90.14	%	$	21,720	90.35	%
Commercial		423	1.88			429	1.78
Construction and land development		729	3.25			780	3.25
Second mortgages		860	3.83			904	3.76
Multifamily		202	0.90			207	0.86
Total real estate loans		22,465	100.00			24,040	100.00
Total PCI loans	$	22,465	100.00	%	$	24,040	100.00	%

There was 0 activity in the allowance for loan losses on PCI loans for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020.

The following table presents information on the PCI loans collectively evaluated for impairment in the allowance for loan losses at March 31, 2021 and December 31, 2020 ~~and 2019.~~(dollars in thousands):


	March 31, 2021				December 31, 2020
	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	$	20,251	$	156	$	21,720
Commercial		—		423		—		429
Construction and land development		—		729		—		780
Second mortgages		—		860		—		904
Multifamily		—		202		—		207
Total real estate loans		156		22,465		156		24,040
Total PCI loans	$	156	$	22,465	$	156	$	24,040

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

June 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

$
26,531

$
156

$
29,465
Commercial

—

470

—

490
Construction and land development

—

1,127

—

1,172
Second mortgages

—

1,156

—

1,169
Multifamily

—

223

—

232
Total real estate loans

156

29,507

156

32,528
Total PCI loans

$
156

$
29,507

$
156

$
32,528

The change in the accretable yield balance for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and the year ended December 31, ~~2019,~~2020, 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

(2,150)
Reclassification from nonaccretable difference

61
Balance, June 30, 2020

$
31,377



Balance, January 1, 2020	$	33,466
Accretion		(4,024)
Reclassification to nonaccretable difference		(253)
Balance, December 31, 2020	$	29,189
Accretion		(847)
Reclassification to nonaccretable difference		(1,019)
Balance, March 31, 2021	$	27,323

The PCI loans were not classified as nonperforming assets as of ~~June 30, 2020,~~March 31, 2021, 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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (dollars in thousands):


	June 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Residential 1‑4 family	$	21	$	21	$	21	$	21
Construction and land development		4,465		4,506		4,292		4,340
Total other real estate owned	$	4,486	$	4,527	$	4,313	$	4,361

At ~~June 30, 2020, there were 0~~March 31, 2021, the Company had $274,000 in residential 1-4 family loans orand PCI loans that were in the process of foreclosure.

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Note 6. Deposits

The following table provides interest bearing deposit information, by type, at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (dollars in thousands):


	June 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Interest bearing checking	$	195,441	$	—	$	261,536	$	239,628
NOW		—		170,532
MMDA		148,050		120,841		171,932		154,503
Savings		108,602		96,570		137,507		124,384
Time deposits less than or equal to $250,000		492,749		477,461		422,372		452,885
Time deposits over $250,000		140,027		119,460		112,038		128,400
Total interest bearing deposits	$	1,084,869	$	984,864	$	1,105,385	$	1,099,800

Effective 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.

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Note 7. Accumulated Other Comprehensive Income

The following tables present activity net of tax in accumulated other comprehensive income (AOCI) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ (dollars in thousands):


	Three months ended June 30, 2020								Three months ended March 31, 2021
	Unrealized		Defined		Gain (Loss) on		Total Other		Unrealized		Defined		Gain (Loss) on		Total Other
	Gain (Loss) on		Benefit		Cash Flow		Comprehensive		Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Securities		Pension Plan		Hedge		Income (Loss)		Securities		Pension Plan		Hedge		Income

Beginning balance	$	3,527	$	(886)	$	(471)	$	2,170	$	7,758	$	(1,073)	$	(494)	$	6,191
Other comprehensive income (loss) before reclassifications		2,349		—		(101)		2,248
Other comprehensive (loss) income before reclassifications										(2,836)		—		143		(2,693)
Amounts reclassified from AOCI		(188)		—		—		(188)		(12)		—		—		(12)
Net current period other comprehensive income (loss)		2,161		—		(101)		2,060
Net current period other comprehensive (loss) income										(2,848)		—		143		(2,705)
Ending balance	$	5,688	$	(886)	$	(572)	$	4,230	$	4,910	$	(1,073)	$	(351)	$	3,486

Three months ended June 30, 2019


Unrealized

Defined

Gain (Loss) on

Total Other

Gain (Loss) on

Benefit

Cash Flow

Comprehensive

Securities

Pension Plan

Hedge

Income (Loss)

Beginning balance

$
1,112

$
(857)

$
122

$
377
Other comprehensive income (loss) before reclassifications

1,872

—

(113)

1,759
Amounts reclassified from AOCI

(186)

—

—

(186)
Net current period other comprehensive income (loss)

1,686

—

(113)

1,573
Ending balance

$
2,798

$
(857)

$
9

$
1,950

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Six months ended June 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

2,959

—

(536)

2,423
Amounts reclassified from AOCI

(158)

—

—

(158)
Net current period other comprehensive income (loss)

2,801

—

(536)

2,265
Ending balance

$
5,688

$
(886)

$
(572)

$
4,230


	Six months ended June 30, 2019								Three months ended March 31, 2020
	Unrealized		Defined		Gain (Loss) on		Total Other		Unrealized		Defined		Gain (Loss) on		Total Other
	Gain (Loss) on		Benefit		Cash Flow		Comprehensive		Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Securities		Pension Plan		Hedge		Income (Loss)		Securities		Pension Plan		Hedge		Income

Beginning balance	$	(618)	$	(857)	$	196	$	(1,279)	$	2,887	$	(886)	$	(36)	$	1,965
Other comprehensive income (loss) before reclassifications		3,591		—		(187)		3,404		610		—		(435)		175
Amounts reclassified from AOCI		(175)		—		—		(175)		30		—		—		30
Net current period other comprehensive income (loss)		3,416		—		(187)		3,229		640		—		(435)		205
Ending balance	$	2,798	$	(857)	$	9	$	1,950	$	3,527	$	(886)	$	(471)	$	2,170

The following tables present the effects of reclassifications out of AOCI on line items of consolidated income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ (dollars in thousands):

Affected Line Item in the Unaudited Consolidated
Details about AOCI Components

Amount Reclassified from AOCI

Statement of Income

Three months ended


June 30, 2020

June 30, 2019


Securities available for sale:






Unrealized gains on securities available for sale

$
(242)

$
(238)

Gain on securities transactions, net
Related tax expense

54

52

Income tax expense

$
(188)

$
(186)

Net of tax


					Affected Line Item in the Unaudited Consolidated					Affected Line Item in the Unaudited Consolidated
Details about AOCI Components	Amount Reclassified from AOCI				Statement of Income	Amount Reclassified from AOCI				Statement of Income
	Six months ended					Three months ended
	June 30, 2020		June 30, 2019			March 31, 2021		March 31, 2020
Securities available for sale:
Unrealized gains on securities available for sale	$	(203)	$	(224)	Gain on securities transactions, net
Related tax expense		45		49	Income tax expense
Unrealized (gain) loss on securities available for sale						$	(16)	$	39	Gain (loss) on securities transactions, net
Related tax expense (benefit)							4		(9)	Income tax expense
	$	(158)	$	(175)	Net of tax	$	(12)	$	30	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

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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.

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●

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 ~~June 30, 2020.~~March 31, 2021.

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 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 as of March 31, 2021 and December 31, 2020 (dollars in thousands):

June 30, 2020


Total

Level 1

Level 2

Level 3
Investment securities available for sale








U.S. Treasury securities

$
21,749

$
21,749

$
—

$
—
U.S. Government agencies

20,281

—

20,281

—
State, county and municipal

109,669

1,622

108,047

—
Mortgage backed securities

32,243

—

32,243

—
Asset backed securities

23,150

—

23,150

—
Corporate bonds

19,775

5,558

14,217

—
Total investment securities available for sale

226,867

28,929

197,938

—
Total assets at fair value

$
226,867

$
28,929

$
197,938

$
—
Cash flow hedge liability

$
730

—

$
730

—
Total liabilities at fair value

$
730

$
—

$
730

$
—


	March 31, 2021
	Total		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. Treasury securities	$	7,804	$	7,804	$	—	$	—
U.S. Government agencies		36,123		9,326		26,797		—
State, county and municipal		124,611		4,574		120,037		—
Mortgage backed securities		32,274		—		32,274		—
Asset backed securities		46,712		4,596		42,116		—
Corporate bonds		25,602		—		25,602		—
Total investment securities available for sale		273,126		26,300		246,826		—
Total assets at fair value	$	273,126	$	26,300	$	246,826	$	—
Cash flow hedge liability	$	449		—	$	449		—
Total liabilities at fair value	$	449	$	—	$	449	$	—

~~Table of Contents~~


	December 31, 2019								December 31, 2020
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. Treasury securities									$	23,499	$	23,499	$	—	$	—
U.S. Government agencies	$	21,936	$	—	$	21,936	$	—		25,853		4,034		21,819		—
State, county and municipal		98,592		10,072		88,520		—		125,720		5,945		119,775		—
Mortgage backed securities		48,740		1,181		47,559		—		32,189		5,534		26,655		—
Asset backed securities		11,604		—		11,604		—		37,488		9,784		27,704		—
Corporate bonds		6,097		—		6,097		—		26,598		500		26,098		—
Total investment securities available for sale		186,969		11,253		175,716		—		271,347		49,296		222,051		—
Total assets at fair value	$	186,969	$	11,253	$	175,716	$	—	$	271,347	$	49,296	$	222,051	$	—
Cash flow hedge liability		44		—	$	44		—		631		—	$	631		—
Total liabilities at fair value	$	44	$	—	$	44	$	—	$	631	$	—	$	631	$	—

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,

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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 reputable pricing companies for security market data. The third party vendor has controls in place for month-to-month market checks and zero pricing, and a Statement on Standards for Attestation Engagements No. 18 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.

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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (dollars in thousands):

June 30, 2020


Total

Level 1

Level 2

Level 3
Impaired loans

$
3,795

$
—

$
—

$
3,795
Loans held for sale

396

—

396

—
Bank premises and equipment held for sale

1,589

—

—

1,589
Other real estate owned

4,486

—

—

4,486
Total assets at fair value

$
10,266

$
—

$
396

$
9,870
Total liabilities at fair value

$
—

$
—

$
—

$
—


	March 31, 2021
	Total		Level 1		Level 2		Level 3
Impaired loans	$	2,409	$	—	$	—	$	2,409
Bank premises and equipment held for sale		1,507		—		—		1,507
Other real estate owned		4,313		—		—		4,313
Total assets at fair value	$	8,229	$	—	$	—	$	8,229
Total liabilities at fair value	$	—	$	—	$	—	$	—

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	December 31, 2019								December 31, 2020
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Impaired loans	$	3,020	$	—	$	—	$	3,020	$	3,449	$	—	$	—	$	3,449
Loans held for sale		501		—		501		—
Bank premises and equipment held for sale		1,589		—		—		1,589		1,507		—		—		1,507
Other real estate owned		4,527		—		—		4,527		4,361		—		—		4,361
Total assets at fair value	$	9,637	$	—	$	501	$	9,136	$	9,317	$	—	$	—	$	9,317
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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, 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 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. The Company makes adjustments for selling costs estimated at 10%~~, market deterioration,~~ and any known liens against the collateral. Therefore, the Company records impaired loans as nonrecurring Level 3. For each of the ~~period~~periods ended ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, weighted average adjustments, calculated based on relative fair value, related to impaired loans were ~~25.3% and 12.8%, respectively.~~12.3%.

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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, 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.~~costs ranging from 2% to 10%. The Company may incur additional write-downs of OREO assets to fair value less estimated costs to sell if valuations indicate a further deterioration in market conditions. As such, the Company records OREO as a nonrecurring fair value measurement classified as Level 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 nonrecurring basis. FASB ASC 825 excludes certain financial instruments and all nonfinancial instruments from its

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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 recognized on the consolidated balance sheet, at fair value measures 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):

June 30, 2020




Estimated Fair






Carrying Value

Value

Level 1

Level 2

Level 3
Financial assets:

Securities held to maturity

$
24,169

$
25,282

$
—

$
25,282

$
—
Loans, net of allowance

1,153,072

1,164,016

—

—

1,164,016
PCI loans, net of allowance

29,351

36,997

—

—

36,997

Financial liabilities:






Interest bearing deposits

1,084,869

1,089,775

—

1,089,775

—
Borrowings

72,291

73,462

—

73,462

—

December 31, 2019




Estimated Fair






Carrying Value

Value

Level 1

Level 2

Level 3
Financial assets:

Securities held to maturity

$
35,733

$
36,633

$
—

$
36,633

$
—
Loans, net of allowance

1,049,894

1,041,671

—

—

1,041,671
PCI loans, net of allowance

32,372

38,982

—

—

38,982

Financial liabilities:






Interest bearing deposits

984,864

985,853

—

985,853

—
Borrowings

72,624

72,457

—

72,457

—


	March 31, 2021
			Estimated Fair
	Carrying Value		Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	20,271	$	21,190	$	—	$	21,190	$	—
Loans, net of allowance		1,191,895		1,205,856		—		—		1,205,856
PCI loans, net of allowance		22,309		22,465		—		—		22,465

Financial liabilities:
Interest bearing deposits		1,105,385		1,108,536		—		1,108,536		—
Borrowings		71,791		72,434		—		72,434		—

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	December 31, 2020
			Estimated Fair
	Carrying Value		Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	21,176	$	22,257	$	—	$	22,257	$	—
Loans, net of allowance		1,170,022		1,178,764		—		—		1,178,764
PCI loans, net of allowance		23,884		32,657		—		—		32,657

Financial liabilities:
Interest bearing deposits		1,099,800		1,103,112		—		1,103,112		—
Borrowings		61,957		62,852		—		62,852		—

Note 9. Earnings Per Share

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is computed using the weighted average number of shares outstanding during the period, including the effect of all potentially dilutive shares outstanding attributable to restricted stock ~~instruments.~~units and stock option awards. The following table presents basic and diluted EPS for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ (dollars and shares in thousands, except per share data):

Weighted Average


Net Income

Shares

Per

(Numerator)

(Denominator)

Share Amount
For the three months ended June 30, 2020

Basic EPS

$
4,160

22,304

$
0.19
Effect of dilutive stock awards

—

204

(0.01)
Diluted EPS

$
4,160

22,508

$
0.18

For the three months ended June 30, 2019






Basic EPS

$
3,544

22,228

$
0.16
Effect of dilutive stock awards

—

205

—
Diluted EPS

$
3,544

22,433

$
0.16

For the six months ended June 30, 2020

Basic EPS

$
5,575

22,352

$
0.25
Effect of dilutive stock awards

—

198

—
Diluted EPS

$
5,575

22,550

$
0.25

For the six months ended June 30, 2019






Basic EPS

$
7,047

22,185

$
0.32
Effect of dilutive stock awards

—

247

(0.01)
Diluted EPS

$
7,047

22,432

$
0.31


			Weighted Average
	Net Income		Shares	Per
	(Numerator)		(Denominator)	Share Amount
For the three months ended March 31, 2021
Basic EPS	$	6,643	22,201	$	0.30
Effect of dilutive stock awards		—	215		—
Diluted EPS	$	6,643	22,416	$	0.30

For the three months ended March 31, 2020
Basic EPS	$	1,415	22,400	$	0.06
Effect of dilutive stock awards		—	191		—
Diluted EPS	$	1,415	22,591	$	0.06

Antidilutive shares issuable under awards or options of ~~1.2 million~~567,000 and ~~579,000~~568,000 were excluded from the computation of diluted earnings per share for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 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 froze the plan benefits for all the defined benefit plan participants effective December 31, 2010.

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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 six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ (dollars in thousands):


	Three months ended
	March 31, 2021		March 31, 2020
Interest cost	$	116	$	33
Expected return on plan assets		(265)		(54)
Amortization of prior service cost		4		1
Recognized net loss due to settlement		—		—
Recognized net actuarial loss		65		12
Net periodic income	$	(80)	$	(8)

Three months ended

Six months ended


June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019
Interest cost

$
33

$
41

$
66

$
81
Expected return on plan assets

(53)

(53)

(107)

(106)
Amortization of prior service cost

1

1

2

2
Recognized net loss due to settlement

—

40

—

53
Recognized net actuarial loss

12

12

24

24
Net periodic (income) cost

$
(7)

$
41

$
(15)

$
54

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Note 11. Cash Flow Hedge

The Company 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 swaps designated as cash flow hedges with a total notional ~~amounts~~amount of $20 million ~~and $10 million~~ at ~~June 30, 2020~~each of March 31, 2021 and December 31, ~~2019, respectively.~~2020. The swaps were entered into with a counterparty that met the Company’s credit standards, and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contracts is not significant. The Company had ~~$660,000 and $180,000~~$770,000 of cash pledged as collateral at ~~June 30, 2020~~each of March 31, 2021 and December 31, ~~2019, respectively.~~2020.

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 swaps as cash flow hedges, with the derivatives’ unrealized gains or losses recorded as a component of other comprehensive income. 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 six~~ month periods ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020. The Company recorded a fair value liability of ~~$730,000~~$449,000 and ~~$44,000~~$631,000 in other liabilities at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. The net losses were recorded as a component of other comprehensive income net of associated tax effects.

Note 12. Revenue Recognition

The 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 and fees 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.

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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. 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.

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The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ (dollars in thousands):


	Three months ended				Six months ended				Three months ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019		March 31, 2021		March 31, 2020
Noninterest income
In-scope of Topic 606:
Service charges on deposit accounts	$	273	$	445	$	727	$	855
Interchange and ATM fees, net		259		262		477		461
Service charges and fees on deposit accounts									$	318	$	454
Interchange and ATM fees										361		218
Brokerage fees and commissions		131		99		203		195		98		72
Noninterest income (in-scope of Topic 606)		663		806		1,407		1,511		777		744
Noninterest income (out-of-scope of Topic 606)		953		645		1,544		954		851		591
Total noninterest income	$	1,616	$	1,451	$	2,951	$	2,465	$	1,628	$	1,335

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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (dollars in thousands):


	June 30, 2020		December 31, 2019
					March 31, 2021		December 31, 2020
Gross lease liability	$	8,660	$	9,278	$	7,739	$	8,047
Less: imputed interest		(2,396)		(2,541)		(2,194)		(2,260)
Present value of lease liability	$	6,264	$	6,737	$	5,545	$	5,787

The Company had 0 finance or sales type leases as of March 31, 2021 and December 30, 2020.

The weighted average remaining lease term and weighted average discount rate for operating leases at ~~June 30, 2020~~ March 31, 2021

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was ~~12.1~~12.5 years and ~~4.70%~~4.83%, respectively. The weighted average remaining lease term and weighted average discount rate for operating leases at December 31, ~~2019~~2020 was ~~12.0~~12.3 years and ~~4.63%~~4.78%, respectively.

Maturities of the gross operating lease liability at ~~June 30, 2020~~March 31, 2021 are as follows (dollars in thousands):


2020	$	613
2021		1,191	$	882
2022		600		600
2023		630		630
2024		573		573
2025				552
Thereafter		5,053		4,502
Total of future payments	$	8,660	$	7,739

Operating lease costs and sublease rental income for the three months ended ~~June 30, 2020~~March 31, 2021 were ~~$321,000~~$317,000 and ~~$28,000,~~$77,000, respectively. Operating lease costs and sublease rental income for the three months ended ~~June 30, 2019~~March 31, 2020 were ~~$445,000~~$314,000 and ~~$39,000,~~$27,000, respectively. ~~Operating lease costs and sublease rental income for the six months ended June 30,~~

~~Table~~Note 14. Subsequent event

On April 7, 2021, the Company sold OREO property with a carrying value of ~~Contents~~

~~2020 were $635,000 and $55,000, respectively. Operating lease costs and sublease rental income~~$3.8 million for a gain of $435,000. In accordance with FASB ASC 610, Other Income, the Company recognizes a sale when it deems that it is probable it will collect substantially all of the consideration to which it will be entitled in exchange for the ~~six months ended June 30, 2019 were $823,000~~OREO property and ~~$66,000, respectively.~~has transferred control to the buyer.

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

The following discussion and analysis of the financial condition at ~~June 30, 2020~~March 31, 2021 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 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, ~~2019.~~2020.

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 24 full-service offices, 18 of which are in Virginia and six of which are in Maryland. The Bank also operates two loan production offices.

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~~customer growth and targeted product types, with lenders and other employees directly involved with customer

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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.

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 and income from 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,~~expenses, professional fees, transactions involving bank-owned property, and other operational expenses. The provision for loan losses and income taxes may also 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;

●

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

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●

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, ~~2019~~2020 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.

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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.

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.

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●

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,

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the Company manages risk by avoiding concentrations toin 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 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. Qualitative factors relate to loan growth and concentrations, internal environment, loan quality deterioration and delinquencies. 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 evaluated for impairment as a pool. Accordingly, the Company does not separately analyze these individual loans for impairment disclosures.

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Accounting for Certain Loans Acquired in a Transfer

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

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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 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

Overview

~~Coming off a strong end to the 2019 year, the Company began the year with good momentum but was disrupted by the~~The coronavirus (COVID-19) pandemic that set off an economic ~~crisis. Specific events that impacted~~crisis in 2020 continues to impact the Company’s financial results for the first ~~six~~three months of ~~2020,~~2021, and will impact future financial ~~results, include~~results. While the government mandated business closures enacted in 2020 have eased, the Company’s customers and ~~stay-at-home orders, which have transformed into the highest~~markets are not back to pre-COVID business levels, and unemployment ~~rate seen~~continues to be a major issue. Continued uncertainties in the ~~Company’s markets. In addition, unprecedented government stimulus programs~~economy and the ~~uncertainties regarding how long the mandates will last have contributed~~time that it could take to ~~the unpredictability of~~fully recover underlie the financial impacts that the Company may experience. The Company ~~is focused~~continues to focus on assessing the risks in its loan portfolio and ~~working~~to work with ~~our~~its customers to minimize future losses. See below for additional discussion regarding trends and the potential effects of COVID-19.

~~During~~Despite the ~~second~~continuing effects of the COVID-19 pandemic, the Company has just completed the best quarter financially in its history. Net income in the first quarter of 2021 increased $5.2 million when compared to the same period in 2020. Net income was $6.6 million in the first quarter of 2021, with earnings per share of $0.30 basic and fully diluted. Net income for the first quarter of 2020 was $1.4 million, with earnings per share of $0.06 basic and fully diluted. The increase in net income was driven by a change of $4.7 million in the ~~Company originated loans under~~provision for loan losses, which reflected a recovery of $1.4 million in the ~~Paycheck Protection Program (PPP)~~first quarter of 2021 compared with a provision of $3.3 million in the first quarter of 2020 at the outset of the ~~Small Business Administration (SBA). These PPP loans totaled $83.5~~COVID-19 pandemic. The credit in the current quarter reflected improvement in loan quality as well as loan risk ratings since the first quarter of 2020. Additionally, there was an increase of $1.8 million ~~at June 30, 2020~~in net interest income, primarily from a decline in interest expense of $1.9 million in the first quarter of 2021 compared with the same period one year earlier. Noninterest income increased $293,000 year over year, driven by an increase of $151,000 in other noninterest income and ~~are included~~an increase of $99,000 in ~~commercial loans. As~~mortgage loan income. Offsetting these ~~loans are 100% guaranteed by the SBA, no loan loss allowance is required. The majority~~increases to net income was an increase 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.~~

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Net income in the second quarter of 2020 reflects an increase of $616,000 over the same period in 2019. Net income was $4.2 million in the second quarter of 2020, or earnings per share of $0.19 basic and $0.18 fully diluted. Net income for the second quarter of 2019 was $3.5 million, or $0.16 per common share, both basic and fully diluted. The increase in net income was driven by a decrease of $1.1 million$161,000 in noninterest expenses, primarily from a reduction of $660,000 in salaries and employee benefits, a majority of which was associated with deferred internal costs, primarily from the origination costs of PPP loans in the second quarter of 2020. Also positively affecting year-over-year net income was a reduction of $515,000 in interest expense which resulted in an increase of $360,000 in net interest income. Additionally, there was an increase of $165,000 in noninterest income. Offsetting these increases in net income were an increase of $775,000 in provision for loan losses and an increase of ~~$252,000~~$1.4 million in income tax expense.

Net income for the first six months of 2020 was $5.6 million, or $0.25 per common share, basic and fully diluted. This is a decrease of $1.5 million, or 20.9%, when compared with net income of $7.0 million, or $0.32 basic and $0.31 fully diluted earnings per share, for the first six months of 2019. The decrease was primarily the result Details of the ~~provision for loan losses~~year-over-year financial performance of ~~$4.2 million for~~ the first six months of 2020 compared with $125,000 for the same period in 2019. The level of provision in 2020 was recorded to reflect the business and market disruptions arising from the COVID-19 pandemic. Offsetting the decrease to net income were a decrease of $1.4 million in noninterest expenses, primarily from a reduction in salaries and employee benefits of $889,000, due primarily to deferred internal costs as noted above, an increase of $486,000 in noninterest income, which was driven by an increase of $432,000 in mortgage loan income, an increase of $473,000 in net interest income, and a decrease of $280,000 in income tax expense.Company are presented below.

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 ~~$360,000,~~$1.8 million, or ~~3.0%~~15.0%, from the ~~second~~first quarter of ~~2019~~2020 to the ~~second~~first quarter of ~~2020.~~2021. Net interest income was ~~$12.4~~$14.1 million in the ~~second~~first quarter of ~~2020~~2021 compared with ~~$12.0~~$12.2 million for the same period in ~~2019.~~2020. Interest and dividend income decreased ~~$155,000,~~$86,000, or ~~1.0%~~0.5%, over this time period. In the first quarter of 2021, $609,000 in PPP origination fees were recognized as income versus none in the same period of 2020. Interest and fees on loans ~~increased by $372,000. This~~were $13.2 million in the first quarter of 2021, an increase ~~was mitigated by decreases~~of $64,000, or 0.5%, over the same period in ~~securities income, which decreased by $257,000, interest~~2020. Interest and fees on PCI loans ~~which~~ decreased by ~~$189,000,~~$241,000 and ~~interest~~were $856,000 in the first quarter of 2021. Securities income was $1.8 million in the first quarter of 2021, an increase of $100,000 over the same period in 2020. Interest on deposits in other banks ~~which~~ decreased by ~~$76,000. Interest on~~$9,000 year over year.

The average balance of the loan portfolio, excluding PCI loans, ~~was $1.1~~increased by $126.1 million inyear over year and averaged $1.191 billion for the ~~second~~first quarter of ~~2020 compared with $1.3 million in the second quarter of 2019.~~2021. The average balance of the PCI portfolio declined ~~$6.2~~$8.1 million during the year-over-year comparison period. The increase in interest and fees on loans was generated by an increase of $134.5 million, or 13.3%, in the average balance of loans. A portion of this loan growth was a shift in the mix of earning assets, as securities average balances declined $8.5 million year over year. The average balance of total earning assets increased ~~$152.3~~$224.2 million, or ~~11.6%~~16.7%, from the ~~second~~first quarter of ~~2019~~2020 to the ~~second~~first quarter of ~~2020.~~2021. The yield on earning assets decreased from ~~4.88%~~4.78% in the ~~second~~first quarter of ~~2019~~2020 to ~~4.33%~~4.12% in the ~~second~~first quarter of ~~2020.~~2021. The yield on earning assets was the culmination of decreases in the yield on all loans, from ~~5.01%~~5.19% in the ~~second quarter of 2019 to 4.55% in the second~~first quarter of 2020 to 4.68% in the first quarter of 2021, in the tax-equivalent yield on securities, from ~~3.23%~~3.08% in the ~~second~~first quarter of ~~2019~~2020 to ~~2.88%~~2.65% in the ~~second~~first quarter of ~~2020,~~2021, and in the yield on interest bearing bank balances, from ~~2.41%~~1.68% to ~~0.31%~~0.34% year over year. ~~The decline in interest bearing bank balances resulted in a decrease in income of $76,000 despite an increase in the average balance of $33.1 million.~~

Interest expense decreased ~~$515,000,~~$1.9 million, or ~~13.2%~~51.9%, when comparing the ~~second~~first quarter of ~~2020~~2021 and the ~~second~~first quarter of ~~2019.~~2020. Interest expense on deposits decreased ~~$407,000,~~$1.9 million, or ~~11.3%~~54.2%, as the cost declined from ~~1.41%~~1.34% in the ~~second~~first quarter of ~~2019~~2020 to ~~1.20%~~0.58% for the same period in ~~2020.~~2021. The average balance of interest bearing deposits increased ~~$46.5~~$70.4 million, or ~~4.6%~~6.9%. This growth was from non-maturity deposit sources. First, there was an increase of ~~$25.7~~$80.6 million, or ~~16.5%~~47.3%, in the average balance of interest bearing checking accounts, which averaged ~~$181.8~~$250.9 million in the ~~second~~first quarter of ~~2020.~~2021. Additionally, there was an increase of ~~$24.4~~$72.1 million in the average balance of savings and money market accounts from the ~~second~~first quarter of ~~2019~~2020 to the same period in ~~2020.~~2021. Offsetting these increases was a decrease in the average balance of time deposits of ~~$3.7~~$82.4 million, to ~~$643.5~~$550.3 million for the ~~second~~first quarter of ~~2020.~~2021. FHLB and other borrowings benefited from a decrease in cost from ~~2.08%~~1.58% in the ~~second~~first quarter of ~~2019~~2020 to ~~1.15%~~1.26% in the ~~second~~first quarter of ~~2020. This reduced~~2021. All of the above contributed to the reduction of interest

~~Table of Contents~~

expense for ~~the category~~interest bearing liabilities by ~~$101,000~~$1.9 million despite an increase of $69.0 million in the average amount ~~outstanding~~outstanding. Also noteworthy is that, although not an interest bearing category, a sizeable amount of ~~$12.8 million.~~funding was generated in the first quarter of 2021 by a year-over-year average balance increase of $139.1 million in noninterest bearing deposits. The amount of liquidity in the banking system, along with lower interest rates and a shift in deposit balances, decreased the cost of interest bearing liabilities from ~~1.45%~~1.36% in the ~~second~~first quarter of ~~2019~~2020 to ~~1.19%~~0.62% in the ~~second~~first quarter of ~~2020.~~2021.

The tax-equivalent net interest margin decreased 29two basis points, from ~~3.69%~~3.68% in the ~~second~~first quarter of ~~2019~~2020 to ~~3.40%~~3.66% in the ~~second~~first quarter of ~~2020. Likewise,~~2021. Conversely, the interest spread ~~decreased~~increased from ~~3.43%~~3.42% to ~~3.14%~~3.50% over the same time period. The decrease in the margin was precipitated by a ~~greater~~ decrease of 66 basis points in the yield on earning assets ~~of 55 basis points~~ compared with a decline of 74 basis points in the cost of interest bearing liabilities applied against growth of ~~26 basis points.~~

Net interest income was $24.6 million for the first six months of 2020. This is an increase of $473,000, or 2.0%, from net interest income of $24.1 million for the first six months of 2019. Interest and dividend income declined by $15,000 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 $1.0$224.2 million, or ~~4.1%~~16.7%, in interest and fees on loans, which increased as a result of growth of $100.4 million, or 10.0%, in the average balance of loans in 2020 over 2019. The yield on loans declined from 5.03% for the first six months of 2019 to 4.73% for the same period in 2020. Five basis points of this decrease are attributable to the addition of $83.5 million in PPP loans net of fees during the second quarter of 2020 at a rate of 1.00%. Interest and fees on PCI loans declined by $385,000, or 15.1%. Interest on deposits in other banks declined by $103,000. The yield on the PCI portfolio was 13.94% for the first six months of 2020 compared with 13.68% for the same period in 2019. Interest and dividends on securities declined by $561,000 in the first six months of 2020 compared with the same period in 2019. The yield on earning assets was 4.54% for the first six months of 2020, a decline of 38 basis points from 4.92% in the first six months of 2019. The yield on total loans, which includes PCI loans, declined from 5.34% for the first six months of 2019 compared to 4.99% for the same period in 2020. The return on interest bearing bank balances declined from 2.53% to 0.64%, while the tax-equivalent yield on the securities portfolio declined from 3.29% for the first six months of 2019 to 2.98% for the first six months of 2020.

Interest expense of $7.1 million for the first six months of 2020 was a decrease of $488,000, or 6.4%, from interest expense of $7.6 million for the first six months of 2019. The cost of interest bearing liabilities decreased over this time frame from 1.41% for the first six months of 2019 to 1.28% for the same period in 2020. Interest on deposits decreased $222,000 due to a decline in the rate paid from 1.36% for the first six months of 2019 to 1.27% for the first six months of 2020. The average balance of interest bearing liabilities increased over this time frame by $35.0 million. Short term borrowing expense decreased by $33,000, and the cost of FHLB and other borrowings decreased by $233,000, or 32.9%, as the rate paid decreased from 2.13% for the first six months of 2019 to 1.36% for the first six months of 2020.

The changes noted to interest income and interest expense led to a decline in the net interest margin from 3.75% for the first six months of 2019 to 3.53% for the same period in 2020. The interest spread also declined over this time frame from 3.51% in 2019 to 3.26% in 2020.

assets.

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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 six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020. The tables also 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 June 30, 2020						Three months ended June 30, 2019						Three months ended March 31, 2021						Three months ended March 31, 2020
					Average						Average						Average						Average
	Average		Interest		Rates		Average		Interest		Rates		Average		Interest		Rates		Average		Interest		Rates
	Balance		Income/		Earned/		Balance		Income/		Earned/		Balance		Income/		Earned/		Balance		Income/		Earned/
(Dollars in thousands)	Sheet		Expense		Paid		Sheet		Expense		Paid		Sheet		Expense		Paid		Sheet		Expense		Paid
ASSETS:
Loans	$	1,145,956	$	13,012	4.55	%	$	1,011,448	$	12,640	5.01	%	$	1,191,395	$	13,150	4.48	%	$	1,065,268	$	13,086	4.93	%
PCI loans		29,978		1,062	14.01			36,212		1,251	13.67			23,226		856	14.75			31,311		1,097	13.87
Total loans		1,175,934		14,074	4.80			1,047,660		13,891	5.32			1,214,621		14,006	4.68			1,096,579		14,183	5.19
Interest bearing bank balances		52,551		41	0.31			19,436		117	2.41			70,192		60	0.34			16,455		69	1.68
Federal funds sold		210		—	0.07			799		5	2.36			198		-	0.07			141		-	1.06
Securities (taxable)		189,378		1,287	2.72			189,429		1,472	3.11			234,938		1,467	2.50			182,340		1,351	2.96
Securities (tax exempt) ⁽¹⁾		50,629		442	3.49			59,098		533	3.60			49,158		414	3.37			49,391		435	3.52
Total earning assets		1,468,702		15,844	4.33			1,316,422		16,018	4.88			1,569,107		15,947	4.12			1,344,906		16,038	4.78
Allowance for loan losses		(12,007)						(8,820)						(12,459)						(8,621)
Non-earning assets		109,847						102,513						105,946						105,540
Total assets	$	1,566,542					$	1,410,115					$	1,662,594					$	1,441,825

LIABILITIES AND SHAREHOLDERS’ EQUITY

Demand - interest bearing	$	181,789		98	0.22		$	156,053		86	0.22		$	250,888	$	138	0.22		$	170,279	$	94	0.22
Savings and money market		241,646		228	0.38			217,219		307	0.57			291,779		183	0.25			219,661		280	0.51
Time deposits		643,465		2,856	1.78			647,159		3,196	1.98			550,297		1,244	0.92			632,664		3,045	1.93
Total interest bearing deposits		1,066,900		3,182	1.20			1,020,431		3,589	1.41			1,092,964		1,565	0.58			1,022,604		3,419	1.34
Short-term borrowings		323		—	0.20			996		7	2.70			439		-	0.20			4,185		23	2.20
FHLB and other borrowings		71,685		209	1.15			58,888		310	2.08			69,174		217	1.26			66,796		266	1.58
Total interest bearing liabilities		1,138,908		3,391	1.19			1,080,315		3,906	1.45			1,162,577		1,782	0.62			1,093,585		3,708	1.36
Noninterest bearing deposits		254,216						170,783						314,979						175,871
Other liabilities		14,396						14,183						13,208						14,184
Total liabilities		1,407,520						1,265,281						1,490,764						1,283,640
Shareholders’ equity		159,022						144,834						171,830						158,185

Total liabilities and shareholders’ equity	$	1,566,542					$	1,410,115					$	1,662,594					$	1,441,825
Net interest earnings			$	12,453					$	12,112					$	14,165					$	12,330
Interest spread					3.14	%					3.43	%					3.50	%					3.42	%
Net interest margin					3.40	%					3.69	%					3.66	%					3.68	%

Tax equivalent adjustment:
Securities			$	93					$	112					$	87					$	92

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

3633

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Six months ended June 30, 2020

Six months ended June 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

$
1,105,612

$
26,098

4.73
%
$
1,005,168

$
25,059

5.03
%
PCI loans

30,644

2,159

13.94

36,993

2,544

13.68

Total loans

1,136,256

28,257

4.99

1,042,161

27,603

5.34

Interest bearing bank balances

34,503

110

0.64

16,920

213

2.53

Federal funds sold

176

—

0.47

429

5

2.36

Securities (taxable)

185,859

2,638

2.84

187,908

2,994

3.19

Securities (tax exempt) ⁽¹⁾

50,010

876

3.51

63,132

1,135

3.60

Total earning assets

1,406,804

31,881

4.54

1,310,550

31,950

4.92

Allowance for loan losses

(10,314)





(8,951)





Non-earning assets

107,694





99,758





Total assets

$
1,504,184





$
1,401,357





LIABILITIES AND SHAREHOLDERS’ EQUITY













Demand - interest bearing

$
176,034

192

0.22

$
156,908

173

0.22

Savings and money market

230,654

508

0.44

219,071

600

0.55

Time deposits

638,064

5,901

1.85

635,354

6,050

1.92

Total interest bearing deposits

1,044,752

6,601

1.27

1,011,333

6,823

1.36

Short-term borrowings

2,254

23

2.06

3,900

56

2.91

FHLB and other borrowings

69,240

475

1.36

66,012

708

2.13

Total interest bearing liabilities

1,116,246

7,099

1.28

1,081,245

7,587

1.41

Noninterest bearing deposits

215,044





165,668





Other liabilities

14,290





12,078





Total liabilities

1,345,580





1,258,991





Shareholders’ equity

158,604





142,366





Total liabilities and shareholders’ equity

$
1,504,184





$
1,401,357





Net interest earnings



$
24,782





$
24,363



Interest spread





3.26
%





3.51
%
Net interest margin





3.53
%





3.75
%

Tax equivalent adjustment:













Securities



$
184





$
238

~~(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. See Allowance 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.

~~Table of Contents~~

The Company records a separate provision for loan losses for its loan portfolio, excluding PCI loans, and the PCI loan portfolio. There was a recovery of $1.4 million of provision for loan losses on the loan portfolio, excluding PCI loans, in the first quarter of ~~$900,000 and $4.2 million for the three and six months ended June 30, 2020, respectively. There was~~2021. This compares to a provision ~~for loan losses on~~of $3.3 million in the first quarter of 2020.

The recovery of provision recorded in the first quarter of 2021 was due to continued improvement in the quality of the loan portfolio ~~excluding PCI loans, of $125,000 for each of~~and an overall improvement in the ~~three and six months ended June 30, 2019.~~

~~The provision recorded during the first six months of 2020 was due to the heightened~~ risks associated with the ~~loan portfolio that resulted from the~~potential economic impact of the ~~rapidly evolving effects~~COVID-19 pandemic. These improvements reflect a more stable economic climate in the first quarter of 2021 compared with each quarter in 2020. This is evidenced by the level of charge-offs and delinquencies, which have remained relatively low. Also, the majority of loans that were granted COVID-19 ~~stay-at-home orders, business shut-downs and increased unemployment. The Company’s lenders reviewed each~~related payment relief have resumed normal payments. Beginning in the first quarter of 2020, management adjusted the loan ~~within the portfolio~~review process to identify, and monitor on a going forward basis, those borrowers that management believed to be possibly impacted by the ~~current state of the~~ economy. Loans identified with increased risk ~~were~~are aggregated by loan type. ~~This~~During the first quarter of 2020, 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 of $3.3 million for the ~~quarter.~~first quarter of 2020. Despite the stay-at-home orders, shut downs, higher than historical unemployment levels and slow growth, the loan portfolio has exhibited a trend over the last year of lower nonaccrual loans, lower other real estate loans and very low charge-offs.

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 ~~June 30, 2020,~~March 31, 2021, the Company identified the following categories of borrowers as being potentially at risk:


Category		% of Total Loans
Consumer	~~15.6~~	19.7	%
Lessors of commercial properties	~~17.9~~	12.4
Lessors of residential properties	~~12.8~~	12.2
Hotels and other lodging	~~5.7~~	5.6
Medical and care services	~~4.7~~	4.4
Food service ~~and~~& drinking	~~2.0~~	2.5
Retail stores	~~1.3~~	1.5
Personal services	~~1.1~~	1.3

The Company is working with borrowers who have currently expressed a need for relief due to the effects of COVID-19. The Company ~~granted~~had provided aggregate COVID-19 related payment relief ~~in the form~~on loans totaling $192.6 million through March 31, 2021. As of ~~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 $169.9~~March 31, 2021, regular payments have resumed on $148.1 million ~~at June 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.~~ which PCI

~~The Company is also helping its customers and communities by participating~~Table of Contents

comprised $11.8 million. As a result, at March 31, 2021, there were $44.5 million in ~~the PPP. As~~loans under COVID-19 related payment relief. PCI loans comprised $13.2 million of ~~June 30, 2020,~~this total at March 31, 2021. Through March 31, 2021, the Company ~~originated 741 loans totaling $83.5~~had re-extended this payment relief on $57.6 million ~~net~~ of ~~fees, with the median size for all loans made being approximately $35,000. As~~ these loans, ~~are 100% guaranteed by~~$2.0 million of which were within the ~~SBA, no allowance for loan losses is required.~~PCI portfolio. At March 31, 2021, $16.1 million in loans were in first time payment relief status.

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 ~~or six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020. Additional discussion of loan quality is presented below.

The loan portfolio, excluding PCI loans, had net charge-offs of ~~$481,000~~$112,000 in the ~~second~~first quarter of ~~2020,~~2021, compared with net recoveries of ~~$33,000~~$90,000 in the ~~second~~first quarter of ~~2019.~~2020. Total charge-offs were ~~$618,000~~$246,000 for the ~~second~~first quarter of ~~2020~~2021 compared with ~~$102,000~~$94,000 in the ~~second~~first quarter of ~~2019.~~2020. Recoveries of previously charged-off loans were ~~$137,000~~$134,000 for the ~~second~~first quarter of 2021 compared with $184,000 in the first quarter of 2020.

Noninterest Income

Noninterest income of $1.6 million in the first quarter of 2021 was an increase of $293,000, or 21.9%, over the first quarter of 2020. Other noninterest income of $447,000 in the first quarter of 2021 was an increase of $151,000 over the same period in 2020, driven by an increase in insurance commissions. Mortgage loan income of $320,000 was an increase of $99,000 year over year. Gains (losses) on securities transactions increased $55,000 year over year, and service charges on deposit accounts increased $7,000 and were $679,000 in the first quarter of 2021. Offsetting these increases to noninterest income were a decrease of $11,000 in gain on sale of loans, of which there were none in the current quarter, and a decrease of $8,000 in income on bank owned life insurance, which was $166,000 in the first quarter of 2021, year over year.

Noninterest Expense

Noninterest expenses were $8.8 million for the first quarter of 2021. This is an increase of $161,000, or 1.9%, from noninterest expenses of $8.6 million for the first quarter of 2020. The largest component of the increase was an increase in FDIC assessment reflecting an increase in the assessment base, which was $212,000 in the first quarter of 2021 compared with $125,000 in the first quarter of 2020. Other noninterest expenses were $1.6 million in the first quarter of 2021, an increase of $72,000 over the same quarter one year earlier. Salaries and employee benefits of $5.2 million in the first quarter of 2021 increased $56,000 over the first quarter of 2020. Data processing fees of $608,000 in the first quarter of 2021 reflected an increase of $16,000 year over year. Offsetting these increases was a year-over-year decline of $84,000 in equipment expenses driven by lower depreciation expense, which were $288,000 for the first quarter of 2021.

Income Taxes

Income tax expense was $1.7 million for the first quarter of 2021, compared with income tax expense of $264,000 for first quarter of 2020. The effective tax rate for the first quarter of 2021 was 20.5% compared with 15.7% for the first quarter of 2020. The increase in the effective tax rate in the first quarter of 2021 compared with the first quarter of 2020 was the result of a higher deduction related to stock option exercises in 2020.

FINANCIAL CONDITION

General

Total assets were $1.699 billion at March 31, 2021 and increased $54.1 million, or 3.3%, when compared with ~~$135,000 in the second quarter of 2019.~~

~~The loan portfolio,~~December 31, 2020. Total loans, excluding PCI loans, ~~had~~were $1.203 billion at March 31, 2021, increasing $20.4 million, or 1.7%, from year end 2020. The March 31, 2021 loan total includes $67.7 million in PPP loans, net ~~charge-offs~~ of ~~$391,000 for the six months ended June 30, 2020, compared with~~fees. PPP loans, net ~~charge-offs~~ of ~~$289,000 in the same period of 2019.~~fees, were $49.3 million at December 31, 2020. Total ~~charge-offs were $712,000 for the six months ended June 30, 2020, compared with $680,000 in the same period of 2019. Recoveries of previously charged-off~~PCI loans were ~~$321,000 for the six months ended June 30, 2020, compared with $391,000 in the same period of 2019.~~$22.5 million at March 31, 2021 versus $24.0 million at December 31, 2020.

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~~Noninterest Income~~

~~Noninterest income of $1.6 million~~The PPP loan balances noted above are included in the second quarter of 2020 was an increase of $165,000, or 11.4%, over the second quarter of 2019. Mortgage loan income increased $273,000, or 273.0%, from $100,000 in the second quarter of 2019 to $373,000 in the second quarter of 2020. Other noninterest income was $296,000 in the second quarter of 2020 compared with $222,000 in the second quarter of 2019, an increase of $74,000. Service charges on deposit accounts of $532,000 in the second quarter of 2020 decreased by $175,000, or 24.8%, year over year. This decrease was primarily the result of reduced transaction volumes created by the COVID-19 stay-at-home orders. Income on bank owned life insurance was $173,000 in the second quarter of 2020,commercial loans. As a ~~decrease of $11,000 year over year.~~

Noninterest income was $3.0 million for the first six months of 2020, an increase of $486,000, or 19.7%, over noninterest income of $2.5 million for the first six months of 2019. Mortgage loan income was $594,000 for the first six months of 2020, an increase of $432,000 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 $592,000 for the first six months of 2020, an increase of $194,000 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 $173,000 in swap fee income. Gain on sale of loans was $11,000 for the first six months of 2020 compared with none for the same period in 2019. Offsetting these increases to noninterest income were a decline of $112,000 in service charges and fees, a decrease of $21,000 in securities gains and a decline of $18,000 in income on bank owned life insurance.

~~Noninterest Expense~~

Noninterest expenses were $7.9 million for the second quarter of 2020. This is a decrease of $1.1 million from noninterest expenses of $9.0 million for the second quarter of 2019. The reason for the decrease is also the result of the ~~large loan volume in the second quarter of~~economic conditions that existed during 2020 ~~that generated credits to salaries~~ and ~~employee benefits in accordance with ASC 310-20,~~ ~~Receivables, Nonrefundable Fees and Costs~~. These credits contributed to the majority of the $660,000, or 12.5%, decline in salaries and employee benefits. Also decreasing for the period was other operating expenses, which decreased $147,000, occupancy expenses, which were $141,000 lower, other real estate expenses, net, which were $109,000 lower, equipment expense, which was $49,000 lower, and FDIC assessment and data processing fees, which were both $6,000 lower. No expense category on the income statement was greater for the second quarter of 2020 compared with the same period in 2019.

~~Noninterest expenses were $16.5~~early 2021, commercial loans, excluding PPP loans, declined by $4.0 million for the six months ended June 30, 2020, a decrease of $1.4 million, or 7.6%, year over year. There were a number of reasons for the decrease. A portion, $559,000, is also the result of the large loan volume in the second quarter of 2020 that generated credits to salaries and employee benefits in accordance with ASC 310-20, ~~Receivables, Nonrefundable Fees and Costs~~. Salaries and employee benefits declined $889,000, or 8.3%. The closure of two branch offices in 2019 positively influenced salaries as well as other expense categories in 2020. Also decreasing for the six month year-over-year period was occupancy expenses, which were $244,000 lower, other real estate expenses, net, which were $95,000 lower, equipment expense, which was $58,000 lower, other operating expenses, which decreased $65,000, and FDIC assessment, which was $31,000 lower. Only data processing fees increased, and they were only $18,000 greater for the first six months of 2020 compared with the same period in 2019.

~~Income Taxes~~

Income tax expense was $1.0 million for the second quarter of 2020, compared with income tax expense of $791,000 for the second quarter of 2019. For the first six months of 2020 income tax expense was $1.3 million compared with $1.6 million for the first six months of 2019. The effective tax rate for the second quarter of 2020 was 20.0% compared with 18.2% for the second quarter of 2019. For the first six months of 2020, the effective tax rate was 19.0% compared with 18.4% for the same period in 2019.

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~~FINANCIAL CONDITION~~

~~General~~

~~Total assets increased $184.2 million, or 12.9%, to $1.615 billion at June 30, 2020 when compared to~~from December 31, 2019. Total loans, excluding PCI loans, were $1.165 billion at June 30, 2020, increasing $107.0 million, or 10.1%, from year end 2019. Total PCI loans were $29.5 million at June 30, 2020 versus $32.5 million at December 31, 2019.

~~Loans net of fees that the Bank originated during the second quarter under the PPP were $83.5 million at June 30,~~ 2020. There were 741 of these PPP loans outstanding at June 30, 2020, and all of these balances are included in the $263.0 million in commercial loans. Commercial loan balances, excluding PPP balances, would have declined by $11.7 million since year end 2019. Commercial real estate loans, the largest category of loans at ~~$443.9~~$504.8 million, or ~~38.1%~~42.0% of gross loans outstanding at March 31, 2021 increased ~~$47.1~~$30.0 million ~~or 11.9% year to date.~~during the first quarter of 2021. Construction and land development loans, totaling ~~$151.5~~$161.8 million, ~~grew $5.0~~decreased by $20.5 million, ~~since year end 2019.~~or 11.2%, during the first quarter of 2021. Residential 1 – 4 family loans declined ~~by $17.8 million~~ during the first ~~six months~~quarter of ~~2020.~~2021 by $12.9 million and ended the period at $184.3 million, or 15.3% of the portfolio.

The Company’s securities portfolio, excluding restricted equity securities, ~~increased $28.3 million since year end 2019 to $251.0~~was $293.4 million at ~~June 30, 2020.~~March 31, 2021 and increased $874,000 during the first quarter of 2021. U.S. Treasury issues ~~increased~~decreased by ~~$21.7~~$15.7 million during the first ~~six months~~quarter of ~~2020~~2021 as excess liquidity was invested ~~short-term~~short term in very liquid and low risk ~~instruments. Corporate securities, with balances of $19.8 million at June 30, 2020, increased by $13.7 million~~instruments during the ~~six month period. State, county~~fourth quarter of 2020 and ~~municipal~~deployed in longer term securities during the ~~largest investment category at $133.8 million at June 30, 2020,~~first quarter of 2021. U.S. Government agencies increased ~~by $9.5~~$10.3 million during the first ~~six months~~quarter of ~~2020.~~2021 and were $36.1 million at March 31, 2021. Asset backed securities, consisting of student loan pools 97% guaranteed by the U.S. Government, increased ~~by $11.5~~$9.2 million during the first ~~six months~~quarter of ~~2020~~2021 and ~~totaled $23.2~~were $46.7 million at ~~June 30, 2020. Offsetting these increases was a decrease~~March 31, 2021. State, county and municipal securities, the largest investment category totaling $144.9 million at March 31, 2021, decreased by $2.0 million during the first quarter of ~~$16.5~~2021. Corporate securities were $25.6 million in mortgage backed securities and a decline of $1.7 million in balances held in U.S. Government agency bonds. The Company actively manages the portfolio to improve its liquidity and maximize the return within the desired risk profile. at March 31, 2021.

The Company is required to account for the effect of changes in the fair value of securities available for sale (AFS) under FASB ASC 320, Investments – Debt and Equity Securities. The fair value of the AFS portfolio was ~~$226.9~~$273.1 million at ~~June 30, 2020~~March 31, 2021 and ~~$187.0~~$271.3 million at December 31, ~~2019.~~2020. At ~~June 30, 2020,~~March 31, 2021, the Company had a net unrealized gain on the AFS portfolio of ~~$7.3~~$6.3 million compared with a net unrealized gain of ~~$3.7~~$9.9 million at December 31, ~~2019.~~2020. Municipal securities comprised ~~48.3%~~45.2% of the total AFS portfolio at ~~June 30, 2020.~~March 31, 2021. 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 ~~$85.3~~$95.4 million at ~~June 30, 2020~~March 31, 2021 compared with ~~$28.7~~$63.2 million at year end ~~2019. The six month~~2020, an increase ~~was $56.6~~of $32.2 million. The majority of this category growth, $29.2 million, occurred in interest bearing bank balances, ~~$53.1~~which were $74.3 million ~~since year end 2019,~~at March 31, 2021, as large amounts of liquidity have been funneled into the banking system through the facilitation of PPP loans by the banking industry and stimulus checks issued by the U.S. Treasury under the Coronavirus Aid, Relief, and Economic Security Act (the ~~CARES Act)~~“CARES Act”). ~~There were federal funds purchased of $3.3 million at June 30, 2020 compared with $24.4 million at December 31, 2019.~~

Interest bearing deposits at ~~June 30, 2020~~March 31, 2021 were ~~$1.085~~$1.105 billion, an increase of ~~$100.0~~$5.6 million, or ~~10.2%~~0.5%, ~~greater than at~~from December 31, ~~2019.~~2020. Interest bearing checking accounts ~~(formerly NOW accounts)~~ of ~~$195.4~~$261.5 million grew by ~~$24.9~~$21.9 million, ~~since year end 2019.~~or 9.1%, during the first quarter of 2021. Money market deposit accounts were ~~$148.1~~$171.9 million at ~~June 30, 2020~~March 31, 2021 and grew ~~$27.2~~$17.4 million, or ~~22.5%~~11.3%, during the first ~~six months~~quarter of ~~2020.~~2021. Savings accounts totaled ~~$108.6~~$137.5 million at ~~June 30, 2020~~March 31, 2021 and grew ~~$12.0~~$13.1 million, ~~for~~or 10.6%, during the first ~~six months~~quarter of ~~2020.~~2021. Strong growth in these non-maturity categories for the year has allowed the ~~Bank~~Company to react to lower interest rates through proactive repricing in certificates of deposit, the highest costing deposit category. As a result, there has been a decline in time deposits less than or equal to $250,000, which decreased by $30.5 million, or 6.7%, in the first quarter of 2021 and were $422.4 million at March 31, 2021. Time deposits over $250,000 declined $16.4 million in the first quarter of 2021 and were $112.0 million at March 31, 2021. Time deposit balances combined were ~~46.4%~~48.3% of ~~total deposits, including noninterest~~interest bearing deposits at ~~June 30, 2020,~~March 31, 2021 and 37.1% of all deposit balances. This is a decline from ~~51.3%~~52.9% of interest bearing balances and 41.6% of all deposit balances at December 31, ~~2019.~~2020. The growth in interest bearing checking accounts, money market accounts and savings accounts, ~~and~~as well as in noninterest bearing ~~deposits, which grew $164.3~~checking accounts, was $87.5 million during the first ~~six months~~quarter of ~~2020, were~~2021. A portion of this growth was associated with the ~~$83.5 million in~~ PPP loans ~~net of fees~~ originated during 2020 and ~~held at June 30, 2020~~2021 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.

FHLB borrowings were $67.7 million at March 31, 2021 compared with $57.8 million at December 31, 2020. The stable level of FHLB borrowings during 2020 and into 2021 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. The average rate paid on FHLB borrowings was 1.26% during the first quarter of 2021. There were no Federal funds purchased at March 31, 2021 or December 31, 2020.

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FHLB borrowings were $68.2 million at June 30, 2020, compared with $68.5 million at December 31, 2019. There were Federal funds purchased of $3.3 million at June 30, 2020, down from $24.4 million at December 31, 2019.

Shareholders’ equity was ~~$160.8~~$172.5 million at ~~June 30, 2020,~~March 31, 2021, or ~~10.0%~~10.2% of total assets, compared with ~~$155.5~~$169.7 million, or ~~10.9%~~10.3% of total assets, at December 31, ~~2019. 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 six months of 2020, the~~2020. The Company repurchased ~~130,800~~309,700 shares of common stock at a total cost of ~~$885,665. The Company evaluates~~$2.2 million during 2020 and 21,100 shares for a total cost of $147,000 during the ~~value~~first quarter of ~~the common stock and capital for regulatory purposes when considering repurchases under the program and, as a result, is not currently making any repurchases in the current economic environment.~~2021.

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. See Allowance 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 loans were $3.5 million at March 31, 2021, a decrease of $976,000 from December 31, 2020. Total non-performing assets totaled ~~$8.7~~$7.8 million at ~~June 30, 2020 and net charge-offs were $391,000 for the six months ended June 30, 2020. This compares~~March 31, 2021 compared with ~~nonperforming assets of $10.8 million and net charge-offs of $879,000 for the year ended December 31, 2019.~~

~~Nonaccrual loans were $4.2 million at June 30, 2020, a $1.1 million decrease from $5.3~~$8.9 million at December 31, ~~2019. The $1.1 million decrease~~2020. There were net charge-offs of $112,000 in ~~nonaccrual loans since December 31, 2019 was~~ the ~~net result~~first quarter of $3.7 million in additions to nonaccrual loans and $4.8 million in reductions. The increase related mainly to one construction and land development relationship totaling $1.4 million and two commercial loans totaling $1.3 million. With respect to the reductions in nonaccrual loans, $240,000 were payments to existing credits, $616,000 were charge-offs, $3.8 million were paid off, and $159,000 returned to accruing status.2021.

The allowance for loan losses ~~excluding PCI, equaled 289.7% of nonaccrual~~to total loans was 0.90% at ~~June 30, 2020~~March 31, 2021 compared with ~~159.3%~~1.04% at December 31, ~~2019.~~2020. The ~~ratio~~volume of ~~nonperforming assets to~~PPP loans originated since the second quarter of 2020 impacted the ratio. PPP loans, net of fees, were $67.7 million at March 31, 2021 and ~~OREO decreased 27 basis points. The ratio was 0.74% at June 30, 2020 versus 1.01%~~$49.3 million at December 31, ~~2019, which was driven primarily~~2020. These loans are fully guaranteed by the ~~decrease~~SBA in ~~nonperforming loans.~~accordance with the CARES Act; therefore, no allowance is required. The Company monitors and adjusts the allowance for loan losses based on loans requiring a reserve. The allowance for loan losses to total loans excluding the PPP loans would have reflected a level of coverage of 0.95% at March 31, 2021 and 1.09% at December 31, 2020.

The allowance for loan losses includes an amount that cannot be related to individual types of loans, and this is referred to as the unallocated 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 partial recovery of $1.4 million from the provision of $4.2 million taken during the year ended December 31, 2020 drove the March 31, 2021 unallocated amount of $913,000, which is reflective of the on-going COVID-related risk grade stresses inherent in the loan portfolio. Several factors justify the maintenance of this unallocated amount, as follows:

●

The uncertainty of the economic impact of COVID-19 continues to be a factor for the remainder of 2021 as the pandemic enters its hopeful twilight. The Company does not believe that any of its COVID-related modifications currently rise to the level of a TDR under the current regulatory guidance, and it continues to monitor impacted loans closely with regularity as modification periods expire and the economy recovers from the pandemic.

●

While the Company believes that it has appropriately assigned risk grade factors to address COVID-related risk in the most vulnerable pools, there is still a degree of uncertainty. For example, the Company expected about 200 applications from current customers during the latest round of the PPP. As of March 31, 2021, the Company has made over 400 PPP loans, indicating that the extent to which its customers are struggling has been greater than expected. Also, new variants of COVID are emerging and causing concern for increased cases that could result in the return of increased restrictions and more economic strain.

●

Coverage ratios at March 31, 2021 relating to the allowance, as noted in the table below, were consistent with prior periods when the ratios were proven to be adequate and produced provisions and allowances for loan losses that are directionally consistent with the credit quality of the loan portfolio. This is an indication

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that the allowance, in the aggregate, is reasonably stated when considering both total loans and loans with some doubt regarding ultimate collectability.

●

The Company believes 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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, total impaired loans, excluding PCI loans, equaled $7.7 million and $9.1 million, ~~and $9.9 million,~~ respectively.

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


	June 30, 2020			December 31, 2019			March 31, 2021			December 31, 2020
Nonaccrual loans	$	4,225		$	5,292		$	3,496		$	4,460
Loans past due 90 days and accruing interest		—			946			33			45
Total nonperforming loans		4,225			6,238			3,529			4,505
OREO		4,486			4,527			4,313			4,361
Total nonperforming assets	$	8,711		$	10,765		$	7,842		$	8,866

Accruing troubled debt restructure loans	$	4,898		$	4,593		$	4,201		$	4,679

Balances
Specific reserve on impaired loans		1,112			584			1,118			1,165
General reserve related to unimpaired loans		11,126			7,845			9,710			11,175
Total allowance for loan losses		12,238			8,429			10,828			12,340

Average loans during the year, net of unearned income		1,105,612			1,023,861			1,191,395			1,138,603

Impaired loans		9,123			9,885			7,697			9,139
Non-impaired loans		1,156,187			1,048,438			1,195,026			1,173,223
Total loans, net of unearned income		1,165,310			1,058,323			1,202,723			1,182,362

Ratios
Allowance for loan losses to loans		1.05	%		0.80	%		0.90	%		1.04
Allowance for loan losses to nonaccrual loans		289.66			159.28			309.73			276.68
General reserve to non-impaired loans		0.96			0.75			0.81			0.95
Nonaccrual loans to loans		0.36			0.50			0.29			0.38
Nonperforming assets to loans and OREO		0.74			1.01			0.65			0.75
Net charge-offs to average loans		0.07			0.09			0.04			0.03

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A further breakout of nonaccrual loans, excluding PCI loans, at March ~~30, 2020~~31, 2021 and December 31, ~~2019~~2020 is below (dollars in thousands):


	June 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Mortgage loans on real estate:
Residential 1‑4 family	$	1,697	$	1,378	$	1,422	$	1,357
Commercial		636		1,006		711		730
Construction and land development		1,122		376		5		44
Multifamily		—		2,463
Agriculture		51		—		45		45
Total real estate loans		3,506		5,223		2,183		2,176
Commercial loans		707		62		1,301		2,264
Consumer installment loans		12		7		12		20
Total loans	$	4,225	$	5,292	$	3,496	$	4,460

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 includes

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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 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~~Activity under the ~~Company’s~~ stock repurchase program that the Company adopted in January 2020 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. On February 19, 2021, the Company’s Board of Directors authorized a new share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock through February 2022. 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 actual means and timing of any purchases, target number of shares and prices or range of prices under the repurchase program, which the Company determines in its discretion, depend on a number of factors, including the market price of the Company’s common stock, share issuances under the Company’s equity plans, general market and economic conditions, and applicable legal and regulatory requirements. The Company’s Board of Directors may modify, amend or terminate the program at any time. There is no assurance as to the amount of shares that the Company will purchase under the program. 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.

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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 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 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” is tier 1 capital divided by total average assets.

The Bank’s ratio of total risk-based capital was ~~13.9%~~13.8% at ~~each of June 30, 2020 and~~March 31, 2021 compared with 13.6% at December 31, ~~2019.~~2020. The tier 1 risk-based capital ratio was ~~12.9%~~13.0% at ~~June 30, 2020~~March 31, 2021 and ~~13.2%~~12.7% at December 31, ~~2019.~~2020. The Bank’s tier 1 leverage ratio was ~~10.3%~~10.4% at ~~June 30, 2020~~March 31, 2021 and ~~11.0%~~10.1% at December 31, ~~2019.~~2020. All capital ratios exceed regulatory minimums to be considered well capitalized. BASEL III introduced the common equity tier 1 capital ratio, which was ~~12.9%~~13.0% at ~~June 30, 2020~~March 31, 2021 and ~~13.2%~~12.7% at December 31, ~~2019.~~2020.

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 Bank does not maintain the full amount of the buffer. At ~~June 30, 2020,~~March 31, 2021, the Bank had a capital conservation buffer of ~~5.9%~~5.8%.

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

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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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 was as follows (dollars in thousands):


	June 30, 2020			December 31, 2019			March 31, 2021			December 31, 2020
Cash and due from banks	$	20,530		$	16,976		$	20,836		$	17,845
Interest bearing bank deposits		64,796			11,708			74,337			45,118
Federal funds sold								234			222
Available for sale securities, at fair value, unpledged		197,631			157,225			237,367			235,784
Total liquid assets	$	282,957		$	185,909		$	332,774		$	298,969

Deposits and other liabilities	$	1,454,223		$	1,275,361		$	1,526,332		$	1,475,155
Ratio of liquid assets to deposits and other liabilities		19.46	%		14.58	%		21.80	%		20.27	%

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 ~~June 30, 2020.~~March 31, 2021.

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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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, is as follows (dollars in thousands):


	June 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Commitments with off-balance sheet risk:
Commitments to extend credit	$	233,909	$	210,086	$	276,433	$	245,858
Standby letters of credit		11,130		15,155		14,480		15,193
Total commitments with off-balance sheet risks	$	245,039	$	225,241	$	290,913	$	261,051

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.

The Company 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 cash flow hedges with total notional amounts of $20 million ~~and $10 million~~ at ~~June 30, 2020~~each of March 31, 2021 and December 31, ~~2019, respectively.~~2020. The Company recorded a fair value liability of ~~$730,000~~$449,000 and ~~$44,000~~$631,000 in other liabilities, at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. The Company’s cash flow hedges are deemed to be highly effective. Therefore, the net losses were recorded as a component of other comprehensive income in the Company’s consolidated statements of comprehensive income.

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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.

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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 ~~June 30, 2020~~March 31, 2021 (dollars in thousands):


	June 30, 2020		March 31, 2021
	%	$	%	$
Change in Yield curve
+400 bp	13.4	6,747	14.9	7,979
+300 bp	9.6	4,825	11.0	5,893
+200 bp	5.6	2,836	7.0	3,725
+100 bp	2.5	1,236	3.1	1,666
most likely	—	—	—	—
‑100 bp	—	24	(1.0)	(539)
‑200 bp	—	(11)	(1.3)	(695)
‑300 bp	—	(14)	(1.3)	(702)
‑400 bp	—	(14)	(1.3)	(702)

At ~~June 30, 2020,~~March 31, 2021, 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 ~~13.4%~~14.9%. 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 ~~0.0%~~1.3%. 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.

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.

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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 chief financial officer (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 rules and 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

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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.

Item 1A. Risk Factors

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, ~~2019~~2020 (Part I, Item 1A)~~, other than the addition of the risk factor relating to the COVID-19 pandemic as set forth below.~~

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~~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 have suspended repurchases 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.

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

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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

Period

Total Number of Shares Purchased ⁽¹⁾

Average Price Paid Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number of Shares That May Yet Be Purchased Under the Program
April 1 - April 30, 2020

15,000

$
4.80

15,000

869,200
May 1 - May 31, 2020

—

—

—

—
June 1 - June 30, 2020

—

—

—

—
Total

15,000

$
4.80

15,000

869,200

⁽¹⁾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~~.Act. The Company purchased ~~115,800~~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 program for the repurchase of up to 200,000 shares of its common stock through January 2021. The Company repurchased 178,900 shares under the program during the fourth quarter ~~ended March 31,~~of 2020.

On February 19, 2021, the Company’s Board of Directors authorized a new share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock through February 2022.

The following table provides information with respect to purchases under the share repurchase program ~~is authorized for a one year period.~~during the first quarter of 2021.


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under the Program
January 1 - January 31, 2021	21,100	$	6.92	21,100	—
February 1 - February 29, 2021	—		—	—	—
March 1 - March 31, 2021	—		—	—	—
Total	21,100	$	6.92	21,100	—

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Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

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 ~~June 30, 2020~~March 31, 2021 formatted in Inline Extensible Business Reporting Language (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		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*	Filed herewith.

4844

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	COMMUNITY BANKERS TRUST CORPORATION
	(Registrant)

	/s/ Rex L. Smith, III
	Rex L. Smith, III
	President and Chief Executive Officer
	(principal executive officer)

Date: ~~August 7, 2020~~May 14, 2021

	/s/ Bruce E. Thomas
	Bruce E. Thomas
	Executive Vice President and Chief Financial Officer
	(principal financial officer)

Date: ~~August 7, 2020~~May 14, 2021

4945


	Six Months Ended June 30, 2020
			Provision
	December 31, 2019		Allocation		Charge-offs		Recoveries		June 30, 2020
Mortgage loans on real estate:
Residential 1‑4 family	$	2,685	$	781	$	—	$	29	$	3,495
Commercial		2,196		2,337		—		79		4,612
Construction and land development		1,044		214		—		84		1,342
Second mortgages		79		(36)		—		2		45
Multifamily		248		251		—		—		499
Agriculture		38		6		—		—		44
Total real estate loans		6,290		3,553		—		194		10,037
Commercial loans		1,980		619		(608)		67		2,058
Consumer installment loans		114		40		(104)		60		110
All other loans		7		1		—		—		8
Unallocated		38		(13)		—		—		25
Total loans	$	8,429	$	4,200	$	(712)	$	321	$	12,238


	Six Months Ended June 30, 2019
			Provision
	December 31, 2018		Allocation		Charge-offs		Recoveries		June 30, 2019
Mortgage loans on real estate:
Residential 1‑4 family	$	2,281	$	429	$	(34)	$	218	$	2,894
Commercial		1,810		429		(277)		64		2,026
Construction and land development		1,161		197		(12)		53		1,399
Second mortgages		20		58		—		3		81
Multifamily		371		(179)		—		—		192
Agriculture		17		(17)		—		—		—
Total real estate loans		5,660		917		(323)		338		6,592
Commercial loans		1,894		377		(257)		4		2,018
Consumer installment loans		152		84		(100)		49		185
All other loans		12		9		—		—		21
Unallocated		1,265		(1,262)		—		—		3
Total loans	$	8,983	$	125	$	(680)	$	391	$	8,819



Balance, January 1, 2019	$	38,107
Accretion		(6,010)
Reclassification from nonaccretable difference		1,369
Balance, December 31, 2019	$	33,466
Accretion		(2,150)
Reclassification from nonaccretable difference		61
Balance, June 30, 2020	$	31,377


Period	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under the Program
April 1 - April 30, 2020	15,000	$	4.80	15,000	869,200
May 1 - May 31, 2020	—		—	—	—
June 1 - June 30, 2020	—		—	—	—
Total	15,000	$	4.80	15,000	869,200