UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended March 31, 2020

 

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: 000-25805

 

Fauquier Bankshares, Inc.

(Exact name of registrant as specified in its charter)

 

Virginia

 

54-1288193

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

10 Courthouse Square, Warrenton, Virginia

 

20186

(Address of principal executive offices)

 

(Zip Code)

 

(540) 347-2700

(Registrant’s telephone number, including area code)

 

(Not applicable)

(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(s)

Name of each exchange

on which registered

Common Stock

Par value $3.13 per share

FBSS

The Nasdaq Capital Market

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

 

Smaller reporting company

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected to not use 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

 

The registrant had 3,794,725 shares of common stock outstanding as of May 8, 2020.

 


FAUQUIER BANKSHARES, INC.

INDEX

 

Part I.  FINANCIAL INFORMATION

 

 

 

Page

Item 1.

Financial Statements

2

 

 

 

 

Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019

2

 

 

 

 

Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2020 and 2019

3

 

 

 

 

Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2020 and 2019

4

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2020 and 2019

5

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2020 and 2019

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

 

 

 

Item 4.

Controls and Procedures

38

 

 

 

Part II.  OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

39

 

 

 

Item 1A.

Risk Factors

39

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

 

 

 

Item 3.

Defaults Upon Senior Securities

41

 

 

 

Item 4.

Mine Safety Disclosures

41

 

 

 

Item 5.

Other Information

41

 

 

 

Item 6.

Exhibits

42

 

 

 

SIGNATURES

43

 

1


Part I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

 

(In thousands, except share and per share data)

 

March 31,

2020

(Unaudited)

 

 

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

9,834

 

 

$

9,124

 

Interest-bearing deposits in other banks

 

 

22,919

 

 

 

37,203

 

Federal funds sold

 

 

14

 

 

 

14

 

Securities available for sale, at fair value

 

 

81,652

 

 

 

79,783

 

Restricted investments

 

 

1,838

 

 

 

2,016

 

Mortgage loans held for sale

 

 

936

 

 

 

247

 

Loans

 

 

567,693

 

 

 

550,226

 

Allowance for loan losses

 

 

(5,594

)

 

 

(5,227

)

Loans, net

 

 

562,099

 

 

 

544,999

 

Premises and equipment, net

 

 

17,197

 

 

 

17,492

 

Accrued interest receivable

 

 

1,926

 

 

 

1,984

 

Other real estate owned, net

 

 

1,356

 

 

 

1,356

 

Bank-owned life insurance

 

 

14,051

 

 

 

13,961

 

Other assets

 

 

13,672

 

 

 

13,992

 

Total assets

 

$

727,494

 

 

$

722,171

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing checking

 

$

124,711

 

 

$

123,492

 

Interest-bearing:

 

 

 

 

 

 

 

 

Checking

 

 

253,887

 

 

 

242,531

 

Savings and money market accounts

 

 

179,917

 

 

 

182,007

 

Time deposits

 

 

71,045

 

 

 

74,125

 

Total interest-bearing

 

 

504,849

 

 

 

498,663

 

Total deposits

 

 

629,560

 

 

 

622,155

 

Federal Home Loan Bank advances

 

 

12,673

 

 

 

16,695

 

Junior subordinated debt

 

 

4,124

 

 

 

4,124

 

Other liabilities

 

 

11,900

 

 

 

12,075

 

Total liabilities

 

 

658,257

 

 

 

655,049

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Common stock, par value $3.13, and additional paid-in capital; authorized: 8,000,000 shares; issued and outstanding: 3,794,725 and 3,783,724 shares including 19,843 and 20,352 unvested restricted shares, respectively

 

 

16,083

 

 

 

15,964

 

Retained earnings

 

 

50,709

 

 

 

49,787

 

Accumulated other comprehensive income, net

 

 

2,445

 

 

 

1,371

 

Total shareholders’ equity

 

 

69,237

 

 

 

67,122

 

Total liabilities and shareholders’ equity

 

$

727,494

 

 

$

722,171

 

 

See accompanying Notes to Consolidated Financial Statements.

2


Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

 

Three Months Ended March 31,

 

(In thousands, except per share data)

 

2020

 

 

2019

 

Interest Income

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

6,467

 

 

$

6,571

 

Interest and dividends on securities:

 

 

 

 

 

 

 

 

Taxable interest income

 

 

379

 

 

 

369

 

Tax-exempt interest

 

 

99

 

 

 

89

 

Dividends

 

 

28

 

 

 

38

 

Interest on deposits in other banks

 

 

84

 

 

 

112

 

Total interest income

 

 

7,057

 

 

 

7,179

 

Interest Expense

 

 

 

 

 

 

 

 

Interest on deposits

 

 

747

 

 

 

839

 

Interest on federal funds purchased

 

 

-

 

 

 

14

 

Interest on Federal Home Loan Bank advances

 

 

71

 

 

 

144

 

Interest on Junior subordinated debt

 

 

50

 

 

 

49

 

Total interest expense

 

 

868

 

 

 

1,046

 

Net interest income

 

 

6,189

 

 

 

6,133

 

Provision for loan losses

 

 

350

 

 

 

50

 

Net interest income after provision for loan losses

 

 

5,839

 

 

 

6,083

 

Noninterest Income

 

 

 

 

 

 

 

 

Trust and estate fees

 

 

461

 

 

 

416

 

Brokerage fees

 

 

146

 

 

 

90

 

Service charges on deposit accounts

 

 

352

 

 

 

383

 

Interchange fee income, net

 

 

270

 

 

 

271

 

Bank-owned life insurance

 

 

90

 

 

 

93

 

Other income

 

 

11

 

 

 

148

 

Gain on sale of securities available for sale

 

 

-

 

 

 

79

 

Gain on sale of mortgage loans held for sale, net

 

 

12

 

 

 

-

 

Total noninterest income

 

 

1,342

 

 

 

1,480

 

Noninterest Expenses

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

2,952

 

 

 

3,012

 

Occupancy

 

 

664

 

 

 

615

 

Furniture and equipment

 

 

191

 

 

 

283

 

Marketing and business development

 

 

109

 

 

 

186

 

Legal, audit and consulting

 

 

270

 

 

 

249

 

Data processing

 

 

375

 

 

 

354

 

Federal Deposit Insurance Corporation assessment

 

 

84

 

 

 

94

 

Other operating expenses

 

 

960

 

 

 

925

 

Total noninterest expenses

 

 

5,605

 

 

 

5,718

 

Income before income taxes

 

 

1,576

 

 

 

1,845

 

Income tax expense

 

 

180

 

 

 

213

 

Net Income

 

$

1,396

 

 

$

1,632

 

Earnings per share, basic

 

$

0.37

 

 

$

0.43

 

Earnings per share, diluted

 

$

0.37

 

 

$

0.43

 

Dividends per share

 

$

0.125

 

 

$

0.12

 

 

See accompanying Notes to Consolidated Financial Statements.

3


Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2020

 

 

2019

 

Net income

 

$

1,396

 

 

$

1,632

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

Change in fair value of securities available for sale, net of tax, $(392) and $(262), respectively

 

 

1,473

 

 

 

984

 

Reclassification adjustment for gains on securities available for sale, net of tax, $0 and $17, respectively

 

 

-

 

 

 

(62

)

Change in fair value of interest rate swap, net of tax, $105 and $24, respectively

 

 

(399

)

 

 

(92

)

Total other comprehensive income, net of tax, $(287) and $(221), respectively

 

 

1,074

 

 

 

830

 

Total comprehensive income

 

$

2,470

 

 

$

2,462

 

 

See accompanying Notes to Consolidated Financial Statements.

4


Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

 

(In thousands, except share and per share data)

 

Common

Stock and Additional Paid-In Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

 

Balance, December 31, 2018

 

$

15,742

 

 

$

44,803

 

 

$

(538

)

 

$

60,007

 

Net income

 

 

-

 

 

 

1,632

 

 

 

-

 

 

 

1,632

 

Other comprehensive income, net of tax effect, $(221)

 

 

-

 

 

 

-

 

 

 

830

 

 

 

830

 

Cash dividends ($0.12 per share)

 

 

-

 

 

 

(455

)

 

 

-

 

 

 

(455

)

Amortization of unearned compensation, restricted stock awards

 

 

34

 

 

 

-

 

 

 

-

 

 

 

34

 

Issuance of common stock - unvested shares (6,404 shares)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Issuance of common stock - vested shares  (4,149 shares)

 

 

95

 

 

 

-

 

 

 

-

 

 

 

95

 

Repurchase of common stock (440 shares)

 

 

(10

)

 

 

-

 

 

 

-

 

 

 

(10

)

Balance, March 31, 2019

 

$

15,861

 

 

$

45,980

 

 

$

292

 

 

$

62,133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

$

15,964

 

 

$

49,787

 

 

$

1,371

 

 

$

67,122

 

Net income

 

 

-

 

 

 

1,396

 

 

 

-

 

 

 

1,396

 

Other comprehensive income, net of tax, $(287)

 

 

-

 

 

 

-

 

 

 

1,074

 

 

 

1,074

 

Cash dividends ($0.125 per share)

 

 

-

 

 

 

(474

)

 

 

-

 

 

 

(474

)

Amortization of unearned compensation, restricted stock awards

 

 

35

 

 

 

-

 

 

 

-

 

 

 

35

 

Issuance of common stock - unvested shares (7,889 shares)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Issuance of common stock - vested shares (4,293 shares)

 

 

90

 

 

 

-

 

 

 

-

 

 

 

90

 

Issuance of common stock - performance-based restricted stock units (826 shares)

 

 

18

 

 

 

-

 

 

 

-

 

 

 

18

 

Repurchase of common stock (2,007 shares)

 

 

(24

)

 

 

-

 

 

 

-

 

 

 

(24

)

Balance, March 31, 2020

 

$

16,083

 

 

$

50,709

 

 

$

2,445

 

 

$

69,237

 

 

See accompanying Notes to Consolidated Financial Statements.

5


Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

 

Three Months Ended March 31,

 

(In thousands)

 

2020

 

 

2019

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

1,396

 

 

$

1,632

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

266

 

 

 

324

 

Provision for loan losses

 

 

350

 

 

 

50

 

Loss on interest rate swaps

 

 

9

 

 

 

-

 

Gain on sales of securities available for sale

 

 

-

 

 

 

(79

)

Amortization of security premiums, net

 

 

126

 

 

 

88

 

Amortization of unearned compensation, net of forfeiture

 

 

(77

)

 

 

59

 

Issuance of vested restricted stock

 

 

108

 

 

 

95

 

Bank-owned life insurance income

 

 

(90

)

 

 

(93

)

Originations of mortgage loans held for sale

 

 

(1,836

)

 

 

(260

)

Proceeds from mortgage loans held for sale

 

 

1,159

 

 

 

-

 

Gain on mortgage loans held for sale

 

 

(12

)

 

 

-

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

(Increase) decrease in other assets

 

 

91

 

 

 

(5,346

)

Increase (decrease) in other liabilities

 

 

(722

)

 

 

4,839

 

Net cash provided by operating activities

 

 

768

 

 

 

1,309

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Proceeds from sales, maturities, calls and principal payments of securities

available for sale

 

 

2,141

 

 

 

16,344

 

Purchase of securities available for sale

 

 

(2,270

)

 

 

(13,075

)

(Purchase) disposal of premises and equipment

 

 

29

 

 

 

(102

)

(Purchase) redemption of restricted investments, net

 

 

178

 

 

 

(331

)

Loan originations, net

 

 

(17,305

)

 

 

4,519

 

Net cash provided by (used in) investing activities

 

 

(17,227

)

 

 

7,355

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Increase (decrease) in noninterest-bearing checking, interest-bearing checking, savings and money market accounts

 

 

10,485

 

 

 

(48,046

)

Increase (decrease) in time deposits

 

 

(3,080

)

 

 

4,766

 

Increase (decrease) in Federal Home Loan Bank advances

 

 

(4,022

)

 

 

5,979

 

Cash dividends paid on common stock

 

 

(474

)

 

 

(455

)

Repurchase of common stock

 

 

(24

)

 

 

(10

)

Net cash provided by (used in) financing activities

 

 

2,885

 

 

 

(37,766

)

Decrease in cash and cash equivalents

 

 

(13,574

)

 

 

(29,102

)

Cash and Cash Equivalents

 

 

 

 

 

 

 

 

Beginning

 

 

46,341

 

 

 

67,110

 

Ending

 

$

32,767

 

 

$

38,008

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

 

 

Interest

 

$

916

 

 

$

947

 

Supplemental Disclosures of Noncash Investing Activities

 

 

 

 

 

 

 

 

Unrealized gain on securities available for sale, net of tax

 

$

1,473

 

 

$

922

 

Unrealized loss on interest rate swap, net of tax

 

$

(399

)

 

$

(92

)

 

See accompanying Notes to Consolidated Financial Statements.

6


FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 1.  General

 

The consolidated financial statements include the accounts of Fauquier Bankshares, Inc. (the “Company”) and its wholly-owned subsidiary, The Fauquier Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, Fauquier Bank Services, Inc. and Specialty Properties Acquisitions - VA, LLC. Specialty Properties Acquisitions - VA, LLC was formed with the sole purpose of holding foreclosed property. The consolidated financial statements do not include the accounts of Fauquier Statutory Trust II, a wholly-owned subsidiary of the Company. In consolidation, significant intercompany financial balances and transactions have been eliminated.  In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2020 and the results of operations for the three months ended March 31, 2020 and 2019, in accordance with accounting principles generally accepted in the United States of America (“GAAP”).    The notes included herein should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

 

The results of operations for the three months ended March 31, 2020 and 2019 are not necessarily indicative of the results expected for the full year or any other interim period.

 

Certain amounts in the 2019 consolidated financial statements have been reclassified to conform to the 2020 presentation. No reclassifications were significant and there was no effect on net income.

 

Significant Events

 

On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate its spread have had and are expected to continue to have an adverse impact on the economies and financial markets globally, nationally and locally. Due to COVID-19, market interest rates have declined significantly, with the 10-year U.S. Treasury bond falling below 1.00% on March 3, 2020 for the first time. Such events also may adversely affect business and consumer confidence, generally, and the Company and its clients, and their respective suppliers, vendors and processors, may be adversely affected. On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range by 50 basis points to 1.00% - 1.25%. This range was further reduced to 0.00% - 0.25% on March 16, 2020. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted to, among other provisions, provide emergency assistance for individuals, families and businesses affected by COVID-19. The reductions in interest rates and other effects of COVID-19 may adversely affect the Company's financial condition and results of operations in future periods. It is unknown how long the adverse conditions associated with COVID-19 will last and what the complete financial effect will be to the Company.  It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including that credit quality on our loan portfolio may decline and loan defaults could increase.  

 

Recent Accounting Pronouncements and Other Regulatory Statements

 

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”  The amendments, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03.  These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters.  Smaller reporting companies who file with the SEC and all other entities who do not file with the SEC are

7


required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. Changes under ASU 2016-13 and subsequent updates represent a fundamental shift from existing GAAP and may result in a material increase to the Company's accounting for credit losses on financial instruments. To prepare for implementation of the new standard the Company has established a working group to evaluate the impact these changes will have on the Company’s financial statements and related disclosures. The Company has also contracted with a third-party for credit modeling in accordance with ASU 2016-13.  The Company has focused on model validations, the development of processes and related controls, and the evaluation of parallel runs. The Company has not yet determined an estimate of the effect of these changes.

 

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (“SAB”) 119.  SAB 119 updated portions of SEC interpretative guidance to align with FASB Accounting Standards Codification (“ASC”) 326, “Financial Instruments – Credit Losses.”  The SAB covers topics including (i) measuring current expected credit losses; (ii) development, governance, and documentation of a systematic methodology; (iii) documenting the results of a systematic methodology; and (iv) validating a systematic methodology.

 

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): “Changes to the Disclosure Requirements for Fair Value Measurement.”  ASU 2018-13 modifies the disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. Certain disclosure requirements in Topic 820 were also removed or modified. ASU 2018-13 was effective for the Company on January 1, 2020.  The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans.”  These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: The projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted.  The Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.”  The ASU is expected to reduce the cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects.  For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.  Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements.

 

In January 2020, the FASB issued ASU 2020-01, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.”  The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions.  ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.  Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting.  For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim

8


periods within those fiscal years.  Early adoption is permitted. The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements.

 

In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of the reference rate reform on the Company’s consolidated financial statements.

 

On June 28, 2018, the SEC adopted amendments to the definition of “smaller reporting company” that were effective on September 10, 2018.  Under the new definition, generally, a company qualifies as a “smaller reporting company” if (i) it has public float of less than $250 million or (ii) it has less than $100 million in annual revenues and (a) no public float or (b) public float of less than $700 million.  Because of the Company’s public float being less than $250 million as of the measurement date in 2019, the Company is considered a smaller reporting company with respect to its SEC filings. On March 12, 2020, the SEC finalized amendments to its definitions of “accelerated filer” and “large accelerated filer.”  The amendments increase the threshold criteria for meeting these filer classifications and are effective on April 27, 2020. Any changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date.  For the Company, this will be its annual report on Form 10-K with respect to the year ending December 31, 2020.  Pursuant to Section 404(b) of the Sarbanes-Oxley Act, the classifications of “accelerated filer” and “large accelerated filer” require a public company to obtain an external auditor attestation concerning the effectiveness of a company’s internal control over financial reporting (“ICFR”) and include the opinion on ICFR in its annual report on Form 10-K. The Company has complied with such requirements during the years it was considered an accelerated filer.  The SEC’s 2020 definition amendments exclude from the accelerated filer and large accelerated filer definitions an issuer that (i) is eligible to be a smaller reporting company and (ii) had annual revenues of less than $100 million in the most recent fiscal year.  Such entity can now be  considered a “non-accelerated filer.”  With respect to the 2020 fiscal year, the Company expects to continue to be a smaller reporting company and no longer be considered an accelerated filer. This would mean the Company would not be required to obtain the external auditor attestation of its ICFR.  If the Company’s annual revenues exceed $100 million, its category may change back to that of an accelerated filer.  Non-accelerated filers have additional time to file quarterly and annual financial statements. 

 

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 COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under 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 COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term 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 than 30 days past due on their contractual payments at the time a modification program is implemented. See Note 3 of the consolidated financial statements for additional disclosure of TDRs as of March 31, 2020.  The Company has not yet determined an estimate of the impact this interagency guidance will have on its consolidated financial statements.

9


 

Note 2.  Securities

The amortized cost and fair value of securities available for sale, with unrealized gains and losses follows:

 

 

 

March 31, 2020

 

(In thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

(Losses)

 

 

Fair Value

 

Obligations of U.S. Government corporations and agencies

 

$

63,144

 

 

$

2,583

 

 

$

(10

)

 

$

65,717

 

Obligations of states and political subdivisions

 

 

15,005

 

 

 

931

 

 

 

(1

)

 

 

15,935

 

 

 

$

78,149

 

 

$

3,514

 

 

$

(11

)

 

$

81,652

 

 

 

 

December 31, 2019

 

(In thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

(Losses)

 

 

Fair Value

 

Obligations of U.S. Government corporations and agencies

 

$

63,090

 

 

$

937

 

 

$

(86

)

 

$

63,941

 

Obligations of states and political subdivisions

 

 

15,054

 

 

 

802

 

 

 

(14

)

 

 

15,842

 

 

 

$

78,144

 

 

$

1,739

 

 

$

(100

)

 

$

79,783

 

 

The amortized cost and fair value of securities available for sale, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

 

 

 

March 31, 2020

 

(In thousands)

 

Amortized

Cost

 

 

Fair Value

 

Due in one year or less

 

$

1,003

 

 

$

1,004

 

Due after one year through five years

 

 

17,339

 

 

 

18,117

 

Due after five years through ten years

 

 

9,793

 

 

 

10,117

 

Due after ten years

 

 

50,014

 

 

 

52,414

 

 

 

$

78,149

 

 

$

81,652

 

 

During the three months ended March 31, 2020, there were no securities sold.  Proceeds from principal repayments were $2.1 million and securities purchased were $2.3 million. During the three months ended March 31, 2019,  $13.9 million of securities were sold.  Proceeds from principal repayments were $2.4 million and securities purchased were $13.1 million.  There were no impairment losses on securities during the three months ended March 31, 2020 and 2019.

 

The following table shows the Company’s securities with gross unrealized losses, by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2020 and December 31, 2019, respectively.

 

(In thousands)

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

March 31, 2020

 

Fair Value

 

 

Unrealized

(Losses)

 

 

Fair Value

 

 

Unrealized

(Losses)

 

 

Fair Value

 

 

Unrealized

(Losses)

 

Obligations of U.S. Government corporations and

agencies

 

$

2,743

 

 

$

(10

)

 

$

-

 

 

$

-

 

 

$

2,743

 

 

$

(10

)

Obligations of states and political subdivisions

 

 

310

 

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

310

 

 

 

(1

)

Total temporary impaired securities

 

$

3,053

 

 

$

(11

)

 

$

-

 

 

$

-

 

 

$

3,053

 

 

$

(11

)

10


 

(In thousands)

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2019

 

Fair Value

 

 

Unrealized

(Losses)

 

 

Fair Value

 

 

Unrealized

(Losses)

 

 

Fair Value

 

 

Unrealized

(Losses)

 

Obligations of U.S. Government corporations and

agencies

 

$

11,460

 

 

$

(42

)

 

$

5,651

 

 

$

(44

)

 

$

17,111

 

 

$

(86

)

Obligations of states and political subdivisions

 

 

2,049

 

 

 

(14

)

 

 

-

 

 

 

-

 

 

 

2,049

 

 

 

(14

)

Total temporary impaired securities

 

$

13,509

 

 

$

(56

)

 

$

5,651

 

 

$

(44

)

 

$

19,160

 

 

$

(100

)

 

At March 31, 2020, there were 3 securities that were in a loss position due to market conditions, primarily interest rates, and not due to credit concerns.  Because the Company intends to hold these investments to maturity and it is more likely than not that the Company will not be required to sell these investments before a recovery of unrealized losses, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2020 and no other-than-temporary impairment has been recognized.

 

The carrying value of securities pledged to secure deposits and for other purposes was $16.7 million and $16.6 million at March 31, 2020 and December 31, 2019, respectively.

Note 3.  Loans and Allowance for Loan Losses

 

The Company’s allowance for loan losses has three basic components: the specific allowance, the general allowance, and the unallocated component. The specific allowance is used to individually allocate an allowance for larger balance, non-homogeneous loans identified as impaired. The general allowance is used for estimating the loss on pools of smaller balance, homogeneous loans, including 1-4 family mortgage loans and other consumer loans. Also, the general allowance is used for the remaining pool of larger balance, non-homogeneous loans which, were not identified as impaired. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

 

11


The following tables present the total allowance for loan losses by portfolio segment for the periods presented.

 

 

 

March 31, 2020

 

(In thousands)

 

Commercial and Industrial

 

 

Commercial Real Estate

 

 

Construction and Land

 

 

Consumer

 

 

Student

 

 

Residential

Real Estate

 

 

Home Equity Lines of Credit

 

 

Unallocated

 

 

Total

 

Allowance for Loan Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance, December 31, 2019

 

$

296

 

 

$

1,788

 

 

$

652

 

 

$

154

 

 

$

65

 

 

$

1,596

 

 

$

326

 

 

$

350

 

 

$

5,227

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

 

 

(2

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3

)

Recoveries

 

 

7

 

 

 

2

 

 

 

-

 

 

 

11

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

20

 

Provision

 

 

118

 

 

 

103

 

 

 

78

 

 

 

7

 

 

 

18

 

 

 

18

 

 

 

8

 

 

 

-

 

 

 

350

 

Ending balance,

March 31, 2020

 

$

421

 

 

$

1,893

 

 

$

730

 

 

$

171

 

 

$

81

 

 

$

1,614

 

 

$

334

 

 

$

350

 

 

$

5,594

 

Ending balances individually evaluated for impairment

 

$

20

 

 

$

222

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

242

 

Ending balances collectively evaluated for impairment

 

$

401

 

 

$

1,671

 

 

$

730

 

 

$

171

 

 

$

81

 

 

$

1,614

 

 

$

334

 

 

$

350

 

 

$

5,352

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

204

 

 

$

2,824

 

 

$

214

 

 

$

-

 

 

$

-

 

 

$

377

 

 

$

-

 

 

 

 

 

 

$

3,619

 

Collectively evaluated for impairment

 

 

35,911

 

 

 

181,954

 

 

 

71,542

 

 

 

6,727