COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

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

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

March 31, 2020

December 31, 2019*
ASSETS

Cash and due from banks

$
15,406

$
16,976
Interest bearing bank deposits

14,960

11,708
Total cash and cash equivalents

30,366

28,684

Securities available for sale, at fair value

202,711

186,969
Securities held to maturity, at cost (fair value of $25,485 and $36,633, respectively)

24,649

35,733
Equity securities, restricted, at cost

8,458

8,855
Total securities

235,818

231,557

Loans held for sale

2,470

501

Loans

1,079,229

1,058,323
Purchased credit impaired (PCI) loans

30,275

32,528
Total loans

1,109,504

1,090,851
Allowance for loan losses (loans of $11,819 and $8,429, respectively; PCI loans of $156 and $156, respectively)

(11,975)

(8,585)
Net loans

1,097,529

1,082,266

Bank premises and equipment, net

29,065

29,472
Bank premises and equipment held for sale

1,589

1,589
Right-of-use lease assets

6,234

6,472
Other real estate owned

4,506

4,527
Bank owned life insurance

29,514

29,340
Other assets

16,449

16,432
Total assets

$
1,453,540

$
1,430,840

LIABILITIES




Deposits:




Noninterest bearing

$
188,327

$
178,584
Interest bearing

1,032,731

984,864
Total deposits

1,221,058

1,163,448

Federal funds purchased

—

24,437
Federal Home Loan Bank borrowings

58,333

68,500
Trust preferred capital notes

4,124

4,124
Lease liabilities

6,513

6,737
Other liabilities

8,044

8,115
Total liabilities

1,298,072

1,275,361

SHAREHOLDERS’ EQUITY




Common stock (200,000,000 shares authorized, $0.01 par value; 22,317,420 and 22,422,621 shares issued and outstanding, respectively)

223

224
Additional paid in capital

150,219

150,728
Retained earnings

2,856

2,562
Accumulated other comprehensive income

2,170

1,965
Total shareholders’ equity

155,468

155,479
Total liabilities and shareholders’ equity

$
1,453,540

$
1,430,840


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

*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 COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2020 AND 2019

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

Three months ended

March 31, 2020

March 31, 2019

Interest and dividend income





Interest and fees on loans

$
13,086

$
12,419

Interest and fees on PCI loans

1,097

1,293

Interest on deposits in other banks

69

96

Interest and dividends on securities

Taxable

1,351

1,522

Nontaxable

343

476

Total interest and dividend income

15,946

15,806

Interest expense





Interest on deposits

3,419

3,234

Interest on borrowed funds

289

447

Total interest expense

3,708

3,681

Net interest income

12,238

12,125

Provision for loan losses

3,300

—

Net interest income after provision for loan losses

8,938

12,125

Noninterest income





Service charges and fees

672

609

Loss on securities transactions, net

(39)

(14)

Gain on sale of other loans

11

—

Income on bank owned life insurance

174

181

Mortgage loan income

221

62

Other

296

176

Total noninterest income

1,335

1,014

Noninterest expense





Salaries and employee benefits

5,152

5,381

Occupancy expenses

827

930

Equipment expenses

372

381

FDIC assessment

125

150

Data processing fees

592

568

Other real estate expense, net

6

(8)

Other operating expenses

1,520

1,438

Total noninterest expense

8,594

8,840

Income before income taxes

1,679

4,299

Income tax expense

264

796

Net income

$
1,415

$
3,503

Net income per share — basic

$
0.06

$
0.16

Net income per share — diluted

$
0.06

$
0.16

Weighted average number of shares outstanding





Basic

22,400

22,141

Diluted

22,591

22,430


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

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

See accompanying notes to unaudited consolidated financial statements

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE INCOME~~CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2020 AND 2019

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

Three months ended


March 31, 2020

March 31, 2019

Net income

$
1,415

$
3,503

Other comprehensive income:

Unrealized gain  on investment securities:

Change in unrealized gain on investment securities

782

2,204

Tax related to unrealized gain on investment securities

(172)

(485)

Reclassification adjustment for loss on securities sold

39

14

Tax related to realized loss on securities sold

(9)

(3)

Cash flow hedge:

Change in unrealized loss on cash flow hedge

(557)

(94)

Tax related to cash flow hedge

122

20

Total other comprehensive income

205

1,656

Total comprehensive income

$
1,620

$
5,159


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


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

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

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

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

See accompanying notes to unaudited consolidated financial statements

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF ~~CHANGES IN SHAREHOLDERS’ EQUITY~~CASH FLOWS

FOR THE ~~THREE~~NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2020 AND 2019

(dollars ~~and shares~~ in thousands)

Accumulated

Additional

Retained

Other

Common Stock

Paid in

Earnings

Comprehensive


Shares

Amount

Capital

(Deficit)

Income (Loss)

Total

Balance January 1, 2019

22,132

$
221

$
148,763

$
(10,244)

$
(1,279)

$
137,461
Issuance of common stock

6

—

54

—

—

54
Exercise and issuance of employee stock options

31

1

298

—

—

299
Net income

—

—

—

3,503

—

3,503
Dividends paid on common stock

—

—

—

(665)

—

(665)
Other comprehensive income

—

—

—

—

1,656

1,656
Balance March 31, 2019

22,169

$
222

$
149,115

$
(7,406)

$
377

$
142,308

Balance January 1, 2020

22,423

$
224

$
150,728

$
2,562

$
1,965

$
155,479
Issuance of common stock

6

—

54

—

—

54
Exercise and issuance of employee stock options

4

—

242

—

—

242
Stock purchased under stock repurchase program

(116)

(1)

(805)

—

—

(806)
Net income

—

—

—

1,415

—

1,415
Dividends paid on common stock

—

—

—

(1,121)

—

(1,121)
Other comprehensive income

—

—

—

—

205

205
Balance March 31, 2020

22,317

$
223

$
150,219

$
2,856

$
2,170

$
155,468


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

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

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

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

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

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

See accompanying notes to unaudited consolidated financial statements

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

~~UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019~~

~~(dollars in thousands)~~

March 31, 2020

March 31, 2019

Operating activities:

Net income

$
1,415

$
3,503

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

Depreciation

483

545

Leased asset amortization

238

231

Stock-based compensation expense

285

266

Tax benefit of exercised stock options

(6)

(31)

Amortization of purchased loan premium

160

60

Provision for loan losses

3,300

—

Amortization of security premiums and accretion of discounts, net

233

281

Net loss on sale of securities

39

14

Net gain on sale and valuation of other real estate owned

(6)

(50)

Net gain on sale of loans

(11)

—

Originations of mortgages held for sale

(8,668)

(1,976)

Proceeds from sales of mortgages held for sale

6,699

1,726

Increase in bank owned life insurance investment

(174)

(181)

Changes in assets and liabilities:

Decrease (increase) in other assets

174

(366)

Decrease in accrued expenses and other liabilities

(846)

(58)

Net cash provided by operating activities

3,315

3,964

Investing activities:





Proceeds from sales/calls/maturities/paydowns of available for sale securities

9,893

19,264

Proceeds from calls/maturities/paydowns of held to maturity securities

11,065

626

Proceeds from sales of restricted equity securities

1,700

—

Purchase of available for sale securities

(25,069)

(10,682)

Purchase of restricted equity securities

(1,302)

(626)

Proceeds from sale of other real estate owned

27

316

Net increase in loans

(19,527)

(4,351)

Principal recoveries of loans previously charged off

184

77

Purchase of premises and equipment, net

(76)

(199)

Purchase small business investment company fund investment

(250)

(262)

Proceeds from sale of loans

632

705

Net cash (used in) provided by investing activities

(22,723)

4,868

Financing activities:





Net increase in deposits

57,610

3,148

Net decrease in federal funds purchased

(24,437)

(19,440)

Net (decrease) increase in short-term Federal Home Loan Bank borrowings

(10,000)

10,000

Proceeds from long-term Federal Home Loan Bank borrowings

40,000

—

Payments on long-term Federal Home Loan Bank borrowings

(40,167)

(375)

Proceeds from issuance of common stock

11

87

Cash dividends paid

(1,121)

(665)

Repurchase of common stock

(806)

—

Net cash provided by (used in) financing activities

21,090

(7,245)

Net increase in cash and cash equivalents

1,682

1,587

Cash and cash equivalents:





Beginning of the period

28,684

34,219

End of the period

$
30,366

$
35,806

Supplemental disclosures of cash flow information:





Interest paid

$
3,689

$
3,512

Income taxes paid

—

439

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 2424 full-service offices, 18 of which are in Virginia and ~~six~~6 of which are in Maryland. The Bank also operates ~~two~~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~~10-K for the year ended December 31, 2019. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles (GAAP) and to the general practices within the banking industry. The interim financial statements have not been audited; however, in the opinion of management, all adjustments, consisting of normal accruals, were made that are necessary to present fairly the balance sheet of the Company as of ~~March 31,~~September 30, 2020, the statements of income and comprehensive income and changes in shareholders’ equity for the three and nine months ended September 30, 2020, and the statements of cash flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2020. Results for the ~~three~~nine month period ended ~~March 31~~September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

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

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

Recent Accounting Developments

In ~~March~~October 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) issued Accounting Standards Codification (ASC) 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs. This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is not permitted. All entities should apply ASU 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements.

Table of Contents

Note 3. Loans and Related Allowance for Loan Losses

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


	March 31, 2020				December 31, 2019
	Amount		% of Loans		Amount		% of Loans

									September 30, 2020				December 31, 2019
									Amount		% of Loans		Amount		% of Loans
Mortgage loans on real estate:
Residential 1‑4 family	$	219,735	20.36	%	$	223,538	21.12	%	$	204,366	17.35	%	$	223,538	21.12	%
Commercial		410,438	38.03			396,858	37.50			452,677	38.44			396,858	37.50
Construction and land development		149,833	13.88			146,566	13.85			159,766	13.57			146,566	13.85
Second mortgages		5,954	0.55			6,639	0.63			6,488	0.55			6,639	0.63
Multifamily		76,206	7.06			72,978	6.90			77,787	6.60			72,978	6.90
Agriculture		7,038	0.65			8,346	0.79			7,138	0.61			8,346	0.79
Total real estate loans		869,204	80.53			854,925	80.79			908,222	77.12			854,925	80.79
Commercial loans		198,544	18.40			191,183	18.06			257,362	21.85			191,183	18.06
Consumer installment loans		10,446	0.97			11,163	1.05			10,606	0.90			11,163	1.05
All other loans		1,035	0.10			1,052	0.10			1,519	0.13			1,052	0.10
Total loans	$	1,079,229	100.00	%	$	1,058,323	100.00	%	$	1,177,709	100.00	%	$	1,058,323	100.00	%

The Company held ~~$12.~~1$11.9 million and ~~$12.~~7$12.7 million in balances of loans guaranteed by the United States Department of Agriculture (USDA), which are included in various categories in the table above, at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively. As these loans are 100% guaranteed by the USDA, no0 loan loss allowance is required. These loan balances included a purchase premium of ~~$974,000~~$906,000 and ~~$1.~~0$1.0 million at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively. The purchase premium is amortized as an adjustment of the related loan yield on a straight line basis, which is substantially equivalent to the results obtained using the effective interest method. Any unamortized purchase premium remaining on loans prepaid by the borrower is written off.

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

At ~~March 31,~~September 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 uncertainties that could affect management’s estimate of probable losses. Management identified loans subject to impairment in accordance with FASB ASC 310.

1112

Table of Contents

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


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

Three months ended

March 31, 2020

March 31, 2020




Unpaid




Recorded

Principal

Related

Average

Interest

Investment (1)

Balance (2)

Allowance

Investment

Recognized
With no related allowance recorded:

Mortgage loans on real estate:

Residential 1‑4 family

$
1,160

$
1,485

$
—

$
1,322

$
10
Commercial

3,132

3,835

—

3,179

34
Construction and land development

328

328

—

328

—
Multifamily

—

—

—

1,231

—
Total real estate loans

4,620

5,648

—

6,060

44
Subtotal impaired loans with no valuation allowance

4,620

5,648

—

6,060

44
With an allowance recorded:










Mortgage loans on real estate:










Residential 1‑4 family

1,883

2,286

490

1,690

11
Commercial

97

559

24

238

2
Construction and land development

1,450

1,551

136

749

—
Total real estate loans

3,430

4,396

650

2,677

13
Commercial loans

1,629

1,629

909

1,042

4
Consumer installment loans

10

10

3

9

—
Subtotal impaired loans with a valuation allowance

5,069

6,035

1,562

3,728

17
Total:










Mortgage loans on real estate:










Residential 1‑4 family

3,043

3,771

490

3,012

21
Commercial

3,229

4,394

24

3,417

36
Construction and land development

1,778

1,879

136

1,077

—
Multifamily

—

—

—

1,231

—
Total real estate loans

8,050

10,044

650

8,737

57
Commercial loans

1,629

1,629

909

1,042

4
Consumer installment loans

10

10

3

9

—
Total impaired loans

$
9,689

$
11,683

$
1,562

$
9,788

$
61

(1)

⁽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)

⁽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.

1213

Table of Contents

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


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

Three months ended

December 31, 2019

March 31, 2019




Unpaid




Recorded

Principal

Related

Average

Interest

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

$
—

$
1,555

$
11
Commercial

3,226

3,966

—

3,435

35
Construction and land development

328

328

—

—

—
Multifamily

2,463

2,463

—

2,555

—
Total real estate loans

7,500

8,607

—

7,545

46
Subtotal impaired loans with no valuation allowance

7,500

8,607

—

7,545

46
With an allowance recorded:










Mortgage loans on real estate:










Residential 1‑4 family

1,498

1,808

380

2,067

20
Commercial

378

876

87

1,143

4
Construction and land development

48

147

11

4,336

—
Total real estate loans

1,924

2,831

478

7,546

24
Commercial loans

454

460

105

2,157

9
Consumer installment loans

7

7

1

3

—
Subtotal impaired loans with a valuation allowance

2,385

3,298

584

9,706

33
Total:










Mortgage loans on real estate:










Residential 1‑4 family

2,981

3,658

380

3,622

31
Commercial

3,604

4,842

87

4,578

39
Construction and land development

376

475

11

4,336

—
Multifamily

2,463

2,463

—

2,555

—
Total real estate loans

9,424

11,438

478

15,091

70
Commercial loans

454

460

105

2,157

9
Consumer installment loans

7

7

1

3

—
Total impaired loans

$
9,885

$
11,905

$
584

$
17,251

$
79

(1)

⁽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)

⁽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 ~~March 31,~~September 30, 2020 and December 31, 2019, is set forth in the table below (dollars in thousands):


	March 31, 2020		December 31, 2019
Nonaccrual loans	$	5,172	$	5,292

					September 30, 2020		December 31, 2019
Nonaccruals					$	4,214	$	5,292
Trouble debt restructure and still accruing		4,517		4,593		4,753		4,593
Total impaired	$	9,689	$	9,885	$	8,967	$	9,885

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was an insignificant amount of cash basis income recognized during the three and nine months ended ~~March 31,~~September 30, 2020 and 2019. For the three months ended ~~March 31,~~September 30, 2020 and 2019, estimated interest income of ~~$97,000~~$61,000 and ~~$223,000,~~$92,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

For the nine months ended September 30, 2020 and 2019, estimated interest income of $152,000 and $284,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

1314

Table of Contents

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


	March 31, 2020
	30‑89 Days		90+ Days Past				Total Past				Total Loans
	Past Due		Due and Accruing		Nonaccrual		Due		Current		Receivable

													September 30, 2020
													30‑89 Days		90+ Days Past				Total Past				Total Loans
													Past Due		Due and Accruing		Nonaccrual		Due		Current		Receivable
Mortgage loans on real estate:
Residential 1‑4 family	$	1,268	$	—	$	1,456	$	2,724	$	217,011	$	219,735	$	1,279	$	—	$	1,338	$	2,617	$	201,749	$	204,366
Commercial		1,689		—		657		2,346		408,092		410,438		—		—		764		764		451,913		452,677
Construction and land development		—		—		1,778		1,778		148,055		149,833		—		—		572		572		159,194		159,766
Second mortgages		459		—		—		459		5,495		5,954		227		—		—		227		6,261		6,488
Multifamily		—		—		—		—		76,206		76,206		—		—		—		—		77,787		77,787
Agriculture		—		—		—		—		7,038		7,038		—		—		51		51		7,087		7,138
Total real estate loans		3,416		—		3,891		7,307		861,897		869,204		1,506		—		2,725		4,231		903,991		908,222
Commercial loans		731		—		1,270		2,001		196,543		198,544		635		—		1,470		2,105		255,257		257,362
Consumer installment loans		27		—		11		38		10,408		10,446		20		—		19		39		10,567		10,606
All other loans		—		—		—		—		1,035		1,035		—		—		—		—		1,519		1,519
Total loans	$	4,174	$	—	$	5,172	$	9,346	$	1,069,883	$	1,079,229	$	2,161	$	—	$	4,214	$	6,375	$	1,171,334	$	1,177,709


	December 31, 2019
	30‑89 Days		90+ Days Past				Total Past				Total Loans
	Past Due		Due and Accruing		Nonaccrual		Due		Current		Receivable

													December 31, 2019
													30‑89 Days		90+ Days Past				Total Past				Total Loans
													Past Due		Due and Accruing		Nonaccrual		Due		Current		Receivable
Mortgage loans on real estate:
Residential 1‑4 family	$	1,308	$	—	$	1,378	$	2,686	$	220,852	$	223,538	$	1,308	$	—	$	1,378	$	2,686	$	220,852	$	223,538
Commercial		552		—		1,006		1,558		395,300		396,858		552		—		1,006		1,558		395,300		396,858
Construction and land development		166		—		376		542		146,024		146,566		166		—		376		542		146,024		146,566
Second mortgages		229		—		—		229		6,410		6,639		229		—		—		229		6,410		6,639
Multifamily		—		—		2,463		2,463		70,515		72,978		—		—		2,463		2,463		70,515		72,978
Agriculture		—		—		—		—		8,346		8,346		—		—		—		—		8,346		8,346
Total real estate loans		2,255		—		5,223		7,478		847,447		854,925		2,255		—		5,223		7,478		847,447		854,925
Commercial loans		1,085		946		62		2,093		189,090		191,183		1,085		946		62		2,093		189,090		191,183
Consumer installment loans		41		—		7		48		11,115		11,163		41		—		7		48		11,115		11,163
All other loans		—		—		—		—		1,052		1,052		—		—		—		—		1,052		1,052
Total loans	$	3,381	$	946	$	5,292	$	9,619	$	1,048,704	$	1,058,323	$	3,381	$	946	$	5,292	$	9,619	$	1,048,704	$	1,058,323

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


	Three Months Ended March 31, 2020
			Provision
	December 31, 2019		Allocation		Charge-offs		Recoveries		March 31, 2020

											Three Months Ended September 30, 2020
													Provision
											June 30, 2020		Allocation		Charge-offs		Recoveries		September 30, 2020
Mortgage loans on real estate:
Residential 1‑4 family	$	2,685	$	234	$	—	$	16	$	2,935	$	3,495	$	(954)	$	—	$	14	$	2,555
Commercial		2,196		2,000		—		44		4,240		4,612		(1,606)		—		5		3,011
Construction and land development		1,044		227		—		83		1,354		1,342		(254)		—		75		1,163
Second mortgages		79		(10)		—		1		70		45		(9)		—		2		38
Multifamily		248		19		—		—		267		499		28		—		—		527
Agriculture		38		7		—		—		45		44		7		—		—		51
Total real estate loans		6,290		2,477		—		144		8,911		10,037		(2,788)		—		96		7,345
Commercial loans		1,980		582		(19)		3		2,546		2,058		(288)		—		19		1,789
Consumer installment loans		114		35		(75)		37		111		110		31		(42)		17		116
All other loans		7		1		—		—		8		8		2		—		—		10
Unallocated		38		205		—		—		243		25		3,043		—		—		3,068
Total loans	$	8,429	$	3,300	$	(94)	$	184	$	11,819	$	12,238	$	—	$	(42)	$	132	$	12,328

1415

Table of Contents


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


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


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

Three Months Ended March 31, 2019

Provision


December 31, 2018

Allocation

Charge-offs

Recoveries

March 31, 2019
Mortgage loans on real estate:











Residential 1‑4 family

$
2,281

$
855

$
—

$
203

$
3,339
Commercial

1,810

(32)

(277)

7

1,508
Construction and land development

1,161

43

(12)

18

1,210
Second mortgages

20

40

—

2

62
Multifamily

371

(10)

—

—

361
Agriculture

17

6

—

—

23
Total real estate loans

5,660

902

(289)

230

6,503
Commercial loans

1,894

291

(229)

2

1,958
Consumer installment loans

152

72

(60)

24

188
All other loans

12

(6)

—

—

6
Unallocated

1,265

(1,259)

—

—

6
Total loans

$
8,983

$
—

$
(578)

$
256

$
8,661

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

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


		March 31, 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

														September 30, 2020
														Allowance for Loan Losses						Recorded Investment in Loans
														Individually		Collectively				Individually		Collectively
														Evaluated for		Evaluated for				Evaluated for		Evaluated for
														Impairment		Impairment		Total		Impairment		Impairment		Total
Mortgage loans on real estate:
Residential 1‑4 family		$	490	$	2,445	$	2,935	$	3,043	$	216,692	$	219,735	$	615	$	1,940	$	2,555	$	2,821	$	201,545	$	204,366
Commercial			24		4,216		4,240		3,229		407,209		410,438		59		2,952		3,011		3,718		448,959		452,677
Construction and land development			136		1,218		1,354		1,778		148,055		149,833		153		1,010		1,163		572		159,194		159,766
Second mortgages			—		70		70		—		5,954		5,954		—		38		38		—		6,488		6,488
Multifamily	��		—		267		267		—		76,206		76,206		—		527		527		—		77,787		77,787
Agriculture			—		45		45		—		7,038		7,038		14		37		51		51		7,087		7,138
Total real estate loans			650		8,261		8,911		8,050		861,154		869,204		841		6,504		7,345		7,162		901,060		908,222
Commercial loans			909		1,637		2,546		1,629		196,915		198,544		334		1,455		1,789		1,786		255,576		257,362
Consumer installment loans			3		108		111		10		10,436		10,446		5		111		116		19		10,587		10,606
All other loans			—		8		8		—		1,035		1,035		—		10		10		—		1,519		1,519
Unallocated			—		243		243		—		—		—		—		3,068		3,068		—		—		—
Total loans		$	1,562	$	10,257	$	11,819	$	9,689	$	1,069,540	$	1,079,229	$	1,180	$	11,148	$	12,328	$	8,967	$	1,168,742	$	1,177,709


	December 31, 2019
	Allowance for Loan Losses						Recorded Investment in Loans
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Impairment		Impairment		Total		Impairment		Impairment		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	380	$	2,305	$	2,685	$	2,981	$	220,557	$	223,538
Commercial		87		2,109		2,196		3,604		393,254		396,858
Construction and land development		11		1,033		1,044		376		146,190		146,566
Second mortgages		—		79		79		—		6,639		6,639
Multifamily		—		248		248		2,463		70,515		72,978
Agriculture		—		38		38		—		8,346		8,346
Total real estate loans		478		5,812		6,290		9,424		845,501		854,925
Commercial loans		105		1,875		1,980		454		190,729		191,183
Consumer installment loans		1		113		114		7		11,156		11,163
All other loans		—		7		7		—		1,052		1,052
Unallocated		—		38		38		—		—		—
Total loans	$	584	$	7,845	$	8,429	$	9,885	$	1,048,438	$	1,058,323

~~Table of Contents~~

December 31, 2019

Allowance for Loan Losses

Recorded Investment in Loans


Individually

Collectively



Individually

Collectively


Evaluated for

Evaluated for

Evaluated for

Evaluated for

Impairment

Impairment

Total

Impairment

Impairment

Total
Mortgage loans on real estate:












Residential 1‑4 family

$
380

$
2,305

$
2,685

$
2,981

$
220,557

$
223,538
Commercial

87

2,109

2,196

3,604

393,254

396,858
Construction and land development

11

1,033

1,044

376

146,190

146,566
Second mortgages

—

79

79

—

6,639

6,639
Multifamily

—

248

248

2,463

70,515

72,978
Agriculture

—

38

38

—

8,346

8,346
Total real estate loans

478

5,812

6,290

9,424

845,501

854,925
Commercial loans

105

1,875

1,980

454

190,729

191,183
Consumer installment loans

1

113

114

7

11,156

11,163
All other loans

—

7

7

—

1,052

1,052
Unallocated

—

38

38

—

—

—
Total loans

$
584

$
7,845

$
8,429

$
9,885

$
1,048,438

$
1,058,323

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

Pass - A pass loan is not adversely classified, as it does not display any of the characteristics for adverse classification. This category includes purchased loans that are 100% guaranteed by U.S. Government agencies of ~~$12.~~1$11.9 million and ~~$12.~~7$12.7 million at ~~March 31,~~September 30, 2020 and December 31, 2019, ~~respectively.~~respectively, and PPP loans 100% guaranteed by the SBA of $85.1 million at September 30, 2020.

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

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


	March 31, 2020
			Special
	Pass		Mention		Substandard		Doubtful		Total

											September 30, 2020
													Special
											Pass		Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	210,368	$	8,135	$	1,232	$	—	$	219,735	$	189,923	$	13,104	$	1,339	$	—	$	204,366
Commercial		357,877		50,505		2,056		—		410,438		357,037		93,500		2,140		—		452,677
Construction and land development		143,507		4,548		1,778		—		149,833		158,447		747		572		—		159,766
Second mortgages		5,257		697		—		—		5,954		5,286		1,202		—		—		6,488
Multifamily		76,206		—		—		—		76,206		70,964		6,823		—		—		77,787
Agriculture		6,938		100		—		—		7,038		6,713		374		51		—		7,138
Total real estate loans		800,153		63,985		5,066		—		869,204		788,370		115,750		4,102		—		908,222
Commercial loans		157,026		37,372		4,146		—		198,544		222,378		27,653		7,331		—		257,362
Consumer installment loans		10,414		22		10		—		10,446		10,537		50		19		—		10,606
All other loans		1,018		17		—		—		1,035		1,503		16		—		—		1,519
Total loans	$	968,611	$	101,396	$	9,222	$	—	$	1,079,229	$	1,022,788	$	143,469	$	11,452	$	—	$	1,177,709


	December 31, 2019
			Special
	Pass		Mention		Substandard		Doubtful		Total

											December 31, 2019
													Special
											Pass		Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	219,210	$	2,964	$	1,364	$	—	$	223,538	$	219,210	$	2,964	$	1,364	$	—	$	223,538
Commercial		391,251		3,188		2,419		—		396,858		391,251		3,188		2,419		—		396,858
Construction and land development		145,782		408		376		—		146,566		145,782		408		376		—		146,566
Second mortgages		6,096		543		—		—		6,639		6,096		543		—		—		6,639
Multifamily		70,515		—		2,463		—		72,978		70,515		—		2,463		—		72,978
Agriculture		8,098		248		—		—		8,346		8,098		248		—		—		8,346
Total real estate loans		840,952		7,351		6,622		—		854,925		840,952		7,351		6,622		—		854,925
Commercial loans		185,123		2,770		3,290		—		191,183		185,123		2,770		3,290		—		191,183
Consumer installment loans		11,140		16		7		—		11,163		11,140		16		7		—		11,163
All other loans		1,052		—		—		—		1,052		1,052		—		—		—		1,052
Total loans	$	1,038,267	$	10,137	$	9,919	$	—	$	1,058,323	$	1,038,267	$	10,137	$	9,919	$	—	$	1,058,323

In accordance with FASB Accounting Standards Update (ASU) ~~2011‑02,~~ 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 1819 and 2525 loans that met the definition of a TDR at ~~March 31,~~September 30, 2020 and 2019, respectively.

The Company had no0 loan modifications considered to be TDRs during the three months ended ~~March 31,~~September 30, 2020. During the nine months ended September 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 nine months ended September 30, 2019.

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A loan is considered to be in default if it is 90 days or more past due. There were no0 TDRs that had been restructured during the previous 12 months that resulted in default during the three and nine months ended September 30, 2020. There were 0 TDRs that had been restructured during the previous 12 months that resulted in default during the three months ended ~~March 31, 2020.~~September 30, 2019. During the ~~three~~nine months ended ~~March 31,~~September 30, 2019, ~~one~~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,~~ 310-10-35, Receivables, Subsequent Measurement.

At ~~March 31,~~September 30, 2020, the Company had ~~1‑4~~1-4 family mortgages in the amount of ~~$102.~~0$92.4 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of ~~$86.~~2$76.7 million.

~~Table of Contents~~

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,~~ 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.~~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~~1-4 family, were analogized to meet the criteria of FASB ASC ~~310‑30.~~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 ~~March 31,~~September 30, 2020 and December 31, 2019, the outstanding contractual balance of the PCI loans was ~~$50.~~6$46.6 million and $53.2 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in

thousands):

March 31, 2020

December 31, 2019




% of PCI



% of PCI

Amount

Loans

Amount

Loans

Mortgage loans on real estate:

Residential 1‑4 family

$
27,283

90.12
%
$
29,465

90.58
%
Commercial

474

1.57

490

1.51

Construction and land development

1,136

3.75

1,172

3.60

Second mortgages

1,157

3.82

1,169

3.59

Multifamily

225

0.74

232

0.72

Total real estate loans

30,275

100.00

32,528

100.00

Total PCI loans

$
30,275

100.00
%
$
32,528

100.00
%


	September 30, 2020				December 31, 2019
			% of PCI				% of PCI
	Amount		Loans		Amount		Loans
Mortgage loans on real estate:
Residential 1‑4 family	$	24,664	90.86	%	$	29,465	90.58	%
Commercial		457	1.68			490	1.51
Construction and land development		846	3.12			1,172	3.60
Second mortgages		963	3.55			1,169	3.59
Multifamily		216	0.79			232	0.72
Total real estate loans		27,146	100.00			32,528	100.00
Total PCI loans	$	27,146	100.00	%	$	32,528	100.00	%

There was no0 activity in the allowance for loan losses on PCI loans for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019.

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


	March 31, 2020				December 31, 2019
	Allowance		Recorded				Recorded
	for loan		investment in		Allowance for		investment in
	losses		loans		loan losses		loans

									September 30, 2020				December 31, 2019
									Allowance		Recorded				Recorded
									for loan		investment in		Allowance for		investment in
									losses		loans		loan losses		loans
Mortgage loans on real estate:
Residential 1‑4 family	$	156	$	27,283	$	156	$	29,465	$	156	$	24,664	$	156	$	29,465
Commercial		—		474		—		490		—		457		—		490
Construction and land development		—		1,136		—		1,172		—		846		—		1,172
Second mortgages		—		1,157		—		1,169		—		963		—		1,169
Multifamily		—		225		—		232		—		216		—		232
Total real estate loans		156		30,275		156		32,528		156		27,146		156		32,528
Total PCI loans	$	156	$	30,275	$	156	$	32,528	$	156	$	27,146	$	156	$	32,528

~~Table of Contents~~

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





Balance, January 1, 2019	$	38,107	$	38,107
Accretion		(6,010)		(6,010)
Reclassification from nonaccretable difference		1,369		1,369
Balance, December 31, 2019	$	33,466	$	33,466
Accretion		(1,091)		(3,110)
Reclassification to nonaccretable difference		(509)		(101)
Balance, March 31, 2020	$	31,866
Balance, September 30, 2020			$	30,255

The PCI loans were not classified as nonperforming assets as of ~~March 31,~~September 30, 2020, as the loans are accounted for on a pooled basis, and interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all PCI loans.

Note 5. Other Real Estate Owned

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


	March 31, 2020		December 31, 2019

					September 30, 2020		December 31, 2019
Residential 1‑4 family	$	21	$	21	$	21	$	21
Construction and land development		4,485		4,506		4,395		4,506
Total other real estate owned	$	4,506	$	4,527	$	4,416	$	4,527

At ~~March 31,~~September 30, 2020, the Company had $~~434,000~~$429,000 in residential ~~1‑4~~1-4 family loans and 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 ~~March 31,~~September 30, 2020 and December 31, 2019 (dollars in thousands):


	March 31, 2020		December 31, 2019


					September 30, 2020		December 31, 2019
Interest bearing checking	$	166,163	$	—	$	201,121	$	—
NOW		—		170,532		—		170,532
MMDA		123,455		120,841		158,569		120,841
Savings		99,394		96,570		118,007		96,570
Time deposits less than or equal to $250,000		506,739		477,461		468,549		477,461
Time deposits over $250,000		136,980		119,460		141,417		119,460
Total interest bearing deposits	$	1,032,731	$	984,864	$	1,087,663	$	984,864

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.

~~Table of Contents~~

Note 7. Accumulated Other Comprehensive Income

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


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


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

Beginning balance	$	2,887	$	(886)	$	(36)	$	1,965	$	5,688	$	(886)	$	(572)	$	4,230
Other comprehensive income (loss) before reclassifications		610		—		(435)		175		1,353		—		37		1,390
Amounts reclassified from AOCI		30		—		—		30		(61)		—		—		(61)
Net current period other comprehensive income (loss)		640		—		(435)		205		1,292		—		37		1,329
Ending balance	$	3,527	$	(886)	$	(471)	$	2,170	$	6,980	$	(886)	$	(535)	$	5,559


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


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

Beginning balance	$	(618)	$	(857)	$	196	$	(1,279)	$	2,798	$	(857)	$	9	$	1,950
Other comprehensive income (loss) before reclassifications		1,719		—		(74)		1,645		948		—		(122)		826
Amounts reclassified from AOCI		11		—		—		11		(39)		—		—		(39)
Net current period other comprehensive income (loss)		1,730		—		(74)		1,656		909		—		(122)		787
Ending balance	$	1,112	$	(857)	$	122	$	377	$	3,707	$	(857)	$	(113)	$	2,737

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

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


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

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

The following tables present the effects of reclassifications out of AOCI on line items of consolidated income for the three and nine months ended ~~March 31,~~September 30, 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


March 31, 2020

March 31, 2019


Securities available for sale:






Unrealized loss on securities available for sale

$
39

$
14

Loss on securities transactions, net
Related tax benefit

(9)

(3)

Income tax expense

$
30

$
11

Net of tax


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


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

Note 8. Fair Values of Assets and Liabilities

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

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

●

Level 2—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

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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—3—Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the ~~Company’s~~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 ~~March 31,~~September 30, 2020.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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


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

March 31, 2020


Total

Level 1

Level 2

Level 3
Investment securities available for sale








U.S. Treasury securities

$
7,500

$
—

$
7,500

$
—
U.S. Government agencies

20,804

1,047

19,757

—
State, county and municipal

102,189

3,573

98,616

—
Mortgage backed securities

46,997

—

46,997

—
Asset backed securities

12,926

2,010

10,916

—
Corporate bonds

12,295

6,365

5,930

—
Total investment securities available for sale

202,711

12,995

189,716

—
Total assets at fair value

$
202,711

$
12,995

$
189,716

$
—
Cash flow hedge liability

$
601

—

$
601

—
Total liabilities at fair value

$
601

$
—

$
601

$
—

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December 31, 2019


Total

Level 1

Level 2

Level 3
Investment securities available for sale

U.S. Government agencies

$
21,936

$
—

$
21,936

$
—
State, county and municipal

98,592

10,072

88,520

—
Mortgage backed securities

48,740

1,181

47,559

—
Asset backed securities

11,604

—

11,604

—
Corporate bonds

6,097

—

6,097

—
Total investment securities available for sale

186,969

11,253

175,716

—
Total assets at fair value

$
186,969

$
11,253

$
175,716

$
—
Cash flow hedge liability

44

—

$
44

—
Total liabilities at fair value

$
44

$
—

$
44

$
—


	December 31, 2019
	Total		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. Government agencies	$	21,936	$	—	$	21,936	$	—
State, county and municipal		98,592		10,072		88,520		—
Mortgage backed securities		48,740		1,181		47,559		—
Asset backed securities		11,604		—		11,604		—
Corporate bonds		6,097		—		6,097		—
Total investment securities available for sale		186,969		11,253		175,716		—
Total assets at fair value	$	186,969	$	11,253	$	175,716	$	—
Cash flow hedge liability		44		—	$	44		—
Total liabilities at fair value	$	44	$	—	$	44	$	—

Investment securities available for sale

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

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


	September 30, 2020
	Total		Level 1		Level 2		Level 3
Impaired loans	$	3,241	$	—	$	—	$	3,241
Loans held for sale		1,151		—		1,151		—
Bank premises and equipment held for sale		1,589		—		—		1,589
Other real estate owned		4,416		—		—		4,416
Total assets at fair value	$	10,397	$	—	$	1,151	$	9,246
Total liabilities at fair value	$	—	$	—	$	—	$	—

March 31, 2020


Total

Level 1

Level 2

Level 3
Impaired loans

$
4,341

$
—

$
—

$
4,341
Loans held for sale

2,470

—

2,470

—
Bank premises and equipment held for sale

1,589

—

—

1,589
Other real estate owned

4,506

—

—

4,506
Total assets at fair value

$
12,906

$
—

$
2,470

$
10,436
Total liabilities at fair value

$
—

$
—

$
—

$
—

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December 31, 2019


Total

Level 1

Level 2

Level 3
Impaired loans

$
3,020

$
—

$
—

$
3,020
Loans held for sale

501

—

501

—
Bank premises and equipment held for sale

1,589

—

—

1,589
Other real estate owned

4,527

—

—

4,527
Total assets at fair value

$
9,637

$
—

$
501

$
9,136
Total liabilities at fair value

$
—

$
—

$
—

$
—


	December 31, 2019
	Total		Level 1		Level 2		Level 3
Impaired loans	$	3,020	$	—	$	—	$	3,020
Loans held for sale		501		—		501		—
Bank premises and equipment held for sale		1,589		—		—		1,589
Other real estate owned		4,527		—		—		4,527
Total assets at fair value	$	9,637	$	—	$	501	$	9,136
Total liabilities at fair value	$	—	$	—	$	—	$	—

Impaired loans

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, Receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. At ~~March 31,~~September 30, 2020 and December 31, 2019, a majority of total impaired loans were evaluated based on the fair value of the collateral. The Company frequently obtains appraisals prepared by external professional appraisers for classified loans greater than $250,000 when the most recent appraisal is greater than 18 months old and 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 the period ended ~~March 31,~~September 30, 2020 and December 31, 2019, weighted average adjustments, calculated based on relative fair value, related to impaired loans were ~~27.5%~~16.4% and 12.8%, respectively.

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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. 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

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

The following reflects the fair value of financial instruments, whether or not 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):

March 31, 2020




Estimated Fair






Carrying Value

Value

Level 1

Level 2

Level 3
Financial assets:

Securities held to maturity

$
24,649

$
25,485

$
—

$
25,485

$
            —
Loans, net of allowance

1,067,410

1,076,569

—

—

1,076,569
PCI loans, net of allowance

30,119

38,091

—

—

38,091

Financial liabilities:






Interest bearing deposits

1,032,731

1,036,360

—

1,036,360

—
Borrowings

62,457

62,644

—

62,644

—


	September 30, 2020
			Estimated Fair
	Carrying Value		Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	23,026	$	24,118	$	—	$	24,118	$	—
Loans, net of allowance		1,165,381		1,174,649		—		—		1,174,649
PCI loans, net of allowance		26,990		35,188		—		—		35,188

Financial liabilities:
Interest bearing deposits		1,087,663		1,091,539		—		1,091,539		—
Borrowings		72,124		73,137		—		73,137		—


	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		—

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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

—

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 stock instruments. The following table presents basic and diluted EPS for the three and nine months ended ~~March 31,~~September 30, 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 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

For the three months ended March 31, 2019






Basic EPS

$
3,503

22,141

$
0.16
Effect of dilutive stock awards

—

289

—
Diluted EPS

$
3,503

22,430

$
0.16


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

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

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

For the nine months ended September 30, 2019
Basic EPS	$	11,660	22,224	$	0.52
Effect of dilutive stock awards		—	251		—
Diluted EPS	$	11,660	22,475	$	0.52

Antidilutive shares issuable under awards or options of ~~568,000~~1.4 million and ~~585,000~~253,000 were excluded from the computation of diluted earnings per share for the three and nine months ended ~~March 31,~~September 30, 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 nine months ended ~~March 31,~~September 30, 2020 and 2019 (dollars in thousands):


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

Three months ended


March 31, 2020

March 31, 2019
Interest cost

$
33

$
40
Expected return on plan assets

(54)

(53)
Amortization of prior service cost

1

1
Recognized net loss due to settlement

—

13
Recognized net actuarial  loss

12

12
Net periodic (income) cost

$
(8)

$
13

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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 total notional amounts of $20 million and $10 million at ~~each of March 31,~~September 30, 2020 and December 31, ~~2019.~~2019, respectively. 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 ~~$530,000~~$770,000 and $180,000 of cash pledged as collateral at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively.

Amounts receivable or payable are recognized as accrued under the terms of the agreements. In accordance with FASB ASC 815, Derivatives and Hedging, the Company has designated the 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 nine month periods ended ~~March 31,~~September 30, 2020 and 2019. The Company recorded a fair value liability of ~~$601,000~~$683,000 and $44,000 in other liabilities at ~~March 31,~~September 30, 2020 and December 31, 2019, 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,~~ 2014-09, Revenue from Contracts with Customers (Topic 606), and all subsequent ASUs that modified Topic 606. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of this guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and brokerage fees and commissions. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service charges on deposit accounts

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

Interchange and ATM fees

The Company earns interchange and ATM fees from debit/credit cardholder transactions conducted through the Visa and ATM payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying

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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.

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

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


	Three months ended
	March 31, 2020		March 31, 2019

					Three months ended				Nine months ended
					September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Noninterest income
In-scope of Topic 606:
Service charges on deposit accounts	$	454	$	410	$	315	$	486	$	1,042	$	1,341
Interchange and ATM fees		218		199		298		271		775		732
Brokerage fees and commissions		72		96		53		67		256		262
Noninterest income (in-scope of Topic 606)		744		705		666		824		2,073		2,335
Noninterest income (out-of-scope of Topic 606)		591		309		806		687		2,350		1,641
Total noninterest income	$	1,335	$	1,014	$	1,472	$	1,511	$	4,423	$	3,976

Note 13. Leases

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

The following table presents operating lease liabilities as of ~~March 31,~~September 30, 2020 and December 31, 2019 (dollars in thousands):


	March 31, 2020		December 31, 2019


					September 30, 2020		December 31, 2019

Gross lease liability	$	8,968	$	9,278	$	8,354	$	9,278
Less: imputed interest		(2,455)		(2,541)		(2,327)		(2,541)
Present value of lease liability	$	6,513	$	6,737	$	6,027	$	6,737

The weighted average remaining lease term and weighted average discount rate for operating leases at ~~March 31,~~September 30, 2020 was ~~12.~~112.2 years and ~~4.66%~~4.74%, respectively. The weighted average remaining lease term and weighted average discount rate for operating leases at December 31, 2019 was ~~12.~~012.0 years and 4.63%, respectively.

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


2020	$	307
2021		1,191
2022		600
2023		630
2024		573
Thereafter		5,053
Total of future payments	$	8,354

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2020

$
921
2021

1,191
2022

600
2023

630
2024

573
Thereafter

5,053
Total of future payments

$
8,968

Operating lease costs and sublease rental income for the three months ended ~~March 31,~~September 30, 2020 were ~~$314,000~~$317,000 and $27,000, respectively. Operating lease costs and sublease rental income for the three months ended ~~March 31,~~September 30, 2019 were ~~$330,000~~$318,000 and ~~$27,000,~~$63,000, respectively. Operating lease costs and sublease rental income for the nine months ended September 30, 2020 were $952,000 and $82,000, respectively. Operating lease costs and sublease rental income for the nine months ended September 30, 2019 were $1.1 million and $129,000, respectively.

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

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

OVERVIEW

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 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 growth and targeted product types, with lenders and other employees directly involved with customer relationships. Additionally, the quality of the interest earning assets further influences the amount of interest income lost on nonaccrual loans and the amount of additions to the allowance for loan losses.

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 ~~expenses,~~fees, professional fees, transactions involving bank-owned property, and other operational expenses. The provision for loan losses and income taxes may materially affect net income.

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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;

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●

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

●

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

●

~~the potential adverse effects of~~ 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;

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●

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~~10-K for the year ended December 31, 2019 and other reports filed from time to time by the Company with the Securities and Exchange Commission.

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

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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~~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.

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●

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~~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, the Company manages risk by avoiding concentrations to geographic regions and by diversifying the lending to various unit mixes, tenant profiles and rental rates.

●

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

●

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

●

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

●

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

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

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

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan

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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 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,~~ 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~~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 ~~first quarter of 2020~~year with good momentum but ~~the quarter~~ was disrupted by the coronavirus (COVID-19) pandemic that set off an economic crisis. Specific events that

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impacted the Company’s financial results ~~at the end of~~for the first ~~quarter,~~nine months of 2020, and will impact future financial results, include government mandated business closures and stay-at-home orders, which have transformed into some of the highest unemployment ~~rate~~rates seen in the Company’s markets. In addition, unprecedented government stimulus programs and the uncertainties regarding how long the mandates will last have contributed to the unpredictability of the financial impacts that the Company may experience. The Company is focused on assessing the risks in its loan portfolio and working with our customers to minimize future losses. See below for additional discussion regarding trends and the potential effects of COVID-19.

Net income in the third quarter of 2020 decreased $97,000 when compared to the same period in 2019. Net income was ~~$1.4~~$4.5 million in the third quarter of 2020, with earnings per share of $0.20 basic and fully diluted. Net income for the third quarter of 2019 was $4.6 million, with earnings per share of $0.21 basic and $0.20 fully diluted. The decrease in net income was driven by a decrease of $1.9 million in interest income, primarily from a $1.1 million payoff within a loan pool in the PCI portfolio, with no carrying value, and thus resulted in the entire payment being recognized as interest

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

Net income for the first ~~quarter~~nine months of 2020 ~~compared with net income of $3.5~~was $10.1 million, ~~in the first quarter of 2019. Earnings~~or $0.45 per common share, basic and fully diluted. This is a decrease of $1.6 million, or 13.5%, when compared with net income of $11.7 million, or $0.52 basic and diluted ~~were $0.06 per share and $0.16~~earnings per share, for the ~~three~~first nine months ~~ended March 31, 2020 and 2019, respectively.~~

of 2019. The decrease ~~of $2.1 million, or 59.6%, in net income, for the first quarter of 2020 compared with the first quarter of 2019~~ was primarily the result of athe provision for loan losses of ~~$3.3~~$4.2 million infor the first ~~quarter~~nine 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 ~~with respect to COVID-19. Additional discussion of~~arising from the ~~provision is presented below.~~COVID-19 pandemic. Also declining on a year-over-year nine month basis was net interest income by $233,000. Offsetting ~~the decrease~~these decreases to net income were a decrease of ~~$532,000~~$2.1 million in noninterest expenses, primarily from a reduction in salaries and employee benefits of $1.1 million, due primarily to capitalized internal loan origination costs related to PPP loan volume, an increase of $447,000 in noninterest income, which was driven by an increase of $484,000 in mortgage loan income, and a decrease of $224,000 in income tax ~~expenses, an increase of $321,000 in noninterest income, a decrease of $246,000 in noninterest expenses and an increase of $113,000 in net interest income.~~expense.

Net Interest Income

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

Net interest income ~~increased $113,000,~~decreased $706,000, or ~~0.9%~~5.3%, from the ~~first~~third quarter of 2019 to the ~~first~~third quarter of 2020. Net interest income was ~~$12.2~~$12.7 million in the ~~first~~third quarter of 2020 compared with ~~$12.1~~$13.4 million for the same period in 2019. Interest and dividend income ~~increased $140,000,~~decreased $1.9 million, or ~~0.9%~~10.9%, over this time period. In the third quarter of 2019, a $1.1 million payoff was received within a loan pool in the PCI portfolio, with no carrying value, which resulted in the entire payment being recognized as interest income. Interest and fees on loans ~~increased~~decreased by ~~$667,000. This increase was mitigated~~$427,000, or 3.2%, driven by ~~securities income, which declined $304,000, interest~~a decrease in rate. Interest and fees on PCI loans, ~~which declined $196,000,~~affected by the $1.1 million payoff previously noted, decreased by $1.4 million and was $962,000 in the third quarter of 2020. Securities income decreased by $138,000, and interest on deposits in other banks ~~which decreased~~increased by ~~$27,000. Interest on PCI loans was $1.1 million in the first quarter of 2020 compared with $1.3 million in the first quarter of 2019.~~ $34,000.

The average balance of the loan portfolio, excluding PCI loans, increased by $131.9 million, year over year and averaged $1.169 billion for the third quarter of 2020. The PCI portfolio declined $6.5 million during the year-over-year comparison period. The increase in interest and fees on loans was generated by an increase of $66.2 million, or 6.6%, 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 $21.9 million year over year. The average balance of total earning assets increased ~~$40.1~~$184.7 million, or ~~3.1%~~13.9%, from the ~~first~~third quarter of 2019 to the ~~first~~third quarter of 2020. The yield on earning assets decreased from ~~4.95%~~5.23% in the ~~first~~third quarter of 2019, boosted by the $1.1 million PCI payment, to ~~4.78%~~4.09% in the ~~first~~third quarter of 2020. The yield on earning assets was the culmination of decreases in the yield on all loans, from ~~5.36%~~5.74% in the ~~first~~third quarter of 2019 to ~~5.19%~~4.55% in the ~~first~~third quarter of 2020, in the tax-equivalent yield on securities, from ~~3.35%~~3.17% in the ~~first~~third quarter of 2019 to ~~3.08%~~2.89% in the ~~first~~third quarter of 2020, and in the yield on interest bearing bank balances, from ~~2.70%~~2.58% to ~~1.68%~~0.68% year over year. Income on interest bearing bank balances increased $34,000 as a result of an increase of $57.1 million in the average balance in the third quarter of 2020 as compared with the same period one year ago.

Interest expense ~~increased $27,000,~~decreased $1.2 million, or ~~0.7%~~29.8%, when comparing the ~~first~~third quarter of ~~2019~~2020 and the ~~first~~third quarter of ~~2020.~~2019. Interest expense on deposits ~~increased $185,000,~~decreased $1.1 million, or ~~5.7%~~29.3%, as the cost declined from 1.45% in the third quarter of 2019 to 0.96% for the same period in 2020. The average balance of interest bearing deposits increased ~~$20.5~~$70.0 million, or ~~2.0%~~6.9%. This growth was ~~primarily comprised of~~from non-maturity deposit sources. First, there was an increase of ~~$9.2~~$45.8 million, or 29.5%, in the average balance of interest bearing checking accounts, which averaged $201.0 million in the third quarter of 2020. Additionally, there was an increase of $43.9 million in the average balance of ~~time deposits, which averaged $632.7 million in~~savings and money market accounts from the ~~first~~third quarter of ~~2020. Interest-bearing demand deposits increased $12.5 million year over year and were $170.3 million, on average,~~2019 to the same period in ~~the first quarter of~~ 2020. Offsetting these increases was a decrease in the average balance of ~~savings and money market accounts~~time deposits of ~~$1.3~~$19.8 million, to ~~$219.7~~$612.8 million for the ~~first~~third quarter of 2020. FHLB and other borrowings benefited from

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a decrease in cost from 1.99% in the third quarter of 2019 to 1.19% in the third quarter of 2020. All of the above contributed to the reduction of interest expense for interest-bearing liabilities by $1.2 million despite an increase in the average amount outstanding of $77.4 million. The amount of liquidity in the banking system, along with lower interest rates and a shift in deposit balances ~~increased~~decreased the cost of interest bearing ~~deposits~~liabilities from ~~1.31%~~1.49% in the ~~first~~third quarter of 2019 to ~~1.34%~~0.97% in the ~~first~~third quarter of ~~2020.~~2020

FHLB and other borrowings decreased, on average, $6.4 million year over year, and there was a decrease in the rate paid, from 2.17% in the first quarter of 2019 to 1.58% in the first quarter of 2020. Overall, the Bank’s cost of interest bearing liabilities decreased two basis points, from 1.38% in the first quarter of 2019 to 1.36% in the first quarter of 2020.

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The tax-equivalent net interest margin decreased 1367 basis points, from ~~3.81%~~4.02% in the ~~first~~third quarter of 2019 to ~~3.68%~~3.35% in the ~~first~~third quarter of 2020. Likewise, the interest spread decreased from ~~3.57%~~3.74% to ~~3.42%~~3.12% over the same time period. The decrease in the margin was precipitated by a greater decrease in the yield on earning assets of 17114 basis points compared with a decline in the cost of interest bearing liabilities of ~~only two~~52 basis points.

Net interest income was $37.3 million for the first nine months of 2020. This is a slight decrease of $233,000, or 0.6%, from net interest income of $37.5 million for the first nine months of 2019. Interest and dividend income declined by $1.9 million over this time frame. Interest and dividend income was impacted by volume increases offset by a decline in yield. First, there was an increase of $612,000, or 1.6%, in interest and fees on loans, which increased as a result of growth of $111.0 million, or 10.9%, in the average balance of loans in 2020 over 2019. The yield on loans declined from 5.03% for the first nine months of 2019 to 4.59% for the same period in 2020. A portion of this decrease is attributable to the addition of $85.1 million in PPP loans net of fees during the second and third quarters of 2020 at a rate of 1.00%. Interest and fees on PCI loans declined by $1.8 million, or 36.0%. Part of this decline is related to payoffs within charged-off loan pools within the PCI portfolio. The yield on the PCI portfolio was 13.71% for the first nine months of 2020 compared with 17.70% for the same period in 2019. Interest on deposits in other banks declined by $69,000. Interest and dividends on securities declined by $699,000 in the first nine months of 2020 compared with the same period in 2019. The yield on earning assets was 4.38% for the first nine months of 2020, a decline of 64 basis points from 5.02% in the first nine months of 2019. The yield on total loans, which includes PCI loans and PPP loans, declined from 5.48% for the first nine months of 2019 to 4.83% for the same period in 2020. The return on interest bearing bank balances declined from 2.55% to 0.66%, while the tax-equivalent yield on the securities portfolio declined from 3.25% for the first nine months of 2019 to 2.95% for the first nine months of 2020.

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

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

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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 nine months ended ~~March 31,~~September 30, 2020 and 2019. 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 September 30, 2020						Three months ended September 30, 2019
					Average						Average
	Average		Interest		Rates		Average		Interest		Rates
	Balance		Income/		Earned/		Balance		Income/		Earned/
(Dollars in thousands)	Sheet		Expense		Paid		Sheet		Expense		Paid
ASSETS:
Loans	$	1,169,330	$	12,760	4.33	%	$	1,037,433	$	13,187	5.04	%
PCI loans		28,480		962	13.21			34,999		2,333	26.07
Total loans		1,197,810		13,722	4.55			1,072,432		15,520	5.74
Interest bearing bank balances		70,590		121	0.68			13,454		87	2.58
Federal funds sold		127		—	0.07			1,795		9	2.08
Securities (taxable)		198,296		1,362	2.75			195,401		1,489	3.05
Securities (tax exempt) ⁽¹⁾		50,551		435	3.44			49,616		450	3.63
Total earning assets		1,517,374		15,640	4.09			1,332,698		17,555	5.23
Allowance for loan losses		(12,424)						(8,872)
Non-earning assets		108,772						101,129
Total assets	$	1,613,722					$	1,424,955

LIABILITIES AND SHAREHOLDERS’ EQUITY

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

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

Tax equivalent adjustment:
Securities			$	91					$	95

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

Three months ended March 31, 2020

Three months ended March 31, 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

$
1,065,268

$
13,086

4.93
%
$
999,047

$
12,419

5.04
%
PCI loans

31,311

1,097

13.87

37,783

1,293

13.69

Total loans

1,096,579

14,183

5.19

1,036,830

13,712

5.36

Interest bearing bank balances

16,455

69

1.68

14,376

96

2.70

Federal funds sold

141

—

1.06

55

—

2.41

Securities (taxable)

182,340

1,351

2.96

186,370

1,522

3.27

Securities (tax exempt) (1)

49,391

435

3.52

67,211

603

3.59

Total earning assets

1,344,906

16,038

4.78

1,304,842

15,933

4.95

Allowance for loan losses

(8,621)





(9,084)





Non-earning assets

105,540





96,770





Total assets

$
1,441,825





$
1,392,528





LIABILITIES AND SHAREHOLDERS’ EQUITY













Demand - interest bearing

$
170,279

94

0.22

$
157,773

87

0.22

Savings and money market

219,661

280

0.51

220,945

293

0.54

Time deposits

632,664

3,045

1.93

623,417

2,854

1.86

Total interest bearing deposits

1,022,604

3,419

1.34

1,002,135

3,234

1.31

Short-term borrowings

4,185

23

2.20

6,837

50

2.94

FHLB and other borrowings

66,796

266

1.58

73,214

397

2.17

Total interest bearing liabilities

1,093,585

3,708

1.36

1,082,186

3,681

1.38

Noninterest bearing deposits

175,871





160,496





Other liabilities

14,184





9,974





Total liabilities

1,283,640





1,252,656





Shareholders’ equity

158,185





139,872





Total liabilities and shareholders’ equity

$
1,441,825





$
1,392,528





Net interest earnings



$
12,330





$
12,252



Interest spread





3.42
%





3.57
%
Net interest margin





3.68
%





3.81
%

Tax equivalent adjustment:













Securities



$
92





$
127

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

LIABILITIES AND SHAREHOLDERS’ EQUITY

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

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

Tax equivalent adjustment:
Securities			$	275					$	333

⁽¹⁾

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

Provision for Loan Losses

Management actively monitors the Company’s asset quality and provides specific loss provisions when necessary. Provisions for loan losses are charged to income to bring the total allowance for loan losses to a level deemed appropriate by management of the Company based on such factors as historical credit loss experience, industry diversification of the commercial loan portfolio, the amount of nonperforming loans and related collateral, the volume growth and composition

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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.

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The Company records a separate provision for loan losses for its loan portfolio, excluding PCI loans, and the PCI loan portfolio. There was no provision for loan losses on the loan portfolio, excluding PCI loans, in the third quarter of either 2020 or 2019. There was a provision for loan losses on the loan portfolio, excluding PCI loans, of ~~$3.3~~$4.2 million and $125,000 for the ~~first quarter of 2020. This compares with no provision for loan losses in the first quarter of 2019.~~nine months ended September 30, 2020 and 2019, respectively.

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

Due to the COVID-19 pandemic, the Company is closely monitoring loan concentrations in various “at risk areas” that it has deemed most likely to be affected by the stay-at-home orders and lack of general business activity, including a lack of travel in our geographic territory. As of ~~March 31,~~September 30, 2020, the Company identified the following categories of borrowers as being potentially at risk:


Category	% of Total Loans
Consumer	~~19.6~~ 15.7	%
Lessors of commercial properties	~~15.7~~18.1
Lessors of residential properties	~~12.2~~ 12.3
Hotels and other lodging	~~4.8~~5.5
Medical and care services	~~4.5~~4.2
Food service ~~and~~& drinking	2.2
Retail stores	~~1.3~~1.4
Personal services	~~1.0~~1.1

The Company is working with borrowers who have currently expressed a need for relief due to the effects of COVID-19. ~~To date, the~~The Company ~~has~~ granted relief in the form 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 ~~$141.2 million.~~$164.1 million at September 30, 2020. In accordance with current regulatory guidance, none of these loans were deemed to be TDRs, as they were all current under their terms as of December 31, 2019.

The Company is also helping its customers and communities by participating in the ~~Paycheck Protection Program (PPP).~~PPP. As of ~~May 6,~~September 30, 2020, the Company ~~has successfully received Small Business Administration (SBA) approval for 631~~originated 793 loans totaling ~~$83.1~~$85.1 million net of fees, with the median size for all loans made being approximately ~~$42,000.~~$31,500. As these loans are 100% guaranteed by the SBA, no allowance for loan losses is required.

With respect to the PCI portfolio, due to the stable nature of its performance and its declining balances over time as the portfolio amortizes, no provision was taken during either of the ~~first quarter of~~three or nine months ended September 30, 2020 ~~or the first quarter of~~and 2019. Additional discussion of loan quality is presented below.

The loan portfolio, excluding PCI loans, had net recoveries of $90,000 in the ~~first~~third quarter of 2020, compared with net charge-offs of ~~$322,000~~$426,000 in the ~~first~~third quarter of 2019. Total charge-offs were ~~$94,000~~$42,000 for the ~~first~~third quarter of 2020 compared

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with ~~$578,000~~$576,000 in the ~~first~~third quarter of 2019. Recoveries of previously charged-off loans were ~~$184,000~~$132,000 for the ~~first~~third quarter of 2020 compared with ~~$256,000~~$150,000 in the ~~first~~third quarter of 2019.

~~Noninterest Income~~

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

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Noninterest Income

Noninterest income of $1.5 million in the third quarter of 2020 was ~~an increase~~a decrease of ~~$321,000,~~$39,000, or ~~31.7%~~2.6%, ~~over~~below the ~~first~~third quarter of 2019. ~~Mortgage loan income increased $159,000, or 256.5%, from $62,000~~Service charges on deposit accounts of $613,000 in the ~~first~~third quarter of ~~2019~~2020 decreased by $145,000, or 19.1%, year over year, due to ~~$221,000~~reduced transaction volumes during the COVID-19 pandemic. Income on bank owned life insurance was $171,000 in the ~~first~~third quarter of ~~2020.Other~~2020, a decrease of $10,000 year over year. Offsetting these decreases to noninterest income was ~~$296,000~~an increase in mortgage loan income, which was $228,000 in the ~~first~~third quarter of 2020 compared with $176,000 in the ~~first~~third quarter of 2019. ~~The increase of $120,000~~Other noninterest income was primarily the result of a $64,000 gain on extinguishment of an FHLB borrowing combined with $90,000 in swap fee income, offset by a $24,000 decrease in brokerage fees and commissions. Service charges on deposit accounts of $672,000$382,000 in the ~~first~~third quarter of 2020 compared with $346,000 in the third quarter of 2019, an increase of $36,000. Gains on securities transactions of $78,000 in the third quarter of 2020 were an increase of $28,000 compared with the same quarter in 2019.

Noninterest income was $4.4 million for the first nine months of 2020, an increase of $447,000, or 11.2%, over noninterest income of $4.0 million for the first nine months of 2019. Mortgage loan income was $822,000 for the first nine months of 2020, an increase of $484,000 over the same period in 2019. This increase was created by continuity among the mortgage team, coupled with attractive rates and increased ~~by $63,000, or 10.3%, year~~referrals within the Bank. Other noninterest income was $974,000 for the first nine months of 2020, an increase of $230,000 over ~~year. This~~the same period in 2019. The increase was primarily the result from 2020 activity that included a $64,000 gain on the extinguishment of ana FHLB borrowing combined with a $261,000 increase in swap fee income. These items were partially offset by a decrease of ~~$15.4 million~~$120,000 from non-recurring insurance proceeds received in 2019. Gain on sale of loans was $11,000 for the ~~average balance~~first nine months of ~~noninterest bearing deposits and $12.5 million~~2020 compared with none for the same period in interest-bearing demand deposits. However, the Company expects lower levels of service charge income in the next quarter due to higher levels of waived fees and an overall decrease in transaction volume arising from the economic impact of COVID-19.2019. Offsetting these increases into noninterest income ~~year over year~~ were ~~decreases~~a decline of ~~$25,000~~$257,000 in ~~losses on securities transactions~~service charges and ~~$7,000~~fees, resulting from reduced transaction volumes created by the COVID-19 pandemic stay-at-home orders, and a decrease of $28,000 in income on bank owned life insurance.

Noninterest Expense

Noninterest expenses ~~decreased $246,000, or 2.8%, when comparing~~were $8.5 million for the ~~first~~third quarter of 2020. This is a decrease of $704,000 from noninterest expenses of $9.2 million for the third quarter of 2019. The primary reason for the decline resulted from a decrease in other real estate expenses, net, which were $87,000 in the third quarter of 2020 tocompared with $565,000 for the same period in 2019. The largest component of the change was a reduction of $229,000 in salaries and employee benefits. During 2019, two branch offices were closed, which in turn reduced the number of full-time equivalent employees in 2020 compared with 2019. These closures also lowered occupancy expenses year over year, which declined $103,000, from $930,000In addition, loan migration to OREO resulted in the ~~first~~Bank paying $624,000 in real estate taxes during the third quarter of ~~2019 to $827,000 in the first quarter of 2020. The Company expects a significant decrease in salaries~~2019. Salaries and employee benefits indeclined $248,000, or 4.7%. Also decreasing for the ~~next quarter as a result of loan cost deferrals related to the over 400 PPP loans processed to date. FDIC assessment of $125,000 in the first quarter of 2020~~period were other operating expenses, which decreased $165,000, and equipment expense, which was ~~a year-over-year decrease of $25,000.~~$47,000 lower. Offsetting these decreases were ~~an increase~~increases of $170,000 in FDIC assessment mainly due to a $165,000 assessment credit received by the FDIC in 2019, and $62,000 in data processing expenses.

Noninterest expenses were $25.0 million for the nine months ended September 30, 2020, a decrease of $2.1 million, or 7.6%, year over year. Other real estate expenses, net were $89,000 for the first nine months of 2020 and decreased by $573,000 versus the same period in 2019. In the third quarter of 2019, a nonperforming loan was migrated to OREO and as part of the process the Bank paid $624,000 in real estate taxes on the property. Salaries and employee benefits declined $1.1 million, or 7.1%. In addition to the internal loan costs relating to the origination of PPP loans, the closure of two branch offices in 2019 have positively affected salaries as well as other expense categories in 2020, namely occupancy and equipment expenses. Occupancy expenses were $242,000 lower, equipment expenses were $105,000 lower, and other operating expenses decreased $230,000. FDIC assessment was $455,000 for the first nine months of ~~$82,000,~~2020 and increased $139,000 over the same period in 2019 reflecting the $165,000 credit noted above. Data processing fees were $1.8 million for the first nine months of 2020, an increase of ~~$24,000~~$80,000 when compared with the same period in ~~data processing expenses and an increase of $14,000 in other real estate expenses, net.~~2019.

Income Taxes

Income tax expense was ~~$264,000~~$1.1 million for the ~~three months ended March 31,~~third quarter of 2020, compared with income tax expense ~~$796,000~~of $1.1 million for the third quarter of 2019. For the first nine months of 2020, income tax expense was $2.5 million compared with $2.7 million for the first ~~quarter~~nine months of 2019. The effective tax rate for the ~~first~~third quarter of 2020 was ~~15.7%~~20.2% compared with ~~18.5%~~19.1% for the ~~first~~third quarter of 2019. For the first nine months of 2020, the effective tax rate was 19.5% compared with 18.7% for the same period in 2019. The ~~decrease~~increase in the effective tax rate in 2020 compared with 2019 is ~~a product~~the result of a ~~higher percentage~~lower level of ~~tax free~~tax-free municipal ~~income along with tax credits representing a higher percentage~~bond interest income.

Table of ~~overall tax expense for the first quarter of 2020.~~ Contents

FINANCIAL CONDITION

General

Total assets increased ~~$22.7~~$191.4 million, or ~~1.6%~~13.4%, to ~~$1.454~~$1.622 billion at ~~March 31,~~September 30, 2020 when compared to December 31, 2019. Total loans, excluding PCI loans, were ~~$1.079~~$1.178 billion at ~~March 31,~~September 30, 2020, increasing ~~$20.9~~$119.4 million, or ~~2.0%~~11.3%, from year end 2019. Total PCI loans were ~~$30.3~~$27.1 million at ~~March 31,~~September 30, 2020 versus $32.5 million at December 31, 2019.

Loans net of fees that the Bank originated under the PPP grew $1.6 million during the third quarter and were $85.1 million at September 30, 2020. There were PPP loans of $83.5 million outstanding at June 30, 2020. All of these balances are included in commercial loans. As a result of the economic conditions that existed during the second and third quarters of 2020, commercial loans, excluding PPP loans, declined by $18.9 million from December 31, 2019. Commercial loan balances, excluding PPP balances, declined by $7.2 million during the third quarter of 2020. Commercial real estate loans, the largest category of loans at ~~$410.4~~$452.7 million, or ~~38.0%~~38.4% of gross loans outstanding, increased ~~$13.6~~$8.8 million, or 2.0%, during the ~~first~~third quarter of 2020. ~~Commercial loans grew $7.4 million and were $198.5 million at March 31, 2020. Multifamily loans, totaling $76.2~~This category has increased $55.8 million, or ~~7.1% of total loans, increased $3.2~~14.1%, year to date and $59.6 million, ~~during the first quarter of 2020.~~or 15.2%, year over year. Construction and land development loans, totaling ~~$149.8~~$159.8 million, grew by ~~$3.3~~$8.2 million, or ~~2.2%.~~5.4%, during the third quarter of 2020, by $13.2 million since year end 2019 and by $28.8 million, or 22.0%, since September 30, 2019. Residential 1 – 4 family loans declined during the third quarter of 2020 by ~~$3.8~~$1.4 million and ended the period at ~~$219.7~~$204.4 million, or ~~20.4%~~17.4% of the portfolio. ~~Agriculture loans secured by real estate~~This category declined by ~~$1.3~~$19.2 million ~~or 15.7%, and totaled $7.0 million at March 31, 2020. Consumer installment loans decreased $717,000~~ during the first ~~quarter~~nine months of 2020 and ~~second mortgages decreased $685,000 during the period.~~$17.6 million since September 30, 2019.

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The Company’s securities portfolio, excluding restricted equity securities, increased ~~$4.7~~$34.0 million since year end 2019 to ~~$227.4~~$256.7 million at ~~March 31,~~September 30, 2020. U.S. Treasury issues increased by ~~$7.5~~$12.5 million during the first ~~quarter~~nine months of ~~2020.~~2020 as excess liquidity was invested short-term in very liquid and low risk instruments. Corporate securities with balances, at fair value, of $25.9 million at September 30, 2020, increased by ~~$6.2~~$19.8 million during the ~~period, while state,~~nine month period. State, county and municipal securities, ~~available for sale~~the largest investment category at $139.6 million at September 30, 2020, increased by ~~$3.6 million.~~$15.2 million during the first nine months of 2020. Asset backed securities, consisting of student loan pools 97% guaranteed by the U.S. Government, increased by $17.4 million during the first nine months of 2020 and totaled $29.0 million at September 30, 2020. Offsetting these increases was a decrease of ~~$10.0~~$18.8 million in mortgage backed securities and a decline of $12.2 million in balances held in U.S. Government agency ~~securities held to maturity. Net losses of $39,000 were recognized during the first quarter of 2020 compared with $14,000 in net losses in the first quarter of 2019.~~bonds. The Company actively manages the portfolio to improve its liquidity and maximize the return within the desired risk profile.

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 ~~$202.7~~$233.7 million at ~~March 31,~~September 30, 2020 and $187.0 million at December 31, 2019. At ~~March 31,~~September 30, 2020, the Company had a net unrealized gain on the AFS portfolio of ~~$4.5~~$8.9 million compared with a net unrealized gain of $3.7 million at December 31, 2019. Municipal securities comprised ~~50.4%~~49.9% of the total AFS portfolio at ~~March 31,~~September 30, 2020. These securities exhibit more price volatility in a changing interest rate environment because of their longer weighted average life, as compared to other categories contained within the rest of the portfolio.

The Company had cash and cash equivalents of ~~$30.4~~$75.5 million ~~and~~at September 30, 2020 compared with $28.7 million at ~~March 31, 2020 and December 31,~~year end 2019, ~~respectively. There were federal funds purchased~~an increase of ~~$24.4 million at December 31, 2019 with no federal funds purchased or sold at March 31, 2020. Interest~~$46.8 million. The majority of this category growth occurred in interest bearing bank balances, ~~were $15.0~~$45.1 million ~~at March 31,~~during the nine months ended September 30, 2020, ~~compared with $11.7 million at December 31, 2019.~~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 CARES Act.

Interest bearing deposits at ~~March 31,~~September 30, 2020 were ~~$1.033~~$1.088 billion, an increase of ~~$47.9~~$102.8 million, or ~~4.9%~~10.4%, from December 31, 2019. Interest bearing checking accounts (formerly NOW accounts) of $201.1 million grew by $5.7 million, or 2.9%, during the third quarter of 2020 and grew $30.6 million, or 17.9%, since year end 2019 and $53.5 million, or 36.2%, since September 30, 2019. Money market deposit accounts were $158.6 million at September 30, 2020 and grew $10.5 million, or 7.1%, during the third quarter of 2020 and $37.7 million, or 31.2%, during the first nine months of 2020. Savings accounts totaled $118.0 million at September 30, 2020 and grew $9.4 million during the third quarter and $21.4 million for the first nine months of 2020. Strong growth in these non-maturity categories for both the quarter and year has

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allowed the Bank to react to lower interest rates through proactive repricing in certificates of deposit, the highest costing deposit category. As a result, there has been tepid growth in time deposits over $250,000, which grew by $1.4 million in the third quarter of 2020. Time deposits less than or equal to $250,000 ~~increased by $29.3~~declined $24.2 million ~~or 6.1%, during~~in the ~~first~~third quarter of 2020. Time deposit balances combined were 56.1% of interest bearing deposits at September 30, 2020, ~~the largest increase~~a decline from 60.6% at December 31, 2019. The growth in ~~the deposit categories. There were also increases of $17.5 million, or 14.7%, in time deposits over $250,000, $2.8 million in savings account balances and $2.6 million in~~interest bearing checking accounts, money market ~~deposit accounts. Interest-bearing checking~~ accounts ~~(formerly NOW accounts) declined $4.4~~and savings accounts, as well as in noninterest bearing deposits, was $192.9 million during the first ~~quarter~~nine months of 2020. A portion of this growth was associated with the $85.1 million in PPP loans originated and held at September 30, 2020 and ~~were~~stimulus checks issued under the ~~only~~CARES Act, as well as previously postponed business activity that resulted from the COVID-19 stay-at-home orders. Certificates of deposit ~~category~~in relation to ~~decline. Effective January 1, 2020, the Company re-classified all NOW accounts~~total deposits declined from 51.3% at December 31, 2019 to ~~interest bearing checking accounts, thereby eliminating the seven days withdrawal notification requirement imposed on NOW accounts.~~44.5% at September 30, 2020.

FHLB ~~advances~~borrowings were ~~$58.3~~$68.0 million at ~~March 31,~~September 30, 2020, compared with $68.5 million at December 31, 2019. The ~~decrease~~stable level of ~~$10.2 million in~~ FHLB borrowings during 2020 has been due to the FHLB swiftly responding to the March 16, 2020 rate cut of 1.50% to the discount rate by repricing advances ~~and $24.4 million in~~downward to ensure low cost liquidity for the banking system. As a result, the Bank has found this level of borrowing to be a stable source of low cost funding. There were Federal funds purchased ~~in the first quarter~~ of $940,000 at September 30, 2020, ~~was replaced with strong retail deposit growth of $57.6 million.~~

~~Shareholders’ equity was $155.5 million at March 31, 2020 and $155.5~~down from $24.4 million at December 31, 2019. ~~The ratio~~

Shareholders’ equity was $165.8 million at September 30, 2020, or 10.2% of ~~shareholders equity to~~total assets, ~~was 10.7% at March 31, 2020 and~~compared with $155.5 million, or 10.9% of total assets, at December 31, 2019. Shareholders’ equity at September 30, 2019 was $152.6 million, or 10.7% of total assets. On January 22, 2020, the Company announced a share repurchase program of up to 1,000,000 shares of its common stock. During the first ~~quarter~~nine months of 2020, the Company repurchased ~~115,800~~130,800 shares of common stock at a total cost of $809,000. The Company evaluates the value 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.$885,665.

Asset Quality – excluding PCI loans

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

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

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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 assets totaled ~~$9.7~~$8.6 million at ~~March 31,~~September 30, 2020 and net ~~recoveries~~charge-offs were ~~$90,000~~$301,000 for the ~~three~~nine months ended ~~March 31,~~September 30, 2020. This compares with nonperforming assets of $10.8 million and net charge-offs of $879,000 for the year ended December 31, 2019.

Nonaccrual loans were ~~$5.2~~$4.2 million at ~~March 31,~~September 30, 2020, a ~~$120,000~~$1.1 million decrease from $5.3 million at December 31, 2019. The ~~$120,000~~$1.1 million decrease in nonaccrual loans since December 31, 2019 was the net result of ~~$3.1~~$5.1 million in additions to nonaccrual loans and ~~$3.2~~$6.2 million in reductions. The increase related mainly to one construction and land development relationship totaling $1.4 million and ~~two~~three commercial loans totaling ~~$1.3~~$2.4 million. With respect to the reductions in nonaccrual loans, ~~$47,000~~$277,000 were payments to existing credits, ~~$22,000~~$619,000 were charge-offs, ~~$3.0~~$4.9 million were paid off, including $1.9 million of the additions noted above, and ~~$159,000~~$415,000 returned to accruing status.

The allowance for loan losses, excluding PCI, equaled ~~228.5%~~292.6% of nonaccrual loans at ~~March 31,~~September 30, 2020 compared with 159.3% at December 31, 2019. The ratio of nonperforming assets to loans and OREO decreased 1228 basis points. The

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ratio was ~~0.89%~~0.73% at ~~March 31,~~September 30, 2020 versus 1.01% at December 31, ~~2019.~~2019, which was driven primarily by the decrease in nonperforming loans and increase in total loans primarily from PPP loan originations.

The allowance for loan losses 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 provision of $4.2 million taken for the nine months ended September 30, 2020 primarily due to risk grade deterioration of the portfolio related to COVID-19 resulted in an elevated unallocated amount of $3.1 million at September 30, 2020. Several factors justify the maintenance of this unallocated amount:

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

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

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

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

See Note 3 to the Company’s financial statements for information related to the allowance for loan losses. At ~~March 31,~~September 30, 2020 and December 31, 2019, total impaired loans, excluding PCI loans, equaled ~~$9.7~~$9.0 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):


	March 31, 2020			December 31, 2019

							September 30, 2020			December 31, 2019
Nonaccrual loans	$	5,172		$	5,292		$	4,214		$	5,292
Loans past due 90 days and accruing interest		—			946			—			946
Total nonperforming loans		5,172			6,238			4,214			6,238
OREO		4,506			4,527			4,416			4,527
Total nonperforming assets	$	9,678		$	10,765		$	8,630		$	10,765


Accruing troubled debt restructure loans	$	4,517		$	4,593		$	4,753		$	4,593


Balances
Specific reserve on impaired loans		1,562			584			1,180			584
General reserve related to unimpaired loans		10,257			7,845			11,148			7,845
Total allowance for loan losses		11,819			8,429			12,328			8,429


Average loans during the year, net of unearned income		1,065,268			1,023,861			1,127,002			1,023,861


Impaired loans		9,689			9,885			8,967			9,885
Non-impaired loans		1,069,540			1,048,438			1,168,742			1,048,438
Total loans, net of unearned income		1,079,229			1,058,323			1,177,709			1,058,323


Ratios
Allowance for loan losses to loans		1.10	%		0.80	%		1.05	%		0.80	%
Allowance for loan losses to nonaccrual loans		228.52			159.28			292.55			159.28
General reserve to non-impaired loans		0.96			0.75			0.95			0.75
Nonaccrual loans to loans		0.48			0.50			0.36			0.50
Nonperforming assets to loans and OREO		0.89			1.01			0.73			1.01
Net charge-offs (recoveries) to average loans		(0.01)			0.09
Net charge-offs to average loans								0.04			0.09

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


	March 31, 2020		December 31, 2019

					September 30, 2020		December 31, 2019
Mortgage loans on real estate:
Residential 1‑4 family	$	1,456	$	1,378	$	1,338	$	1,378
Commercial		657		1,006		764		1,006
Construction and land development		1,778		376		572		376
Multifamily		—		2,463		—		2,463
Agriculture						51		—
Total real estate loans		3,891		5,223		2,725		5,223
Commercial loans		1,270		62		1,470		62
Consumer installment loans		11		7		19		7
Total loans	$	5,172	$	5,292	$	4,214	$	5,292

Asset Quality – PCI loans

Loans accounted for under FASB ASC ~~310‑30~~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

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

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

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

Under the final rule on Enhanced Regulatory Capital Standards, commonly referred to as Basel III and which became effective January 1, 2015, the federal banking regulators have defined four tests for assessing the capital strength and adequacy of banks, based on 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% at each of ~~March 31,~~September 30, 2020 and December 31, 2019. The tier 1 risk-based capital ratio was 12.9% at ~~March 31,~~September 30, 2020 and 13.2% at December 31, 2019. The Bank’s tier 1 leverage ratio was ~~10.9%~~10.2% at ~~March 31,~~September 30, 2020 and 11.0% at December 31, 2019. All capital ratios exceed regulatory minimums to be considered well capitalized. BASEL III introduced the common equity tier 1 capital ratio, which was 12.9% at ~~March 31,~~September 30, 2020 and 13.2% at December 31, 2019.

Under Basel III, a capital conservation buffer of 2.5% above the minimum risk-based capital thresholds was established. Dividend and executive compensation restrictions begin if the Bank does not maintain the full amount of the buffer. At ~~March 31,~~September 30, 2020, the Bank had a capital conservation buffer of 5.9%.

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


	March 31, 2020			December 31, 2019

							September 30, 2020			December 31, 2019
Cash and due from banks	$	15,406		$	16,976		$	18,689		$	16,976
Interest bearing bank deposits		14,960			11,708			56,795			11,708
Available for sale securities, at fair value, unpledged		173,170			157,225			198,581			157,225
Total liquid assets	$	203,536		$	185,909		$	274,065		$	185,909


Deposits and other liabilities	$	1,298,072		$	1,275,361		$	1,456,447		$	1,275,361
Ratio of liquid assets to deposits and other liabilities		15.68	%		14.58	%		18.82	%		14.58	%

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 ~~March 31,~~September 30, 2020.

Off-Balance Sheet Arrangements and Contractual Obligations

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


	March 31, 2020		December 31, 2019

					September 30, 2020		December 31, 2019
Commitments with off-balance sheet risk:
Commitments to extend credit	$	220,070	$	210,086	$	244,625	$	210,086
Standby letters of credit		15,269		15,155		11,890		15,155
Total commitments with off-balance sheet risks	$	235,339	$	225,241	$	256,515	$	225,241

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.

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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 ~~each of March 31,~~September 30, 2020 and December 31, ~~2019.~~2019, respectively. The Company recorded a fair value liability of ~~$601,000~~$683,000 and $44,000 in other liabilities, at ~~March 31,~~September 30, 2020 and December 31, 2019, ~~respectively~~.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 ~~(loss)~~ 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.

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


	March 31, 2020
	%	$

			September 30, 2020
			%	$
Change in Yield curve
+400 bp	5.6	2,730	13.0	6,740
+300 bp	4.0	1,943	9.3	4,811
+200 bp	2.0	976	5.4	2,814
+100 bp	0.4	184	2.2	1,135
most likely	—	—	—	—
‑100 bp	0.1	42	(0.1)	(60)
‑200 bp	—	(5)	(0.1)	(71)
‑300 bp	(0.1)	(33)	(0.1)	(73)
‑400 bp	(0.1)	(33)	(0.1)	(73)

At ~~March 31,~~September 30, 2020, the Company’s interest rate risk model indicated that, in a rising rate environment of 400 basis points over a 12 month period, net interest income could increase by ~~5.6%~~13.0%. For the same time period, the interest rate risk model indicated that in a declining rate environment of 400 basis points, net interest income could decrease by 0.1%. While these percentages are subjective based upon assumptions used within the model, management believes the balance sheet is appropriately balanced with acceptable risk to changes in interest rates.

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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,~~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)~~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 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.

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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 (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~~.deferrals. In addition, we are a certified and qualified SBA lender and ~~are assisting~~assisted our customers with their applications ~~for~~under the ~~Paycheck Protection Program.~~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 for a period of time under our stock repurchase program to preserve capital and liquidity in order to support our customers and employees and, although we have no current plans to reduce or suspend our common stock dividend, we will continue to exercise prudent capital management and monitor the business environment.

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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
January 1 - January 31, 2020

—

$
—

—

—
February 1 - February 29, 2020

20,800

8.60

20,800

979,200
March 1 - March 31, 2020

95,000

6.60

95,000

884,200
Total

115,800

$
7.60

115,800

884,200

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

~~(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 130,800 shares under the program during the first two quarters of 2020 before suspending activity under it effective April 2, 2020. On October 26, 2020, the Company authorized the recommencement of the programfor the repurchase ~~program is authorized for a one year period.~~of up to 200,000 shares of its common stock through January 2021.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit No.	Description
31.1	Rule ~~13a‑14(a)~~13a-14(a)/~~15d‑14(a)~~15d-14(a) Certification for Chief Executive Officer*
31.2	Rule ~~13a‑14(a)~~13a-14(a)/~~15d‑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~~10-Q for the period ended ~~March 31,~~September 30, 2020 formatted in Inline Extensible Business Reporting Language ~~(XBRL)~~(iXBRL): (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements*
104	CoverPage Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*	Filed herewith.

*Filed herewith.

4451

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~~SIGNATURES~~

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: ~~May 8,~~November 6, 2020

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

Date: ~~May 8,~~November 6, 2020

4552


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

	For the quarterly period ended ~~March 31,~~September 30, 2020

or

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

	For the transition period from to


Virginia	20-2652949
~~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~~(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)


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


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


	Held to Maturity				Available for Sale
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	2,727	$	2,727	$	25,502	$	25,665
Due after one year through five years		15,442		16,012		68,115		69,161
Due after five years through ten years		6,229		6,463		83,115		86,513
Due after ten years		251		283		21,459		21,372
Total securities	$	24,649	$	25,485	$	198,191	$	202,711

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	27 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk	41 47
Item 4. Controls and Procedures	42 48
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	42 48
Item 1A. Risk Factors	42 49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	44 50
Item 3. Defaults upon Senior Securities	44 50
Item 4. Mine Safety Disclosures	44 50
Item 5. Other Information	44 50
Item 6. Exhibits	44 51
SIGNATURES	45 52


	September 30, 2020		December 31, 2019 *
ASSETS
Cash and due from banks	$	18,689	$	16,976
Interest bearing bank deposits		56,795		11,708
Total cash and cash equivalents		75,484		28,684

Securities available for sale, at fair value		233,653		186,969
Securities held to maturity, at cost (fair value of $24,118 and $36,633, respectively)		23,026		35,733
Equity securities, restricted, at cost		8,875		8,855
Total securities		265,554		231,557

Loans held for sale		1,151		501

Loans		1,177,709		1,058,323
Purchased credit impaired (PCI) loans		27,146		32,528
Total loans		1,204,855		1,090,851
Allowance for loan losses (loans of $12,328 and $8,429, respectively; PCI loans of $156 and $156, respectively)		(12,484)		(8,585)
Net loans		1,192,371		1,082,266

Bank premises and equipment, net		28,197		29,472
Bank premises and equipment held for sale		1,589		1,589
Right-of-use lease assets		5,766		6,472
Other real estate owned		4,416		4,527
Bank owned life insurance		29,858		29,340
Other assets		17,851		16,432
Total assets	$	1,622,237	$	1,430,840

LIABILITIES
Deposits:
Noninterest bearing	$	281,679	$	178,584
Interest bearing		1,087,663		984,864
Total deposits		1,369,342		1,163,448

Federal funds purchased		940		24,437
Federal Home Loan Bank borrowings		68,000		68,500
Trust preferred capital notes		4,124		4,124
Lease liabilities		6,027		6,737
Other liabilities		8,014		8,115
Total liabilities		1,456,447		1,275,361

SHAREHOLDERS’ EQUITY
Common stock (200,000,000 shares authorized, $0.01 par value; 22,321,000 and 22,422,621 shares issued and outstanding, respectively)		223		224
Additional paid in capital		150,708		150,728
Retained earnings		9,300		2,562
Accumulated other comprehensive income		5,559		1,965
Total shareholders’ equity		165,790		155,479
Total liabilities and shareholders’ equity	$	1,622,237	$	1,430,840


	March 31, 2020		December 31, 2019*
ASSETS
Cash and due from banks	$	15,406	$	16,976
Interest bearing bank deposits		14,960		11,708
Total cash and cash equivalents		30,366		28,684

Securities available for sale, at fair value		202,711		186,969
Securities held to maturity, at cost (fair value of $25,485 and $36,633, respectively)		24,649		35,733
Equity securities, restricted, at cost		8,458		8,855
Total securities		235,818		231,557

Loans held for sale		2,470		501

Loans		1,079,229		1,058,323
Purchased credit impaired (PCI) loans		30,275		32,528
Total loans		1,109,504		1,090,851
Allowance for loan losses (loans of $11,819 and $8,429, respectively; PCI loans of $156 and $156, respectively)		(11,975)		(8,585)
Net loans		1,097,529		1,082,266

Bank premises and equipment, net		29,065		29,472
Bank premises and equipment held for sale		1,589		1,589
Right-of-use lease assets		6,234		6,472
Other real estate owned		4,506		4,527
Bank owned life insurance		29,514		29,340
Other assets		16,449		16,432
Total assets	$	1,453,540	$	1,430,840

LIABILITIES
Deposits:
Noninterest bearing	$	188,327	$	178,584
Interest bearing		1,032,731		984,864
Total deposits		1,221,058		1,163,448

Federal funds purchased		—		24,437
Federal Home Loan Bank borrowings		58,333		68,500
Trust preferred capital notes		4,124		4,124
Lease liabilities		6,513		6,737
Other liabilities		8,044		8,115
Total liabilities		1,298,072		1,275,361

SHAREHOLDERS’ EQUITY
Common stock (200,000,000 shares authorized, $0.01 par value; 22,317,420 and 22,422,621 shares issued and outstanding, respectively)		223		224
Additional paid in capital		150,219		150,728
Retained earnings		2,856		2,562
Accumulated other comprehensive income		2,170		1,965
Total shareholders’ equity		155,468		155,479
Total liabilities and shareholders’ equity	$	1,453,540	$	1,430,840


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


Balance January 1, 2019	22,132	$	221	$	148,763	$	(10,244)	$	(1,279)	$	137,461
Issuance of common stock	6		—		54		—		—		54
Exercise and issuance of employee stock options	31		1		298		—		—		299
Net income	—		—		—		3,503		—		3,503
Dividends paid on common stock	—		—		—		(665)		—		(665)
Other comprehensive income	—		—		—		—		1,656		1,656
Balance March 31, 2019	22,169	$	222	$	149,115	$	(7,406)	$	377	$	142,308

Balance January 1, 2020	22,423	$	224	$	150,728	$	2,562	$	1,965	$	155,479
Issuance of common stock	6		—		54		—		—		54
Exercise and issuance of employee stock options	4		—		242		—		—		242
Stock purchased under stock repurchase program	(116)		(1)		(805)		—		—		(806)
Net income	—		—		—		1,415		—		1,415
Dividends paid on common stock	—		—		—		(1,121)		—		(1,121)
Other comprehensive income	—		—		—		—		205		205
Balance March 31, 2020	22,317	$	223	$	150,219	$	2,856	$	2,170	$	155,468


	March 31, 2020		March 31, 2019
Operating activities:
Net income	$	1,415	$	3,503
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		483		545
Leased asset amortization		238		231
Stock-based compensation expense		285		266
Tax benefit of exercised stock options		(6)		(31)
Amortization of purchased loan premium		160		60
Provision for loan losses		3,300		—
Amortization of security premiums and accretion of discounts, net		233		281
Net loss on sale of securities		39		14
Net gain on sale and valuation of other real estate owned		(6)		(50)
Net gain on sale of loans		(11)		—
Originations of mortgages held for sale		(8,668)		(1,976)
Proceeds from sales of mortgages held for sale		6,699		1,726
Increase in bank owned life insurance investment		(174)		(181)
Changes in assets and liabilities:
Decrease (increase) in other assets		174		(366)
Decrease in accrued expenses and other liabilities		(846)		(58)
Net cash provided by operating activities		3,315		3,964

Investing activities:
Proceeds from sales/calls/maturities/paydowns of available for sale securities		9,893		19,264
Proceeds from calls/maturities/paydowns of held to maturity securities		11,065		626
Proceeds from sales of restricted equity securities		1,700		—
Purchase of available for sale securities		(25,069)		(10,682)
Purchase of restricted equity securities		(1,302)		(626)
Proceeds from sale of other real estate owned		27		316
Net increase in loans		(19,527)		(4,351)
Principal recoveries of loans previously charged off		184		77
Purchase of premises and equipment, net		(76)		(199)
Purchase small business investment company fund investment		(250)		(262)
Proceeds from sale of loans		632		705
Net cash (used in) provided by investing activities		(22,723)		4,868

Financing activities:
Net increase in deposits		57,610		3,148
Net decrease in federal funds purchased		(24,437)		(19,440)
Net (decrease) increase in short-term Federal Home Loan Bank borrowings		(10,000)		10,000
Proceeds from long-term Federal Home Loan Bank borrowings		40,000		—
Payments on long-term Federal Home Loan Bank borrowings		(40,167)		(375)
Proceeds from issuance of common stock		11		87
Cash dividends paid		(1,121)		(665)
Repurchase of common stock		(806)		—
Net cash provided by (used in) financing activities		21,090		(7,245)

Net increase in cash and cash equivalents		1,682		1,587

Cash and cash equivalents:
Beginning of the period		28,684		34,219
End of the period	$	30,366	$	35,806

Supplemental disclosures of cash flow information:
Interest paid	$	3,689	$	3,512
Income taxes paid		—		439
Transfers of loans to other real estate owned		—		392
Right-of-use lease assets in exchange for lease liability		—		7,408


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

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


	March 31, 2020
			Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Securities Available for Sale
U.S. Treasury securities	$	7,497	$	3	$	—	$	7,500
U.S. Government agencies		21,452		67		(715)		20,804
State, county and municipal		98,168		4,120		(99)		102,189
Mortgage backed securities		45,118		1,959		(80)		46,997
Asset backed securities		13,568		4		(646)		12,926
Corporate bonds		12,388		35		(128)		12,295
Total Securities Available for Sale	$	198,191	$	6,188	$	(1,668)	$	202,711

Securities Held to Maturity
State, county and municipal	$	24,649	$	847	$	(11)	$	25,485
Total Securities Held to Maturity	$	24,649	$	847	$	(11)	$	25,485

				��
	Held to Maturity				Available for Sale
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	2,941	$	2,960	$	31,603	$	31,763
Due after one year through five years		14,630		15,403		80,130		82,863
Due after five years through ten years		5,204		5,467		88,038		93,204
Due after ten years		251		288		24,935		25,823
Total securities	$	23,026	$	24,118	$	224,706	$	233,653


	March 31, 2020
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss

													September 30, 2020
													Less than 12 Months				12 Months or More				Total
													Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities Available for Sale
U.S. Government agencies	$	6,628	$	(380)	$	6,155	$	(335)	$	12,783	$	(715)	$	2,912	$	(9)	$	8,765	$	(271)	$	11,677	$	(280)
State, county and municipal		5,834		(88)		306		(11)		6,140		(99)		4,830		(35)		301		(15)		5,131		(50)
Mortgage backed securities		8,977		(79)		437		(1)		9,414		(80)
Asset backed securities		9,675		(635)		599		(11)		10,274		(646)		12,536		(38)		4,388		(97)		16,924		(135)
Corporate bonds		10,512		(128)		—		—		10,512		(128)		7,727		(13)		—		—		7,727		(13)
Total	$	41,626	$	(1,310)	$	7,497	$	(358)	$	49,123	$	(1,668)	$	28,005	$	(95)	$	13,454	$	(383)	$	41,459	$	(478)

Securities Held to Maturity
State, county and municipal	$	1,765	$	(11)	$	—	$	—	$	1,765	$	(11)
Total	$	1,765	$	(11)	$	—	$	—	$	1,765	$	(11)


	Three Months Ended March 31, 2019
			Provision
	December 31, 2018		Allocation		Charge-offs		Recoveries		March 31, 2019
Mortgage loans on real estate:
Residential 1‑4 family	$	2,281	$	855	$	—	$	203	$	3,339
Commercial		1,810		(32)		(277)		7		1,508
Construction and land development		1,161		43		(12)		18		1,210
Second mortgages		20		40		—		2		62
Multifamily		371		(10)		—		—		361
Agriculture		17		6		—		—		23
Total real estate loans		5,660		902		(289)		230		6,503
Commercial loans		1,894		291		(229)		2		1,958
Consumer installment loans		152		72		(60)		24		188
All other loans		12		(6)		—		—		6
Unallocated		1,265		(1,259)		—		—		6
Total loans	$	8,983	$	—	$	(578)	$	256	$	8,661


	March 31, 2020				December 31, 2019
			% of PCI				% of PCI
	Amount		Loans		Amount		Loans
Mortgage loans on real estate:
Residential 1‑4 family	$	27,283	90.12	%	$	29,465	90.58	%
Commercial		474	1.57			490	1.51
Construction and land development		1,136	3.75			1,172	3.60
Second mortgages		1,157	3.82			1,169	3.59
Multifamily		225	0.74			232	0.72
Total real estate loans		30,275	100.00			32,528	100.00
Total PCI loans	$	30,275	100.00	%	$	32,528	100.00	%


					Affected Line Item in the Unaudited Consolidated
Details about AOCI Components	Amount Reclassified from AOCI				Statement of Income
	Three months ended
	March 31, 2020		March 31, 2019
Securities available for sale:
Unrealized loss on securities available for sale	$	39	$	14	Loss on securities transactions, net
Related tax benefit		(9)		(3)	Income tax expense
	$	30	$	11	Net of tax


	March 31, 2020
	Total		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. Treasury securities	$	7,500	$	—	$	7,500	$	—
U.S. Government agencies		20,804		1,047		19,757		—
State, county and municipal		102,189		3,573		98,616		—
Mortgage backed securities		46,997		—		46,997		—
Asset backed securities		12,926		2,010		10,916		—
Corporate bonds		12,295		6,365		5,930		—
Total investment securities available for sale		202,711		12,995		189,716		—
Total assets at fair value	$	202,711	$	12,995	$	189,716	$	—
Cash flow hedge liability	$	601		—	$	601		—
Total liabilities at fair value	$	601	$	—	$	601	$	—


	March 31, 2020
			Estimated Fair
	Carrying Value		Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	24,649	$	25,485	$	—	$	25,485	$	—
Loans, net of allowance		1,067,410		1,076,569		—		—		1,076,569
PCI loans, net of allowance		30,119		38,091		—		—		38,091

Financial liabilities:
Interest bearing deposits		1,032,731		1,036,360		—		1,036,360		—
Borrowings		62,457		62,644		—		62,644		—


			Weighted Average
	Net Income		Shares	Per
	(Numerator)		(Denominator)	Share Amount
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

For the three months ended March 31, 2019
Basic EPS	$	3,503	22,141	$	0.16
Effect of dilutive stock awards		—	289		—
Diluted EPS	$	3,503	22,430	$	0.16


	Three months ended March 31, 2020						Three months ended March 31, 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	$	1,065,268	$	13,086	4.93	%	$	999,047	$	12,419	5.04	%
PCI loans		31,311		1,097	13.87			37,783		1,293	13.69
Total loans		1,096,579		14,183	5.19			1,036,830		13,712	5.36
Interest bearing bank balances		16,455		69	1.68			14,376		96	2.70
Federal funds sold		141		—	1.06			55		—	2.41
Securities (taxable)		182,340		1,351	2.96			186,370		1,522	3.27
Securities (tax exempt) (1)		49,391		435	3.52			67,211		603	3.59
Total earning assets		1,344,906		16,038	4.78			1,304,842		15,933	4.95
Allowance for loan losses		(8,621)						(9,084)
Non-earning assets		105,540						96,770
Total assets	$	1,441,825					$	1,392,528

LIABILITIES AND SHAREHOLDERS’ EQUITY

Demand - interest bearing	$	170,279		94	0.22		$	157,773		87	0.22
Savings and money market		219,661		280	0.51			220,945		293	0.54
Time deposits		632,664		3,045	1.93			623,417		2,854	1.86
Total interest bearing deposits		1,022,604		3,419	1.34			1,002,135		3,234	1.31
Short-term borrowings		4,185		23	2.20			6,837		50	2.94
FHLB and other borrowings		66,796		266	1.58			73,214		397	2.17
Total interest bearing liabilities		1,093,585		3,708	1.36			1,082,186		3,681	1.38
Noninterest bearing deposits		175,871						160,496
Other liabilities		14,184						9,974
Total liabilities		1,283,640						1,252,656
Shareholders’ equity		158,185						139,872

Total liabilities and shareholders’ equity	$	1,441,825					$	1,392,528
Net interest earnings			$	12,330					$	12,252
Interest spread					3.42	%					3.57	%
Net interest margin					3.68	%					3.81	%

Tax equivalent adjustment:
Securities			$	92					$	127


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
January 1 - January 31, 2020	—	$	—	—	—
February 1 - February 29, 2020	20,800		8.60	20,800	979,200
March 1 - March 31, 2020	95,000		6.60	95,000	884,200
Total	115,800	$	7.60	115,800	884,200