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Section 1: 10-Q (FORM 10-Q AT 03/31/20)

United States
Securities and Exchange Commission
Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2020

OR

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

For the transition period from ____________ to ____________

Commission file number 0-20914

OHIO VALLEY BANC CORP.
(Exact name of registrant as specified in its charter)

Ohio
31-1359191
(State of Incorporation)
(I.R.S. Employer Identification No.)

420 Third Avenue, Gallipolis, Ohio
45631
(Address of principal executive offices)
(ZIP Code)

(740) 446-2631
(Registrant’s telephone number, including area code)
_____________________

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

(Title of each class)
(Trading Symbol)
(Name of each exchange on which registered)
Common shares, without par value
OVBC
The NASDAQ Stock Market LLC (The NASDAQ Global Market)

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

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

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

Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
Emerging growth company
     

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

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

The number of common shares of the registrant outstanding as of May 8, 2020 was 4,787,446.
 



OHIO VALLEY BANC CORP.
Index

   
Page Number
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (Unaudited)
 
 
Consolidated Balance Sheets
3
 
Consolidated Statements of Income
4
 
Consolidated Statements of Comprehensive Income
5
 
Consolidated Statements of Changes in Shareholders’ Equity
6
 
Condensed Consolidated Statements of Cash Flows
7
 
Notes to the Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 26
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
37
Item 4.
Controls and Procedures
37
     
PART II.
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
38
Item 1A.
Risk Factors
38
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
40
Item 3.
Defaults Upon Senior Securities
40
Item 4.
Mine Safety Disclosures
40
Item 5.
Other Information
40
Item 6.
Exhibits
41
     
Signatures
 
42



 

2

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

OHIO VALLEY BANC CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands, except share and per share data)

   
March 31,
2020
   
December 31,
2019
 
             
ASSETS
           
Cash and noninterest-bearing deposits with banks
 
$
16,023
   
$
12,812
 
Interest-bearing deposits with banks
   
50,648
     
39,544
 
Total cash and cash equivalents
   
66,671
     
52,356
 
                 
Certificates of deposit in financial institutions
   
2,360
     
2,360
 
Securities available for sale
   
112,191
     
105,318
 
Securities held to maturity (estimated fair value: 2020 - $12,115; 2019 - $12,404)
   
11,808
     
12,033
 
Restricted investments in bank stocks
   
7,506
     
7,506
 
                 
Total loans
   
775,086
     
772,774
 
    Less: Allowance for loan losses
   
(8,729
)
   
(6,272
)
Net loans
   
766,357
     
766,502
 
                 
Premises and equipment, net
   
20,970
     
19,217
 
Premises and equipment held for sale, net
   
649
     
653
 
Other real estate owned, net
   
325
     
540
 
Accrued interest receivable
   
2,650
     
2,564
 
Goodwill
   
7,319
     
7,319
 
Other intangible assets, net
   
157
     
174
 
Bank owned life insurance and annuity assets
   
30,813
     
30,596
 
Operating lease right-of-use asset, net
   
998
     
1,053
 
Other assets
   
5,067
     
5,081
 
Total assets
 
$
1,035,841
   
$
1,013,272
 
                 
LIABILITIES
               
Noninterest-bearing deposits
 
$
213,262
   
$
222,607
 
Interest-bearing deposits
   
632,617
     
598,864
 
Total deposits
   
845,879
     
821,471
 
                 
Other borrowed funds
   
32,459
     
33,991
 
Subordinated debentures
   
8,500
     
8,500
 
Operating lease liability
   
998
     
1,053
 
Accrued liabilities
   
17,509
     
20,078
 
Total liabilities
   
905,345
     
885,093
 
                 
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)
   
----
     
----
 
                 
SHAREHOLDERS’ EQUITY
               
Common stock ($1.00 stated value per share, 10,000,000 shares authorized; 2020 - 5,447,185 shares issued; 2019 - 5,447,185 shares issued)
   
5,447
     
5,447
 
Additional paid-in capital
   
51,165
     
51,165
 
Retained earnings
   
86,748
     
86,751
 
Accumulated other comprehensive income
   
2,848
     
528
 
Treasury stock, at cost (659,739 shares)
   
(15,712
)
   
(15,712
)
Total shareholders’ equity
   
130,496
     
128,179
 
Total liabilities and shareholders’ equity
 
$
1,035,841
   
$
1,013,272
 



See accompanying notes to consolidated financial statements
 

3


OHIO VALLEY BANC CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share data)

   
Three months ended
March 31,
 
   
2020
   
2019
 
             
Interest and dividend income:
           
Loans, including fees
 
$
10,873
   
$
11,912
 
Securities
               
Taxable
   
597
     
618
 
Tax exempt
   
73
     
84
 
Dividends
   
66
     
113
 
Interest-bearing deposits with banks
   
162
     
319
 
Other Interest
   
14
     
12
 
     
11,785
     
13,058
 
                 
Interest expense:
               
Deposits
   
1,509
     
1,342
 
Other borrowed funds
   
200
     
235
 
Subordinated debentures
   
72
     
94
 
     
1,781
     
1,671
 
Net interest income
   
10,004
     
11,387
 
Provision for loan losses
   
3,846
     
2,377
 
Net interest income after provision for loan losses
   
6,158
     
9,010
 
                 
Noninterest income:
               
Service charges on deposit accounts
   
493
     
503
 
Trust fees
   
68
     
64
 
Income from bank owned life insurance and annuity assets
   
217
     
178
 
Mortgage banking income
   
90
     
69
 
Debit / credit card interchange income
   
943
     
914
 
Loss on other real estate owned
   
(101
)
   
----
 
Tax preparation fees
   
615
     
----
 
Litigation settlement
   
2,000
     
----
 
Other
   
117
     
118
 
     
4,442
     
1,846
 
Noninterest expense:
               
Salaries and employee benefits
   
5,455
     
5,536
 
Occupancy
   
432
     
453
 
Furniture and equipment
   
262
     
263
 
Professional fees
   
598
     
672
 
Marketing expense
   
268
     
270
 
FDIC insurance
   
----
     
3
 
Data processing
   
599
     
535
 
Software
   
381
     
411
 
Foreclosed assets
   
43
     
106
 
Amortization of intangibles
   
17
     
31
 
Other
   
1,464
     
1,288
 
     
9,519
     
9,568
 
                 
Income before income taxes
   
1,081
     
1,288
 
Provision for income taxes
   
79
     
95
 
                 
NET INCOME
 
$
1,002
   
$
1,193
 
                 
Earnings per share
 
$
.21
   
$
.25
 
                 



See accompanying notes to consolidated financial statements
 

4



OHIO VALLEY BANC CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands)
 
   
   
Three months ended
March 31,
 
   
2020
   
2019
 
             
Net Income
 
$
1,002
   
$
1,193
 
                 
Other comprehensive income:
               
  Change in unrealized gain on available for sale securities
   
2,937
     
1,996
 
  Related tax expense
   
(617
)
   
(419
)
Total other comprehensive income, net of tax
   
2,320
     
1,577
 
                 
Total comprehensive income
 
$
3,322
   
$
2,770
 








See accompanying notes to consolidated financial statements
 

5


OHIO VALLEY BANC CORP.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY (UNAUDITED)
 
(dollars in thousands, except share and per share data)
 
Quarter-to-date
 
Common
Stock
   
Additional Paid-In Capital
   
Retained
Earnings
   
Accumulated Other Comprehensive Income (Loss)
   
Treasury
Stock
   
Total
Shareholders' Equity
 
Balance at January 1, 2020
 
$
5,447
   
$
51,165
   
$
86,751
   
$
528
   
$
(15,712
)
 
$
128,179
 
Net income
   
----
     
----
     
1,002
     
----
     
----
     
1,002
 
Other comprehensive income, net
   
----
     
----
     
----
     
2,320
     
----
     
2,320
 
Cash dividends, $.21 per share
   
----
     
----
     
(1,005
)
   
----
     
----
     
(1,005
)
Balance at March 31, 2020
 
$
5,447
   
$
51,165
   
$
86,748
   
$
2,848
   
$
(15,712
)
 
$
130,496
 
                                                 
Balance at January 1, 2019
 
$
5,400
   
$
49,477
   
$
80,844
   
$
(2,135
)
 
$
(15,712
)
 
$
117,874
 
Net income
   
----
     
----
     
1,193
     
----
     
----
     
1,193
 
Other comprehensive income, net
   
----
     
----
     
----
     
1,577
     
----
     
1,577
 
Common stock issued to ESOP, 8,333 shares
   
8
     
320
     
----
     
----
     
----
     
328
 
Common stock issued through
dividend reinvestment, 10,000 shares
   
10
     
365
     
----
     
----
     
----
     
375
 
Cash dividends, $.21 per share
   
----
     
----
     
(995
)
   
----
     
----
     
(995
)
Balance at March 31, 2019
 
$
5,418
   
$
50,162
   
$
81,042
   
$
(558
)
 
$
(15,712
)
 
$
120,352
 







See accompanying notes to consolidated financial statements
 

6


OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED)
(dollars in thousands)
 
             
   
Three months ended
March 31,
 
   
2020
   
2019
 
             
Net cash provided by operating activities:
 
$
1,819
   
$
1,358
 
                 
Investing activities:
               
Proceeds from maturities of securities available for sale
   
6,310
     
3,881
 
Purchases of securities available for sale
   
(10,287
)
   
(10,035
)
Proceeds from maturities of securities held to maturity
   
215
     
215
 
Net change in loans
   
(3,720
)
   
(4,717
)
Proceeds from sale of other real estate owned
   
147
     
----
 
Purchases of premises and equipment
   
(2,049
)
   
(1,246
)
Net cash (used in) investing activities
   
(9,384
)
   
(11,902
)
                 
Financing activities:
               
Change in deposits
   
24,417
     
15,017
 
Proceeds from common stock through dividend reinvestment
   
----
     
375
 
Cash dividends
   
(1,005
)
   
(995
)
Repayment of Federal Home Loan Bank borrowings
   
(1,383
)
   
(1,508
)
Change in other long-term borrowings
   
(149
)
   
(628
)
Net cash provided by financing activities
   
21,880
     
12,261
 
                 
Change in cash and cash equivalents
   
14,315
     
1,717
 
Cash and cash equivalents at beginning of period
   
52,356
     
71,180
 
Cash and cash equivalents at end of period
 
$
66,671
   
$
72,897
 
                 
Supplemental disclosure:
               
Cash paid for interest
 
$
1,805
   
$
1,434
 
Transfers from loans to other real estate owned
   
33
     
40
 
Initial recognition of operating lease right-of-use asset
   
----
     
1,280
 
Operating lease liability arising from obtaining right-of-use asset
   
----
     
1,280
 
                 




See accompanying notes to consolidated financial statements
 

7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION:  The accompanying consolidated financial statements include the accounts of Ohio Valley Banc Corp. (“Ohio Valley”) and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the “Bank”), Loan Central, Inc. (“Loan Central”), a consumer finance company, Ohio Valley Financial Services Agency, LLC, an insurance agency, and OVBC Captive, Inc. (the “Captive”), a limited purpose property and casualty insurance company.  The Bank has one wholly-owned subsidiary, Ohio Valley REO, LLC (“Ohio Valley REO”), an Ohio limited liability company, to which the Bank transfers certain real estate acquired by the Bank through foreclosure for sale by Ohio Valley REO.  Ohio Valley and its subsidiaries are collectively referred to as the “Company”.  All material intercompany accounts and transactions have been eliminated in consolidation.
These interim financial statements are prepared by the Company without audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at March 31, 2020, and its results of operations and cash flows for the periods presented.  The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the operating results to be anticipated for the full fiscal year ending December 31, 2020.  The accompanying consolidated financial statements do not purport to contain all the necessary financial disclosures required by U.S. generally accepted accounting principles (“US GAAP”) that might otherwise be necessary in the circumstances.  The Annual Report of the Company for the year ended December 31, 2019 contains consolidated financial statements and related notes which should be read in conjunction with the accompanying consolidated financial statements.
The consolidated financial statements for 2019 have been reclassified to conform to the presentation for 2020.  These reclassifications had no effect on net income or shareholders’ equity.

RECENT EVENTS:  In March 2020, the World Health Organization declared the outbreak of the coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. COVID-19 has negatively impacted the global economy, disrupted global supply chains and increased unemployment levels. The resulting temporary closure of many businesses and the implementation of social distancing and sheltering-in-place policies has, and may continue to impact, many of the Company’s customers. While the full effects of the pandemic remain unknown, the Company is committed to supporting its customers, employees and communities during this difficult time.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), was signed into law. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by COVID-19. Under these provisions, modifications deemed to be COVID-19-related would not be considered a troubled debt restructuring if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or December 31, 2020. Also under the CARE Act, the Bank is a lender for the Small Business Administration's (“SBA”) Paycheck Protection Program ("PPP"), a program that provides assistance to small businesses. The PPP provides small businesses with funds to pay up to 8 weeks of payroll costs, including benefits. The funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities. The payments on these loans will be deferred for six months. Forgiveness of the PPP loans is based on the employer maintaining or quickly rehiring employees and maintaining salary levels.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:  The accounting and reporting policies followed by the Company conform to US GAAP established by the Financial Accounting Standards Board (“FASB”). The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

 

8



NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The potential financial impact of COVID 19 is unknown at this time. However, if these actions are sustained, it may adversely impact several industries within our geographic footprint and impair the ability of our customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Effects may include:

 The provision for loan losses could increase. Continued uncertainty regarding the severity and duration of the COVID-19 pandemic and related economic effects will continue to affect the accounting for loan losses. It also is possible that asset quality could worsen, and loan charge-offs increase. The Company is actively participating in the PPP program providing loans to small businesses negatively impacted by the COVID-19 pandemic. PPP loans are fully guaranteed by the U.S. government, if that should change, the Company could be required to increase its allowance for loan losses through an additional provision for loan losses charged to earnings.

 Valuation and fair value measurement challenges may occur. Material adverse impacts may include all or a combination of valuation impairments on the Company’s securities, impaired loans, other real estate owned, and interest rate swap agreements.

INDUSTRY SEGMENT INFORMATION:  Internal financial information is primarily reported and aggregated in two lines of business: banking and consumer finance.

EARNINGS PER SHARE:  Earnings per share are computed based on net income divided by the weighted average number of common shares outstanding during the period.  The weighted average common shares outstanding were 4,787,446 and 4,748,474 for the three months ended March 31, 2020 and 2019, respectively.  Ohio Valley had no dilutive effect and no potential common shares issuable under stock options or other agreements for any period presented.

ADOPTION OF NEW ACCOUNTING STANDARD UPDATES (“ASU”): In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. For non-public entities, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this ASU did not have a material impact on the Company’s consolidated financial position or results of operations.

ACCOUNTING GUIDANCE TO BE ADOPTED IN FUTURE PERIODS:  In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses”. ASU 2016-13 requires entities to replace the current “incurred loss” model with an “expected loss” model, which is referred to as the current expected credit loss (“CECL”) model.  These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. A CECL steering committee has developed a CECL model and is evaluating the source data, various credit loss methodologies and model results in relation to the new ASU guidance.  Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective.  Management expects the adoption will result in a material increase to the allowance for loan losses balance.  At this time, the impact is being evaluated. On October 16, 2019, the FASB confirmed it would delay the effective date of this ASU for smaller reporting companies, such as the Company, until fiscal years beginning after December 15, 2022.


 

9


NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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.  There are three levels of inputs that may be used to measure fair values:
 
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
 
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
 
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
 
The following is a description of the Company’s valuation methodologies used to measure and disclose the fair values of its financial assets and liabilities on a recurring or nonrecurring basis:
 
Securities:  The fair values for securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Impaired Loans:  At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned:  Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. In some instances, fair value adjustments can be made based on a quoted price from an observable input, such as a purchase agreement.  Such adjustments would be classified as a Level 2 classification.


 

10


NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with management’s own assumptions of fair value based on factors that include recent market data or industry-wide statistics.

On an as-needed basis, the Company reviews the fair value of collateral, taking into consideration current market data, as well as all selling costs that typically approximate 10%.

Interest Rate Swap Agreements:  The fair value of interest rate swap agreements is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments).  The variable cash receipts (or payments) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves (Level 2).

Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:

   
Fair Value Measurements at March 31, 2020 Using
 
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable
Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                 
U.S. Government sponsored entity securities
   
----
   
$
16,016
     
----
 
Agency mortgage-backed securities, residential
   
----
     
96,175
     
----
 
Interest rate swap derivatives
   
----
     
985
     
----
 
Interest rate swap derivatives
   
----
     
(985
)
   
----
 

   
Fair Value Measurements at December 31, 2019 Using
 
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable
Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                 
U.S. Government sponsored entity securities
   
----
   
$
16,736
     
----
 
Agency mortgage-backed securities, residential
   
----
     
88,582
     
----
 
Interest rate swap derivatives
   
----
     
465
     
----
 
Interest rate swap derivatives
   
----
     
(465
)
   
----
 

There were no transfers between Level 1 and Level 2 during 2020 or 2019.

 

11


NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Assets and Liabilities Measured on a Nonrecurring Basis
Assets and liabilities measured at fair value on a nonrecurring basis are summarized below:

   
Fair Value Measurements at March 31, 2020, Using
 
Assets:
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable
Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Impaired loans:
                 
  Commercial real estate:
                 
     Owner-occupied
   
----
     
----
   
$
459
 
  Commercial and Industrial
   
----
     
----
     
777
 
 
   
Fair Value Measurements at December 31, 2019, Using
 
Assets:
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable
Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Impaired loans:
                 
  Commercial real estate:
                 
     Owner-occupied
   
----
     
----
   
$
1,644
 
  Commercial and Industrial
   
----
     
----
     
4,559
 

At March 31, 2020, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $2,090, with a corresponding valuation allowance of $854, resulting in an increase of $854 in provision expense during the three months ended March 31, 2020, with no corresponding charge-offs recognized.  This is compared to an increase of $163 in provision expense during the three months ended March 31, 2019, with no corresponding charge-offs recognized.  At December 31, 2019, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $7,010, with a corresponding valuation allowance of $807, resulting in an increase of $807 in provision expense during the year ended December 31, 2019, with no corresponding charge-offs recognized.

There was no other real estate owned that was measured at fair value less costs to sell at March 31, 2020 and December 31, 2019. There were no corresponding write downs during the three months ended March 31, 2020 and 2019.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2020 and December 31, 2019:


March 31, 2020
Fair
Value
 
Valuation
Technique(s)
 
Unobservable
Input(s)
 
 
Range
 
(Weighted
Average)
 
Impaired loans:
                   
  Commercial real estate:
                   
      Owner-occupied
 
$
459
 
Sales approach
 
Adjustment to comparables
 
10% to 50%
     
27.8%

  Commercial and industrial
   
777
 
Sales approach
 
Adjustment to comparables
 
24% to 50%
     
28.9%



December 31, 2019
Fair
Value
 
Valuation
Technique(s)
 
Unobservable
Input(s)
 
 
Range
 
(Weighted
Average)
 
Impaired loans:
                   
  Commercial real estate:
                   
      Owner-occupied
 
$
1,644
 
Sales approach
 
Adjustment to comparables
 
0% to 20%
     
9.7%

  Commercial and industrial
   
4,559
 
Sales approach
 
Adjustment to comparables
 
0% to 61%
     
10.3%


 

12


NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

The carrying amounts and estimated fair values of financial instruments at March 31, 2020 and December 31, 2019 are as follows:

         
Fair Value Measurements at March 31, 2020 Using
 
   
Carrying
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial Assets:
                             
Cash and cash equivalents
 
$
66,671
   
$
66,671
   
$
----
   
$
----
   
$
66,671
 
Certificates of deposit in financial institutions
   
2,360
     
----
     
2,360
     
----
     
2,360
 
Securities available for sale
   
112,191
     
----
     
112,191
     
----
     
112,191
 
Securities held to maturity
   
11,808
     
----
     
6,420
     
5,695
     
12,115
 
Loans, net
   
766,357
     
----
     
----
     
761,147
     
761,147
 
Interest rate swap derivatives
   
985
     
----
     
985
     
----
     
985
 
Accrued interest receivable
   
2,650
     
----
     
385
     
2,265
     
2,650
 
                                         
Financial liabilities:
                                       
Deposits
   
845,879
     
213,262
     
635,176
     
----
     
848,438
 
Other borrowed funds
   
32,459
     
----
     
33,792
     
----
     
33,792
 
Subordinated debentures
   
8,500
     
----
     
5,979
     
----
     
5,979
 
Interest rate swap derivatives
   
985
     
----
     
985
     
----
     
985
 
Accrued interest payable
   
1,565
     
1
     
1,564
     
----
     
1,565
 

         
Fair Value Measurements at December 31, 2019 Using:
 
   
Carrying
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial Assets:
                             
Cash and cash equivalents
 
$
52,356
   
$
52,356
   
$
----
   
$
----
   
$
52,356
 
Certificates of deposit in financial institutions
   
2,360
     
----
     
2,360
     
----
     
2,360
 
Securities available for sale
   
105,318
     
----
     
105,318
     
----
     
105,318
 
Securities held to maturity
   
12,033
     
----
     
6,446
     
5,958
     
12,404
 
Loans, net
   
766,502
     
----
     
----
     
771,285
     
771,285
 
Interest rate swap derivatives
   
465
     
----
     
465
     
----
     
465
 
Accrued interest receivable
   
2,564
     
----
     
315
     
2,249
     
2,564
 
                                         
Financial liabilities:
                                       
Deposits
   
821,471
     
222,607
     
599,937
     
----
     
822,544
 
Other borrowed funds
   
33,991
     
----
     
34,345
     
----
     
34,345
 
Subordinated debentures
   
8,500
     
----
     
6,275
     
----
     
6,275
 
Interest rate swap derivatives
   
465
     
----
     
465
     
----
     
465
 
Accrued interest payable
   
1,589
     
3
     
1,586
     
----
     
1,589
 

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.


 

13

NOTE 3 – SECURITIES

The following table summarizes the amortized cost and fair value of securities available for sale and securities held to maturity at March 31, 2020 and December 31, 2019 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive (loss) and gross unrecognized gains and losses:

Securities Available for Sale
 
Amortized
Cost
   
Gross Unrealized
Gains
   
Gross Unrealized
Losses
   
Estimated
Fair Value
 
March 31, 2020
                       
  U.S. Government sponsored entity securities
 
$
15,621
   
$
395
   
$
----
   
$
16,016
 
  Agency mortgage-backed securities, residential
   
92,965
     
3,212
     
(2
)
   
96,175
 
      Total securities
 
$
108,586
   
$
3,607
   
$
(2
)
 
$
112,191
 
                                 
December 31, 2019
                               
  U.S. Government sponsored entity securities
 
$
16,579
   
$
163
   
$
(6
)
 
$
16,736
 
  Agency mortgage-backed securities, residential
   
88,071
     
807
     
(296
)
   
88,582
 
      Total securities
 
$
104,650
   
$
970
   
$
(302
)
 
$
105,318
 

Securities Held to Maturity
 
Amortized
Cost
   
Gross Unrecognized
Gains
   
Gross Unrecognized
Losses
   
Estimated
Fair Value
 
March 31, 2020
                       
  Obligations of states and political subdivisions
 
$
11,806
   
$
308
   
$
(1
)
 
$
12,113
 
  Agency mortgage-backed securities, residential
   
2
     
----
     
----
     
2
 
      Total securities
 
$
11,808
   
$
308
   
$
(1
)
 
$
12,115
 
                                 
December 31, 2019
                               
  Obligations of states and political subdivisions
 
$
12,031
   
$
372
   
$
(1
)
 
$
12,402
 
  Agency mortgage-backed securities, residential
   
2
     
----
     
----
     
2
 
      Total securities
 
$
12,033
   
$
372
   
$
(1
)
 
$
12,404
 

The amortized cost and estimated fair value of debt securities at March 31, 2020, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay the debt obligations prior to their contractual maturities.  Securities not due at a single maturity are shown separately.

   
Available for Sale
   
Held to Maturity
 
 
Debt Securities:
 
Amortized
Cost
   
Estimated
Fair Value
   
Amortized
Cost
   
Estimated
Fair Value
 
                         
  Due in one year or less
 
$
7,289
   
$
7,404
   
$
639
   
$
641
 
  Due in over one to five years
   
8,332
     
8,612
     
6,802
     
7,014
 
  Due in over five to ten years
   
----
     
----
     
4,365
     
4,458
 
  Agency mortgage-backed securities, residential
   
92,965
     
96,175
     
2
     
2
 
      Total debt securities
 
$
108,586
   
$
112,191
   
$
11,808
   
$
12,115
 

The following table summarizes securities with unrealized losses at March 31, 2020 and December 31, 2019, aggregated by major security type and length of time in a continuous unrealized loss position:

March 31, 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
                                   
Agency mortgage-backed
                                   
securities, residential
 
$
----
   
$
----
   
$
198
   
$
(2
)
 
$
198
   
$
(2
)
      Total available for sale
 
$
----
   
$
----
   
$
198
   
$
(2
)
 
$
198
   
$
(2
)

   
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair Value
   
Unrecognized Loss
   
Fair Value
   
Unrecognized Loss
   
Fair Value
   
Unrecognized Loss
 
Securities Held to Maturity
                                   
Obligations of states and
                                   
political subdivisions
 
$
204
   
$
(1
)
 
$
----
   
$
----
   
$
204
   
$
(1
)
      Total held to maturity
 
$
204
   
$
(1
)
 
$
----
   
$
----
   
$
204
   
$
(1
)



 

14


NOTE 3 – SECURITIES (Continued)

December 31, 2019
 
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
Securities Available for Sale
                                   
U.S. Government sponsored
                                   
entity securities
 
$
----
   
$
----
   
$
1,999
   
$
(6
)
 
$
1,999
   
$
(6
)
Agency mortgage-backed
                                               
securities, residential
   
15,041
     
(84
)
   
21,344
     
(212
)
   
36,385
     
(296
)
      Total available for sale
 
$
15,041
   
$
(84
)
 
$
23,343
   
$
(218
)
 
$
38,384
   
$
(302
)

   
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair Value
   
Unrecognized Loss
   
Fair Value
   
Unrecognized Loss
   
Fair Value
   
Unrecognized Loss
 
Securities Held to Maturity
                                   
Obligations of states and
                                   
political subdivisions
 
$
204
   
$
(1
)
 
$
----
   
$
----
   
$
204
   
$
(1
)
      Total held to maturity
 
$
204
   
$
(1
)
 
$
----
   
$
----
   
$
204
   
$
(1
)

There were no sales of investment securities during the three months ended March 31, 2020 or 2019. Unrealized losses on the Company’s debt securities have not been recognized into income because the issuers’ securities are of high credit quality as of March 31, 2020, and management does not intend to sell, and it is likely that management will not be required to sell, the securities prior to their anticipated recovery.  Management does not believe any individual unrealized loss at March 31, 2020 and December 31, 2019 represents an other-than-temporary impairment.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are comprised of the following:
 
March 31,
   
December 31,
 
   
2020
   
2019
 
Residential real estate
 
$
307,879
   
$
310,253
 
Commercial real estate:
               
    Owner-occupied
   
55,515
     
55,825
 
    Nonowner-occupied
   
137,141
     
131,398
 
    Construction
   
34,892
     
34,913
 
Commercial and industrial
   
102,570
     
100,023
 
Consumer:
               
    Automobile
   
61,729
     
63,770
 
    Home equity
   
21,894
     
22,882
 
    Other
   
53,466
     
53,710
 
     
775,086
     
772,774
 
Less:  Allowance for loan losses
   
(8,729
)
   
(6,272
)
                 
Loans, net
 
$
766,357
   
$
766,502
 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2020 and 2019:

March 31, 2020
 
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and Industrial
   
Consumer
   
Total
 
Allowance for loan losses:
                             
    Beginning balance
 
$
1,250
   
$
1,928
   
$
1,447
   
$
1,647
   
$
6,272
 
    Provision for loan losses
   
926
     
1,572
     
624
     
724
     
3,846
 
    Loans charged off
   
(198
)
   
(516
)
   
(33
)
   
(889
)
   
(1,636
)
    Recoveries
   
24
     
44
     
7
     
172
     
247
 
    Total ending allowance balance
 
$
2,002
   
$
3,028
   
$
2,045
   
$
1,654
   
$
8,729
 

March 31, 2019
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and Industrial
   
Consumer
   
Total
 
Allowance for loan losses:
                             
    Beginning balance
 
$
1,583
   
$
2,186
   
$
1,063
   
$
1,896
   
$
6,728
 
    Provision for loan losses
   
813
     
393
     
473
     
699
     
2,378
 
    Loans charged-off
   
(329
)
   
(141
)
   
(233
)
   
(658
)
   
(1,361
)
    Recoveries
   
12
     
14
     
12
     
230
     
268
 
    Total ending allowance balance
 
$
2,079
   
$
2,452
   
$
1,315
   
$
2,167
   
$
8,013
 


 

15


NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following table presents the balance in the allowance for loan losses and the recorded investment of loans by portfolio segment and based on impairment method as of March 31, 2020 and December 31, 2019:

March 31, 2020
 
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and Industrial
   
Consumer
   
Total
 
Allowance for loan losses:
                             
Ending allowance balance attributable to loans:
                             
Individually evaluated for impairment
 
$
----
   
$
409
   
$
445
   
$
----
   
$
854
 
Collectively evaluated for impairment
   
2,002
     
2,619
     
1,600
     
1,654
     
7,875
 
Total ending allowance balance
 
$
2,002
   
$
3,028
   
$
2,045
   
$
1,654
   
$
8,729
 
                                         
Loans:
                                       
Loans individually evaluated for impairment
 
$
428
   
$
5,088
   
$
5,207
   
$
403
   
$
11,126
 
Loans collectively evaluated for impairment
   
307,451
     
222,460
     
97,363
     
136,686
     
763,960
 
Total ending loans balance
 
$
307,879
   
$
227,548
   
$
102,570
   
$
137,089
   
$
775,086
 

December 31, 2019
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and Industrial
   
Consumer
   
Total
 
Allowance for loan losses:
                             
Ending allowance balance attributable to loans:
                             
Individually evaluated for impairment
 
$
----
   
$
385
   
$
303
   
$
119
   
$
807
 
Collectively evaluated for impairment
   
1,250
     
1,543
     
1,144
     
1,528
     
5,465
 
Total ending allowance balance
 
$
1,250
   
$
1,928
   
$
1,447
   
$
1,647
   
$
6,272
 
                                         
Loans:
                                       
Loans individually evaluated for impairment
 
$
438
   
$
11,300
   
$
4,910
   
$
487
   
$
17,135
 
Loans collectively evaluated for impairment
   
309,815
     
210,836
     
95,113
     
139,875
     
755,639
 
Total ending loans balance
 
$
310,253
   
$
222,136
   
$
100,023
   
$
140,362
   
$
772,774
 

The following tables present information related to loans individually evaluated for impairment by class of loans as of March 31, 2020 and December 31, 2019:

March 31, 2020
 
Unpaid
Principal Balance
   
Recorded
Investment
   
Allowance for Loan Losses Allocated
 
With an allowance recorded
                 
    Commercial real estate:
                 
        Owner-occupied
 
$
868
   
$
868
   
$
409
 
    Commercial and industrial
   
1,222
     
1,222
     
445
 
With no related allowance recorded:
                       
    Residential real estate
   
428
     
428
     
----
 
    Commercial real estate:
                       
        Owner-occupied
   
3,201
     
3,201
     
----
 
        Nonowner-occupied
   
1,019
     
1,019
     
----
 
    Commercial and industrial
   
3,985
     
3,985
     
----
 
    Consumer:
                       
        Home equity
   
403
     
403
     
----
 
            Total
 
$
11,126
   
$
11,126
   
$
854
 


 

16

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

December 31, 2019
 
Unpaid
Principal Balance
   
Recorded
Investment
   
Allowance for Loan Losses Allocated
 
With an allowance recorded:
                 
    Commercial real estate:
                 
        Owner-occupied
 
$
2,030
   
$
2,030
   
$
385
 
    Commercial and industrial
   
4,861
     
4,861
     
303
 
    Consumer:
                       
        Automobile
   
8
     
8
     
8
 
        Other
   
111
     
111
     
111
 
With no related allowance recorded:
                       
    Residential real estate
   
438
     
438
     
----
 
    Commercial real estate:
                       
        Owner-occupied
   
1,778
     
1,778
     
----
 
        Nonowner-occupied
   
7,492
     
7,492
     
----
 
    Commercial and industrial
   
49
     
49
     
----
 
    Consumer:
                       
        Home equity
   
368
     
368
     
----
 
            Total
 
$
17,135
   
$
17,135
   
$
807
 

The following tables present information related to loans individually evaluated for impairment by class of loans for the three months ended March 31, 2020 and 2019:

   
Three months ended March 31, 2020
 
   
Average
Impaired Loans
   
Interest Income
Recognized
   
Cash Basis Interest Recognized
 
With an allowance recorded
                 
    Commercial real estate:
                 
        Owner-occupied
 
$
875
   
$
9
   
$
9
 
    Commercial and industrial
   
611
     
7
     
7
 
With no related allowance recorded:
                       
    Residential real estate
   
433
     
4
     
4
 
    Commercial real estate:
                       
        Owner-occupied
   
2,754
     
48
     
48
 
        Nonowner-occupied
   
1,033
     
11
     
11
 
    Commercial and industrial
   
4,279
     
66
     
66
 
    Consumer:
                       
        Home equity
   
385
     
5
     
5
 
            Total
 
$
10,370
   
$
150
   
$
150
 

   
Three months ended March 31, 2019
 
   
Average
Impaired Loans
   
Interest Income
Recognized
   
Cash Basis Interest Recognized
 
With an allowance recorded:
                 
    Residential real estate
 
$
1,255
   
$
7
   
$
7
 
    Commercial real estate:
                       
        Owner-occupied
   
78
     
2
     
2
 
        Nonowner-occupied
   
360
     
----
     
----
 
    Commercial and industrial
   
984
     
36
     
36
 
    Consumer:
                       
        Home equity
   
3
     
----
     
----
 
With no related allowance recorded:
                       
    Residential real estate
   
451
     
4
     
4
 
    Commercial real estate:
                       
        Owner-occupied
   
2,862
     
52
     
52
 
        Nonowner-occupied
   
4,177
     
112
     
112
 
    Commercial and industrial
   
5,258
     
84
     
84
 
            Total
 
$
15,428
   
$
297
   
$
297
 


 

17

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The recorded investment of a loan is its carrying value excluding accrued interest and deferred loan fees.

Nonaccrual loans and loans past due 90 days or more and still accruing include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified as impaired loans.

The Company transfers loans to other real estate owned, at fair value less cost to sell, in the period the Company obtains physical possession of the property (through legal title or through a deed in lieu). As of March 31, 2020, there were no other real estate owned for residential real estate properties, as compared to $68 at December 31, 2019. In addition, nonaccrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $831 and $1,780 as of March 31, 2020 and December 31, 2019, respectively.

The following table presents the recorded investment of nonaccrual loans and loans past due 90 days or more and still accruing by class of loans as of March 31, 2020 and December 31, 2019:

March 31, 2020
 
Loans Past Due
90 Days And
Still Accruing
   
Nonaccrual
 
             
Residential real estate
 
$
360
   
$
5,867
 
Commercial real estate:
               
    Owner-occupied
   
60
     
348
 
    Nonowner-occupied
   
----
     
724
 
    Construction
   
----
     
237
 
Commercial and industrial
   
1,192
     
534
 
Consumer:
               
    Automobile
   
116
     
77
 
    Home equity
   
----
     
359
 
    Other
   
255
     
49
 
        Total
 
$
1,983
   
$
8,195
 


December 31, 2019
 
Loans Past Due
90 Days And
Still Accruing
   
Nonaccrual
 
             
Residential real estate
 
$
255
   
$
6,119
 
Commercial real estate:
               
    Owner-occupied
   
----
     
863
 
    Nonowner-occupied
   
----
     
804
 
    Construction
   
----
     
229
 
Commercial and industrial
   
----
     
590
 
Consumer:
               
    Automobile
   
239
     
61
 
    Home equity
   
----
     
392
 
    Other
   
395
     
91
 
        Total
 
$
889
   
$
9,149
 


 

18


NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following table presents the aging of the recorded investment of past due loans by class of loans as of March 31, 2020 and December 31, 2019:

March 31, 2020
 
30-59
Days
Past Due
   
60-89
Days
Past Due
   
90 Days
Or More
Past Due
   
Total
Past Due
   
Loans Not
Past Due
   
Total
 
                                     
Residential real estate
 
$
3,499
   
$
1,153
   
$
2,456
   
$
7,108
   
$
300,771
   
$
307,879
 
Commercial real estate:
                                               
    Owner-occupied
   
1,951
     
----
     
313
     
2,264
     
53,251
     
55,515
 
    Nonowner-occupied
   
1,457
     
----
     
601
     
2,058
     
135,083
     
137,141
 
    Construction
   
52
     
----
     
68
     
120
     
34,772
     
34,892
 
Commercial and industrial
   
287
     
47
     
1,726
     
2,060
     
100,510
     
102,570
 
Consumer:
                                               
    Automobile
   
1,200
     
275
     
190
     
1,665
     
60,064
     
61,729
 
    Home equity
   
212
     
80
     
255
     
547
     
21,347
     
21,894
 
    Other
   
519
     
205
     
264
     
988
     
52,478
     
53,466
 
        Total
 
$
9,177
   
$
1,760
   
$
5,873
   
$
16,810
   
$
758,276
   
$
775,086
 

December 31, 2019
 
30-59
Days
Past Due
   
60-89
Days
Past Due
   
90 Days
Or More
Past Due
   
Total
Past Due
   
Loans Not
Past Due
   
Total
 
                                     
Residential real estate
 
$
4,015
   
$
1,314
   
$
1,782
   
$
7,111
   
$
303,142
   
$
310,253
 
Commercial real estate:
                                               
    Owner-occupied
   
383
     
59
     
144
     
586
     
55,239
     
55,825
 
    Nonowner-occupied
   
12
     
----
     
697
     
709
     
130,689
     
131,398
 
    Construction
   
186
     
19
     
49
     
254
     
34,659
     
34,913
 
Commercial and industrial
   
1,320
     
312
     
241
     
1,873
     
98,150
     
100,023
 
Consumer:
                                               
    Automobile
   
986
     
329
     
246
     
1,561
     
62,209
     
63,770
 
    Home equity
   
106
     
18
     
279
     
403
     
22,479
     
22,882
 
    Other
   
559
     
139
     
443
     
1,141
     
52,569
     
53,710
 
        Total
 
$
7,567
   
$
2,190
   
$
3,881
   
$
13,638
   
$
759,136
   
$
772,774
 

Troubled Debt Restructurings:

A troubled debt restructuring (“TDR”) occurs when the Company has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty.  All TDRs are considered to be impaired.   The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a reduction in the contractual principal and interest payments of the loan; or short-term interest-only payment terms.

The Company has allocated reserves for a portion of its TDRs to reflect the fair values of the underlying collateral or the present value of the concessionary terms granted to the customer.


 

19

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following table presents the types of TDR loan modifications by class of loans as of March 31, 2020 and December 31, 2019:

March 31, 2020
 
TDRs
Performing to Modified Terms
   
TDRs Not
Performing to Modified Terms
   
Total
TDRs
 
Residential real estate:
                 
        Interest only payments
 
$
207
   
$
----
   
$
207
 
Commercial real estate:
                       
    Owner-occupied
                       
        Interest only payments
   
868
     
----
     
868
 
        Reduction of principal and interest payments
   
1,509
     
----
     
1,509
 
        Maturity extension at lower stated rate than market rate
   
373
     
----
     
373
 
        Credit extension at lower stated rate than market rate
   
391
     
----
     
391
 
    Nonowner-occupied
                       
        Credit extension at lower stated rate than market rate
   
394
     
----
     
394
 
Commercial and industrial:
                       
        Interest only payments
   
3,984
     
----
     
3,984
 
                         
            Total TDRs
 
$
7,726
   
$
----
   
$
7,726
 


December 31, 2019
 
TDRs
Performing to Modified Terms
   
TDRs Not
Performing to Modified Terms
   
Total
TDRs
 
Residential real estate:
                 
        Interest only payments
 
$
209
   
$
----
   
$
209
 
Commercial real estate:
                       
    Owner-occupied
                       
        Interest only payments
   
882
     
----
     
882
 
        Reduction of principal and interest payments
   
1,521
     
----
     
1,521
 
        Maturity extension at lower stated rate than market rate
   
393
     
----
     
393
 
        Credit extension at lower stated rate than market rate
   
393
     
----
     
393
 
    Nonowner-occupied
                       
        Credit extension at lower stated rate than market rate
   
395
     
----
     
395
 
Commercial and industrial:
                       
        Interest only payments
   
4,574
     
----
     
4,574
 
        Reduction of principal and interest payments
   
185
     
----
     
185
 
                         
            Total TDRs
 
$
8,552
   
$
----
   
$
8,552
 

At March 31, 2020, the balance in TDR loans decreased $826, or 9.7%, from year-end 2019.  The Company’s specific allocations in reserves to customers whose loan terms have been modified in TDRs totaled $450 at March 31, 2020, as compared to $227 in reserves at December 31, 2019.  At March 31, 2020, the Company had $1,516 in commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs, as compared to $941 at December 31, 2019.

 

20


NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

There were no TDR loan modifications that occurred during the three months ended March 31, 2020. The following table presents the pre- and post-modification balances of TDR loan modifications by class of loans that occurred during the three months ended March 31, 2019:

         
TDRs
Performing to Modified Terms
   
TDRs Not
Performing to Modified Terms
 
Three months ended March 31, 2019
 
Number of
Loans
   
Pre-Modification Recorded Investment
   
Post-Modification Recorded Investment
   
Pre-Modification Recorded Investment
   
Post-Modification Recorded Investment
 
Commercial real estate:
                             
    Owner-occupied
                             
        Reduction of principal and interest payments
   
1
   
$
1,036
   
$
1,036
   
$
----
   
$
----
 
Commercial and Industrial:
                                       
        Reduction of principal and interest payments
   
1
     
199
     
199
                 
              Total TDRs
   
2
   
$
1,235
   
$
1,235
   
$
----
   
$
----
 

The TDRs described above had no impact on the allowance for loan losses and resulted in no charge-offs during the three months ended March 31, 2019.

The Company had no TDRs that occurred during the three months ended March 31, 2020 or March 31, 2019 that experienced any payment defaults within twelve months following their loan modification.  A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.  TDR loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Under the terms of the CARE Act, as of March 31, 2020, the Company had modified 95 loans related to the COVID-19 pandemic with an aggregate loan balance of $15,934 that were not reported as TDRs in the tables presented above.  As of May 7, 2020, the volume of COVID-19 modifications had increased to 593 loans with an aggregate loan balance of $128,262.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. These risk categories are represented by a loan grading scale from 1 through 11. The Company analyzes loans individually with a higher credit risk rating and groups these loans into categories called “criticized” and ”classified” assets. The Company considers its criticized assets to be loans that are graded 8 and its classified assets to be loans that are graded 9 through 11. The Company’s risk categories are reviewed at least annually on loans that have aggregate borrowing amounts that meet or exceed $750.

The Company uses the following definitions for its criticized loan risk ratings:

Special Mention.  Loans classified as special mention indicate considerable risk due to deterioration of repayment (in the earliest stages) due to potential weak primary repayment source, or payment delinquency.  These loans will be under constant supervision, are not classified and do not expose the institution to sufficient risks to warrant classification.  These deficiencies should be correctable within the normal course of business, although significant changes in company structure or policy may be necessary to correct the deficiencies.  These loans are considered bankable assets with no apparent loss of principal or interest envisioned.  The perceived risk in continued lending is considered to have increased beyond the level where such loans would normally be granted.  Credits that are defined as a TDR should be graded no higher than special mention until they have been reported as performing over one year after restructuring.


 

21

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The Company uses the following definitions for its classified loan risk ratings:

Substandard.  Loans classified as substandard represent very high risk, serious delinquency, nonaccrual, or unacceptable credit. Repayment through the primary source of repayment is in jeopardy due to the existence of one or more well defined weaknesses and the collateral pledged may inadequately protect collection of the loans. Loss of principal is not likely if weaknesses are corrected, although financial statements normally reveal significant weakness. Loans are still considered collectible, although loss of principal is more likely than with special mention loan grade 8 loans. Collateral liquidation is considered likely to satisfy debt.

Doubtful.  Loans classified as doubtful display a high probability of loss, although the amount of actual loss at the time of classification is undetermined. This classification should be temporary until such time that actual loss can be identified, or improvements made to reduce the seriousness of the classification. These loans exhibit all substandard characteristics with the addition that weaknesses make collection or liquidation in full highly questionable and improbable. This classification consists of loans where the possibility of loss is high after collateral liquidation based upon existing facts, market conditions, and value. Loss is deferred until certain important and reasonable specific pending factors which may strengthen the credit can be more accurately determined. These factors may include proposed acquisitions, liquidation procedures, capital injection, receipt of additional collateral, mergers, or refinancing plans. A doubtful classification for an entire credit should be avoided when collection of a specific portion appears highly probable with the adequately secured portion graded substandard.

Loss.  Loans classified as loss are considered uncollectible and are of such little value that their continuance as bankable assets is not warranted.  This classification does not mean that the credit has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset yielding such a minimum value even though partial recovery may be affected in the future.  Amounts classified as loss should be promptly charged off.

Criticized and classified loans will mostly consist of commercial and industrial and commercial real estate loans. The Company considers its loans that do not meet the criteria for a criticized and classified asset rating as pass rated loans, which will include loans graded from 1 (Prime) to 7 (Watch). All commercial loans are categorized into a risk category either at the time of origination or reevaluation date. As of March 31, 2020 and December 31, 2019, and based on the most recent analysis performed, the risk category of commercial loans by class of loans was as follows:

March 31, 2020

 
Pass
   
Criticized
   
Classified
   
Total
 
Commercial real estate:
                       
    Owner-occupied
 
$
47,876
   
$
1,634
   
$
6,005
   
$
55,515
 
    Nonowner-occupied
   
129,848
     
6,309
     
984
     
137,141
 
    Construction
   
34,843
     
----
     
49
     
34,892
 
Commercial and industrial
   
92,468
     
4,071
     
6,031
     
102,570
 
        Total
 
$
305,035
   
$
12,014
   
$
13,069
   
$
330,118
 

December 31, 2019

 
Pass
   
Criticized
   
Classified
   
Total
 
Commercial real estate:
                       
    Owner-occupied
 
$
49,486
   
$
2,889
   
$
3,450
   
$
55,825
 
    Nonowner-occupied
   
123,847
     
----
     
7,551
     
131,398
 
    Construction
   
34,864
     
----
     
49
     
34,913
 
Commercial and industrial
   
89,749
     
298
     
9,976
     
100,023
 
        Total
 
$
297,946
   
$
3,187
   
$
21,026
   
$
322,159
 

The Company also obtains the credit scores of its borrowers upon origination (if available by the credit bureau), but the scores are not updated. The Company focuses mostly on the performance and repayment ability of the borrower as an indicator of credit risk and does not consider a borrower's credit score to be a significant influence in the determination of a loan's credit risk grading.

 

22


NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment of residential and consumer loans by class of loans based on repayment activity as of March 31, 2020 and December 31, 2019:

March 31, 2020
 
Consumer
             
   
Automobile
   
Home Equity
   
Other
   
Residential
Real Estate
   
Total
 
                               
Performing
 
$
61,536
   
$
21,535
   
$
53,162
   
$
301,652
   
$
437,885
 
Nonperforming
   
193
     
359
     
304
     
6,227
     
7,083
 
    Total
 
$
61,729
   
$
21,894
   
$
53,466
   
$
307,879
   
$
444,968