0001083643 --12-31 Accelerated Filer 2020 Q2 10-Q false P3M P3M P1M P3Y Common Stock Par value $3.13 per share 0 0001083643 2020-01-01 2020-06-30 xbrli:shares 0001083643 2020-08-07 iso4217:USD 0001083643 2020-06-30 0001083643 2019-12-31 iso4217:USD xbrli:shares 0001083643 2020-04-01 2020-06-30 0001083643 2019-04-01 2019-06-30 0001083643 2019-01-01 2019-06-30 0001083643 us-gaap:FiduciaryAndTrustMember 2020-04-01 2020-06-30 0001083643 us-gaap:FiduciaryAndTrustMember 2019-04-01 2019-06-30 0001083643 us-gaap:FiduciaryAndTrustMember 2020-01-01 2020-06-30 0001083643 us-gaap:FiduciaryAndTrustMember 2019-01-01 2019-06-30 0001083643 us-gaap:DepositAccountMember 2020-04-01 2020-06-30 0001083643 us-gaap:DepositAccountMember 2019-04-01 2019-06-30 0001083643 us-gaap:DepositAccountMember 2020-01-01 2020-06-30 0001083643 us-gaap:DepositAccountMember 2019-01-01 2019-06-30 0001083643 us-gaap:CreditAndDebitCardMember 2020-04-01 2020-06-30 0001083643 us-gaap:CreditAndDebitCardMember 2019-04-01 2019-06-30 0001083643 us-gaap:CreditAndDebitCardMember 2020-01-01 2020-06-30 0001083643 us-gaap:CreditAndDebitCardMember 2019-01-01 2019-06-30 0001083643 us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember 2019-03-31 0001083643 us-gaap:RetainedEarningsMember 2019-03-31 0001083643 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-03-31 0001083643 2019-03-31 0001083643 us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember 2019-04-01 2019-06-30 0001083643 us-gaap:RetainedEarningsMember 2019-04-01 2019-06-30 0001083643 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-04-01 2019-06-30 0001083643 us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember 2019-06-30 0001083643 us-gaap:RetainedEarningsMember 2019-06-30 0001083643 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-06-30 0001083643 2019-06-30 0001083643 us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember 2020-03-31 0001083643 us-gaap:RetainedEarningsMember 2020-03-31 0001083643 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-03-31 0001083643 2020-03-31 0001083643 us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember 2020-04-01 2020-06-30 0001083643 us-gaap:RetainedEarningsMember 2020-04-01 2020-06-30 0001083643 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-04-01 2020-06-30 0001083643 us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember 2020-06-30 0001083643 us-gaap:RetainedEarningsMember 2020-06-30 0001083643 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-06-30 0001083643 us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember 2018-12-31 0001083643 us-gaap:RetainedEarningsMember 2018-12-31 0001083643 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-12-31 0001083643 2018-12-31 0001083643 us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember 2019-01-01 2019-06-30 0001083643 us-gaap:RetainedEarningsMember 2019-01-01 2019-06-30 0001083643 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-01-01 2019-06-30 0001083643 us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember 2019-12-31 0001083643 us-gaap:RetainedEarningsMember 2019-12-31 0001083643 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-12-31 0001083643 us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember 2020-01-01 2020-06-30 0001083643 us-gaap:RetainedEarningsMember 2020-01-01 2020-06-30 0001083643 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-01-01 2020-06-30 xbrli:pure 0001083643 fbss:COVID19Member 2020-01-01 2020-06-30 0001083643 us-gaap:USTreasuryAndGovernmentMember 2020-06-30 0001083643 us-gaap:USStatesAndPoliticalSubdivisionsMember 2020-06-30 0001083643 us-gaap:USTreasuryAndGovernmentMember 2019-12-31 0001083643 us-gaap:USStatesAndPoliticalSubdivisionsMember 2019-12-31 fbss:Loan 0001083643 fbss:SmallBusinessAdministrationCARESActPaycheckProtectionProgramMember 2020-06-30 0001083643 us-gaap:CommercialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-12-31 0001083643 fbss:ConstructionAndLandMember 2019-12-31 0001083643 us-gaap:ConsumerPortfolioSegmentMember 2019-12-31 0001083643 fbss:StudentUsGovernmentGuaranteedMember 2019-12-31 0001083643 us-gaap:ResidentialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:HomeEquityMember 2019-12-31 0001083643 us-gaap:UnallocatedFinancingReceivablesMember 2019-12-31 0001083643 us-gaap:CommercialPortfolioSegmentMember 2020-01-01 2020-06-30 0001083643 us-gaap:CommercialRealEstatePortfolioSegmentMember 2020-01-01 2020-06-30 0001083643 fbss:ConstructionAndLandMember 2020-01-01 2020-06-30 0001083643 us-gaap:ConsumerPortfolioSegmentMember 2020-01-01 2020-06-30 0001083643 fbss:StudentUsGovernmentGuaranteedMember 2020-01-01 2020-06-30 0001083643 us-gaap:ResidentialPortfolioSegmentMember 2020-01-01 2020-06-30 0001083643 us-gaap:HomeEquityMember 2020-01-01 2020-06-30 0001083643 us-gaap:UnallocatedFinancingReceivablesMember 2020-01-01 2020-06-30 0001083643 us-gaap:CommercialPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:CommercialRealEstatePortfolioSegmentMember 2020-06-30 0001083643 fbss:ConstructionAndLandMember 2020-06-30 0001083643 us-gaap:ConsumerPortfolioSegmentMember 2020-06-30 0001083643 fbss:StudentUsGovernmentGuaranteedMember 2020-06-30 0001083643 us-gaap:ResidentialPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:HomeEquityMember 2020-06-30 0001083643 us-gaap:UnallocatedFinancingReceivablesMember 2020-06-30 0001083643 us-gaap:CommercialPortfolioSegmentMember 2018-12-31 0001083643 us-gaap:CommercialRealEstatePortfolioSegmentMember 2018-12-31 0001083643 fbss:ConstructionAndLandMember 2018-12-31 0001083643 us-gaap:ConsumerPortfolioSegmentMember 2018-12-31 0001083643 fbss:StudentUsGovernmentGuaranteedMember 2018-12-31 0001083643 us-gaap:ResidentialPortfolioSegmentMember 2018-12-31 0001083643 us-gaap:HomeEquityMember 2018-12-31 0001083643 us-gaap:UnallocatedFinancingReceivablesMember 2018-12-31 0001083643 us-gaap:CommercialPortfolioSegmentMember 2019-01-01 2019-06-30 0001083643 us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-01-01 2019-06-30 0001083643 fbss:ConstructionAndLandMember 2019-01-01 2019-06-30 0001083643 us-gaap:ConsumerPortfolioSegmentMember 2019-01-01 2019-06-30 0001083643 fbss:StudentUsGovernmentGuaranteedMember 2019-01-01 2019-06-30 0001083643 us-gaap:ResidentialPortfolioSegmentMember 2019-01-01 2019-06-30 0001083643 us-gaap:HomeEquityMember 2019-01-01 2019-06-30 0001083643 us-gaap:UnallocatedFinancingReceivablesMember 2019-01-01 2019-06-30 0001083643 us-gaap:CommercialPortfolioSegmentMember 2019-06-30 0001083643 us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-06-30 0001083643 fbss:ConstructionAndLandMember 2019-06-30 0001083643 us-gaap:ConsumerPortfolioSegmentMember 2019-06-30 0001083643 fbss:StudentUsGovernmentGuaranteedMember 2019-06-30 0001083643 us-gaap:ResidentialPortfolioSegmentMember 2019-06-30 0001083643 us-gaap:HomeEquityMember 2019-06-30 0001083643 us-gaap:UnallocatedFinancingReceivablesMember 2019-06-30 0001083643 us-gaap:CommercialPortfolioSegmentMember 2019-01-01 2019-12-31 0001083643 us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-01-01 2019-12-31 0001083643 fbss:ConstructionAndLandMember 2019-01-01 2019-12-31 0001083643 us-gaap:ConsumerPortfolioSegmentMember 2019-01-01 2019-12-31 0001083643 fbss:StudentUsGovernmentGuaranteedMember 2019-01-01 2019-12-31 0001083643 us-gaap:ResidentialPortfolioSegmentMember 2019-01-01 2019-12-31 0001083643 us-gaap:HomeEquityMember 2019-01-01 2019-12-31 0001083643 us-gaap:UnallocatedFinancingReceivablesMember 2019-01-01 2019-12-31 0001083643 2019-01-01 2019-12-31 0001083643 us-gaap:PassMember us-gaap:CommercialPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:PassMember us-gaap:CommercialRealEstatePortfolioSegmentMember 2020-06-30 0001083643 us-gaap:PassMember fbss:ConstructionAndLandMember 2020-06-30 0001083643 us-gaap:PassMember us-gaap:ConsumerPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:PassMember fbss:StudentUsGovernmentGuaranteedMember 2020-06-30 0001083643 us-gaap:PassMember us-gaap:ResidentialPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:PassMember us-gaap:HomeEquityMember 2020-06-30 0001083643 us-gaap:PassMember 2020-06-30 0001083643 us-gaap:SpecialMentionMember us-gaap:CommercialPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:SpecialMentionMember us-gaap:CommercialRealEstatePortfolioSegmentMember 2020-06-30 0001083643 us-gaap:SpecialMentionMember fbss:ConstructionAndLandMember 2020-06-30 0001083643 us-gaap:SpecialMentionMember us-gaap:ConsumerPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:SpecialMentionMember fbss:StudentUsGovernmentGuaranteedMember 2020-06-30 0001083643 us-gaap:SpecialMentionMember us-gaap:ResidentialPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:SpecialMentionMember us-gaap:HomeEquityMember 2020-06-30 0001083643 us-gaap:SpecialMentionMember 2020-06-30 0001083643 us-gaap:SubstandardMember us-gaap:CommercialPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:SubstandardMember us-gaap:CommercialRealEstatePortfolioSegmentMember 2020-06-30 0001083643 us-gaap:SubstandardMember fbss:ConstructionAndLandMember 2020-06-30 0001083643 us-gaap:SubstandardMember us-gaap:ConsumerPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:SubstandardMember fbss:StudentUsGovernmentGuaranteedMember 2020-06-30 0001083643 us-gaap:SubstandardMember us-gaap:ResidentialPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:SubstandardMember us-gaap:HomeEquityMember 2020-06-30 0001083643 us-gaap:SubstandardMember 2020-06-30 0001083643 us-gaap:DoubtfulMember us-gaap:CommercialPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:DoubtfulMember us-gaap:CommercialRealEstatePortfolioSegmentMember 2020-06-30 0001083643 us-gaap:DoubtfulMember fbss:ConstructionAndLandMember 2020-06-30 0001083643 us-gaap:DoubtfulMember us-gaap:ConsumerPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:DoubtfulMember fbss:StudentUsGovernmentGuaranteedMember 2020-06-30 0001083643 us-gaap:DoubtfulMember us-gaap:ResidentialPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:DoubtfulMember us-gaap:HomeEquityMember 2020-06-30 0001083643 us-gaap:DoubtfulMember 2020-06-30 0001083643 us-gaap:UnlikelyToBeCollectedFinancingReceivableMember us-gaap:CommercialPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:UnlikelyToBeCollectedFinancingReceivableMember us-gaap:CommercialRealEstatePortfolioSegmentMember 2020-06-30 0001083643 us-gaap:UnlikelyToBeCollectedFinancingReceivableMember fbss:ConstructionAndLandMember 2020-06-30 0001083643 us-gaap:UnlikelyToBeCollectedFinancingReceivableMember us-gaap:ConsumerPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:UnlikelyToBeCollectedFinancingReceivableMember fbss:StudentUsGovernmentGuaranteedMember 2020-06-30 0001083643 us-gaap:UnlikelyToBeCollectedFinancingReceivableMember us-gaap:ResidentialPortfolioSegmentMember 2020-06-30 0001083643 us-gaap:UnlikelyToBeCollectedFinancingReceivableMember us-gaap:HomeEquityMember 2020-06-30 0001083643 us-gaap:UnlikelyToBeCollectedFinancingReceivableMember 2020-06-30 0001083643 us-gaap:PassMember us-gaap:CommercialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:PassMember us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-12-31 0001083643 us-gaap:PassMember fbss:ConstructionAndLandMember 2019-12-31 0001083643 us-gaap:PassMember us-gaap:ConsumerPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:PassMember fbss:StudentUsGovernmentGuaranteedMember 2019-12-31 0001083643 us-gaap:PassMember us-gaap:ResidentialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:PassMember us-gaap:HomeEquityMember 2019-12-31 0001083643 us-gaap:PassMember 2019-12-31 0001083643 us-gaap:SpecialMentionMember us-gaap:CommercialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:SpecialMentionMember us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-12-31 0001083643 us-gaap:SpecialMentionMember fbss:ConstructionAndLandMember 2019-12-31 0001083643 us-gaap:SpecialMentionMember us-gaap:ConsumerPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:SpecialMentionMember fbss:StudentUsGovernmentGuaranteedMember 2019-12-31 0001083643 us-gaap:SpecialMentionMember us-gaap:ResidentialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:SpecialMentionMember us-gaap:HomeEquityMember 2019-12-31 0001083643 us-gaap:SpecialMentionMember 2019-12-31 0001083643 us-gaap:SubstandardMember us-gaap:CommercialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:SubstandardMember us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-12-31 0001083643 us-gaap:SubstandardMember fbss:ConstructionAndLandMember 2019-12-31 0001083643 us-gaap:SubstandardMember us-gaap:ConsumerPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:SubstandardMember fbss:StudentUsGovernmentGuaranteedMember 2019-12-31 0001083643 us-gaap:SubstandardMember us-gaap:ResidentialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:SubstandardMember us-gaap:HomeEquityMember 2019-12-31 0001083643 us-gaap:SubstandardMember 2019-12-31 0001083643 us-gaap:DoubtfulMember us-gaap:CommercialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:DoubtfulMember us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-12-31 0001083643 us-gaap:DoubtfulMember fbss:ConstructionAndLandMember 2019-12-31 0001083643 us-gaap:DoubtfulMember us-gaap:ConsumerPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:DoubtfulMember fbss:StudentUsGovernmentGuaranteedMember 2019-12-31 0001083643 us-gaap:DoubtfulMember us-gaap:ResidentialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:DoubtfulMember us-gaap:HomeEquityMember 2019-12-31 0001083643 us-gaap:DoubtfulMember 2019-12-31 0001083643 us-gaap:UnlikelyToBeCollectedFinancingReceivableMember us-gaap:CommercialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:UnlikelyToBeCollectedFinancingReceivableMember us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-12-31 0001083643 us-gaap:UnlikelyToBeCollectedFinancingReceivableMember fbss:ConstructionAndLandMember 2019-12-31 0001083643 us-gaap:UnlikelyToBeCollectedFinancingReceivableMember us-gaap:ConsumerPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:UnlikelyToBeCollectedFinancingReceivableMember fbss:StudentUsGovernmentGuaranteedMember 2019-12-31 0001083643 us-gaap:UnlikelyToBeCollectedFinancingReceivableMember us-gaap:ResidentialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:UnlikelyToBeCollectedFinancingReceivableMember us-gaap:HomeEquityMember 2019-12-31 0001083643 us-gaap:UnlikelyToBeCollectedFinancingReceivableMember 2019-12-31 0001083643 us-gaap:CommercialPortfolioSegmentMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2020-06-30 0001083643 us-gaap:CommercialRealEstatePortfolioSegmentMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2020-06-30 0001083643 fbss:ConstructionAndLandMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2020-06-30 0001083643 us-gaap:ConsumerPortfolioSegmentMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2020-06-30 0001083643 fbss:StudentUsGovernmentGuaranteedMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2020-06-30 0001083643 us-gaap:ResidentialPortfolioSegmentMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2020-06-30 0001083643 us-gaap:HomeEquityMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2020-06-30 0001083643 us-gaap:FinancingReceivables30To59DaysPastDueMember 2020-06-30 0001083643 us-gaap:CommercialPortfolioSegmentMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2020-06-30 0001083643 us-gaap:CommercialRealEstatePortfolioSegmentMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2020-06-30 0001083643 fbss:ConstructionAndLandMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2020-06-30 0001083643 us-gaap:ConsumerPortfolioSegmentMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2020-06-30 0001083643 fbss:StudentUsGovernmentGuaranteedMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2020-06-30 0001083643 us-gaap:ResidentialPortfolioSegmentMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2020-06-30 0001083643 us-gaap:HomeEquityMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2020-06-30 0001083643 us-gaap:FinancingReceivables60To89DaysPastDueMember 2020-06-30 0001083643 us-gaap:CommercialPortfolioSegmentMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2020-06-30 0001083643 us-gaap:CommercialRealEstatePortfolioSegmentMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2020-06-30 0001083643 fbss:ConstructionAndLandMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2020-06-30 0001083643 us-gaap:ConsumerPortfolioSegmentMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2020-06-30 0001083643 fbss:StudentUsGovernmentGuaranteedMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2020-06-30 0001083643 us-gaap:ResidentialPortfolioSegmentMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2020-06-30 0001083643 us-gaap:HomeEquityMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2020-06-30 0001083643 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2020-06-30 0001083643 us-gaap:FinancingReceivables30To59DaysPastDueMember us-gaap:CommercialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:FinancingReceivables30To59DaysPastDueMember us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-12-31 0001083643 us-gaap:FinancingReceivables30To59DaysPastDueMember fbss:ConstructionAndLandMember 2019-12-31 0001083643 us-gaap:FinancingReceivables30To59DaysPastDueMember us-gaap:ConsumerPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:FinancingReceivables30To59DaysPastDueMember fbss:StudentUsGovernmentGuaranteedMember 2019-12-31 0001083643 us-gaap:FinancingReceivables30To59DaysPastDueMember us-gaap:ResidentialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:FinancingReceivables30To59DaysPastDueMember us-gaap:HomeEquityMember 2019-12-31 0001083643 us-gaap:FinancingReceivables30To59DaysPastDueMember 2019-12-31 0001083643 us-gaap:FinancingReceivables60To89DaysPastDueMember us-gaap:CommercialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:FinancingReceivables60To89DaysPastDueMember us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-12-31 0001083643 us-gaap:FinancingReceivables60To89DaysPastDueMember fbss:ConstructionAndLandMember 2019-12-31 0001083643 us-gaap:FinancingReceivables60To89DaysPastDueMember us-gaap:ConsumerPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:FinancingReceivables60To89DaysPastDueMember fbss:StudentUsGovernmentGuaranteedMember 2019-12-31 0001083643 us-gaap:FinancingReceivables60To89DaysPastDueMember us-gaap:ResidentialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:FinancingReceivables60To89DaysPastDueMember us-gaap:HomeEquityMember 2019-12-31 0001083643 us-gaap:FinancingReceivables60To89DaysPastDueMember 2019-12-31 0001083643 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember us-gaap:CommercialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-12-31 0001083643 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember fbss:ConstructionAndLandMember 2019-12-31 0001083643 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember us-gaap:ConsumerPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember fbss:StudentUsGovernmentGuaranteedMember 2019-12-31 0001083643 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember us-gaap:ResidentialPortfolioSegmentMember 2019-12-31 0001083643 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember us-gaap:HomeEquityMember 2019-12-31 0001083643 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2019-12-31 0001083643 us-gaap:CommercialRealEstatePortfolioSegmentMember 2020-04-01 2020-06-30 fbss:Property 0001083643 us-gaap:FinancingReceivables1To29DaysPastDueMember 2020-06-30 0001083643 fbss:WhollyOwnedConnecticutStatutoryBusinessTrustMember fbss:FloatingRateCapitalSecuritiesMember 2006-09-21 0001083643 fbss:FloatingRateJuniorSubordinatedDeferrableInterestDebenturesDue2036Member 2020-06-30 0001083643 fbss:FloatingRateJuniorSubordinatedDeferrableInterestDebenturesDue2036Member 2020-01-01 2020-06-30 0001083643 fbss:FloatingRateCapitalSecuritiesMember us-gaap:LondonInterbankOfferedRateLIBORMember 2020-01-01 2020-06-30 0001083643 srt:MaximumMember fbss:InterestRateSwapsOnJuniorSubordinatedDebtDueTwoThousandThirtySixMember 2010-06-29 2010-07-01 0001083643 us-gaap:LondonInterbankOfferedRateLIBORMember fbss:InterestRateSwapsOnJuniorSubordinatedDebtDueTwoThousandThirtySixMember 2020-01-01 2020-06-30 0001083643 us-gaap:LondonInterbankOfferedRateLIBORMember fbss:InterestRateSwapsOnJuniorSubordinatedDebtDueTwoThousandThirtySixMember 2020-06-30 0001083643 fbss:InterestRateSwapsOnJuniorSubordinatedDebtDueTwoThousandThirtySixMember 2020-06-30 0001083643 fbss:InterestRateSwapsOnJuniorSubordinatedDebtDueTwoThousandThirtySixMember 2019-06-30 0001083643 fbss:InterestRateSwapThrough2020Member 2020-01-01 2020-06-30 0001083643 fbss:InterestRateSwapThrough2020Member 2019-01-01 2019-06-30 0001083643 fbss:InterestRateSwapThrough2020Member 2020-04-01 2020-06-30 0001083643 fbss:InterestRateSwapThrough2020Member 2019-04-01 2019-06-30 0001083643 fbss:InterestRateSwapsOnJuniorSubordinatedDebtDueTwoThousandThirtySixMember 2016-06-23 2016-06-24 0001083643 fbss:InterestRateSwapThrough2031Member 2020-01-01 2020-06-30 0001083643 fbss:InterestRateSwapThrough2031Member 2019-01-01 2019-06-30 0001083643 fbss:InterestRateSwapThrough2031Member 2020-04-01 2020-06-30 0001083643 fbss:InterestRateSwapThrough2031Member 2019-04-01 2019-06-30 0001083643 us-gaap:InterestRateSwapMember 2020-01-01 2020-06-30 fbss:Derivative 0001083643 fbss:InterestRateSwapsForCommercialLoansMember 2020-06-30 0001083643 fbss:InterestRateSwapsForCommercialLoansMember 2020-01-01 2020-06-30 0001083643 fbss:InterestRateSwapsForCommercialLoansMember 2019-01-01 2019-06-30 0001083643 fbss:InterestRateSwapsForCommercialLoansMember 2019-04-01 2019-06-30 0001083643 fbss:InterestRateSwapsForCommercialLoansMember 2020-04-01 2020-06-30 0001083643 fbss:InterestRateSwapsForCommercialLoansMember us-gaap:LondonInterbankOfferedRateLIBORMember 2020-01-01 2020-06-30 0001083643 fbss:InterestRateSwapsForCommercialLoansMember srt:MinimumMember 2020-01-01 2020-06-30 0001083643 fbss:InterestRateSwapsForCommercialLoansMember srt:MaximumMember 2020-01-01 2020-06-30 0001083643 fbss:InterestRateSwapsForCommercialLoansMember us-gaap:SubsequentEventMember 2020-07-28 0001083643 fbss:InterestRateSwapsForCommercialLoansMember us-gaap:SubsequentEventMember 2020-07-28 2020-07-28 0001083643 us-gaap:InterestRateSwapMember 2020-06-30 0001083643 us-gaap:InterestRateSwapMember 2019-12-31 0001083643 fbss:InterestRateSwapThrough2020Member us-gaap:CashFlowHedgingMember 2020-06-30 0001083643 fbss:InterestRateSwapThrough2031Member us-gaap:CashFlowHedgingMember 2020-06-30 0001083643 fbss:InterestRateSwapThrough2025Member us-gaap:FairValueHedgingMember 2020-06-30 0001083643 fbss:InterestRateSwapThrough2022Member us-gaap:FairValueHedgingMember 2020-06-30 0001083643 fbss:InterestRateSwapThrough2020Member us-gaap:CashFlowHedgingMember 2020-01-01 2020-06-30 0001083643 fbss:InterestRateSwapThrough2031Member us-gaap:CashFlowHedgingMember 2020-01-01 2020-06-30 0001083643 fbss:InterestRateSwapThrough2025Member us-gaap:FairValueHedgingMember 2020-01-01 2020-06-30 0001083643 fbss:InterestRateSwapThrough2022Member us-gaap:FairValueHedgingMember 2020-01-01 2020-06-30 0001083643 fbss:InterestRateSwapThrough2020Member us-gaap:CashFlowHedgingMember us-gaap:OtherLiabilitiesMember 2020-06-30 0001083643 fbss:InterestRateSwapThrough2031Member us-gaap:CashFlowHedgingMember us-gaap:OtherLiabilitiesMember 2020-06-30 0001083643 fbss:InterestRateSwapThrough2025Member us-gaap:FairValueHedgingMember us-gaap:OtherLiabilitiesMember 2020-06-30 0001083643 fbss:InterestRateSwapThrough2022Member us-gaap:FairValueHedgingMember us-gaap:OtherLiabilitiesMember 2020-06-30 0001083643 fbss:InterestRateSwapThrough2020Member us-gaap:CashFlowHedgingMember 2019-12-31 0001083643 fbss:InterestRateSwapThrough2031Member us-gaap:CashFlowHedgingMember 2019-12-31 0001083643 fbss:InterestRateSwapThrough2025Member us-gaap:FairValueHedgingMember 2019-12-31 0001083643 fbss:InterestRateSwapThrough2022Member us-gaap:FairValueHedgingMember 2019-12-31 0001083643 fbss:InterestRateSwapThrough2020Member us-gaap:CashFlowHedgingMember 2019-01-01 2019-12-31 0001083643 fbss:InterestRateSwapThrough2031Member us-gaap:CashFlowHedgingMember 2019-01-01 2019-12-31 0001083643 fbss:InterestRateSwapThrough2025Member us-gaap:FairValueHedgingMember 2019-01-01 2019-12-31 0001083643 fbss:InterestRateSwapThrough2022Member us-gaap:FairValueHedgingMember 2019-01-01 2019-12-31 0001083643 fbss:InterestRateSwapThrough2020Member us-gaap:CashFlowHedgingMember us-gaap:OtherLiabilitiesMember 2019-12-31 0001083643 fbss:InterestRateSwapThrough2031Member us-gaap:CashFlowHedgingMember us-gaap:OtherLiabilitiesMember 2019-12-31 0001083643 fbss:InterestRateSwapThrough2025Member us-gaap:FairValueHedgingMember us-gaap:OtherLiabilitiesMember 2019-12-31 0001083643 fbss:InterestRateSwapThrough2022Member us-gaap:FairValueHedgingMember us-gaap:OtherLiabilitiesMember 2019-12-31 0001083643 fbss:StockIncentivePlanMember 2020-06-30 0001083643 fbss:StockIncentivePlanMember us-gaap:RestrictedStockMember 2020-01-01 2020-06-30 0001083643 srt:DirectorMember fbss:StockIncentivePlanMember us-gaap:RestrictedStockMember 2020-04-01 2020-06-30 0001083643 srt:DirectorMember fbss:StockIncentivePlanMember us-gaap:RestrictedStockMember 2019-04-01 2019-06-30 0001083643 srt:DirectorMember fbss:StockIncentivePlanMember us-gaap:RestrictedStockMember 2020-01-01 2020-06-30 0001083643 srt:DirectorMember fbss:StockIncentivePlanMember us-gaap:RestrictedStockMember 2019-01-01 2019-06-30 0001083643 us-gaap:RestrictedStockMember 2020-06-30 0001083643 us-gaap:RestrictedStockMember 2019-06-30 0001083643 fbss:StockIncentivePlanMember us-gaap:RestrictedStockMember 2019-12-31 0001083643 fbss:StockIncentivePlanMember us-gaap:RestrictedStockMember 2020-06-30 0001083643 us-gaap:RestrictedStockMember fbss:StockIncentivePlanMember 2018-12-31 0001083643 us-gaap:RestrictedStockMember fbss:StockIncentivePlanMember 2019-01-01 2019-06-30 0001083643 us-gaap:RestrictedStockMember fbss:StockIncentivePlanMember 2019-06-30 0001083643 fbss:StockIncentivePlanMember fbss:PerformanceBasedRestrictedStockUnitsMember srt:ExecutiveOfficerMember 2020-04-01 2020-06-30 0001083643 fbss:StockIncentivePlanMember fbss:PerformanceBasedRestrictedStockUnitsMember srt:ExecutiveOfficerMember 2019-04-01 2019-06-30 0001083643 fbss:StockIncentivePlanMember fbss:PerformanceBasedRestrictedStockUnitsMember srt:ExecutiveOfficerMember 2020-01-01 2020-06-30 0001083643 fbss:StockIncentivePlanMember fbss:PerformanceBasedRestrictedStockUnitsMember srt:ExecutiveOfficerMember 2019-01-01 2019-06-30 0001083643 fbss:StockIncentivePlanMember fbss:PerformanceBasedRestrictedStockUnitsMember 2020-06-30 0001083643 fbss:StockIncentivePlanMember fbss:PerformanceBasedRestrictedStockUnitsMember 2019-06-30 0001083643 fbss:StockIncentivePlanMember fbss:PerformanceBasedRestrictedStockUnitsMember 2019-12-31 0001083643 fbss:StockIncentivePlanMember fbss:PerformanceBasedRestrictedStockUnitsMember 2020-01-01 2020-06-30 0001083643 fbss:PerformanceBasedRestrictedStockUnitsMember fbss:StockIncentivePlanMember 2018-12-31 0001083643 fbss:PerformanceBasedRestrictedStockUnitsMember fbss:StockIncentivePlanMember 2019-01-01 2019-06-30 0001083643 us-gaap:SupplementalEmployeeRetirementPlanDefinedBenefitMember 2020-06-30 0001083643 us-gaap:SupplementalEmployeeRetirementPlanDefinedBenefitMember 2019-12-31 0001083643 us-gaap:SupplementalEmployeeRetirementPlanDefinedBenefitMember 2020-04-01 2020-06-30 0001083643 us-gaap:SupplementalEmployeeRetirementPlanDefinedBenefitMember 2019-04-01 2019-06-30 0001083643 us-gaap:SupplementalEmployeeRetirementPlanDefinedBenefitMember 2020-01-01 2020-06-30 0001083643 us-gaap:SupplementalEmployeeRetirementPlanDefinedBenefitMember 2019-01-01 2019-06-30 fbss:Hour 0001083643 srt:MaximumMember 2020-01-01 2020-06-30 fbss:Installment 0001083643 srt:MinimumMember 2020-01-01 2020-06-30 fbss:Director 0001083643 fbss:FormerKeyEmployeeMember 2020-04-01 2020-06-30 0001083643 fbss:FormerKeyEmployeeMember 2019-04-01 2019-06-30 0001083643 fbss:FormerKeyEmployeeMember 2020-01-01 2020-06-30 0001083643 fbss:FormerKeyEmployeeMember 2019-01-01 2019-06-30 0001083643 fbss:FormerKeyEmployeeMember 2020-06-30 0001083643 fbss:FormerKeyEmployeeMember 2019-12-31 0001083643 us-gaap:USTreasuryAndGovernmentMember us-gaap:FairValueMeasurementsRecurringMember 2020-06-30 0001083643 us-gaap:USTreasuryAndGovernmentMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel1Member 2020-06-30 0001083643 us-gaap:USTreasuryAndGovernmentMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member 2020-06-30 0001083643 us-gaap:USTreasuryAndGovernmentMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel3Member 2020-06-30 0001083643 us-gaap:USStatesAndPoliticalSubdivisionsMember us-gaap:FairValueMeasurementsRecurringMember 2020-06-30 0001083643 us-gaap:USStatesAndPoliticalSubdivisionsMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel1Member 2020-06-30 0001083643 us-gaap:USStatesAndPoliticalSubdivisionsMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member 2020-06-30 0001083643 us-gaap:USStatesAndPoliticalSubdivisionsMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel3Member 2020-06-30 0001083643 us-gaap:FairValueMeasurementsRecurringMember 2020-06-30 0001083643 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel1Member 2020-06-30 0001083643 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member 2020-06-30 0001083643 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel3Member 2020-06-30 0001083643 us-gaap:USTreasuryAndGovernmentMember us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001083643 us-gaap:USTreasuryAndGovernmentMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel1Member 2019-12-31 0001083643 us-gaap:USTreasuryAndGovernmentMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member 2019-12-31 0001083643 us-gaap:USTreasuryAndGovernmentMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel3Member 2019-12-31 0001083643 us-gaap:USStatesAndPoliticalSubdivisionsMember us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001083643 us-gaap:USStatesAndPoliticalSubdivisionsMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel1Member 2019-12-31 0001083643 us-gaap:USStatesAndPoliticalSubdivisionsMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member 2019-12-31 0001083643 us-gaap:USStatesAndPoliticalSubdivisionsMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel3Member 2019-12-31 0001083643 us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001083643 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel1Member 2019-12-31 0001083643 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member 2019-12-31 0001083643 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel3Member 2019-12-31 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember fbss:MortgageLoansHeldForSaleMember 2020-01-01 2020-06-30 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember fbss:MortgageLoansHeldForSaleMember 2020-04-01 2020-06-30 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember fbss:MortgageLoansHeldForSaleMember 2019-04-01 2019-06-30 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember fbss:MortgageLoansHeldForSaleMember 2019-01-01 2019-06-30 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel3Member 2020-01-01 2020-06-30 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember 2020-06-30 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel1Member 2020-06-30 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel2Member 2020-06-30 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel3Member 2020-06-30 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember 2019-12-31 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel1Member 2019-12-31 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel2Member 2019-12-31 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel3Member 2019-12-31 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel3Member fbss:ImpairedLoansMember fbss:DiscountedAppraisedValueMember 2020-06-30 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel3Member fbss:OtherRealEstateOwnedMember fbss:DiscountedAppraisedValueMember 2020-06-30 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel3Member fbss:ImpairedLoansMember fbss:DiscountedAppraisedValueMember 2020-01-01 2020-06-30 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel3Member fbss:OtherRealEstateOwnedMember fbss:DiscountedAppraisedValueMember 2020-01-01 2020-06-30 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel3Member fbss:ImpairedLoansMember fbss:DiscountedAppraisedValueMember srt:WeightedAverageMember 2020-06-30 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel3Member fbss:OtherRealEstateOwnedMember fbss:DiscountedAppraisedValueMember srt:WeightedAverageMember 2020-06-30 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel3Member fbss:DiscountedAppraisedValueMember fbss:ImpairedLoansMember 2019-12-31 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel3Member fbss:DiscountedAppraisedValueMember fbss:OtherRealEstateOwnedMember 2019-12-31 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel3Member fbss:DiscountedAppraisedValueMember fbss:ImpairedLoansMember 2019-01-01 2019-12-31 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel3Member fbss:DiscountedAppraisedValueMember fbss:OtherRealEstateOwnedMember 2019-01-01 2019-12-31 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel3Member fbss:DiscountedAppraisedValueMember srt:WeightedAverageMember fbss:ImpairedLoansMember 2019-12-31 0001083643 us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:FairValueInputsLevel3Member fbss:DiscountedAppraisedValueMember srt:WeightedAverageMember fbss:OtherRealEstateOwnedMember 2019-12-31 0001083643 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2020-06-30 0001083643 us-gaap:FairValueInputsLevel1Member 2020-06-30 0001083643 us-gaap:FairValueInputsLevel2Member 2020-06-30 0001083643 us-gaap:FairValueInputsLevel3Member 2020-06-30 0001083643 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2020-06-30 0001083643 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2019-12-31 0001083643 us-gaap:FairValueInputsLevel1Member 2019-12-31 0001083643 us-gaap:FairValueInputsLevel2Member 2019-12-31 0001083643 us-gaap:FairValueInputsLevel3Member 2019-12-31 0001083643 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2019-12-31 0001083643 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2018-12-31 0001083643 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2018-12-31 0001083643 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-12-31 0001083643 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2019-01-01 2019-06-30 0001083643 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2019-01-01 2019-06-30 0001083643 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2019-06-30 0001083643 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2019-06-30 0001083643 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-06-30 0001083643 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2019-12-31 0001083643 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2019-12-31 0001083643 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-12-31 0001083643 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2020-01-01 2020-06-30 0001083643 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2020-01-01 2020-06-30 0001083643 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2020-06-30 0001083643 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2020-06-30 0001083643 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2020-06-30 0001083643 us-gaap:OtherAssetsMember 2020-06-30 0001083643 us-gaap:OtherAssetsMember 2019-12-31 0001083643 us-gaap:OtherLiabilitiesMember 2020-06-30 0001083643 us-gaap:OtherLiabilitiesMember 2019-12-31

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

☒

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

 

For the quarterly period ended June 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_____________

 

Commission File Number: 000-25805

 

Fauquier Bankshares, Inc.

(Exact name of registrant as specified in its charter)

 

Virginia

 

54-1288193

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

10 Courthouse Square, Warrenton, Virginia

 

20186

(Address of principal executive offices)

 

(Zip Code)

 

(540) 347-2700

(Registrant’s telephone number, including area code)

 

(Not applicable)

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

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange

on which registered

Common Stock

Par value $3.13 per share

FBSS

The Nasdaq Capital Market

 

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

 

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

 

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

 

Large accelerated filer

☐

 

 

Accelerated filer

☒

Non-accelerated filer

☐

 

 

Smaller reporting company

☒

 

 

 

 

Emerging growth company

☐

 

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

 

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

 

The registrant had 3,794,725 shares of common stock outstanding as of August 7, 2020.

 

FAUQUIER BANKSHARES, INC.

INDEX

 

Part I.  FINANCIAL INFORMATION

 

 

 

Page

Item 1.

Financial Statements

2

 

 

 

 

Consolidated Balance Sheets (Unaudited)

2

 

 

 

 

Consolidated Statements of Operations (Unaudited)

3

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited)

4

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited)

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

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

25

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

39

 

 

 

Item 4.

Controls and Procedures

39

 

 

 

Part II.  OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

40

 

 

 

Item 1A.

Risk Factors

40

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

Item 3.

Defaults Upon Senior Securities

42

 

 

 

Item 4.

Mine Safety Disclosures

42

 

 

 

Item 5.

Other Information

42

 

 

 

Item 6.

Exhibits

43

 

 

 

SIGNATURES

44

 

1

Part I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

 

(In thousands, except share and per share data)

 

June 30,

2020

(Unaudited)

 

 

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

12,839

 

 

$

9,124

 

Interest-bearing deposits in other banks

 

 

66,686

 

 

 

37,203

 

Federal funds sold

 

 

14

 

 

 

14

 

Securities available for sale, at fair value

 

 

78,250

 

 

 

79,783

 

Restricted investments

 

 

2,687

 

 

 

2,016

 

Mortgage loans held for sale

 

 

-

 

 

 

247

 

Loans

 

 

622,660

 

 

 

550,226

 

Allowance for loan losses

 

 

(6,400

)

 

 

(5,227

)

Loans, net

 

 

616,260

 

 

 

544,999

 

Premises and equipment, net

 

 

16,978

 

 

 

17,492

 

Accrued interest receivable

 

 

2,818

 

 

 

1,984

 

Other real estate owned, net

 

 

1,356

 

 

 

1,356

 

Bank-owned life insurance

 

 

14,141

 

 

 

13,961

 

Other assets

 

 

13,524

 

 

 

13,992

 

Total assets

 

$

825,553

 

 

$

722,171

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing checking

 

$

169,542

 

 

$

123,492

 

Interest-bearing:

 

 

 

 

 

 

 

 

Checking

 

 

262,274

 

 

 

242,531

 

Savings and money market accounts

 

 

203,038

 

 

 

182,007

 

Time deposits

 

 

70,952

 

 

 

74,125

 

Total interest-bearing

 

 

536,264

 

 

 

498,663

 

Total deposits

 

 

705,806

 

 

 

622,155

 

Federal Home Loan Bank advances

 

 

32,651

 

 

 

16,695

 

Junior subordinated debt

 

 

4,124

 

 

 

4,124

 

Other liabilities

 

 

11,884

 

 

 

12,075

 

Total liabilities

 

 

754,465

 

 

 

655,049

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

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

 

 

16,117

 

 

 

15,964

 

Retained earnings

 

 

51,812

 

 

 

49,787

 

Accumulated other comprehensive income, net

 

 

3,159

 

 

 

1,371

 

Total shareholders’ equity

 

 

71,088

 

 

 

67,122

 

Total liabilities and shareholders’ equity

 

$

825,553

 

 

$

722,171

 

 

See accompanying Notes to Consolidated Financial Statements.

2

Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands, except per share data)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

6,507

 

 

$

6,573

 

 

$

12,974

 

 

$

13,144

 

Interest and dividends on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable interest income

 

 

364

 

 

 

365

 

 

 

743

 

 

 

734

 

Tax-exempt interest

 

 

100

 

 

 

85

 

 

 

199

 

 

 

174

 

Dividends

 

 

27

 

 

 

32

 

 

 

55

 

 

 

70

 

Interest on deposits in other banks

 

 

10

 

 

 

224

 

 

 

94

 

 

 

336

 

Total interest income

 

 

7,008

 

 

 

7,279

 

 

 

14,065

 

 

 

14,458

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

499

 

 

 

957

 

 

 

1,246

 

 

 

1,796

 

Interest on federal funds purchased

 

 

-

 

 

 

-

 

 

 

-

 

 

 

14

 

Interest on Federal Home Loan Bank advances

 

 

76

 

 

 

188

 

 

 

147

 

 

 

332

 

Interest on Junior subordinated debt

 

 

49

 

 

 

50

 

 

 

99

 

 

 

99

 

Total interest expense

 

 

624

 

 

 

1,195

 

 

 

1,492

 

 

 

2,241

 

Net interest income

 

 

6,384

 

 

 

6,084

 

 

 

12,573

 

 

 

12,217

 

Provision for loan losses

 

 

911

 

 

 

205

 

 

 

1,261

 

 

 

255

 

Net interest income after provision for loan losses

 

 

5,473

 

 

 

5,879

 

 

 

11,312

 

 

 

11,962

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust and estate fees

 

 

499

 

 

 

427

 

 

 

960

 

 

 

843

 

Brokerage fees

 

 

120

 

 

 

128

 

 

 

266

 

 

 

218

 

Service charges on deposit accounts

 

 

220

 

 

 

378

 

 

 

572

 

 

 

761

 

Interchange fee income, net

 

 

297

 

 

 

313

 

 

 

567

 

 

 

584

 

Bank-owned life insurance

 

 

90

 

 

 

90

 

 

 

180

 

 

 

183

 

Other income (loss)

 

 

(43

)

 

 

58

 

 

 

(32

)

 

 

206

 

Gain on sale of securities available for sale

 

 

-

 

 

 

-

 

 

 

-

 

 

 

79

 

Gain on sale of mortgage loans held for sale, net

 

 

33

 

 

 

6

 

 

 

45

 

 

 

6

 

Total noninterest income

 

 

1,216

 

 

 

1,400

 

 

 

2,558

 

 

 

2,880

 

Noninterest Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

2,435

 

 

 

2,923

 

 

 

5,387

 

 

 

5,935

 

Occupancy

 

 

579

 

 

 

604

 

 

 

1,243

 

 

 

1,219

 

Furniture and equipment

 

 

190

 

 

 

275

 

 

 

381

 

 

 

558

 

Marketing and business development

 

 

107

 

 

 

171

 

 

 

216

 

 

 

357

 

Legal, audit and consulting

 

 

304

 

 

 

282

 

 

 

574

 

 

 

531

 

Data processing

 

 

361

 

 

 

325

 

 

 

736

 

 

 

679

 

Federal Deposit Insurance Corporation assessment

 

 

81

 

 

 

93

 

 

 

165

 

 

 

187

 

Other operating expenses

 

 

832

 

 

 

836

 

 

 

1,792

 

 

 

1,761

 

Total noninterest expenses

 

 

4,889

 

 

 

5,509

 

 

 

10,494

 

 

 

11,227

 

Income before income taxes

 

 

1,800

 

 

 

1,770

 

 

 

3,376

 

 

 

3,615

 

Income tax expense

 

 

222

 

 

 

206

 

 

 

402

 

 

 

419

 

Net Income

 

$

1,578

 

 

$

1,564

 

 

$

2,974

 

 

$

3,196

 

Earnings per share, basic

 

$

0.42

 

 

$

0.41

 

 

$

0.78

 

 

$

0.84

 

Earnings per share, diluted

 

$

0.42

 

 

$

0.41

 

 

$

0.78

 

 

$

0.84

 

Dividends per share

 

$

0.125

 

 

$

0.12

 

 

$

0.25

 

 

$

0.24

 

 

See accompanying Notes to Consolidated Financial Statements.

3

Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income

 

$

1,578

 

 

$

1,564

 

 

$

2,974

 

 

$

3,196

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of securities available for sale, net of tax, $(188), $(257), $(580) and $(519), respectively

 

 

708

 

 

 

970

 

 

 

2,181

 

 

 

1,954

 

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(62

)

Change in fair value of interest rate swap, net of tax, $(1), $37, $104 and $61, respectively

 

 

6

 

 

 

(136

)

 

 

(393

)

 

 

(228

)

Total other comprehensive income, net of tax, $(189), $(220), $(476) and $(441), respectively

 

 

714

 

 

 

834

 

 

 

1,788

 

 

 

1,664

 

Total comprehensive income

 

$

2,292

 

 

$

2,398

 

 

$

4,762

 

 

$

4,860

 

 

See accompanying Notes to Consolidated Financial Statements.

4

Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

 

 

(In thousands, except share and per share data)

 

Common

Stock and Additional Paid-In Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income

 

 

Total

 

Balance, March 31, 2019

 

$

15,861

 

 

$

45,980

 

 

$

292

 

 

$

62,133

 

Net income

 

 

-

 

 

 

1,564

 

 

 

-

 

 

 

1,564

 

Other comprehensive loss, net of tax, $(220)

 

 

-

 

 

 

-

 

 

 

834

 

 

 

834

 

Cash dividends ($0.12 per share)

 

 

-

 

 

 

(454

)

 

 

-

 

 

 

(454

)

Amortization of unearned compensation, restricted stock awards

 

 

40

 

 

 

-

 

 

 

-

 

 

 

40

 

Repurchase of common stock (520 shares)

 

 

(11

)

 

 

-

 

 

 

-

 

 

 

(11

)

Balance, June 30, 2019

 

$

15,890

 

 

$

47,090

 

 

$

1,126

 

 

$

64,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2020

 

$

16,083

 

 

$

50,709

 

 

$

2,445

 

 

$

69,237

 

Net income

 

 

-

 

 

 

1,578

 

 

 

-

 

 

 

1,578

 

Other comprehensive income, net of tax, $(189)

 

 

-

 

 

 

-

 

 

 

714

 

 

 

714

 

Cash dividends ($0.125 per share)

 

 

-

 

 

 

(475

)

 

 

-

 

 

 

(475

)

Amortization of unearned compensation, restricted stock awards

 

 

34

 

 

 

-

 

 

 

-

 

 

 

34

 

Balance, June 30, 2020

 

$

16,117

 

 

$

51,812

 

 

$

3,159

 

 

$

71,088

 

 

 

(In thousands, except share and per share data)

 

Common

Stock and Additional Paid-In Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

 

Balance, December 31, 2018

 

$

15,742

 

 

$

44,803

 

 

$

(538

)

 

$

60,007

 

Net income

 

 

-

 

 

 

3,196

 

 

 

-

 

 

 

3,196

 

Other comprehensive income, net of tax effect, $(441)

 

 

-

 

 

 

-

 

 

 

1,664

 

 

 

1,664

 

Cash dividends ($0.24 per share)

 

 

-

 

 

 

(909

)

 

 

-

 

 

 

(909

)

Amortization of unearned compensation, restricted stock awards

 

 

74

 

 

 

-

 

 

 

-

 

 

 

74

 

Issuance of common stock - unvested shares (5,884 shares)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

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

 

 

95

 

 

 

-

 

 

 

-

 

 

 

95

 

Repurchase of common stock (960 shares)

 

 

(21

)

 

 

-

 

 

 

-

 

 

 

(21

)

Balance, June 30, 2019

 

$

15,890

 

 

$

47,090

 

 

$

1,126

 

 

$

64,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

$

15,964

 

 

$

49,787

 

 

$

1,371

 

 

$

67,122

 

Net income

 

 

-

 

 

 

2,974

 

 

 

-

 

 

 

2,974

 

Other comprehensive income, net of tax, $(476)

 

 

-

 

 

 

-

 

 

 

1,788

 

 

 

1,788

 

Cash dividends ($0.25 per share)

 

 

-

 

 

 

(949

)

 

 

-

 

 

 

(949

)

Amortization of unearned compensation, restricted stock awards

 

 

69

 

 

 

-

 

 

 

-

 

 

 

69

 

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

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

 

 

90

 

 

 

-

 

 

 

-

 

 

 

90

 

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

 

 

18

 

 

 

-

 

 

 

-

 

 

 

18

 

Repurchase of common stock (2,007 shares)

 

 

(24

)

 

 

-

 

 

 

-

 

 

 

(24

)

Balance, June 30, 2020

 

$

16,117

 

 

$

51,812

 

 

$

3,159

 

 

$

71,088

 

 

See accompanying Notes to Consolidated Financial Statements.

5

Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Six Months Ended June 30,

 

(In thousands)

 

2020

 

 

2019

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

2,974

 

 

$

3,196

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

535

 

 

 

644

 

Provision for loan losses

 

 

1,261

 

 

 

255

 

Loss on interest rate swaps

 

 

2

 

 

 

-

 

Gain on sales of securities available for sale

 

 

-

 

 

 

(79

)

Amortization of security premiums, net

 

 

247

 

 

 

206

 

Amortization of unearned compensation, net of forfeiture

 

 

(30

)

 

 

134

 

Issuance of vested restricted stock

 

 

108

 

 

 

95

 

Bank-owned life insurance income

 

 

(180

)

 

 

(183

)

Originations of mortgage loans held for sale

 

 

(1,884

)

 

 

(260

)

Proceeds from mortgage loans held for sale

 

 

2,176

 

 

 

266

 

Gain on mortgage loans held for sale

 

 

(45

)

 

 

(6

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Increase in other assets

 

 

(844

)

 

 

(5,650

)

Increase (decrease) in other liabilities

 

 

(744

)

 

 

4,925

 

Net cash provided by operating activities

 

 

3,576

 

 

 

3,543

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

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

available for sale

 

 

6,317

 

 

 

18,014

 

Purchase of securities available for sale

 

 

(2,270

)

 

 

(15,601

)

Purchase of premises and equipment

 

 

(21

)

 

 

(374

)

Purchase of restricted investments, net

 

 

(671

)

 

 

(331

)

Loan originations, net

 

 

(72,367

)

 

 

5,483

 

Net cash provided by (used in) investing activities

 

 

(69,012

)

 

 

7,191

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

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

 

 

86,824

 

 

 

(39,428

)

Increase (decrease) in time deposits

 

 

(3,173

)

 

 

11,046

 

Increase in Federal Home Loan Bank advances

 

 

15,956

 

 

 

5,958

 

Cash dividends paid on common stock

 

 

(949

)

 

 

(909

)

Repurchase of common stock

 

 

(24

)

 

 

(21

)

Net cash provided by (used in) financing activities

 

 

98,634

 

 

 

(23,354

)

Increase (decrease) in cash and cash equivalents

 

 

33,198

 

 

 

(12,620

)

Cash and Cash Equivalents

 

 

 

 

 

 

 

 

Beginning

 

 

46,341

 

 

 

67,110

 

Ending

 

$

79,539

 

 

$

54,490

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

 

 

Interest

 

$

1,556

 

 

$

2,037

 

Income taxes

 

$

-

 

 

$

420

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Noncash Investing Activities

 

 

 

 

 

 

 

 

Unrealized gain on securities available for sale, net of tax

 

$

2,181

 

 

$

1,892

 

Unrealized loss on interest rate swap, net of tax

 

$

(393

)

 

$

(228

)

 

See accompanying Notes to Consolidated Financial Statements.

6

FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 1.General

 

The consolidated financial statements include the accounts of Fauquier Bankshares, Inc. (the “Company”) and its wholly-owned subsidiary, The Fauquier Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, Fauquier Bank Services, Inc. and Specialty Properties Acquisitions - VA, LLC. Specialty Properties Acquisitions - VA, LLC was formed with the sole purpose of holding foreclosed property. The consolidated financial statements do not include the accounts of Fauquier Statutory Trust II, a wholly-owned subsidiary of the Company. In consolidation, significant intercompany financial balances and transactions have been eliminated.  In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 2020 and the results of operations for the three and six months ended June 30, 2020 and 2019, in accordance with accounting principles generally accepted in the United States of America (“GAAP”).    The notes included herein should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

 

The results of operations for the three and six months ended June 30, 2020 and 2019 are not necessarily indicative of the results expected for the full year or any other interim period.

 

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

 

Significant Events

 

On March 11, 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) a pandemic as a result of the global spread of the illness.  In response to the outbreak, federal and state authorities in the U.S. introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders and strict social distancing.  

 

The full impact of COVID-19 is unknown and rapidly evolving.  It has caused substantial disruption in international and U.S. economies, markets and employment.  On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted to, among other provisions, provide emergency assistance for individuals, families and businesses affected by COVID-19.  

 

The outbreak is having a significant adverse impact on certain industries the Company serves, including but not limited to, religious organizations, hospitality, childcare and restaurants.  As of June 30, 2020, the Company’s aggregate exposure in these industries was $65.9 million, or 10.6% of total loans.  Based on management’s current assessment of the increased inherent risk in the loan portfolio, the allowance for loan losses increased  $1.2 million, or 22.4%, compared to December 31, 2019.  The increase in the allowance for loan losses was in large part due to an increase in the qualitative factors related to COVID-19.  Most notably, a $860,000 increase, was driven by the deteriorating economic conditions caused by COVID-19, including the increase in the unemployment rate for the Commonwealth of Virginia.      

 

Due to the significant uncertainties related to the ultimate duration of COVID-19, it is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including that the credit quality of the Company’s loan portfolio may decline and loan defaults could increase.  

 

Recent Accounting Pronouncements and Other Regulatory Statements

 

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”  The amendments, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on

7

available for sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03.  These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters.  Smaller reporting companies who file with the SEC and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. Changes under ASU 2016-13 and subsequent updates represent a fundamental shift from existing GAAP and may result in a material increase to the Company's accounting for credit losses on financial instruments. To prepare for implementation of the new standard the Company has established a working group to evaluate the impact these changes will have on the Company’s financial statements and related disclosures. The Company has also contracted with a third-party for credit modeling in accordance with ASU 2016-13.  The Company has focused on model validations, the development of processes and related controls, and the evaluation of parallel runs. The Company has not yet determined an estimate of the effect of these changes.

 

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

 

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

 

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

 

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

 

In January 2020, the FASB issued ASU 2020-01, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.”  The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions.  ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair

8

value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.  Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting.  For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.  Early adoption is permitted. The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements.

 

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

 

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

 

In March 2020 (revised in April 2020), various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (“the agencies”), issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under ASC 310-40, “Receivables - Troubled Debt Restructurings by Creditors,” a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. See Note 3 of the consolidated financial statements for additional disclosure of TDRs as of June 30, 2020.  

9

 

Note 2.Securities

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

 

 

 

June 30, 2020

 

(In thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

(Losses)

 

 

Fair Value

 

Obligations of U.S. Government corporations and agencies

 

$

58,895

 

 

$

3,071

 

 

$

-

 

 

$

61,966

 

Obligations of states and political subdivisions

 

 

14,956

 

 

 

1,328

 

 

 

-

 

 

 

16,284

 

 

 

$

73,851

 

 

$

4,399

 

 

$

-

 

 

$

78,250

 

 

 

 

December 31, 2019

 

(In thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

(Losses)

 

 

Fair Value

 

Obligations of U.S. Government corporations and agencies

 

$

63,090

 

 

$

937

 

 

$

(86

)

 

$

63,941

 

Obligations of states and political subdivisions

 

 

15,054

 

 

 

802

 

 

 

(14

)

 

 

15,842

 

 

 

$

78,144

 

 

$

1,739

 

 

$

(100

)

 

$

79,783

 

 

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

 

 

 

June 30, 2020

 

(In thousands)

 

Amortized

Cost

 

 

Fair Value

 

Due after one year through five years

 

$

17,305

 

 

$

18,360

 

Due after five years through ten years

 

 

10,020

 

 

 

10,588

 

Due after ten years

 

 

46,526

 

 

 

49,302

 

 

 

$

73,851

 

 

$

78,250

 

 

During the six months ended June 30, 2020 and 2019, securities purchased were $2.3 million and $15.6 million, respectively. During the six months ended June 30, 2020 and 2019, proceeds from maturities, calls and principal payments of securities were $6.3 million and $4.1 million, respectively.  During the six months ended June 30, 2020 there were no securities sold.  During the six months ended June 30, 2019, securities sold were $13.9 million.  There were no impairment losses on securities during the three and six months ended June 30, 2020 and 2019.

 

There were no securities with gross unrealized losses at June 30, 2020.  The following table shows the Company’s securities with gross unrealized losses, by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2019.

 

(In thousands)

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2019

 

Fair Value

 

 

Unrealized

(Losses)

 

 

Fair Value

 

 

Unrealized

(Losses)

 

 

Fair Value

 

 

Unrealized

(Losses)

 

Obligations of U.S. Government corporations and

agencies

 

$

11,460

 

 

$

(42

)

 

$

5,651

 

 

$

(44

)

 

$

17,111

 

 

$

(86

)

Obligations of states and political subdivisions

 

 

2,049

 

 

 

(14

)

 

 

-

 

 

 

-

 

 

 

2,049

 

 

 

(14

)

Total temporary impaired securities

 

$

13,509

 

 

$

(56

)

 

$

5,651

 

 

$

(44

)

 

$

19,160

 

 

$

(100

)

 

 

10

The carrying value of securities pledged to secure deposits and for other purposes was $16.9 million and $16.6 million at June 30, 2020 and December 31, 2019, respectively.

 

Note 3.Loans and Allowance for Loan Losses

 

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

 

A provision in the CARES Act included the creation of the Paycheck Protection Program (“PPP”) through the Small Business Administration (“SBA”).  Loans provided by the Bank through the PPP may be forgiven based on the borrowers’ compliance with the terms of the program.  The SBA provides a 100% guaranty to the lender of principal and interest, unless the lender violates an obligation under the agreement.  As loan losses are expected to be immaterial, if any at all, due to the SBA guaranty, there is no provision allocated for PPP loans within the allowance for loan loss calculation. The Commercial and Industrial loan portfolio segment in the tables below include 543 PPP loans that totaled $52.8 million at June 30, 2020. There were no loans that were forgiven at June 30, 2020.

 

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

 

 

 

June 30, 2020

 

(In thousands)

 

Commercial and Industrial

 

 

Commercial Real Estate

 

 

Construction and Land

 

 

Consumer

 

 

Student

 

 

Residential

Real Estate

 

 

Home Equity Lines of Credit

 

 

Unallocated

 

 

Total

 

Allowance for Loan Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance, December 31, 2019

 

$

296

 

 

$

1,788

 

 

$

652

 

 

$

154

 

 

$

65

 

 

$

1,596

 

 

$

326

 

 

$

350

 

 

$

5,227

 

Charge-offs

 

 

(99

)

 

 

-

 

 

 

-

 

 

 

(19

)

 

 

(2

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(120

)

Recoveries

 

 

7

 

 

 

5

 

 

 

-

 

 

 

20

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

32

 

Provision (recovery)

 

 

339

 

 

 

382

 

 

 

366

 

 

 

(2

)

 

 

10

 

 

 

182

 

 

 

(16

)

 

 

-

 

 

 

1,261

 

Ending balance,

June 30, 2020

 

$

543

 

 

$

2,175

 

 

$

1,018

 

 

$

153

 

 

$

73

 

 

$

1,778

 

 

$

310

 

 

$

350

 

 

$

6,400

 

Ending balances individually evaluated for impairment

 

$

69

 

 

$

67

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

136

 

Ending balances collectively evaluated for impairment

 

$

474

 

 

$

2,108

 

 

$

1,018

 

 

$

153

 

 

$

73

 

 

$

1,778

 

 

$

310

 

 

$

350

 

 

$

6,264

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

702

 

 

$

9,025

 

 

$

201

 

 

$

-

 

 

$

-

 

 

$

377

 

 

$

-

 

 

 

 

 

 

$

10,305

 

Collectively evaluated for impairment

 

 

86,342

 

 

 

177,979

 

 

 

73,500

 

 

 

6,428

 

 

 

7,832

 

 

 

227,540

 

 

 

32,734

 

 

 

 

 

 

 

612,355

 

Ending balance, June 30, 2020

 

$

87,044

 

 

$

187,004

 

 

$

73,701

 

 

$

6,428

 

 

$

7,832

 

 

$

227,917

 

 

$

32,734

 

 

 

 

 

 

$

622,660

 

11

 

 

 

June 30, 2019

 

(In thousands)

 

Commercial and Industrial

 

 

Commercial Real Estate

 

 

Construction and Land

 

 

Consumer

 

 

Student

 

 

Residential

Real Estate

 

 

Home Equity Lines of Credit

 

 

Unallocated

 

 

Total

 

Allowance for Loan Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance, December 31, 2018

 

$

483

 

 

$

1,738

 

 

$

635

 

 

$

145

 

 

$

68

 

 

$

1,311

 

 

$

446

 

 

$

350

 

 

$

5,176

 

Charge-offs

 

 

(74

)

 

 

-

 

 

 

-

 

 

 

(23

)

 

 

(10

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(107

)

Recoveries

 

 

1

 

 

 

75

 

 

 

-

 

 

 

9

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

85

 

Provision (recovery)

 

 

162

 

 

 

(34

)

 

 

15

 

 

 

10

 

 

 

9

 

 

 

137

 

 

 

(44

)

 

 

-

 

 

 

255

 

Ending balance, June 30, 2019

 

$

572

 

 

$

1,779

 

 

$

650

 

 

$

141

 

 

$

67

 

 

$

1,448

 

 

$

402

 

 

$

350

 

 

$

5,409

 

 

 

 

December 31, 2019

 

(In thousands)

 

Commercial and Industrial

 

 

Commercial Real Estate

 

 

Construction and Land

 

 

Consumer

 

 

Student

 

 

Residential

Real Estate

 

 

Home Equity Lines of Credit

 

 

Unallocated

 

 

Total

 

Allowance for Loan Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance, December 31, 2018

 

$

483

 

 

$

1,738

 

 

$

635

 

 

$

145

 

 

$

68

 

 

$

1,311

 

 

$

446

 

 

$

350

 

 

$

5,176

 

Charge-offs

 

 

(328

)

 

 

-

 

 

 

-

 

 

 

(50

)

 

 

(13

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(391

)

Recoveries

 

 

2

 

 

 

80

 

 

 

-

 

 

 

14

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

96

 

Provision (recovery)

 

 

139

 

 

 

(30

)

 

 

17

 

 

 

45

 

 

 

10

 

 

 

285

 

 

 

(120

)

 

 

-

 

 

 

346

 

Ending balance, December 31, 2019

 

$

296

 

 

$

1,788

 

 

$

652

 

 

$

154

 

 

$

65

 

 

$

1,596

 

 

$

326

 

 

$

350

 

 

$

5,227

 

Ending balances individually evaluated for impairment

 

$

-

 

 

$

229

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

229

 

Ending balances collectively evaluated for impairment

 

$

296

 

 

$

1,559

 

 

$

652

 

 

$

154

 

 

$

65

 

 

$

1,596

 

 

$

326

 

 

$

350

 

 

$

4,998

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

187

 

 

$

2,847

 

 

$

233

 

 

$

-

 

 

$

-

 

 

$

379

 

 

$

-

 

 

 

 

 

 

$

3,646

 

Collectively evaluated for impairment

 

 

27,217

 

 

 

179,051

 

 

 

64,998

 

 

 

5,958

 

 

 

8,151

 

 

 

224,937

 

 

 

36,268

 

 

 

 

 

 

 

546,580

 

Ending balance, December 31, 2019

 

$

27,404

 

 

$

181,898

 

 

$

65,231

 

 

$

5,958

 

 

$

8,151

 

 

$

225,316

 

 

$

36,268

 

 

 

 

 

 

$

550,226

 

 

 


12

Loans by credit quality indicators were as follows at the dates presented:

 

 

 

June 30, 2020

 

(In thousands)

 

Commercial and Industrial

 

 

Commercial Real Estate

 

 

Construction and Land

 

 

Consumer

 

 

Student

 

 

Residential

Real Estate

 

 

Home Equity Lines of Credit

 

 

Total

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

86,035

 

 

$

175,248

 

 

$

71,046

 

 

$

6,426

 

 

$

7,832

 

 

$

220,639

 

 

$

30,691

 

 

$

597,917

 

Special mention

 

 

166

 

 

 

8,500

 

 

 

2,292

 

 

 

2

 

 

 

-

 

 

 

322

 

 

 

127

 

 

 

11,409

 

Substandard

 

 

843

 

 

 

3,256

 

 

 

363

 

 

 

-

 

 

 

-

 

 

 

6,956

 

 

 

1,916

 

 

 

13,334

 

Doubtful

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

87,044

 

 

$

187,004

 

 

$

73,701

 

 

$

6,428

 

 

$

7,832

 

 

$

227,917

 

 

$

32,734

 

 

$

622,660

 

 

 

December 31, 2019

 

(In thousands)

Commercial and Industrial

 

 

Commercial Real Estate

 

 

Construction and Land

 

 

Consumer

 

 

Student

 

 

Residential

Real Estate

 

 

Home Equity Lines of Credit

 

 

Total

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

26,555

 

 

$

175,063

 

 

$

62,231

 

 

$

5,955

 

 

$

8,151

 

 

$

218,686

 

 

$

34,218

 

 

$

530,859

 

Special mention

 

422

 

 

 

3,487

 

 

 

2,594

 

 

 

3

 

 

 

-

 

 

 

336

 

 

 

127

 

 

 

6,969

 

Substandard

 

427

 

 

 

3,348

 

 

 

406

 

 

 

-

 

 

 

-

 

 

 

6,294

 

 

 

1,923

 

 

 

12,398

 

Doubtful

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

$

27,404

 

 

$

181,898

 

 

$

65,231

 

 

$

5,958

 

 

$

8,151

 

 

$

225,316

 

 

$

36,268

 

 

$

550,226

 

 

The past due status of loans at the dates presented were:

  

 

 

June 30, 2020

 

(In thousands)

 

30-59 Days

Past Due

 

 

60-89 Days

Past Due

 

 

90+ Days Past Due

 

 

Total Past Due

 

 

Current

 

 

Total Loans

 

 

90+ Days Past Due and Accruing

 

 

Nonaccruals

 

Commercial and industrial

 

$

710

 

 

$

10

 

 

$

702

 

 

$

1,422

 

 

$

85,622

 

 

$

87,044

 

 

$

144

 

 

$

558

 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

989

 

 

 

989

 

 

 

186,015

 

 

 

187,004

 

 

 

-

 

 

 

989

 

Construction and land

 

 

860

 

 

 

-

 

 

 

-

 

 

 

860

 

 

 

72,841

 

 

 

73,701

 

 

 

-

 

 

 

-

 

Consumer

 

 

7

 

 

 

1

 

 

 

-

 

 

 

8

 

 

 

6,420

 

 

 

6,428

 

 

 

-

 

 

 

-

 

Student

 

 

546

 

 

 

157

 

 

 

765

 

 

 

1,468

 

 

 

6,364

 

 

 

7,832

 

 

 

765

 

 

 

-

 

Residential real estate

 

 

392

 

 

 

763

 

 

 

-

 

 

 

1,155

 

 

 

226,762

 

 

 

227,917

 

 

 

-

 

 

 

-

 

Home equity lines of credit

 

 

44

 

 

 

-

 

 

 

65

 

 

 

109

 

 

 

32,625

 

 

 

32,734

 

 

 

65

 

 

 

-

 

Total

 

$

2,559

 

 

$

931

 

 

$

2,521

 

 

$

6,011

 

 

$

616,649

 

 

$

622,660

 

 

$

974

 

 

$

1,547

 

13

 

 

 

December 31, 2019

 

(In thousands)

 

30-59 Days

Past Due

 

 

60-89 Days

Past Due

 

 

90+ Days Past Due

 

 

Total Past Due

 

 

Current

 

 

Total Loans

 

 

90+ Days Past Due and Accruing

 

 

Nonaccruals

 

Commercial and industrial

 

$

330

 

 

$

-

 

 

$

34

 

 

$

364

 

 

$

27,040

 

 

$

27,404

 

 

$

34

 

 

$

-

 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

989

 

 

 

989

 

 

 

180,909

 

 

 

181,898

 

 

 

-

 

 

 

989

 

Construction and land

 

 

5,472

 

 

 

-

 

 

 

-

 

 

 

5,472

 

 

 

59,759

 

 

 

65,231

 

 

 

-

 

 

 

-

 

Consumer

 

 

11

 

 

 

1

 

 

 

-

 

 

 

12

 

 

 

5,946

 

 

 

5,958

 

 

 

-

 

 

 

-

 

Student

 

 

345

 

 

 

220

 

 

 

1,204

 

 

 

1,769

 

 

 

6,382

 

 

 

8,151

 

 

 

1,205

 

 

 

-

 

Residential real estate

 

 

739

 

 

 

109

 

 

 

397

 

 

 

1,245

 

 

 

224,071

 

 

 

225,316

 

 

 

397

 

 

 

-

 

Home equity lines of credit

 

 

389

 

 

 

-

 

 

 

-

 

 

 

389

 

 

 

35,879

 

 

 

36,268

 

 

 

-

 

 

 

-

 

Total

 

$

7,286

 

 

$

330

 

 

$

2,624

 

 

$

10,240

 

 

$

539,986

 

 

$

550,226

 

 

$

1,636

 

 

$

989

 

 

The following table presents information related to impaired loans, by portfolio segment, at the dates presented.

 

 

 

June 30, 2020

 

(In thousands)

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Recognized

 

With no specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

144

 

 

$

144

 

 

$

-

 

 

$

165

 

 

$

2

 

Commercial real estate

 

 

8,227

 

 

 

8,227

 

 

 

-

 

 

 

8,263

 

 

 

171

 

Construction and land

 

 

201

 

 

 

201

 

 

 

-

 

 

 

210

 

 

 

5

 

Residential real estate

 

 

377

 

 

 

377

 

 

 

-

 

 

 

378

 

 

 

4

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

558

 

 

$

558

 

 

$

69

 

 

$

939

 

 

$

8

 

Commercial real estate

 

 

798

 

 

 

798

 

 

 

67

 

 

 

804

 

 

 

15

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

702

 

 

$

702

 

 

$

69

 

 

$

1,104

 

 

$

10

 

Commercial real estate

 

 

9,025

 

 

 

9,025

 

 

 

67

 

 

 

9,067

 

 

 

186

 

Construction and land

 

 

201

 

 

 

201

 

 

 

-

 

 

 

210

 

 

 

5

 

Residential real estate

 

 

377

 

 

 

377

 

 

 

-

 

 

 

378

 

 

 

4

 

Total

 

$

10,305

 

 

$

10,305

 

 

$

136

 

 

$

10,759

 

 

$

205

 

 

 

 

December 31, 2019

 

(In thousands)

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Average Recorded Investment

 

 

Interest Income Recognized

 

With no specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

187

 

 

$

187

 

 

$

-

 

 

$

287

 

 

$

13

 

Commercial real estate

 

 

1,048

 

 

 

1,048

 

 

 

-

 

 

 

1,213

 

 

 

61

 

Construction and land

 

 

233

 

 

 

233

 

 

 

-

 

 

 

494

 

 

 

25

 

Residential real estate

 

 

379

 

 

 

379

 

 

 

-

 

 

 

384

 

 

 

16

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

1,799

 

 

 

1,813

 

 

 

229

 

 

 

1,806

 

 

 

38

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

187

 

 

$

187

 

 

$

-

 

 

$

287

 

 

$

13

 

Commercial real estate

 

 

2,847

 

 

 

2,861

 

 

 

229

 

 

 

3,019

 

 

 

99

 

Construction and land

 

 

233

 

 

 

233

 

 

 

-

 

 

 

494

 

 

 

25

 

Residential real estate

 

 

379

 

 

 

379

 

 

 

-

 

 

 

384

 

 

 

16

 

Total

 

$

3,646

 

 

$

3,660

 

 

$

229

 

 

$

4,184

 

 

$

153

 

14

TDRs are those loans for which a concession has been granted to a borrower experiencing financial difficulties.  TDRs are identified at the point when the borrower enters into a modification agreement.  The following table summarizes a modification that was classified as a TDR during the three and six months ended June 30, 2020.  There were no loan modifications that were classified as TDRs during the three and six months ended June 30, 2019.

 

(Dollars in thousands)

 

Three and Six Months Ended

June 30, 2020

 

Class of Loan

 

Number of Contracts

 

Pre-Modification Outstanding Recorded Investment

 

 

Post-Modification Outstanding Recorded Investment

 

Commercial real estate

 

1

 

$

6,221

 

 

$

6,221

 

 

TDRs are considered impaired loans and are individually evaluated for impairment in the determination of the allowance for loan losses.  TDR payment defaults occur when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or the TDR becomes 90 days or more past due. There were no TDR defaults during the three and six months ended June 30, 2020 and 2019.  

 

At June 30, 2020, there were six loans totaling $8.6 million that have been identified as TDRs, which were current and performing in accordance with the modified terms.  At December 31, 2019, there were five loans in the portfolio, totaling $2.5 million, that were identified as TDRs, which were current and performing in accordance with the modified terms.   

 

At June 30, 2020 and 2019, the Company had no foreclosed residential real estate property in its possession or in the process of foreclosure.  

 

In response to COVID-19 and under the provisions of the CARES Act, the Company granted short-term loan modifications for the deferral of scheduled payments for a 90-day period beginning in April 2020.  Modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not considered TDRs. Borrowers who were considered current were ones whose loans were less than 30 days past due on their contractual payments at the time a modification was entered.  At June 30, 2020, the Company modified 194 loans totaling $92.8 million under this guidance and, such loans were not considered TDRs.

 

Note 4.Junior Subordinated Debt

 

On September 21, 2006, the Company’s wholly-owned Connecticut statutory business trust, Fauquier Statutory Trust II (“Trust II”), privately issued $4.0 million face amount of the trust’s Floating Rate Capital Securities in a pooled capital securities offering. Simultaneously, Trust II used the proceeds of that sale to purchase $4.0 million principal amount of the Company’s Floating Rate Junior Subordinated Deferrable Interest Debentures due 2036. The interest rate on the capital security resets every three months at 1.70% above the then current three-month LIBOR. Interest is paid quarterly. Total capital securities at June 30, 2020 and December 31, 2019 were $4.1 million. The Trust II issuance of capital securities and the respective subordinated debentures are callable at any time. The subordinated debentures are an unsecured obligation of the Company and are junior in right of payment to all present and future senior indebtedness of the Company. The capital securities are guaranteed by the Company on a subordinated basis.

 

Note 5.Derivative Instruments and Hedging Activities

 

The Company uses interest rate swaps to reduce interest rate risk and to manage net interest income.  Interest differentials paid or received under the swap agreements are reflected as adjustments to interest income. These interest rate swap agreements include both cash flow and fair value hedge derivative instruments that qualify for hedge accounting. The notional amounts of the interest rate swaps are not exchanged and do not represent exposure to credit loss. In the event of default by a counter party, the risk in these transactions is the cost of replacing the agreements at current market rates.

 

The Company entered into an interest rate swap agreement on July 1, 2010 to manage the interest rate exposure on its Junior Subordinated Debt due 2036. By entering into this agreement, the Company converts a floating rate liability into a fixed rate liability through 2020. Under the terms of the agreement, the Company receives interest quarterly at the rate equivalent to the three-month LIBOR plus 1.70%, repricing every three months on the same date as the Company’s Junior Subordinated Debt

15

and pays interest monthly at the fixed rate of 3.21%. Interest expense on the interest rate swap was $27,900 and $6,300 for the three months ended June 30, 2020 and 2019, respectively, and $41,200 and $10,900 for the six months ended June 30, 2020 and 2019, respectively. In addition, on June 24, 2016, the Company entered into a forward interest rate swap agreement to convert the floating rate liability on the same Junior Subordinated Debt to fixed from 2020 to 2031. There was no interest expense recognized on the forward interest rate swap for the three and six months ended June 30, 2020 and 2019, and there will be no exchange of payments until September 15, 2020, the expiration date of the interest rate swap. These swaps are designated as cash flow hedges with changes in the fair value recorded through other comprehensive income.

 

The Company entered into two swap agreements to manage the interest rate risk related to two commercial loans on February 11, 2015 and April 7, 2015. The agreements allow the Company to convert fixed rate assets to floating rate assets through 2022 and 2025. The Company receives interest monthly at the rate equivalent to one-month LIBOR plus a spread repricing on the same date as the loans and pays interest at fixed rates. Interest expense on these swaps was $16,200 for the three months ended June 30, 2020 and interest income was $9,100 for the three months ended June 30, 2019.  Interest expense for these swaps was $18,000 for the six months ended June 30, 2020 and interest income was $18,100 for the six months ended June 30, 2019. These swaps are designated as fair value hedges and changes in fair value are recorded in current earnings.  On July 28, 2020, one of these swap agreements with a notional/contract amount of $1.2 million was terminated resulting in a termination fee of $89,200.

 

Cash collateral held at other banks for these swaps was $1.1 million and $730,000 at June 30, 2020 and December 31, 2019, respectively. Collateral is dependent on the market valuation of the underlying hedges.

The following table summarizes the Company’s derivative instruments as of June 30, 2020 and December 31, 2019:

 

(In thousands)

 

June 30, 2020

Derivatives designated as hedging instruments

 

Notional/Contract Amount

 

 

Fair Value

 

 

Fair Value

Balance Sheet Location

 

Expiration Date

Interest rate swap - cash flow

 

$

4,000

 

 

$

(24

)

 

Other Liabilities

 

9/15/2020

Interest rate forward swap - cash flow

 

 

4,000

 

 

 

(572

)

 

Other Liabilities

 

6/15/2031

Interest rate swap - fair value

 

 

1,215

 

 

 

(87

)

 

Other Liabilities

 

4/9/2025

Interest rate swap - fair value

 

 

4,251

 

 

 

(111

)

 

Other Liabilities

 

2/12/2022

 

(In thousands)

 

December 31, 2019

Derivatives designated as hedging instruments

 

Notional/Contract Amount

 

 

Fair Value

 

 

Fair Value

Balance Sheet Location

 

Expiration Date

Interest rate swap - cash flow

 

$

4,000

 

 

$

(41

)

 

Other Liabilities

 

9/15/2020

Interest rate forward swap - cash flow

 

 

4,000

 

 

 

(59

)

 

Other Liabilities

 

6/15/2031

Interest rate swap - fair value

 

 

1,167

 

 

 

(17

)

 

Other Liabilities

 

4/9/2025

Interest rate swap - fair value

 

 

4,230

 

 

 

(23

)

 

Other Liabilities

 

2/12/2022

 

 


16

Note 6.Earnings Per Share

 

The components of the Company’s earnings per share calculations are as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

Shares

 

 

Per Share Amount

 

 

Shares

 

 

Per Share Amount

 

 

Shares

 

 

Per Share Amount

 

 

Shares

 

 

Per Share Amount

 

Basic earnings per share

 

 

3,794,725

 

 

$

0.42

 

 

 

3,784,934

 

 

$

0.41

 

 

 

3,791,676

 

 

$

0.78

 

 

 

3,781,931

 

 

$

0.84

 

Effect of dilutive stock awards

 

 

6,840

 

 

 

 

 

 

 

9,032

 

 

 

 

 

 

 

6,539

 

 

 

 

 

 

 

9,524

 

 

 

 

 

Diluted earnings per share

 

 

3,801,565

 

 

$

0.42

 

 

 

3,793,966

 

 

$

0.41

 

 

 

3,798,215

 

 

$

0.78

 

 

 

3,791,455

 

 

$

0.84

 

 

Unvested restricted shares have voting rights and receive nonforfeitable dividends during the vesting period; therefore, they are included in calculating basic earnings per share. The portion of unvested performance-based restricted stock units that are expected to vest, but have not yet been awarded, are included in the calculation of diluted earnings per share.

 

Note 7.Share-based Compensation

 

Stock Incentive Plan

 

On May 21, 2019, the shareholders of the Company approved the Fauquier Bankshares, Inc. Amended and Restated Stock Incentive Plan (the “Plan”).  The Plan superseded the Company’s stock incentive plan that was approved by shareholders in 2009.  Under the Plan, awards of options, restricted stock, and other stock-based awards may be granted to employees, directors or consultants of the Company or any affiliate.  The effective date of the Plan is May 21, 2019 with a termination date of May 21, 2029. The Company’s Board of Directors may terminate, suspend or modify the Plan within certain restrictions. The Plan authorizes for issuance 350,000 shares of the Company’s common stock.

 

Restricted Shares

 

Restricted shares are accounted for using the fair market value of the Company’s common stock on the date on which these shares were awarded. The restricted shares issued to certain executive officers are subject to a vesting period, whereby the restrictions on the shares lapse on the third anniversary of the date the shares were awarded. Compensation expense for these shares is recognized over the three-year period. The restricted shares issued to nonemployee directors are not subject to a vesting period and compensation expense is recognized on the date the shares are granted.  Compensation expense for restricted shares was $34,400 and $39,600, net of forfeitures, for the three months ended June 30, 2020 and 2019, respectively, and $158,800 and $168,800 for the six months ended June 30, 2020 and 2019, respectively.  The total unrecognized compensation expense related to restricted shares was $238,000 and $241,000 for the six months ended June 30, 2020 and 2019, respectively.  This expense is expected to be recognized through 2023.

 

A summary of the status of the Company’s unvested restricted shares granted under the Plan is presented below:

 

 

 

June 30, 2020

 

 

June 30, 2019

 

 

 

Shares

 

 

Weighted Average Grant Date Fair Value

Per Share

 

 

Shares

 

 

Weighted Average Grant Date Fair Value

Per Share

 

Unvested shares, beginning

 

 

20,352

 

 

$

20.20

 

 

 

22,569

 

 

$

17.98

 

Granted

 

 

12,182

 

 

 

20.95

 

 

 

12,058

 

 

 

21.69

 

Vested

 

 

(10,684

)

 

 

19.14

 

 

 

(10,553

)

 

 

17.84

 

Forfeited or surrendered

 

 

(2,007

)

 

 

19.21

 

 

 

(440

)

 

 

14.98

 

Unvested shares, ending

 

 

19,843

 

 

$

21.33

 

 

 

23,634

 

 

$

20.10

 

 

17

Performance-based Restricted Stock Units

 

The Company grants performance-based restricted stock units to certain executive officers.  Performance-based restricted stock units are accounted for using the fair market value of the Company’s common stock on the date awarded, and adjusted for subsequent changes in the market value.  Performance-based restricted stock units are subject to a vesting period, whereby the restrictions on the rights lapse on the third anniversary of the date the units were awarded.  Until vesting, the shares underlying the units are not issued and are not included in shares outstanding.  Vesting is contingent upon the Company’s reaching predetermined performance goals as compared with a predetermined peer group of banks.  Compensation expense for performance-based restricted stock units was $13,100 and $28,400, net of forfeitures, for the three months ended June 30, 2020 and 2019, respectively, and $(98,900) and $53,700 for the six months ended June 30, 2020 and 2019, respectively.  The total unrecognized compensation expense related to performance-based restricted stock units was $99,000 and $188,000 for the six months ended June 30, 2020 and 2019, respectively.  This expense is expected to be recognized through 2023 and is dependent upon management reaching the predetermined goals.

A summary of the status of the Company’s unvested performance-based restricted stock units is presented below:

 

 

 

June 30, 2020

 

 

June 30, 2019

 

 

 

Restricted Stock Units

 

 

Weighted Average Grant Date Fair Value

Per Share

 

 

Restricted Stock Units

 

 

Weighted Average Grant Date Fair Value

Per Share

 

Unvested shares, beginning

 

 

30,012

 

 

$

18.90

 

 

 

22,103

 

 

$

17.90

 

Granted

 

 

7,889

 

 

 

20.95

 

 

 

7,909

 

 

 

21.69

 

Vested

 

 

(826

)

 

 

19.74

 

 

 

-

 

 

 

-

 

Forfeited

 

 

(11,701

)

 

 

16.92

 

 

 

-

 

 

 

-

 

Unvested shares, ending

 

 

25,374

 

 

$

20.43

 

 

 

30,012

 

 

$

18.98

 

 

Note 8.Employee Benefit Plans

 

The Company has supplemental executive retirement plans (“SERP”) for certain executives in which the contributions are solely funded by the Company.  Benefits are to be paid in monthly installments following retirement or death. The SERP liability was $2.9 million at June 30, 2020 and December 31, 2019. For the three months ended June 30, 2020 and 2019, SERP expenses were $71,100 and $74,700, respectively, and $142,200 and $147,600 for the six months ended June 30, 2020 and 2019, respectively.

 

The Company has a defined contribution retirement plan under Internal Revenue Code of 1986 Section 401(k) covering all employees who are at least 18 years of age and worked more than 20 hours per week. Under the plan, a participant may contribute an amount up to 100% of their covered compensation for the year, not to exceed the dollar limit set by law (Code Section 402(g)). The Company will make an annual matching contribution equal to 100% on the first 6% of compensation deferred, for a maximum match of 6% of compensation. The Company makes an additional safe harbor contribution equal to 3% of compensation to all eligible participants. The Company’s 401(k) plan expenses were $169,100 and $180,700 for the three months ended June 30, 2020 and 2019, respectively, and $405,400 and $411,500 for the six months ended June 30, 2020 and 2019, respectively.

 

The Company maintains a Director Deferred Compensation Plan (“Deferred Compensation Plan”). This plan provides that any nonemployee director of the Company may elect to defer receipt of all or any portion of his or her compensation as a director. A participating director may elect to have amounts held in a deferred cash account, which is credited on a quarterly basis with interest equal to the highest rate offered by the Bank at the end of the preceding quarter. Alternatively, a participant may elect to have a deferred stock account in which deferred amounts are treated as if invested in the Company’s common stock at the fair market value on the date of deferral. The value of a stock account will change based upon the fair market value of an equivalent number of shares of common stock. In addition, the deferred amounts deemed invested in common stock will be credited with dividends on an equivalent number of shares. Amounts considered invested in the Company’s common stock are paid, at the election of the director, either in cash or in whole shares of the common stock and

18

cash-in-lieu of fractional shares. Directors may elect to receive amounts contributed to their respective accounts in one or up to five installments. There were no directors participating in the Deferred Compensation Plan during the three and six months ended June 30, 2020 and 2019.

 

The Company has a nonqualified deferred compensation program for a former key employee’s retirement, in which the contribution expense is funded solely by the Company. The retirement benefit to be provided is variable based upon the performance of underlying life insurance policy assets. Deferred compensation expense for the three months ended June 30, 2020 and 2019 was $6,900 and $21,300, respectively, and $14,800 and $37,200 for the six months ended June 30, 2020 and 2019, respectively.  Concurrent with the establishment of the deferred compensation program, the Company purchased life insurance policies on this employee with the Company named as owner and beneficiary. These life insurance policies are intended to be utilized as a source of funding the deferred compensation program.  Income on these life insurance policies was $7,100 and $7,300 for the three months ended June 30, 2020 and 2019, respectively, and $14,200 and $14,300 for the six months ended June 30, 2020 and 2019, respectively.  The Company has recorded on its consolidated balance sheets $1.4 million in cash surrender value of these policies at June 30, 2020 and December 31, 2019 and accrued liabilities of $154,000 and $153,000 at June 30, 2020 and December 31, 2019, respectively.

 

Note 9.Fair Value Measurement

 

GAAP requires the Company to record fair value adjustments to certain assets and liabilities. The fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants as of the measurement date.

 

GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.  GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:

 

Level 1:Inputs are defined as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2:

Inputs are defined as inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3:Inputs are defined as unobservable inputs for the asset or liability.

 

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:

 

Securities available for sale:  Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, then the security would fall to the lowest level of the hierarchy (Level 3). The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with an independent pricing service that uses Intercontinental Exchange (“ICE”) as the primary source for valuation. ICE utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information.  Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

 

Interest rate swaps:  The Company recognizes interest rate swaps at fair value and classifies as Level 2.  The Company has contracted with a third-party to provide valuations for interest rate swaps using standard valuation techniques.

 


19

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis:

 

 

 

Fair Value Measurements

 

(In thousands)

 

Balance

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets at June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. Government corporations and agencies

 

$

61,966

 

 

$

-

 

 

$

61,966

 

 

$

-

 

Obligations of states and political subdivisions

 

 

16,284

 

 

 

-

 

 

 

16,284

 

 

 

-

 

Total available for sale securities

 

 

78,250

 

 

 

-

 

 

 

78,250

 

 

 

-

 

Mutual funds

 

 

417

 

 

 

417

 

 

 

-

 

 

 

-

 

Total assets at fair value

 

$

78,667

 

 

$

417

 

 

$

78,250

 

 

$

-

 

Liabilities at June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

794

 

 

$

-

 

 

$

794

 

 

$

-

 

Total liabilities at fair value

 

$

794

 

 

$

-

 

 

$

794

 

 

$

-

 

Assets at December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. Government corporations and agencies

 

$

63,941

 

 

$

-

 

 

$

63,941

 

 

$

-

 

Obligations of states and political subdivisions

 

 

15,842

 

 

 

-

 

 

 

15,842

 

 

 

-

 

Total available for sale securities

 

 

79,783

 

 

 

-

 

 

 

79,783

 

 

 

-

 

Mutual funds

 

 

403

 

 

 

403

 

 

 

-

 

 

 

-

 

Total assets at fair value

 

$

80,186

 

 

$

403

 

 

$

79,783

 

 

$

-

 

Liabilities at December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

140

 

 

$

-

 

 

$

140

 

 

$

-

 

Total liabilities at fair value

 

$

140

 

 

$

-

 

 

$

140

 

 

$

-

 

 

The Company may be required, from time to time, to measure and recognize certain assets at fair value on a nonrecurring basis in accordance with GAAP. The following describes the valuation techniques and inputs used by the Company in determining the fair value of certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements.

 

Mortgage Loans Held for Sale:  Mortgage loans held for sale are carried at lower of cost or market value. These loans currently consist of 1-4 family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2).  No nonrecurring fair value adjustments were recorded on mortgage loans held for sale during the three and six months ended June 30, 2020 and 2019. Net gains and losses on the sale of loans are recorded as a component of noninterest income on the consolidated statements of operations.

 

Impaired Loans:  A loan is designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loans or the fair value of the collateral securing the loans, or the present value of the cash flows. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate.  The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal of one year or less, conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is in the process of construction or if an appraisal of the real estate property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal of one year or less, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3).  Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of operations.

 

20

Other Real Estate Owned: OREO is measured at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. The Company considers OREO as Level 3.

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis at June 30, 2020 and December 31, 2019.

 

 

 

June 30, 2020

 

(In thousands)

 

Balance

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans, net

 

$

1,220

 

 

$

-

 

 

$

-

 

 

$

1,220

 

Other real estate owned, net

 

 

1,356

 

 

 

-

 

 

 

-

 

 

 

1,356

 

 

 

 

December 31, 2019

 

(In thousands)

 

Balance

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale

 

$

247

 

 

$

-

 

 

$

247

 

 

$

-

 

Impaired loans, net

 

 

1,570

 

 

 

-

 

 

 

-

 

 

 

1,570

 

Other real estate owned, net

 

 

1,356

 

 

 

-

 

 

 

-

 

 

 

1,356

 

 

The following table displays quantitative information about Level 3 fair value measurements at June 30, 2020 and December 31, 2019.

 

 

 

June 30, 2020

 

(Dollars in thousands)

 

Fair Value

 

 

Valuation Technique

 

Unobservable Input

 

Weighted Average Discount

 

Impaired loans, net

 

$

1,220

 

 

Appraised values

 

Age of appraisal, current market conditions, experience within local market

 

 

10

%

Other real estate owned, net

 

 

1,356

 

 

Appraised values

 

Age of appraisal, current market conditions and selling costs

 

 

18

%

Total

 

$

2,576

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

(Dollars in thousands)

 

Fair Value

 

 

Valuation Technique

 

Unobservable Input

 

Weighted Average Discount

 

Impaired loans, net

 

$

1,570

 

 

Appraised values

 

Age of appraisal, current market conditions, experience within local market

 

 

13

%

Other real estate owned, net

 

 

1,356

 

 

Appraised values

 

Age of appraisal, current market conditions and selling costs

 

 

18

%

Total

 

$

2,926

 

 

 

 

 

 

 

 

 

 

21

ASC 825, “Financial Instruments”, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. 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, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

 

The estimated fair values and related carrying amounts of the Company’s financial instruments are as follows:

 

 

 

June 30, 2020

 

(In thousands)

 

Carrying Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

79,539

 

 

$

79,539

 

 

$

-

 

 

$

-

 

 

$

79,539

 

Securities available for sale

 

 

78,250

 

 

 

-

 

 

 

78,250

 

 

 

-

 

 

 

78,250

 

Restricted investments

 

 

2,687

 

 

 

-

 

 

 

2,687

 

 

 

-

 

 

 

2,687

 

Loans, net

 

 

616,260

 

 

 

-

 

 

 

-

 

 

 

615,710

 

 

 

615,710

 

Accrued interest receivable

 

 

2,818

 

 

 

-

 

 

 

2,818

 

 

 

-

 

 

 

2,818

 

Mutual funds

 

 

417

 

 

 

417

 

 

 

-

 

 

 

-

 

 

 

417

 

Bank-owned life insurance

 

 

14,141

 

 

 

-

 

 

 

14,141

 

 

 

-

 

 

 

14,141

 

Total financial assets

 

$

794,112

 

 

$

79,956

 

 

$

97,896

 

 

$

615,710

 

 

$

793,562

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

705,806

 

 

$

-

 

 

$

706,432

 

 

$

-

 

 

$

706,432

 

FHLB advances

 

 

32,651

 

 

 

-

 

 

 

33,223

 

 

 

-

 

 

 

33,223

 

Junior subordinated debt

 

 

4,124

 

 

 

-

 

 

 

4,124

 

 

 

-

 

 

 

4,124

 

Accrued interest payable

 

 

153

 

 

 

-

 

 

 

153

 

 

 

-

 

 

 

153

 

Interest rate swaps

 

 

794

 

 

 

-

 

 

 

794

 

 

 

-

 

 

 

794

 

Total financial liabilities

 

$

743,528

 

 

$

-

 

 

$

744,726

 

 

$

-

 

 

$

744,726

 

 

 

 

December 31, 2019

 

(In thousands)

 

Carrying Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

46,341

 

 

$

46,341

 

 

$

-

 

 

$

-

 

 

$

46,341

 

Securities available for sale

 

 

79,783

 

 

 

-

 

 

 

79,783

 

 

 

-

 

 

 

79,783

 

Restricted investments

 

 

2,016

 

 

 

-

 

 

 

2,016

 

 

 

-

 

 

 

2,016

 

Mortgage loans held for sale

 

 

247

 

 

 

 

 

 

 

247

 

 

 

-

 

 

 

247

 

Loans, net

 

 

544,999

 

 

 

-

 

 

 

-

 

 

 

541,367

 

 

 

541,367

 

Accrued interest receivable

 

 

1,984

 

 

 

-

 

 

 

1,984

 

 

 

-

 

 

 

1,984

 

Mutual funds

 

 

403

 

 

 

403

 

 

 

-

 

 

 

-

 

 

 

403

 

Bank-owned life insurance

 

 

13,961

 

 

 

-

 

 

 

13,961

 

 

 

-

 

 

 

13,961

 

Total financial assets

 

$

689,734

 

 

$

46,744

 

 

$

97,991

 

 

$

541,367

 

 

$

686,102

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

622,155

 

 

$

-

 

 

$

622,295

 

 

$

-

 

 

$

622,295

 

FHLB advances

 

 

16,695

 

 

 

-

 

 

 

16,724

 

 

 

-

 

 

 

16,724

 

Junior subordinated debt

 

 

4,124

 

 

 

-

 

 

 

4,446

 

 

 

-

 

 

 

4,446

 

Accrued interest payable

 

 

217

 

 

 

-

 

 

 

217

 

 

 

-

 

 

 

217

 

Interest rate swaps

 

 

140

 

 

 

-

 

 

 

140

 

 

 

-

 

 

 

140

 

Total financial liabilities

 

$

643,331

 

 

$

-

 

 

$

643,822

 

 

$

-

 

 

$

643,822

 

 

The Company assumes interest rate risk (the risk that general interest rate levels will change) during its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change

22

may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment.  Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

 

Note 10.Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss), net of tax, for the six months ended June 30, 2020 and 2019 were:

(In thousands)

 

Gains (Losses) on Cash Flow Hedges

 

 

Unrealized Gains (Losses) on Available for Sale Securities

 

 

Supplemental Executive Retirement Plans

 

 

Total

 

Balance, December 31, 2018

 

$

172

 

 

$

(850

)

 

$

140

 

 

$

(538

)

Other comprehensive income (loss) before reclassifications

 

 

(228

)

 

 

1,892

 

 

 

-

 

 

 

1,664

 

Balance, June 30, 2019

 

$

(56

)

 

$

1,042

 

 

$

140

 

 

$

1,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

$

(78

)

 

$

1,292

 

 

$

157

 

 

$

1,371

 

Other comprehensive income (loss) before reclassifications

 

 

(393

)

 

 

2,181

 

 

 

-

 

 

 

1,788

 

Balance, June 30, 2020

 

$

(471

)

 

$

3,473

 

 

$

157

 

 

$

3,159

 

 

Note 11.Investment in Affordable Housing Projects

 

The Company invests in certain qualified affordable housing projects located in the Commonwealth of Virginia.  The general purpose of these investments is to develop and preserve affordable housing for low income families through residential rental property projects. The Company exerts no control over the operating or financial policies of the partnerships. Return on these investments is through receipt of tax credits and other tax benefits which are subject to recapture by taxing authorities based on compliance features at the project level. The investments are due to expire by 2035. The Company accounts for the affordable housing investments using the equity method and has recorded $4.0 million and $4.2 million in other assets at June 30, 2020 and December 31, 2019, respectively, and $717,000 and $749,000 in other liabilities related to unfunded capital calls through 2023 at June 30, 2020 and December 31, 2019, respectively. The related federal tax credits, included in income tax expense in the consolidated statements of operations, for the six months ended June 30, 2020 and 2019 were $234,000 and $276,000, respectively.  There were $123,100 and $60,000 in flow-through losses recorded in noninterest income during the three months ended June 30, 2020 and 2019, respectively, and $228,400 and $143,300 for the six months ended June 30, 2020 and 2019, respectively.

 

Note 12.Leases

 

The following tables present information about the Company’s leases at the dates indicated:

 

(Dollars in thousands)

 

June 30, 2020

 

Lease liability

 

$

4,823

 

Right-of-use asset

 

$

4,772

 

Weighted average remaining lease term

 

8.27 years

 

Weighted average discount rate

 

 

3.55

%

 

23

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Lease Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease expense

 

$

201

 

 

$

199

 

 

$

412

 

 

$

410

 

Short-term lease expense

 

 

4

 

 

 

3

 

 

 

9

 

 

 

6

 

Total lease expense

 

$

205

 

 

$

202

 

 

$

421

 

 

$

416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for amounts included in lease liabilities

 

$

167

 

 

$

161

 

 

$

389

 

 

368

 

 

The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability at June 30, 2020:

 

(In thousands)

 

 

 

 

Undiscounted Cash Flow

 

June 30, 2020

 

Six months ending December 31, 2020

 

$

281

 

Twelve months ending December 31, 2021

 

 

682

 

Twelve months ending December 31, 2022

 

 

694

 

Twelve months ending December 31, 2023

 

 

707

 

Twelve months ending December 31, 2024

 

 

646

 

Thereafter

 

 

2,604

 

Total undiscounted cash flows

 

$

5,614

 

Less:  Discount

 

 

(791

)

Lease liability

 

$

4,823

 

 

24

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

As used in the following management’s discussion and analysis, the terms “Company,” “we,” “us” or “our” refer to Fauquier Bankshares, Inc. and our consolidated subsidiaries unless the context indicates that the reference is to our subsidiary bank, The Fauquier Bank, for which we also use the term “Bank.”

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

In addition to the historical information contained herein, this report contains forward-looking statements. Forward-looking statements are based on certain assumptions and describe future plans, strategies, and expectations of the Company, and are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “may,” “will” or similar expressions. Although the Company believes its plans, intentions and expectations reflected in these forward-looking statements are reasonable, the Company can give no assurance that these plans, intentions or expectations will be achieved.  The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain, and actual results could differ materially from those contemplated. Factors that could have a material adverse effect on the Company’s operations and future prospects include, but are not limited to: the effects of the novel coronavirus (“COVID-19”) pandemic, including its potential effects on the economic environment, our clients and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; changes in interest rates; the impact of adverse economic conditions; the legislative/regulatory climate; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System (the “Federal Reserve”); acts of war or terrorism; widespread disease or pandemics, such as the COVID-19 pandemic, or other adverse external events; the quality or composition of the loan or investment portfolios; the value of the collateral securing loans in the portfolio; demand for loan products; deposit flows; the level of net charge-offs on loans and the adequacy of the allowance for loan losses; competition; effectiveness of the Company’s credit processes and management of the Company’s credit risk; demand for financial services in the Company’s market area; the Company’s plans to increase market share; mergers, acquisitions and dispositions; cybersecurity threats or attacks; and tax and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements in this report and you should not place undue reliance on such statements, which reflect the Company’s position as of the date of this report.

 

GENERAL

 

The Company was incorporated under the laws of the Commonwealth of Virginia on January 13, 1984. The Company is a registered bank holding company and owns all of the shares of The Fauquier Bank (the “Bank”).  The Company engages in its business through the Bank, a Virginia state-chartered bank that commenced operations in 1902. The Company has no significant operations other than owning the stock of the Bank.  The Bank has 11 full-service branch offices located in the Virginia communities of Old Town-Warrenton, Warrenton, Catlett, The Plains, Sudley Road-Manassas, New Baltimore, Bealeton, Bristow, Haymarket, Gainesville, and Centreville Road-Manassas. The executive offices of the Company and the main office of the Bank are located at 10 Courthouse Square, Warrenton, Virginia 20186.

 

The Bank’s general market area principally includes Fauquier County, Prince William County, and neighboring communities and is located approximately 50 miles southwest of Washington, D.C.

 

The Bank provides a full range of financial services, including internet banking, mobile banking, commercial, retail, insurance, wealth management and financial planning services.  Retail banking services to individuals and businesses include various types of interest and noninterest-bearing checking accounts, money market and savings accounts, and time deposits.  In addition, the Bank provides secured and unsecured commercial and real estate loans, standby letters of credit, secured and unsecured lines of credit, personal loans, residential mortgages and home equity loans, and automobile and other types of consumer financing.

 

The Bank operates a Wealth Management Services (“WMS”) division that began with the granting of trust powers to the Bank in 1919. This division provides personalized services including investment management, financial planning, trust, estate settlement, retirement, insurance, and brokerage services.

 

The Bank, through its subsidiary Fauquier Bank Services, Inc., has equity ownership interests in Bankers Insurance, LLC, a Virginia independent insurance company, and Bankers Title Shenandoah, LLC, a title insurance company, which are each

25

owned by a consortium of Virginia community banks.  Fauquier Bank Services, Inc. previously had an equity ownership interest in Infinex Investments, Inc., a full-service broker/dealer, owned by banks and banking associations in various states, whose ownership was sold by Fauquier Bank Services, Inc. in January 2019.

 

The revenues of the Bank are primarily derived from interest on and fees received in connection with, real estate and other loans, and from interest and dividends from investment securities. The principal sources of funds for the Bank’s lending activities are its deposits, repayment of loans, maturity of investment securities, and borrowings from the Federal Home Loan Bank of Atlanta (“FHLB”). Additional revenues are derived from fees for deposit related and WMS related services.  

 

The Bank’s operations are influenced by general economic conditions and by related monetary and fiscal policies of regulatory agencies, including the Federal Reserve. As a Virginia-chartered bank and a member of the Federal Reserve, the Bank is supervised and examined by the Federal Reserve and the Virginia State Corporation Commission. Interest rates on competing investments and general market rates of interest influence deposit flows and costs of funds. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rate environment and its impact on local demand and the availability of funds. The Bank faces strong competition in the attraction of deposits, its primary source of lendable funds, and in the origination of loans.

 

CRITICAL ACCOUNTING POLICIES

 

GENERAL. The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within the Company’s statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors, including judgements made related to the effect of the COVID-19 pandemic, could affect the ultimate value that is obtained either when 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 its estimates. In addition, GAAP itself may change from one previously acceptable accounting method to another method. Although the economics of the Company’s transactions would be the same, the timing of the recognition of the Company’s transactions could change.

 

ALLOWANCE FOR LOAN LOSSES. The Company establishes the allowance for loan losses through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when it is believed that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in management’s judgment, will be adequate to absorb probable losses inherent in the loan portfolio. Management’s judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available.  Note 1 to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of the Annual Report on Form 10-K for the year ended December 31, 2019, provides additional information related to the allowance for loan losses.

 

The Company employs an independent outsourced loan review function, which annually substantiates and/or adjusts internally generated risk ratings. This independent review function reports directly to the Company’s Board of Directors’ audit committee, and the results of this review are factored into the calculation of the allowance for loan losses.

 

OTHER-THAN-TEMPORARY IMPAIRMENT (“OTTI”) FOR SECURITIES. Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no OTTI. If there is a credit loss, OTTI exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income (loss). For equity securities, impairment is considered to be other-than-temporary based on the Company’s ability and intent to hold

26

the investment until recovery of fair value. OTTI of an equity security results in a write-down that must be included in net income. The Company regularly reviews each investment security for OTTI based on criteria that includes the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the best estimate of the present value of cash flows expected to be collected from debt securities, the intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

 

SIGNIFICANT DEVELOPMENTS – COVID-19 Update

 

To the extent the economic impacts of COVID-19 continue for a prolonged period and conditions stagnate or worsen, the Company’s provision for loan losses, net interest income and overall profitability may be adversely affected.

 

Business Continuity

While COVID-19 continues to aggressively spread throughout the United States, the Company remains committed to adhering to health and safety-related requirements and best practices across all of our locations by taking proactive and disciplined steps to promote safety and overall wellbeing of our employees, clients, shareholders and communities.  Through the Company’s Enterprise Risk Management framework, which is governed by the Board of Directors, the Company’s Business Continuity Plan and the Bank’s Incident Response Plan remain integral parts of monitoring day to day business activities, including the return of the Company’s workforce, on a phased-in approach, subject to certain mandates and restrictions.  We have not furloughed nor do we expect to furlough any of our employees. Management continues to closely monitor business activities and has or will adjust accordingly as the health and safety of all constituents remain our priority.

 

Paycheck Protection Program (“PPP”)

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted to, among other provisions, provide emergency assistance for individuals, families and businesses affected by COVID-19.  The CARES Act included the creation of the PPP through the Small Business Administration (“SBA”).  Loans provided by the Bank through the PPP may be forgiven based on the borrowers’ compliance with the terms of the program.  The SBA provides a 100% guaranty to the lender of principal and interest, unless the lender violates an obligation under the agreement.  As loan losses are expected to be immaterial, if any at all, due to the SBA guaranty, there is no provision allocated for PPP loans within the allowance for loan loss calculation.  The Company disbursed $52.8 million in PPP loans to 543 borrowers through June 30, 2020.  There were no loans that were forgiven during the three months ended June 30, 2020.

 

The following table summarizes the details of the Company’s PPP loans:

 

 

 

Three Months Ended

 

(Dollars in thousands)

 

June 30, 2020

 

PPP loans outstanding

 

$

52,758

 

Average PPP loans outstanding

 

$

35,138

 

PPP average loan size

 

$

97

 

PPP interest income, net

 

$

295

 

PPP unearned fees

 

$

1,872

 

PPP weighted average processing fee

 

 

4.00

%

PPP average yield

 

 

3.38

%

 

Participation in the PPP has impacted the Company’s financial metrics in the second quarter.  Loan and deposit growth, earnings per share, and return on assets have all increased, to a certain extent, due to the PPP.  Conversely, net interest margin, the allowance coverage ratio, and the leverage ratio have decreased.  Since PPP loans are 100% guaranteed by the SBA, the Company’s common equity tier 1, tier 1 and total risk-based capital metrics were not impacted by PPP loan balances.

 

Deferral Requests

The CARES Act and interagency guidance provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings (“TDR”) for a limited period of time to account for the effects of COVID-19. In response to this guidance, the Company granted short-term loan modifications for the deferral of

27

scheduled payments for a 90-day period beginning in April 2020.  At June 30, 2020, the Company had modified 194 loans totaling $92.8 million under this guidance.  The following table summarizes loans modified by category at June 30, 2020:

  

 

 

June 30, 2020

 

(Dollars in thousands)

 

Balance

 

 

Loan

Deferrals

 

 

Deferrals to

Total Loans

 

Commercial and industrial

 

$

87,044

 

 

$

6,612

 

 

 

1.1

%

Commercial real estate

 

 

187,004

 

 

 

67,789

 

 

 

10.9

%

Construction and land

 

 

73,701

 

 

 

2,676

 

 

 

0.4

%

Consumer

 

 

6,428

 

 

 

147

 

 

 

0.0

%

Student

 

 

7,832

 

 

 

-

 

 

 

0.0

%

Residential real estate

 

 

227,917

 

 

 

15,591

 

 

 

2.5

%

Home equity lines of credit

 

 

32,734

 

 

 

-

 

 

 

0.0

%

Total

 

$

622,660

 

 

$

92,815

 

 

 

14.9

%

 

As of August 6, 2020, approximately 40% of the 90-day deferments have ended and have returned to their normal payment schedules.  In addition, as of August 6, 2020, 13 borrowers have requested an additional deferment period, consisting of 9 commercial loans and 4 consumer loans, with aggregate outstanding balances of $17.6 million.

 

Modifications to borrowers whose industries are expected to be stressed by COVID-19, include, but are not limited to, religious organizations, hospitality, childcare and restaurants.  The following table summarizes these industries as it relates to the Company’s loan portfolio:

 

(Dollars in thousands)

 

June 30, 2020

 

Loan Category

 

Balance

 

 

Percent of

Total Loans

 

 

Loan

Deferrals

 

 

Loan Deferrals as a Percent of

Loan Category

 

Religious Organizations

 

$

25,450

 

 

 

4.09

%

 

$

13,546

 

 

 

53.23

%

Hospitality

 

 

13,373

 

 

 

2.15

%

 

 

5,393

 

 

 

40.33

%

Childcare

 

 

14,731

 

 

 

2.37

%

 

 

6,594

 

 

 

44.76

%

Restaurants

 

 

12,378

 

 

 

1.99

%

 

 

7,144

 

 

 

57.72

%

 

 

$

65,932

 

 

 

10.59

%

 

$

32,677

 

 

 

49.56

%

 

Refer to Note 3 of the consolidated financial statements for additional disclosures related to TDRs as of June 30, 2020.

 

Net Interest income

While net interest income has been significantly impacted by the lower interest rate environment, the Company’s interest income has benefited from PPP loans and related processing fees.  PPP loans carry a fixed rate of 1.0% with a two-year contractual maturity.  For the three months ended June 30, 2020, PPP loans contributed $295,000 to the Company’s net interest income, with the average yield of 3.38%, and a weighted average processing fee of 4.0%.   As of June 30, 2020, the Company has collected $2.1 million in processing fees, of which $1.9 million remains unearned.  

 

EXECUTIVE OVERVIEW

 

This discussion is intended to focus on certain financial information regarding the Company and the Bank and may not contain all the information that is important to the reader. The purpose of this discussion is to provide the reader with a more thorough understanding of the Company’s financial statements. As such, this discussion should be read carefully in conjunction with the consolidated financial statements and accompanying notes contained elsewhere in this report.

 

The Company strives to be a top performing community bank by providing financial services in its market with consistent, quality client service, premier technological support, value-added products, and a strong commitment to the community.

 


28

Financial highlights include:  

 

•

Net income of $1.6 million for the second quarter, an increase 0.90% from the second quarter of 2019.  Year to date net income of $3.0 million, a decrease of 6.9% compared to the first six months of 2019;    

 

•

Net interest margin of 3.49% for the second quarter, a decrease of 24 basis points over the second quarter of 2019.  Year to date net interest margin of 3.62%, a decrease of 19 basis points compared to the first six months of 2019;

 

•

Cost of funds of 0.35% for the second quarter, a decrease of 41 basis points from the second quarter of 2019.  Year to date cost of funds of 0.45%, a decrease of 27 basis points compared to the first six months of 2019;

 

•

Provision for loan losses of $911,000 for the second quarter, an increase of $706,000 over the second quarter of 2019.  Year to date provision for loan losses of $1.3 million, an increase of $1.0 million compared to the first six months of 2019;  

 

•

Total loans of $622.7 million, which includes $52.8 million of PPP loans, an increase of 13.2% compared with December 31, 2019.    

 

•

Allowance for loan losses of $6.4 million, an increase of 22.4% compared with December 31, 2019;  

 

•

Deposits of $705.8 million, an increase of 13.4% compared with December 31, 2019;  

 

•

Regulatory capital remains strong with ratios exceeding the well capitalized thresholds in all categories.  

 

Net income of  $1.6 million, or $0.42 per diluted share for the second quarter, was relatively unchanged when compared with the second quarter of 2019.  For the six months ended June 30, 2020, net income was $3.0 million, or $0.78 per diluted share compared with $3.2 million, or $0.84 per diluted share for the six months ended June 30, 2019.  

 

For the quarter ended June 30, 2020, the Company’s return on average equity (“ROE”) and return on average assets (“ROA”) were 9.02% and 0.80%, respectively, compared to 9.94% and 0.89%, for the second quarter of 2019, respectively.  For the six months ended June 30, 2020, ROE and ROA were 8.62% and 0.79%, respectively, compared with 10.38% and 0.92%, respectively, for the six months ended June 30, 2019.

 

OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

 

NET INTEREST INCOME AND EXPENSE

 

Net interest income is the largest component of net income, and is the difference between income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities. Future trends regarding net interest income are dependent on the absolute level of market interest rates, the shape of the yield curve, the amount of lost income from nonperforming assets, the amount of prepaying loans, the mix and amount of various deposit types, competition for loans and deposits, and many other factors. These factors are individually difficult to predict, and when taken together, the uncertainty of future trends compounds.  

 

The Federal Reserve decreased the targeted federal funds rate by a total of 75 basis points in the second half of 2019. In addition, in response to COVID-19, the Federal Reserve decreased the targeted federal funds interest rate by a total of 150 basis points in March 2020. These decreases impact the comparability of net interest income between 2019 and 2020.

 

Net interest income increased $300,000 or 4.93% to $6.4 million for the second quarter of 2020 from $6.1 million for the second quarter of 2019.  Net interest income increased $356,000 or 2.91% to $12.6 million for the six months ended June 30, 2020 from $12.2 million for the six months ended June 30, 2019.  The net interest margin decreased to 3.49% in the second quarter of 2020 from 3.73% in the second quarter of 2019.  The net interest margin decreased to 3.62% for the six months ended June 30, 2020 from 3.81% for the six months ended June 30, 2019.  Total earning assets increased primarily from organic loan growth and from the origination of PPP loans.  This, coupled with the decrease in funding costs contributed to the increase in net interest income, however as a result of the lower interest rate environment and the fixed rate of 1% on PPP loans, yields on investments and loans have declined during the three and six months ended June 30, 2020, giving rise to a negative impact on the net interest margin.  Given the current interest rate environment, we expect that our net interest income and net interest margin could decrease in future periods.

 

Interest income decreased $271,000 or 3.72% to $7.0 million for the second quarter of 2020 from $7.3 million for the second quarter of 2019.  The decrease in interest income was due to the 63 basis points decrease in the average yield on earning assets, from 4.46% during the second quarter of 2019 to 3.83% during the second quarter of 2020.  Interest income decreased

29

$393,000 or 2.72% to $14.1 million for the six months ended June 30, 2020 from $14.5 million for the six months ended June 30, 2019.  

 

While the average loan balances increased from $545.2 million for the second quarter of 2019 to $610.8 million for the second quarter of 2020, the tax equivalent yield decreased 56 basis points to 4.28% for the second quarter of 2020, compared with 4.84% for the second quarter of 2019.  Excluding PPP loans, the tax equivalent yield was 4.34% for the second quarter of 2020, a decrease of 50 basis points compared to the second quarter of 2019.  Average balances for loans were $582.6 million and $545.3 million for the six months ended June 30, 2020 and 2019, respectively, resulting in the tax equivalent yield of 4.48% and 4.86% for the six months ended June 30, 2020 and 2019, respectively.  Excluding PPP loans, the tax equivalent yield was 3.0% for the six months ended June 30, 2020.

 

Average interest-bearing deposit balances increased $40.2 million to $519.6 million for the second quarter of 2020, from $479.4 million for the second quarter of 2019.  Interest expense decreased $571,000 or 47.78% from $1.2 million for the second quarter of 2019 to $624,000 for the second quarter of 2020.  Cost of funds decreased to 0.35% for the second quarter of 2020 from 0.76% for the second quarter of 2019.  Average interest-bearing deposit balances increased $28.9 million to $507.0 million for the six months ended June 30, 2020 from $478.1 million for the six months ended June 30, 2019.   Interest expense decreased $749,000 or 33.42% from $2.2 million for the six months ended June 30, 2019 to $1.5 million for the six months ended June 30, 2020.  Cost of funds were 0.45% and 0.72% for the six months ended June 30, 2020 and 2019, respectively.    The increase in interest-bearing deposit balances is primarily the result of organic deposit growth from new and existing personal and business clients.  The funding of PPP loans into interest-bearing deposit accounts contributed significantly to this increase.  The decreases in the cost of funds is the result of the Company’s response to interest rate trends and the reduction of rates on certain interest-bearing transaction accounts, and lower funding costs on FHLB advances.  

 


30

The following tables set forth information, for the periods indicated, relating to the Company’s average balance sheet which reflects the average yield on assets, average cost of liabilities and average yields and rates paid. These yields and costs are derived by dividing income or expense by the average daily balances of assets and liabilities, respectively.

 

Average Balances, Income and Expense, and Average Yields and Rates

 

 

 

Three Months Ended

June 30, 2020

 

 

Three Months Ended

June 30, 2019

 

(Dollars in thousands)

 

Average

 

 

Income/

 

 

Average

 

 

Average

 

 

Income/

 

 

Average

 

Assets

 

Balances

 

 

Expense

 

 

Rate

 

 

Balances

 

 

Expense

 

 

Rate

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

$

609,534

 

 

$

6,507

 

 

 

4.29

%

 

$

543,237

 

 

$

6,573

 

 

 

4.85

%

Nonaccrual (1)

 

 

1,235

 

 

 

-

 

 

 

-

 

 

 

1,929

 

 

 

-

 

 

 

-

 

Total loans

 

 

610,769

 

 

 

6,507

 

 

 

4.28

%

 

 

545,166

 

 

 

6,573

 

 

 

4.84

%

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

66,768

 

 

 

391

 

 

 

2.35

%

 

 

60,317

 

 

 

397

 

 

 

2.63

%

Tax-exempt (2)

 

 

16,004

 

 

 

126

 

 

 

3.15

%

 

 

12,999

 

 

 

108

 

 

 

3.31

%

Total securities

 

 

82,772

 

 

 

517

 

 

 

2.51

%

 

 

73,316

 

 

 

505

 

 

 

2.75

%

Deposits in other banks

 

 

44,096

 

 

 

10

 

 

 

0.10

%

 

 

38,404

 

 

 

224

 

 

 

2.35

%

Federal funds sold

 

 

14

 

 

 

-

 

 

 

0.29

%

 

 

14

 

 

 

-

 

 

 

2.32

%

Total earning assets

 

 

737,651

 

 

 

7,034

 

 

 

3.83

%

 

 

656,900

 

 

 

7,302

 

 

 

4.46

%

Less: Allowance for loan losses

 

 

(5,815

)

 

 

 

 

 

 

 

 

 

 

(5,345

)

 

 

 

 

 

 

 

 

Total nonearning assets

 

 

58,225

 

 

 

 

 

 

 

 

 

 

 

56,151

 

 

 

 

 

 

 

 

 

Total Assets

 

$

790,061

 

 

 

 

 

 

 

 

 

 

$

707,706

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

$

155,236

 

 

 

 

 

 

 

 

 

 

$

119,171

 

 

 

 

 

 

 

 

 

Interest-bearing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 

 

254,375

 

 

$

128

 

 

 

0.20

%

 

 

228,675

 

 

$

292

 

 

 

0.51

%

Money market

 

 

94,267

 

 

 

75

 

 

 

0.32

%

 

 

74,149

 

 

 

159

 

 

 

0.86

%

Savings

 

 

99,932

 

 

 

15

 

 

 

0.06

%

 

 

86,090

 

 

 

70

 

 

 

0.33

%

Time deposits

 

 

71,060

 

 

 

281

 

 

 

1.59

%

 

 

90,492

 

 

 

436

 

 

 

1.93

%

Total interest-bearing deposits

 

 

519,634

 

 

 

499

 

 

 

0.39

%

 

 

479,406

 

 

 

957

 

 

 

0.80

%

Federal funds purchased

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

2.74

%

FHLB advances

 

 

28,597

 

 

 

76

 

 

 

1.07

%

 

 

29,749

 

 

 

188

 

 

 

2.54

%

Junior subordinated debt

 

 

4,124

 

 

 

49

 

 

 

4.86

%

 

 

4,124

 

 

 

50

 

 

 

4.83

%

Total interest-bearing liabilities

 

 

552,355

 

 

 

624

 

 

 

0.45

%

 

 

513,280

 

 

 

1,195

 

 

 

0.93

%

Other liabilities

 

 

12,141

 

 

 

 

 

 

 

 

 

 

 

12,178

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

70,329

 

 

 

 

 

 

 

 

 

 

 

63,077

 

 

 

 

 

 

 

 

 

Total Liabilities & Shareholders’ Equity

 

$

790,061

 

 

 

 

 

 

 

 

 

 

$

707,706

 

 

 

 

 

 

 

 

 

Net interest income (tax-equivalent basis)

 

 

 

 

 

$

6,410

 

 

 

3.38

%

 

 

 

 

 

$

6,107

 

 

 

3.52

%

Less: tax-equivalent adjustment

 

 

 

 

 

 

(26

)

 

 

 

 

 

 

 

 

 

 

(23

)

 

 

 

 

Net interest income

 

 

 

 

 

$

6,384

 

 

 

 

 

 

 

 

 

 

$

6,084

 

 

 

 

 

Interest expense as a percent of

average earning assets

 

 

 

 

 

 

 

 

 

 

0.34

%

 

 

 

 

 

 

 

 

 

 

0.73

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.49

%

 

 

 

 

 

 

 

 

 

 

3.73

%

 

(1)

Nonaccrual loans are included in the average balance of total loans and total earning assets.

(2)

Income and rates on non-taxable assets are computed on a tax-equivalent basis using a federal tax rate of 21%.

31

 

 

For the Six Months Ended

June 30, 2020

 

 

For the Six Months Ended

June 30, 2019

 

(Dollars in thousands)

 

Average

 

 

Income/

 

 

Average

 

 

Average

 

 

Income/

 

 

Average

 

Assets

 

Balances

 

 

Expense

 

 

Rate

 

 

Balances

 

 

Expense

 

 

Rate

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

$

581,528

 

 

$

12,974

 

 

 

4.48

%

 

$

543,323

 

 

$

13,144

 

 

 

4.88

%

Nonaccrual (1)

 

 

1,116

 

 

 

-

 

 

 

-

 

 

 

1,956

 

 

 

-

 

 

 

-

 

Total loans

 

 

582,644

 

 

 

12,974

 

 

 

4.48

%

 

 

545,279

 

 

 

13,144

 

 

 

4.86

%

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

66,516

 

 

 

798

 

 

 

2.42

%

 

 

59,253

 

 

 

804

 

 

 

2.72

%

Tax-exempt (2)

 

 

16,029

 

 

 

252

 

 

 

3.14

%

 

 

13,271

 

 

 

220

 

 

 

3.33

%

Total securities

 

 

82,545

 

 

 

1,050

 

 

 

2.56

%

 

 

72,524

 

 

 

1,024

 

 

 

2.83

%

Deposits in other banks

 

 

35,965

 

 

 

94

 

 

 

0.53

%

 

 

31,401

 

 

 

336

 

 

 

2.16

%

Federal funds sold

 

 

14

 

 

 

-

 

 

 

0.63

%

 

 

14

 

 

 

-

 

 

 

2.77

%

Total earning assets

 

 

701,168

 

 

 

14,118

 

 

 

4.05

%

 

 

649,218

 

 

 

14,504

 

 

 

4.50

%

Less: Allowance for loan losses

 

 

(5,583

)

 

 

 

 

 

 

 

 

 

 

(5,363

)

 

 

 

 

 

 

 

 

Total nonearning assets

 

 

57,624

 

 

 

 

 

 

 

 

 

 

 

56,529

 

 

 

 

 

 

 

 

 

Total Assets

 

$

753,209

 

 

 

 

 

 

 

 

 

 

$

700,384

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

$

139,784

 

 

 

 

 

 

 

 

 

 

$

117,292

 

 

 

 

 

 

 

 

 

Interest-bearing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 

 

246,909

 

 

$

343

 

 

 

0.28

%

 

 

231,809

 

 

$

554

 

 

 

0.48

%

Money market

 

 

92,441

 

 

 

239

 

 

 

0.52

%

 

 

71,470

 

 

 

289

 

 

 

0.81

%

Savings

 

 

95,666

 

 

 

67

 

 

 

0.14

%

 

 

87,818

 

 

 

154

 

 

 

0.35

%

Time

 

 

71,985

 

 

 

597

 

 

 

1.67

%

 

 

87,026

 

 

 

799

 

 

 

1.85

%

Total interest-bearing deposits

 

 

507,001

 

 

 

1,246

 

 

 

0.49

%

 

 

478,123

 

 

 

1,796

 

 

 

0.76

%

Federal funds purchased

 

 

1

 

 

 

-

 

 

 

1.43

%

 

 

996

 

 

 

14

 

 

 

2.90

%

FHLB advances

 

 

20,993

 

 

 

147

 

 

 

1.41

%

 

 

25,543

 

 

 

332

 

 

 

2.63

%

Junior subordinated debt

 

 

4,124

 

 

 

99

 

 

 

4.85

%

 

 

4,124

 

 

 

99

 

 

 

4.83

%

Total interest-bearing liabilities

 

 

532,119

 

 

 

1,492

 

 

 

0.56

%

 

 

508,786

 

 

 

2,241

 

 

 

0.89

%

Other liabilities

 

 

11,921

 

 

 

 

 

 

 

 

 

 

 

12,206

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

69,385

 

 

 

 

 

 

 

 

 

 

 

62,100

 

 

 

 

 

 

 

 

 

Total Liabilities & Shareholders' Equity

 

$

753,209

 

 

 

 

 

 

 

 

 

 

$

700,384

 

 

 

 

 

 

 

 

 

Net interest income (tax equivalent basis)

 

 

 

 

 

$

12,626

 

 

 

3.48

%

 

 

 

 

 

$

12,263

 

 

 

3.61

%

Less: tax equivalent adjustment

 

 

 

 

 

 

(53

)

 

 

 

 

 

 

 

 

 

 

(46

)

 

 

 

 

Net interest income

 

 

 

 

 

$

12,573

 

 

 

 

 

 

 

 

 

 

$

12,217

 

 

 

 

 

Interest expense as a percent of

average earning assets

 

 

 

 

 

 

 

 

 

 

0.43

%

 

 

 

 

 

 

 

 

 

 

0.70

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.62

%

 

 

 

 

 

 

 

 

 

 

3.81

%

 

(1)

Nonaccrual loans are included in the average balance of total loans and total earning assets.

(2)

Income and rates on non-taxable assets are computed on a tax-equivalent basis using a federal tax rate of 21%.

 

RATE VOLUME ANALYSIS

 

The following tables set forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to changes in volume (change in volume multiplied by old rate) and changes in rates (change in rate multiplied by

32

old volume). Changes in rate and volume, which cannot be separately identified, are allocated proportionately between changes in rate and changes in volume.

 

 

 

For the Three Months Ended June 30, 2020

Compared to June 30, 2019

 

(In thousands)

 

Change

 

 

Due to Volume

 

 

Due to Rate

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

$

(66

)

 

$

802

 

 

$

(868

)

Securities

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

(6

)

 

 

43

 

 

 

(49

)

Tax-exempt (1)

 

 

18

 

 

 

25

 

 

 

(7

)

Deposits in other banks

 

 

(214

)

 

 

32

 

 

 

(246

)

Total interest income

 

 

(268

)

 

 

902

 

 

 

(1,170

)

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 

 

(164

)

 

 

33

 

 

 

(197

)

Money market

 

 

(84

)

 

 

43

 

 

 

(127

)

Savings

 

 

(55

)

 

 

11

 

 

 

(66

)

Time deposits

 

 

(155

)

 

 

(92

)

 

 

(63

)

Federal funds purchased

 

 

-

 

 

 

-

 

 

 

-

 

FHLB advances

 

 

(112

)

 

 

(7

)

 

 

(105

)

Junior subordinated debt

 

 

(1

)

 

 

-

 

 

 

(1

)

Total interest expense

 

 

(571

)

 

 

(12

)

 

 

(559

)

Net interest income

 

$

303

 

 

$

914

 

 

$

(611

)

 

(1)

Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 21%.

 

 

 

For the Six Months Ended June 30, 2020

Compared to June 30, 2019

 

 

 

 

 

 

 

Due to

 

 

Due to

 

(In thousands)

 

Change

 

 

Volume

 

 

Rate

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

$

(170

)

 

$

924

 

 

$

(1,094

)

Securities

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

(6

)

 

 

99

 

 

 

(105

)

Tax-exempt (1)

 

 

32

 

 

 

46

 

 

 

(14

)

Deposits in other banks

 

 

(242

)

 

 

48

 

 

 

(290

)

Total interest income

 

 

(386

)

 

 

1,117

 

 

 

(1,503

)

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 

 

(211

)

 

 

37

 

 

 

(248

)

Money market

 

 

(50

)

 

 

85

 

 

 

(135

)

Savings

 

 

(87

)

 

 

14

 

 

 

(101

)

Time

 

 

(202

)

 

 

(138

)

 

 

(64

)

Federal funds purchased

 

 

(14

)

 

 

(14

)

 

 

-

 

FHLB advances

 

 

(185

)

 

 

(59

)

 

 

(126

)

Junior subordinated debt

 

 

-

 

 

 

-

 

 

 

-

 

Total interest expense

 

 

(749

)

 

 

(75

)

 

 

(674

)

Net interest income

 

$

363

 

 

$

1,192

 

 

$

(829

)

 

(1)

Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 21%.

33

 

PROVISION FOR LOAN LOSSES

 

The provision for loan losses is charged to operations in order to maintain the allowance for loan losses at a level considered necessary to absorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan losses, the Company considers the overall risk characteristics of the loan portfolio, past and current loss experience, trends in the Bank’s delinquent and nonperforming loans, estimated values of collateral, and the impact of current economic conditions. The amount of the allowance is based on estimates and there can be no assurances, however, that future losses will not exceed estimated amounts, or that increased amounts in the provision for loan losses will not be required in future periods as more information becomes available or events change.  The allowance for loan losses is assessed on a quarterly basis and provisions for loan losses are made in order to maintain the allowance.  

 

The full impact of COVID-19 is unknown and rapidly changing.  The pandemic has caused substantial disruption in the U.S. economy.  The outbreak is having a significant adverse impact on certain industries the Company serves, including but not limited to, religious organizations, hospitality, childcare and restaurants.  Due to COVID-19 and the economic impact it could have on the Company’s loan portfolio, additional details about exposures to these stressed industries is included in the above section titled SIGNIFICANT DEVELOPMENTS – COVID-19 Update.  

 

The Company recorded a provision for loan losses of $911,000 for the second quarter of 2020 compared with $205,000 for the second quarter of 2019.  The provision for loan losses was $1.3 million and $255,000 for the six months ended June 30, 2020 and 2019, respectively.  Approximately $860,000 of the second quarter provision was due to the change in economic conditions, which worsened significantly beginning in March 2020 as a result of the pandemic and the slow-down in business activity.  The primary economic loss driver contributing to the increase in the provision for loan losses was the increased unemployment rate for the Commonwealth of Virginia.  If economic conditions continue to worsen, the Company could recognize elevated levels of provision for loan losses in future periods.  

 

NONINTEREST INCOME

 

Noninterest income decreased $184,000 to $1.2 million for the second quarter of 2020 from $1.4 million for the second quarter of 2019.  Noninterest income decreased $322,000 to $2.6 million for the six months ended June 30, 2020 from $2.9 million for the six months ended June 30, 2019.  

 

The following summarizes noninterest income for the three and six months ended June 30, 2020 and 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

Increase (Decrease)

 

 

Six Months Ended June 30,

 

 

Increase (Decrease)

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

Amount

 

 

Percent

 

 

2020

 

 

2019

 

 

Amount

 

 

Percent

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust and estate fees

 

$

499

 

 

$

427

 

 

$

72

 

 

 

16.86

%

 

$

960

 

 

$

843

 

 

$

117

 

 

 

13.88

%

Brokerage fees

 

 

120

 

 

 

128

 

 

 

(8

)

 

 

(6.25

)%

 

 

266

 

 

 

218

 

 

 

48

 

 

 

22.02

%

Service charges on deposit accounts

 

 

220

 

 

 

378

 

 

 

(158

)

 

 

(41.80

)%

 

 

572

 

 

 

761

 

 

 

(189

)

 

 

(24.84

)%

Interchange fee income, net

 

 

297

 

 

 

313

 

 

 

(16

)

 

 

(5.11

)%

 

 

567

 

 

 

584

 

 

 

(17

)

 

 

(2.91

)%

Bank-owned life insurance

 

 

90

 

 

 

90

 

 

 

-

 

 

 

-

 

 

 

180

 

 

 

183

 

 

 

(3

)

 

 

(1.64

)%

Other income (loss)

 

 

(43

)

 

 

58

 

 

 

(101

)

 

 

(174.14

)%

 

 

(32

)

 

 

206

 

 

 

(238

)

 

 

(115.53

)%

Gain on sale/call of securities available for sale

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

79

 

 

 

(79

)

 

 

(100.00

)%

Gain on sale of mortgage loans held for sale, net

 

 

33

 

 

 

6

 

 

 

27

 

 

 

450.00

%

 

 

45

 

 

 

6

 

 

 

39

 

 

 

650.00

%

Total noninterest income

 

$

1,216

 

 

$

1,400

 

 

$

(184

)

 

 

(13.14

)%

 

$

2,558

 

 

$

2,880

 

 

$

(322

)

 

 

(11.18

)%

 


34

The primary changes in noninterest income were:

 

•

Trust, estate and brokerage fee income increased due to the overall increase in assets under management and stable production from brokerage services.  

 

•

Service charges on deposit accounts have declined primarily as a result of the lower volume of fees generated from nonsufficient fund charges.  

 

•

Changes in other income (loss) was primarily the result of two factors.  First, automated teller machine (“ATM”) surcharge income decreased and the Company recognized losses on the disposal of ATMs, due to the Company outsourcing this activity. Second, income of $214,000 was received during the first quarter of 2020 from the Bank’s ownership interest in Bankers Insurance, LLC.  This income was offset, in part, by pass-through losses of $70,000 from the Bank’s investment in qualified affordable housing projects during the second quarter of 2020.  

 

NONINTEREST EXPENSE

 

Noninterest expense decreased $620,000 to $4.9 million for the second quarter of 2020 from $5.5 million for the second quarter of 2019.  Noninterest expense decreased $733,000 to $10.5 million for the six months ended June 30, 2020 from $11.2 million for the six months ended June 30, 2019.  

 

The following summarizes noninterest expense for the three and six months ended June 30, 2020 and 2019:

 

 

 

Three Months Ended June 30,

 

 

Increase (Decrease)

 

 

Six Months Ended June 30,

 

 

Increase (Decrease)

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

Amount

 

 

Percent

 

 

2020

 

 

2019

 

 

Amount

 

 

Percent

 

Noninterest Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

$

2,435

 

 

$

2,923

 

 

$

(488

)

 

 

(16.70

)%

 

$

5,387

 

 

$

5,935

 

 

$

(548

)

 

 

(9.23

)%

Occupancy

 

 

579

 

 

 

604

 

 

 

(25

)

 

 

(4.14

)%

 

 

1,243

 

 

 

1,219

 

 

 

24

 

 

 

1.97

%

Furniture and equipment

 

 

190

 

 

 

275

 

 

 

(85

)

 

 

(30.91

)%

 

 

381

 

 

 

558

 

 

 

(177

)

 

 

(31.72

)%

Marketing and business development

 

 

107

 

 

 

171

 

 

 

(64

)

 

 

(37.43

)%

 

 

216

 

 

 

357

 

 

 

(141

)

 

 

(39.50

)%

Legal, audit and consulting

 

 

304

 

 

 

282

 

 

 

22

 

 

 

7.80

%

 

 

574

 

 

 

531

 

 

 

43

 

 

 

8.10

%

Data processing

 

 

361

 

 

 

325

 

 

 

36

 

 

 

11.08

%

 

 

736

 

 

 

679

 

 

 

57

 

 

 

8.39

%

Federal Deposit Insurance Corporation assessment

 

 

81

 

 

 

93

 

 

 

(12

)

 

 

(12.90

)%

 

 

165

 

 

 

187

 

 

 

(22

)

 

 

(11.76

)%

Other operating expenses

 

 

832

 

 

 

836

 

 

 

(4

)

 

 

(0.48

)%

 

 

1,792

 

 

 

1,761

 

 

 

31

 

 

 

1.76

%

Total noninterest expenses

 

$

4,889

 

 

$

5,509

 

 

$

(620

)

 

 

(11.25

)%

 

$

10,494

 

 

$

11,227

 

 

$

(733

)

 

 

(6.53

)%

 

The primary changes in noninterest expense were:

 

•

Salaries and benefits have decreased primarily as a result of origination costs from PPP loans that are recognized as a contra salary expense in accordance with GAAP.  

 

•

Furniture and equipment expenses decreased primarily due to a decrease in depreciation and maintenance from the ATMs, as noted above in noninterest income, that were removed due to the Bank’s outsourcing this service.

 

•

Marketing and business development expenses decreased due primarily to timing differences in marketing campaigns.  

 

•

Data processing expenses have increased slightly as a result of the heightened level of client transactions for the reported periods.

 

•

Federal Deposit Insurance Corporation assessments decreased as a result of a reduction in the quarterly assessment multiplier which is based on the various performance metrics.

 

INCOME TAXES

 

Income tax expense was $222,000 and $206,000 for the second quarter of 2020 and 2019, respectively, resulting in an effective tax rate of 12.33% and 11.64%, respectively.  Income tax expense was $402,000 and $419,000 for the six months ended June 30, 2020 and 2019, respectively, resulting in an effective tax rate of 11.91% and 11.59%, respectively.  The effective tax rate differed from the statutory federal income tax rate of 21% due to the Bank’s investment in tax-exempt

35

securities, income from Bank-owned life insurance policies, and community development tax credits. The Company’s estimated tax credits were $234,000 and $276,000 for the six months ended June 30, 2020 and 2019, respectively.  

 

FINANCIAL CONDITION AT JUNE 30, 2020 AND DECEMBER 31, 2019

 

Summary Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease)

 

(Dollars in thousands)

 

June 30,

2020

 

 

December 31,

2019

 

 

Amount

 

 

Percent

 

Total cash and cash equivalents

 

$

79,539

 

 

$

46,341

 

 

$

33,198

 

 

 

71.64

%

Securities available for sale, at fair value

 

 

78,250

 

 

 

79,783

 

 

 

(1,533

)

 

 

(1.92

)%

Total loans

 

 

622,660

 

 

 

550,226

 

 

 

72,434

 

 

 

13.16

%

Allowance for loan losses

 

 

6,400

 

 

 

5,227

 

 

 

1,173

 

 

 

22.44

%

Total assets

 

 

825,553

 

 

 

722,171

 

 

 

103,382

 

 

 

14.32

%

Total deposits

 

 

705,806

 

 

 

622,155

 

 

 

83,651

 

 

 

13.45

%

Federal Home Loan Bank advances

 

 

32,651

 

 

 

16,695

 

 

 

15,956

 

 

 

95.57

%

Total shareholders’ equity

 

 

71,088

 

 

 

67,122

 

 

 

3,966

 

 

 

5.91

%

 

Growth in assets is primarily attributable to the influx of PPP loans during the period and the increase in excess cash held at the Federal Reserve.  Excess cash held at the Federal Reserve is the result of core deposit growth and one new FHLB advance taken in the second quarter in anticipation of PPP loan funding.  Deposit growth is from existing personal and business relationships, along with new business established from the PPP loan program.  

 

Total loans were $622.7 million as of June 30, 2020 compared with $550.2 million as of December 31, 2019.  Excluding $52.8 million in PPP loans, total loans were $569.8 million on June 30, 2020, representing growth of 3.58% over the prior year end. As noted in the below table, the commercial and industrial loan segment contributed significantly to net loan growth during the six months ended June 30, 2020.  Excluding PPP loans from this category, commercial and industrial loans were $34.3 million or 25.1% growth over year end December 31, 2019.  Our overall loan growth, excluding PPP loans, is in line with our expectations as we anticipated moderate loan growth as a result of COVID-19 and the related decline in economic conditions in our market areas.  

  

Summary of Loans by Segment

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease)

 

(Dollars in thousands)

 

June 30,

2020

 

 

December 31, 2019

 

 

Amount

 

 

Percent

 

Commercial and industrial

 

$

87,044

 

 

$

27,404

 

 

$

59,640

 

 

 

217.63

%

Commercial real estate

 

 

187,004

 

 

 

181,898

 

 

 

5,106

 

 

 

2.81

%

Construction and land

 

 

73,701

 

 

 

65,231

 

 

 

8,470

 

 

 

12.98

%

Consumer

 

 

6,428

 

 

 

5,958

 

 

 

470

 

 

 

7.89

%

Student

 

 

7,832

 

 

 

8,151

 

 

 

(319

)

 

 

(3.91

)%

Residential real estate

 

 

227,917

 

 

 

225,316

 

 

 

2,601

 

 

 

1.15

%

Home equity lines of credit

 

 

32,734

 

 

 

36,268

 

 

 

(3,534

)

 

 

(9.74

)%

Total

 

$

622,660

 

 

$

550,226

 

 

$

72,434

 

 

 

13.16

%

 

Certain industry sectors will be more negatively impacted by the economic effects of COVID-19 and related governmental action than others. While we believe our commercial portfolio is adequately diversified, we believe COVID-19 will have a significant adverse impact on certain industries the Company serves, including but not limited to, religious organizations, hospitality, childcare and restaurants.  Additional details related to exposures to these stressed industries are included in the above section titled SIGNIFICANT DEVELOPMENTS – COVID-19 Update.  We continue to monitor the level of concentrations within our loan portfolio, as a whole.  We are also in ongoing conversations with our clients to assess the current and projected impacts of COVID-19 on their businesses.  


36

ASSET QUALITY

 

As described in further detail in the above section titled SIGNIFICANT DEVELOPMENTS – COVID-19 Update, under the CARES Act, the Company instituted a 90-day loan payment deferral program to qualified clients.  None of these modifications were considered TDRs, in accordance with regulatory and accounting guidance and none were considered impaired.

 

Nonperforming assets, which include nonperforming loans and other real estate owned, were $12.5 million at June 30, 2020 compared with $6.5 million at December 31, 2019 and $7.1 million at June 30, 2019.  The increase in nonperforming loans was primarily due to one commercial real estate relationship totaling $6.2 million that was modified and is considered a performing TDR.  Loans 90+ days past due represent student loans that were 90+ days past due and accruing and have a 98% guaranty by the U.S. Department of Education.  We continue to monitor the performance of our entire loan portfolio for indications of stress, including identifying certain commercial loan industries that we believe are more susceptible to risk presented by the pandemic.

 

The following table sets forth certain information with respect of the Company’s nonperforming assets and related metrics:

 

(Dollars in thousands)

 

June 30,

2020

 

 

December 31,

2019

 

 

June 30,

2019

 

Nonaccrual loans

 

$

1,547

 

 

$

989

 

 

$

2,278

 

Restructured loans still accruing

 

 

8,613

 

 

 

2,471

 

 

 

2,979

 

Loans 90+ days past due and accruing

 

 

975

 

 

 

1,636

 

 

 

484

 

Total nonperforming loans

 

 

11,135

 

 

 

5,096

 

 

 

5,741

 

Other real estate owned, net

 

 

1,356

 

 

 

1,356

 

 

 

1,356

 

Total nonperforming assets

 

$

12,491

 

 

$

6,452

 

 

$

7,097

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

$

6,400

 

 

$

5,227

 

 

$

5,409

 

Allowance for loan losses to total loans

 

 

1.03

%

 

 

0.95

%

 

 

0.99

%

Nonaccrual loans to total loans

 

 

0.25

%

 

 

0.18

%

 

 

0.42

%

Allowance for loan losses to nonperforming loans

 

 

57.48

%

 

 

102.57

%

 

 

94.22

%

Nonperforming loans to total loans

 

 

1.79

%

 

 

0.93

%

 

 

1.06

%

Nonperforming assets to total assets

 

 

1.51

%

 

 

0.89

%

 

 

0.99

%

 

At June 30, 2020, the allowance for loan losses was $6.4 million or 1.03% of total loans compared with $5.2 million or 0.95% of total loans at December 31, 2019 and $5.4 million or 0.99% of total loans on June 30, 2019.  Excluding PPP loans, the allowance for loan losses to total loans was 1.12% at June 30, 2020.  The increase in the allowance is due primarily to the increase in qualitative factors of approximately $860,000 during the second quarter of 2020 related to COVID-19 and the current economic conditions, including, but not limited to, the increased unemployment rate for the Commonwealth of Virginia.  The allowance for loan losses was not impacted by PPP loans due to the 100% SBA guaranty for loans funded under this program.  

 

COVID-19 may have a continued adverse effect on the credit quality of our loan portfolio during the remainder of 2020. Disruption to our clients could result in increased loan delinquencies and defaults.  Management believes impaired loans may also increase in the future as a result of the COVID-19 pandemic.

 

CAPITAL

 

One of management’s strategic objectives is to continue to increase the Company’s shareholders’ return on equity while maintaining a strong capital base.  The Company and the Bank are subject to various capital requirements administered by bank regulatory agencies. Failure to meet minimum capital requirements can trigger certain mandatory and discretionary actions by regulators that could have a direct material effect on the Company’s financial condition and results of operations.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. In addition to the regulatory risk-based capital, the Bank must maintain a capital

37

conservation buffer of additional total capital and common equity tier 1 capital as required by the Basel III capital framework as adopted by the Federal Reserve and the Federal Deposit Insurance Corporation.  The phase-in of the capital conservation buffer requirement began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019.

 

As a result of recent legislation, the federal banking agencies developed a Community Bank Leverage Ratio (“CBLR”), which is the ratio of a bank’s tangible equity capital to average total consolidated assets, for financial institutions with assets of less than $10.0 billion. A qualifying community bank that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under prompt corrective action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new CBLR at not less than 8% and not more than 10%. Beginning in the second quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the CBLR framework; and qualified community banks will have until January 1, 2022, before the CBLR requirement is re-established at greater than 9%. Pursuant to the CARES Act and related interim final rules, the CBLR will be 8% for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter.  A financial institution can elect to be subject to this new definition, and opt-out of this new definition, at any time.  Management did not elect to be subject to the CLBR at June 30, 2020.  

 

Management believes the Bank satisfies all capital adequacy requirements to which it was subject as of June 30, 2020 and December 31, 2019 and is considered “well capitalized” as defined by the regulatory authorities.  The following table provides information on the regulatory capital ratios for the Bank at June 30, 2020 and December 31, 2019.  

 

(Dollars in thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Tier 1 Capital:

 

 

 

 

 

 

 

 

Common equity

 

$

74,334

 

 

$

70,312

 

Unrealized gain on securities available for sale, net

 

 

(3,475

)

 

 

(1,294

)

Unrealized benefit obligation for supplemental retirement plans

 

 

(155

)

 

 

(155

)

Total Common equity tier 1 capital

 

 

70,704

 

 

 

68,863

 

Tier 2 Capital:

 

 

 

 

 

 

 

 

Allowable allowance for loan losses

 

 

6,400

 

 

 

5,227

 

Total Capital

 

$

77,104

 

 

$

74,090

 

Risk Weighted Assets

 

$

571,932

 

 

$

547,202

 

Regulatory Capital Ratios:

 

 

 

 

 

 

 

 

Leverage Ratio

 

 

9.00

%

 

 

9.40

%

Common Equity Tier 1 Capital Ratio

 

 

12.36

%

 

 

12.58

%

Tier 1 Capital Ratio

 

 

12.36

%

 

 

12.58

%

Total Capital Ratio

 

 

13.48

%

 

 

13.54

%

 

LIQUIDITY

 

Liquidity management involves meeting the present and future financial obligations of the Company with the sale or maturity of assets or with the occurrence of additional liabilities. Liquidity needs are met with cash on hand, deposits in other banks, federal funds sold, and unencumbered securities classified as available for sale.  At June 30, 2020, liquid assets totaled $139.7 million, or 16.9% of total assets and 18.5% of total liabilities.

 

Securities provide a constant source of liquidity through paydowns and maturities.  The Company maintains short-term borrowing arrangements, namely federal funds lines of credit, with larger financial institutions as an additional source of liquidity and the Bank’s membership with the FHLB also provides a source of borrowings with numerous rate and term structures.

 

The Company believes there could be potential stresses on liquidity management as a direct result of COVID-19. As clients manage their own liquidity stress, we could experience an increase in the utilization of existing lines of credit. The Federal Reserve and FHLB have established lending facilities that will allow banks to obtain funding specifically for loans that were

38

made under the PPP, and will allow them to retain existing sources of liquidity for our traditional operations.  The Bank did not choose to participate in these lending facilities during the six months ended June 30, 2020.  Additionally, on March 15, 2020, in response to COVID-19, the Federal Reserve reduced reserve requirements for insured depository institutions to 0.00%, which further increased the Bank’s available liquidity.  

 

Management monitors the liquidity position regularly and attempts to maintain a position which utilizes available funds most efficiently. As a result, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meets the credit needs of its clients’ as we move into a period of uncertain economic conditions related to COVID-19.  Management will continue to closely monitor the Company’s liquidity as these conditions change.

 

CONTRACTUAL OBLIGATIONS

 

As of June 30, 2020, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in “Management’s Discussion and Analysis and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

As of June 30, 2020, there have been no material changes to the off-balance sheet arrangements disclosed in “Management’s Discussion and Analysis and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

IMPACT OF INFLATION AND CHANGING PRICES

 

The consolidated financial statements and the accompanying notes presented elsewhere in this document have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of the Company and the Bank are monetary in nature. The impact of inflation is reflected in the increased cost of operations. As a result, interest rates have a greater impact on the Company’s performance than inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

CHANGES IN ACCOUNTING PRINCIPLES

 

For information regarding recent accounting pronouncements and their effect on the Company, see “Recent Accounting Pronouncements” in Note 1 of the Notes to Consolidated Financial Statements contained herein.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes to the quantitative and qualitative disclosures made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures that are designed to provide assurance that the information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods required by the Securities and Exchange Commission. An evaluation of the effectiveness of the design and operations of the Company’s disclosure controls and procedures at the end of the period covered by this report was carried out under the supervision and with the participation of the management of Fauquier Bankshares, Inc., including the Chief Executive Officer and the Chief Financial Officer. Based on such an evaluation, the Chief Executive Officer and the Chief Financial Officer concluded the Company’s disclosure controls and procedures were effective as of the end of such period.

 

39

The Company regularly assesses the adequacy of its internal control over financial reporting and enhances its controls in response to internal control assessments and internal and external audit and regulatory recommendations. There have not been any significant changes in the Company’s internal control over financial reporting or in other factors that have materially affected or are reasonably likely to materially affect, such controls during the quarter ended June 30, 2020.

 

Part II.  OTHER INFORMATION

 

 

There are no pending or threatened legal proceedings to which the Company or the Bank is a party or to which the property of either the Company or the Bank is subject to that, in the opinion of management, may materially impact the financial condition of either the Company or the Bank.

 

ITEM 1A.  RISK FACTORS

 

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factors represent material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10- K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission.  Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

 

The economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations.

In December 2019, COVID-19 was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, more than 30 million people have filed claims for unemployment, and stock markets have declined in value and, in particular, bank stocks have significantly declined in value. In response to the COVID-19 outbreak, the Federal Reserve has reduced the benchmark federal funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers through the issuance of an interagency statement, and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of COVID-19 has caused the Company to modify business practices, including branch operations, employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, clients and business partners.

 

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened.

 

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material adverse effect on our business, financial condition, liquidity, and results of operations:

 

•

demand for our products and services may decline, making it difficult to grow assets and income;

 

•

if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges, additions to our allowance for loan losses, and reduced income, among other impacts;

40

 

•

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

 

•

our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

 

•

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

 

•

as the result of the decline in the Federal Reserve’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

 

•

a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;

 

•

our wealth management and trust revenues may decline with continuing market turmoil;

 

•

a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could result in our recording a valuation allowance against our current outstanding deferred tax assets;

 

•

we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

 

•

Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.

 

Moreover, our future success and profitability substantially depends on the management skills of our executive officers. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

 

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

 

As a participating lender in the PPP, the Company and the Bank are subject to additional risks of litigation from the Bank’s clients or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company and the Bank to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. On April 24, 2020, the second round of PPP funding was signed into law and provides more than $320 billion in new funding for PPP.

 

Since the opening of the PPP, several large banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of similar litigation, from both clients and non‑clients that approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

 

The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company or the Bank.

 

41

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On January 16, 2020, the Company’s Board of Directors authorized the Company to repurchase up to 113,512 shares (3% of common stock outstanding on January 1, 2020) beginning January 16, 2020 and continuing until the next reset approved by the Board of Directors.  During the six month period ended June 30, 2020, 2,007 shares of common stock were repurchased at an average price of $20.99 per share. No shares were repurchased during the second quarter of 2020. Under the share repurchase program, the Company has the remaining authority to repurchase up to 111,505 shares of the Company’s common stock as of June 30, 2020.

 

Repurchases may be made through open market purchases or in privately negotiated transactions, and shares repurchased will be returned to the status of authorized and unissued shares of common stock. The actual timing, number, and value of shares repurchased under the program will be determined by management.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.  OTHER INFORMATION

 

None.

 

42

ITEM 6.  EXHIBITS

 

The following exhibits are filed as part of this report and this list includes the Exhibit Index.

 

 

Exhibit Number

 

Exhibit Description

 

 

 

3.1

 

Articles of Incorporation of Fauquier Bankshares, Inc., as amended, incorporated by reference to Exhibit 3.1 to Form 10-K filed March 15, 2010.

 

 

 

3.2

 

Bylaws of Fauquier Bankshares, Inc., as amended and restated, incorporated by reference to Exhibit 3.2 to Form 8-K filed April 7, 2020.

 

 

 

10.1

 

Employment Agreement, dated August 1, 2020, by and between Fauquier Bankshares, Inc., The Fauquier Bank and Christine E. Headly, incorporated by reference to Exhibit 10.1 to Form 8-K filed August 4, 2020.

 

 

 

31.1

 

Certification of CEO pursuant to Rule 13a-14(a).

 

 

 

31.2

 

Certification of CFO pursuant to Rule 13a-14(a).

 

 

 

32.1

 

Certification of CEO pursuant to 18 U.S.C. Section 1350.

 

 

 

32.2

 

Certification of CFO pursuant to 18 U.S.C. Section 1350.

 

 

 

101

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020, formatted in inline XBRL: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Comprehensive Income, (4) Consolidated Statements of Changes in Shareholders’ Equity, (5) Consolidated Statements of Cash Flows and (6) the Notes to Consolidated Financial Statements.

 

 

 

104

 

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101).

 

 

 

43

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.

 

FAUQUIER BANKSHARES, INC.

 

(Registrant)

 

 

 

By:  /s/ Marc J. Bogan

 

Marc J. Bogan

 

President & Chief Executive Officer

 

(Principal Executive Officer)

 

Dated:  August 7, 2020

 

 

By:  /s/ Christine E. Headly

 

Christine E. Headly

 

Executive Vice President & Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 

Dated:  August 7, 2020

 

 

 

44