Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2019

Consolidation, Policy [Policy Text Block]

Principles of Consolidation

The consolidated financial statements of First National Corporation include the accounts of all

six

companies. All material intercompany balances and transactions have been eliminated in consolidation, except for balances and transactions related to the Trusts. The subordinated debt of these Trusts is reflected as a liability of the Company.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses.

Concentration Risk, Credit Risk, Policy [Policy Text Block]

Significant Group Concentrations of Credit Risk

Most of the Company’s activities are with customers located within the Shenandoah Valley, central regions of Virginia, and the city of Richmond. The types of lending that the Company engages in are included in Note

The Company has a concentration of credit risk in commercial real estate, but does

not

have a significant concentration to any

one

customer or industry.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company has defined cash equivalents as those amounts included in the balance sheet captions “Cash and due from banks” and “Interest-bearing deposits in banks.”

Investment, Policy [Policy Text Block]

Securities

Investments in debt securities with readily determinable fair values are classified as either held to maturity (HTM), available for sale (AFS), or trading based on management’s intent. Currently, all of the Company’s debt securities are classified as either AFS or HTM. Equity investments in the FHLB, the Federal Reserve Bank of Richmond, and Community Bankers Bank are separately classified as restricted securities and are carried at cost. AFS securities are carried at estimated fair value with the corresponding unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), and HTM securities are carried at amortized cost. When an individual AFS security is sold, the Company releases the income tax effects associated with the AFS security from accumulated other comprehensive income (loss). Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains or losses on the sale of securities are recorded on the trade date using the amortized cost of the specific security sold.

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 the Company (

) intends to sell the security or (

) it is more likely than

not

that it 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-than-likely that it 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 of the security exceeds the present value of the cash flows expected to be collected from the security. If there is

credit loss, there is

other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment 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 carried at cost, such as restricted securities, impairment is considered to be other-than-temporary based on the Company’s ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in income.

The Company regularly reviews each security for other-than-temporary impairment based on criteria that include 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 Company’s intention with regard to holding the security to maturity, and the likelihood that the Company would be required to sell the security before recovery.

Financing Receivable, Held-for-sale [Policy Text Block]

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. The Company, through its banking subsidiary, requires a firm purchase commitment from a permanent investor before loans held for sale can be closed, thus limiting interest rate risk. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

The Bank enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from

days. The Bank protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Bank commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. As a result, the Bank is

not

exposed to losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity.

The market value of rate lock commitments and best efforts contracts is

not

readily ascertainable with precision because rate lock commitments and best efforts contracts are

not

actively traded in stand-alone markets. The Bank determines the fair value of rate lock commitments and best efforts contracts by measuring the change in the value of the underlying asset while taking into consideration the probability that the rate lock commitments will close. Because of the high correlation between rate lock commitments and best efforts contracts,

gain or loss occurs on the rate lock commitments.

Financing Receivable [Policy Text Block]

Loans

The Company, through its banking subsidiary, grants mortgage, commercial, and consumer loans to customers. The Bank segments its loan portfolio into real estate loans, commercial and industrial loans, and consumer and other loans. Real estate loans are further divided into the following classes: Construction and Land Development;

Family Residential; and Other Real Estate Loans. Descriptions of the Company’s loan classes are as follows:

Real

Estate

Loans

–

Construction

and

Land

Development

: The Company originates construction loans for the acquisition and development of land and construction of commercial buildings, condominiums, townhomes, and

one

-to-

four

family residences.

Real

Estate

Loans

–

Family

: This class of loans includes loans secured by

one

-to-

four

family homes. In addition to traditional residential mortgage loans secured by a

first

or junior lien on the property, the Bank offers home equity lines of credit.

Real

Estate

Loans

–

Other

: This loan class consists primarily of loans secured by various types of commercial real estate typically in the Bank’s market area, including multi-family residential buildings, office and retail buildings, industrial and warehouse buildings, hotels, and religious facilities.

Commercial

and

Industrial

Loans:

Commercial loans

may

be unsecured or secured with non-real estate commercial property. The Company's banking subsidiary makes commercial loans to businesses located within its market area and also to businesses outside of its market area through loan participations with other financial institutions.

Consumer

and

Other

Loans

: Consumer loans include all loans made to individuals for consumer or personal purposes. They include new and used automobile loans, unsecured loans, and lines of credit. The Company's banking subsidiary makes consumer loans to individuals located within its market area and also to individuals outside of its market through the purchase of loans from another financial institution.

A substantial portion of the loan portfolio is represented by residential and commercial loans secured by real estate throughout the Bank's market area. The ability of the Bank’s debtors to honor their contracts

may

be impacted by the real estate and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances less the allowance for loan losses and any deferred fees or costs on originated loans. Interest income is accrued and credited to income based on the unpaid principal balance. Loan origination fees, net of certain origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are generally placed on non-accrual status when the collection of principal or interest is

days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than

days past due

may

remain on accrual status if management determines it has adequate collateral to cover the principal and interest. For those loans that are carried on non-accrual status, payments are

first

applied to principal outstanding. A loan

may

be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. These policies are applied consistently across the loan portfolio.

All interest accrued but

not

collected for loans that are placed on non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. When a loan is returned to accrual status, interest income is recognized based on the new effective yield to maturity of the loan.

Any unsecured loan that is deemed uncollectible is charged-off in full. Any secured loan that is considered by management to be uncollectible is partially charged-off and carried at the fair value of the collateral less estimated selling costs. This charge-off policy applies to all loan segments.

Impaired Financing Receivable, Policy [Policy Text Block]

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value (net of selling costs), and the probability of collecting scheduled principal and interest payments when due. Additionally, management generally evaluates substandard and doubtful loans greater than

$250

thousand for impairment. Loans that experience insignificant payment delays and payment shortfalls generally are

not

classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair market value of the collateral, net of selling costs, if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company typically does

not

separately identify individual consumer, residential, and certain small commercial loans that are less than

$250

thousand for impairment disclosures, except for troubled debt restructurings (TDRs) as noted below.

Troubled Debt Restructuring [Policy Text Block]

Troubled Debt Restructurings (TDR)

In situations where, for economic or legal reasons related to a borrower’s financial condition, management grants a concession to the borrower that it would

not

otherwise consider, the related loan is classified as a TDR. TDRs are considered impaired loans. Upon designation as a TDR, the Company evaluates the borrower’s payment history, past due status, and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to being modified as a TDR and if the Company concludes that the borrower is able to make such payments, and there are

other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on non-accrual status at the time of the TDR, the loan will remain on non-accrual status following the modification and

may

be returned to accrual status based on the policy for returning loans to accrual status as noted above. There were

$360

thousand and

$467

thousand in loans classified as TDRs as of

December 31, 2019

and

2018

, respectively.

Loans and Leases Receivable, Allowance for Loan Losses Policy [Policy Text Block]

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management determines that the loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance. For further information about the Company’s loans and the allowance for loan losses, see Notes

and

The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that

may

affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The Company performs regular credit reviews of the loan portfolio to review credit quality and adherence to underwriting standards. The credit reviews consist of reviews by its internal credit administration department and reviews performed by an independent

third

party. Upon origination, each loan is assigned a risk rating ranging from

one

to nine, with loans closer to

one

having less risk. This risk rating scale is the Company's primary credit quality indicator. The Company has various committees that review and ensure that the allowance for loans losses methodology is in accordance with GAAP and loss factors used appropriately reflect the risk characteristics of the loan portfolio.

The allowance represents an amount that, in management’s judgment, will be adequate to absorb any losses on existing loans that

may

become uncollectible. 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, 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 the collateral, overall portfolio quality, and review of specific potential losses. The evaluation also considers the following risk characteristics of each loan portfolio class:

•

family residential mortgage loans carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.


	•	Real estate construction and land development loans carry risks that the project may not be finished according to schedule, the project may not be finished according to budget, and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure or other factors unrelated to the project.


	•	Other real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because repayment of these loans may be dependent upon the profitability and cash flows of the business or project.


	•	Commercial and industrial loans carry risks associated with the successful operation of a business because repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much reliability.


	•	Consumer and other loans carry risk associated with the continued creditworthiness of the borrower and the value of the collateral, if any. These loans are typically either unsecured or secured by rapidly depreciating assets such as automobiles. They are also likely to be immediately and adversely affected by job loss, divorce, illness, personal bankruptcy, or other changes in circumstances. Consumer and other loans also include purchased consumer loans which could have been originated outside of the Company's market area.

The allowance for loan losses consists of specific and general components. The specific component relates to loans that are classified as impaired, and is established when the discounted cash flows, fair value of collateral less estimated costs to sell, or observable market price of the impaired loan is lower than the carrying value of that loan. For collateral dependent loans, an updated appraisal is ordered if a current

one

not

on file. Appraisals are typically performed by independent

third

-party appraisers with relevant industry experience. Adjustments to the appraised value

may

be made based on recent sales of like properties or general market conditions among other considerations.

The general component covers loans that are

not

considered impaired and is based on historical loss experience adjusted for qualitative factors. The historical loss experience is calculated by loan type and uses an average loss rate during the preceding

twelve

quarters. The qualitative factors are assigned by management based on delinquencies and asset quality, national and local economic trends, effects of the changes in the value of underlying collateral, trends in volume and nature of loans, effects of changes in the lending policy, the experience and depth of management, concentrations of credit, quality of the loan review system, and the effect of external factors such as competition and regulatory requirements. The factors assigned differ by loan type. The general allowance estimates losses whose impact on the portfolio has yet to be recognized by a specific allowance. Allowance factors and the overall size of the allowance

may

change from period to period based on management’s assessment of the above described factors and the relative weights given to each factor.

Property, Plant and Equipment, Policy [Policy Text Block]

Premises and Equipment

Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Premises and equipment are depreciated over their estimated useful lives ranging from

three

years to

forty

years; leasehold improvements are amortized over the lives of the respective leases or the estimated useful life of the leasehold improvement, whichever is less. Software is amortized over its estimated useful life ranging from

three

seven

years. Depreciation and amortization are recorded on the straight-line method.

Costs of maintenance and repairs are charged to expense as incurred. Costs of replacing structural parts of major units are considered individually and are expensed or capitalized as the facts dictate. Gains and losses on routine dispositions are reflected in current operations.

Real Estate Held for Development and Sale, Policy [Policy Text Block]

Other Real Estate Owned

Other real estate owned (OREO) consists of properties obtained through a foreclosure proceeding or through an in-substance foreclosure in satisfaction of loans and properties originally acquired for branch operations or expansion but

longer intended to be used for that purpose. OREO is initially recorded at fair value less estimated costs to sell to establish a new cost basis. OREO is subsequently reported at the lower of cost or fair value less costs to sell, determined on the basis of current appraisals, comparable sales, and other estimates of fair value obtained principally from independent sources, adjusted for estimated selling costs. Management also considers other factors or recent developments, such as changes in absorption rates or market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition, which could result in adjustments to the collateral value estimates indicated in the appraisals. Significant judgments and complex estimates are required in estimating the fair value of other real estate owned, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. In response to market conditions and other economic factors, management

may

utilize liquidation sales as part of its distressed asset disposition strategy. As a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other real estate owned. Management reviews the value of other real estate owned each quarter, if any, and adjusts the values as appropriate. Revenue and expenses from operations and changes in the valuation allowance are included in other real estate owned expense (income).

Bank Owned Life Insurance [Policy Text Block]

Bank-Owned Life Insurance

The Company owns insurance on the lives of a certain group of key employees. The policies were purchased to help offset the increase in the costs of various fringe benefit plans, including healthcare. The cash surrender value of these policies is included as an asset on the consolidated balance sheets, and any increase in cash surrender value is recorded as income from bank owned life insurance on the consolidated statements of income. In the event of the death of an insured individual under these policies, the Company receives a death benefit which is also recorded as income from bank owned life insurance. The Company recorded

$469

thousand of death benefits received as income from bank owned life insurance under these policies for the year ended

December 31, 2018.

The Company did

not

receive any death benefits under these policies for the year ended

December 31, 2019.

The Company is exposed to credit risk to the extent an insurance company is unable to fulfill its financial obligations under a policy.

Intangible Assets, Finite-Lived, Policy [Policy Text Block]

Intangible Assets

Intangible assets consist of a core deposit intangible asset arising from a branch acquisition which is amortized on an accelerated method over its estima

ted useful life of

six

years.

Share-based Payment Arrangement [Policy Text Block]

Stock Based Compensation

Compensation cost is recognized for restricted stock units and other stock awards issued to employees and directors based on the fair value of the awards at the date of grant. The market price of the Company’s common stock at the date of grant is used to estimate the fair value of restricted stock units and other stock awards.

Pension and Other Postretirement Plans, Pensions, Policy [Policy Text Block]

Retirement Plans

Employee

401

(k) and profit sharing plan expense is the amount of matching contributions and Bank discretionary matches.

Transfers and Servicing of Financial Assets, Transfers of Financial Assets, Policy [Policy Text Block]

Transfers of Financial Assets

Transfers of financial assets, including loan participations, are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (

) the assets have been isolated from the Company, (

) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (

) the Company does

not

maintain effective control over the transferred assets through an agreement to repurchase them before maturity.

Income Tax, Policy [Policy Text Block]

Income Taxes

Deferred income tax assets and liabilities are determined using the asset and liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Deferred taxes are reduced by a valuation allowance when, in the opinion of management, it is more likely than

not

that some portion or all of the deferred tax assets will

not

be realized.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than

not

that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are

not

offset or aggregated with other positions. Tax positions that meet the more-likely-than-

not

recognition threshold are measured as the largest amount of tax benefit that is more than

percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. There was

liability for unrecognized tax benefits recorded as of

December 31, 2019

and

2018

. Interest and penalties associated with unrecognized tax benefits, if any, are classified as additional income taxes in the consolidated statements of income.

Management and Investment Advisory Fees, Policy [Policy Text Block]

Wealth Management Department

Securities and other property held by the wealth management department in a fiduciary or agency capacity are

not

assets of the Company and are

not

included in the accompanying consolidated financial statements.

Earnings Per Share, Policy [Policy Text Block]

Earnings Per Common Share

Basic earnings per common share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that

may

be issued by the Company relate to restricted stock units and are determined using the treasury method. See Note

for further information regarding earnings per common share.

Advertising Cost [Policy Text Block]

Advertising Costs

The Company follows the policy of charging the production costs of advertising to expense as incurred. Total advertising expense incurred for

2019

and

2018

was

$449

thousand and

$359

thousand, respectively.

Comprehensive Income, Policy [Policy Text Block]

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities and pension liability adjustments, are reported as a separate component of the equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income.

Commitments and Contingencies, Policy [Policy Text Block]

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does

not

believe there are such matters that will have a material effect on the consolidated financial statements.

Reclassification, Policy [Policy Text Block]

Reclassifications

Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had

effect on prior year net income or shareholders' equity.

New Accounting Pronouncements, Policy [Policy Text Block]

Adoption of New Accounting Standards

January 1, 2019,

the Company adopted ASU

No.

2016

02,

“Leases (Topic

842

).” Among other things, in the amendments in ASU

2016

02,

lessees are required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (

) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (

) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic

606,

Revenue from Contracts with Customers. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach does

not

require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors

may

not

apply a full retrospective transition approach. The FASB made subsequent amendments to Topic

842

through ASU

2018

(“Codification Improvements to Topic

842,

Leases.”) and ASU

2018

(“Leases (Topic

842

): Targeted Improvements.”) Among these amendments is the provision in ASU

2018

that provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic

840,

Leases). The adoption of this standard did

not

have a material effect on the Company's consolidated financial statements. For further information about the Company's leases, see Note

17.

January 1, 2019,

the Company adopted ASU

No.

2017

08,

"Receivables—Nonrefundable Fees and Other Costs (Subtopic

310

), Premium Amortization on Purchased Callable Debt Securities.” The amendments in ASU

2017

shorten the amortization period for certain callable debt securities purchased at a premium. Under the new guidance, premiums on these qualifying callable debt securities are amortized to the earliest call date. Discounts on purchased debt securities continue to be accreted to maturity. The adoption of this standard did

not

have a material effect on the Company's consolidated financial statements and

cumulative effect adjustment was recorded.

January 1, 2019,

the Company adopted ASU

No.

2017

12,

"Derivatives and Hedging (Topic

815

): Targeted Improvements to Accounting for Hedging Activities." The amendments in ASU

2017

modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments were simplified upon implementation of this update. The new guidance also provides for a reclassification of certain debt securities from held to maturity to available for sale if the security is eligible to be hedged using the last-of-layer method. Any unrealized gain or loss existing at the time of transfer is recorded in accumulated comprehensive income or loss. As a permitted activity, the reclassification of securities will

not

taint future held to maturity classification so long as the securities transferred are eligible to be hedged under the last-of-layer method. Accordingly, on

January 1, 2019,

the Company reclassified eligible held to maturity securities with amortized costs totaling

23.4

million as available for sale. The unrealized loss associated with the reclassified securities totaled

$431

thousand and was included in the Company's accumulated other comprehensive income (loss) on the date of reclassification.

Recent Accounting Pronouncements

June 2016,

the FASB issued ASU

No.

2016

13,

“Financial Instruments – Credit Losses (Topic

326

): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public business entities that meet the definition of a SEC filer, excluding smaller reporting companies, the standard is effective for fiscal years beginning after

December 15, 2019,

including interim periods in those fiscal years. All other entities, including the Company, will be required to apply the guidance for fiscal years, and interim periods within those years, beginning after

December 15, 2022.

The Company is currently assessing the impact that ASU

2016

will have on its consolidated financial statements. The Company has formed a committee to address the compliance requirements of this ASU, which has analyzed gathered data, defined loan pools and segments, and selected methods for applying the concepts included in this ASU. The Company is in the process of testing selected models, building policy and processing documentation, modeling the impact of the ASU on the capital and strategic plans, performing model validation, and finalizing policies and procedures. This guidance

may

result in material changes in the Company's accounting for credit losses of financial instruments.

April 2019,

the FASB issued ASU

No.

2019

04,

“Codification Improvements to Topic

326,

Financial Instruments—Credit Losses, Topic

815,

Derivatives and Hedging, and Topic

825,

Financial Instruments.” This ASU clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including improvements resulting from various Transition Resource Group (TRG) Meetings. The effective date of each of the amendments depends on the adoption date of ASU

2016

ASU

2016

03,

and ASU

2017

12.

The Company is currently assessing the impact that ASU

2019

will have on its consolidated financial statements.

May 2019,

the FASB issued ASU

No.

2019

05,

“Financial Instruments—Credit Losses (Topic

326

): Targeted Transition Relief.” The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic

326

with an option to irrevocably elect the fair value option in Subtopic

825

10,

applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic

326.

The fair value option election does

not

apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings. The effective date and transition methodology for the amendments in ASU

2019

are the same as in ASU

2016

13.

The Company is currently assessing the impact that ASU

2019

will have on its consolidated financial statements.

November 2019,

the FASB issued ASU

No.

2019

11,

“Codification Improvements to Topic

326,

Financial Instruments – Credit Losses.” This ASU addresses issues raised by stakeholders during the implementation of ASU

2016

13,

“Financial Instruments—Credit Losses (Topic

326

): Measurement of Credit Losses on Financial Instruments.” Among other narrow-scope improvements, the new ASU clarifies guidance around how to report expected recoveries. “Expected recoveries” describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. While applying the credit losses standard, stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (also known as PCD assets). In response to this question, the ASU permits organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The ASU includes effective dates and transition requirements that vary depending on whether or

not

an entity has already adopted ASU

2016

13.

The Company is currently assessing the impact that ASU

2019

will have on its consolidated financial statements.

December 2019,

the FASB issued ASU

No.

2019

12,

“Income Taxes (Topic

740

) – Simplifying the Accounting for Income Taxes.” The ASU is expected to reduce 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

will have on its consolidated financial statements.

January 2020,

the FASB issued ASU

No.

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

made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after

December 15, 2020,

and interim periods within those fiscal years. Early adoption is permitted. The Company does

not

expect the adoption of ASU

2020

to have a material impact on its consolidated financial statements.

Effective

November 25, 2019,

the SEC adopted Staff Accounting Bulletin (SAB)

119.

SAB

119

updated portions of SEC interpretative guidance to align with FASB ASC

326,

“Financial Instruments – Credit Losses.” It covers topics including (

) measuring current expected credit losses; (

) development, governance, and documentation of a systematic methodology; (

) documenting the results of a systematic methodology; and (

) validating a systematic methodology.