Note 1 - General	3 Months Ended
Mar. 31, 2020
Notes to Financial Statements
Organization, Consolidation, Basis of Presentation, Business Description and Accounting Policies [Text Block]	Note 1. General The accompanying unaudited consolidated financial statements of First National Corporation (the Company) and its subsidiary, First Bank (the Bank), have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial positions at March 31, 2020 and December 31, 2019 , the statements of income and comprehensive income for the three months ended March 31, 2020 and 2019 , the cash flows for the three months ended March 31, 2020 and 2019 , and the changes in shareholders’ equity for the three months ended March 31, 2020 and 2019 . The statements should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report on Form 10 -K for the year ended December 31, 2019 . Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 . Risks and Uncertainties The outbreak of COVID- 19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID- 19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID- 19 could also potentially create widespread business continuity issues for the Company. Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID- 19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID- 19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID- 19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware. Results of Operations The Company’s net interest income could decrease due to COVID- 19. In keeping with guidance from regulators, the Company is actively working with COVID- 19 affected borrowers to defer their payments, interest, and fees. While interest will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods. The Company’s noninterest income could decrease due to COVID- 19. The Bank suspended certain overdraft fees at the beginning of the second quarter in an effort to provide relief to its customers who may experience financial difficulties related to the pandemic, and as a result, service charges on deposits are expected to decrease in future periods as a result of the suspension. ATM and check card income could also be lower in future periods from changes in customer spending. Wealth management revenue is expected to decrease in future periods as a result of recent declines in the market values of investments, and mortgage fee income may decrease from less home buying activity in the Company's market area. At this time, the Company is unable to project the materiality of such an impact but recognizes the breadth of the economic impact is likely to impact its noninterest income in future periods. The Company’s noninterest expense could increase due to COVID- 19. The Bank may incur additional loan expenses in future periods from obtaining updated appraisals on loan collateral and additional legal and professional expenses through the engagement of consultants to assist with assessing the level of credit risk in the loan portfolio and developing strategies to minimize potential loan losses. At this time, the Company is unable to project the materiality of such an impact but recognizes the breadth of the economic impact is likely to impact its noninterest expense in future periods. Capital and Liquidity While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID- 19, its reported and regulatory capital ratios could be adversely impacted by provision for loan losses in future periods. Larger amounts of provision for loan losses may result from factors including higher specific reserves on newly identified impaired loans, higher levels of net charge-offs, and additional adjustments to qualitative factors in the general reserve component of the Bank’s allowance for loan losses. In March 2020, the Company suspended future stock repurchases under its stock repurchase program due to the economic uncertainty caused by the pandemic. The Company will continue to update its enterprise risk assessment and capital plans as the operating environment develops. The Company maintains access to multiple sources of liquidity. While wholesale funding markets have remained open, interest rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession causes large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding. Processes, Controls and Business Continuity Plan The Company has invoked its Pandemic Continuity of Operations Plan that includes a remote working strategy. The Company does not anticipate incurring additional material cost related to its continued deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date. The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID- 19. The Company does not currently face any material resource constraint through the implementation of its business continuity plan. Lending Operations and Accommodations to Borrowers In keeping with regulatory guidance to work with borrowers during this unprecedented situation, the Company is executing a payment deferral program for its individual and business customers adversely affected by the pandemic for up to 90 days. As of April 30, 2020, the Company had executed 464 of these deferrals on outstanding loan balances of $171.0 million. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings. With the passage of the Paycheck Protection Program (PPP), administered by the Small Business Administration (SBA), the Company is actively participating in assisting its customers with applications for resources through the program. PPP loans have a two -year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven and repaid by the SBA in accordance with the terms of the program. As of April 30, 2020, the Company had closed or approved with the SBA 575 PPP loans, representing $74.9 million in funding. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan losses through additional provision for loan losses charged to earnings. Asset Quality The Bank anticipates the pandemic to have an unfavorable impact on the financial condition of its customers, and as a result, has begun the process of identifying the related credit risk within its loan portfolio with the goal of mitigating the risk and minimizing potential loan charge-offs. We expect significant pressure on several sectors of the loan portfolio, including hospitality, retail/shopping and health care, among others. The magnitude of the potential decline in the Bank’s loan quality will likely depend on the length and extent that the Bank’s customers experience business interruptions from the pandemic. In addition, the Bank’s loan deferral program could make it difficult to identify the extent that asset quality may be worsening in future periods until the payment deferral periods have ended and scheduled loan payments become due. Derivative Financial Instruments On April 21, 2020, the Company entered into two interest rate swap agreements related to its outstanding junior subordinated debt. The Company plans to recognize derivative financial instruments at fair value as either an other asset or other liability in its Consolidated Balance Sheets in future periods. The Company’s derivative financial instruments are comprised of interest rate swaps that qualify and are designated as cash flow hedges on the Company’s junior subordinated debt. Gains or losses on the Company’s cash flow hedges will be reported as a component of other comprehensive income, net of deferred income taxes, and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings. The Company’s derivative financial instruments are described more fully in Note 17. Adoption of New Accounting Pronouncements In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017 - 04, “Intangibles - Goodwill and Other (Topic 350 ) - Simplifying the Test for Goodwill Impairment” (ASU 2017 - 04 ). ASU 2017 - 04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two -step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU 2017 - 04 was effective for the Company on January 1, 2020. The adoption of this standard did not have a material effect on the Company's consolidated financial statements. 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 ). 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 adoption of this standard did not have a material effect on the Company's consolidated financial statements. In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (the agencies) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310 - 40, “Receivables – Troubled Debt Restructurings by Creditors,” (ASC 310 - 40 ), 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 (e.g., six months) 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. This interagency guidance is expected to have a material impact on the Company's financial statements; however, this impact cannot be quantified at this time. For further information about the Company's short-term modifications in response to COVID- 19 to borrowers who were current prior to any relief, see Note 4. Recent Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments” (ASU 2016 - 13 ). 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. The FASB has issued multiple updates to ASU 2016 - 13 as codified in Topic 326, including ASU’s 2019 - 04, 2019 - 05, 2019 - 10, 2019 - 11, 2020 - 02, and 2020 - 03. These ASU’s 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 U.S. Securities and Exchange Commission (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. The Company is currently assessing the impact that ASU 2016 - 13 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. 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 ( 1 ) measuring current expected credit losses; ( 2 ) development, governance, and documentation of a systematic methodology; ( 3 ) documenting the results of a systematic methodology; and ( 4 ) validating a systematic methodology. In December 2019, the FASB issued ASU No. 2019 - 12, “Income Taxes (Topic 740 ) – Simplifying the Accounting for Income Taxes” (ASU 2019 - 12 ). 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 does not expect the adoption of ASU 2019 - 12 to have a material impact on its consolidated financial statements. In 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” (ASU 2020 - 01 ). The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016 - 01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim 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” (ASU 2020 - 04 ). 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 generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference 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 in the process of identifying loans and other financial instruments that are directly or indirectly influenced by LIBOR. The Company is assessing ASU 2020 - 04 and its impact on the Company's transition away from LIBOR for its loan and other financial instruments. On March 12, 2020, the SEC finalized amendments to the definitions of its “accelerated filer” and “large accelerated filer” definitions. 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. Prior to these changes, the Company was required to comply with section 404 (b) of the Sarbanes Oxley Act concerning auditor attestation over internal control over financial reporting as an “accelerated filer” as it had more than $75 million in public float but less than $700 million at the end of the Company’s most recent second quarter. The rule change expands the definition of “smaller reporting companies” to include entities with public float of less than $700 million and less than $100 million in annual revenues. The Company expects to meet this expanded category of small reporting company and will no longer be considered an accelerated filer. If the Company’s annual revenues exceed $100 million, its category will change back to “accelerated filer”. The classifications of “accelerated filer” and “large accelerated filer” require a public company to obtain an auditor attestation concerning the effectiveness of internal control over financial reporting (ICFR) and include the opinion on ICFR in its annual report on Form 10 -K. Smaller reporting companies also have additional time to file quarterly and annual financial statements. All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of internal control over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for smaller reporting companies. These amendments will change the Company's reporting and audit requirements as it will have the additional time provided to file quarterly and annual financial statements and will no longer be required to obtain an auditor attestation concerning the internal controls over financial reporting.

Note

General

The accompanying unaudited consolidated financial statements of First National Corporation (the Company) and its subsidiary, First Bank (the Bank), have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. Accordingly, they do

not

include all of the information and footnotes required by GAAP. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial positions at

March 31, 2020

and

December 31, 2019

, the statements of income and comprehensive income for the

three

months ended

March 31, 2020

and

2019

, the cash flows for the

three

months ended

March 31, 2020

and

2019

, and the changes in shareholders’ equity for the

three

months ended

March 31, 2020

and

2019

. The statements should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report on Form

-K for the year ended

December 31, 2019

. Operating results for the

three

months ended

March 31, 2020

are

not

necessarily indicative of the results that

may

be expected for the year ending

December 31, 2020

Risks and Uncertainties

The outbreak of COVID-

has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-

to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been

material impact to the Company’s employees to date, COVID-

could also potentially create widespread business continuity issues for the Company.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law at the end of

March 2020

as a

trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-

19,

certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-

escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is

not

possible to know the full universe or extent that the impact of COVID-

19,

and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

Results of Operations

The Company’s net interest income could decrease due to COVID-

19.

In keeping with guidance from regulators, the Company is actively working with COVID-

affected borrowers to defer their payments, interest, and fees. While interest will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact but recognizes the breadth of the economic impact

may

affect its borrowers’ ability to repay in future periods.

The Company’s noninterest income could decrease due to COVID-

19.

The Bank suspended certain overdraft fees at the beginning of the

second

quarter in an effort to provide relief to its customers who

may

experience financial difficulties related to the pandemic, and as a result, service charges on deposits are expected to decrease in future periods as a result of the suspension. ATM and check card income could also be lower in future periods from changes in customer spending. Wealth management revenue is expected to decrease in future periods as a result of recent declines in the market values of investments, and mortgage fee income

may

decrease from less home buying activity in the Company's market area. At this time, the Company is unable to project the materiality of such an impact but recognizes the breadth of the economic impact is likely to impact its noninterest income in future periods.

The Company’s noninterest expense could increase due to COVID-

19.

The Bank

may

incur additional loan expenses in future periods from obtaining updated appraisals on loan collateral and additional legal and professional expenses through the engagement of consultants to assist with assessing the level of credit risk in the loan portfolio and developing strategies to minimize potential loan losses. At this time, the Company is unable to project the materiality of such an impact but recognizes the breadth of the economic impact is likely to impact its noninterest expense in future periods.

Capital and Liquidity

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-

19,

its reported and regulatory capital ratios could be adversely impacted by provision for loan losses in future periods. Larger amounts of provision for loan losses

may

result from factors including higher specific reserves on newly identified impaired loans, higher levels of net charge-offs, and additional adjustments to qualitative factors in the general reserve component of the Bank’s allowance for loan losses. In

March 2020,

the Company suspended future stock repurchases under its stock repurchase program due to the economic uncertainty caused by the pandemic. The Company will continue to update its enterprise risk assessment and capital plans as the operating environment develops.

The Company maintains access to multiple sources of liquidity. While wholesale funding markets have remained open, interest rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession causes large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

Processes, Controls and Business Continuity Plan

The Company has invoked its Pandemic Continuity of Operations Plan that includes a remote working strategy. The Company does

not

anticipate incurring additional material cost related to its continued deployment of the remote working strategy.

material operational or internal control challenges or risks have been identified to date. The Company does

not

anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-

19.

The Company does

not

currently face any material resource constraint through the implementation of its business continuity plan.

Lending Operations and Accommodations to Borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation, the Company is executing a payment deferral program for its individual and business customers adversely affected by the pandemic for up to

days. As of

April 30, 2020,

the Company had executed

464

of these deferrals on outstanding loan balances of

$171.0

million. In accordance with interagency guidance issued in

March 2020,

these short-term deferrals are

not

considered troubled debt restructurings.

With the passage of the Paycheck Protection Program (PPP), administered by the Small Business Administration (SBA), the Company is actively participating in assisting its customers with applications for resources through the program. PPP loans have a

two

-year term and earn interest at

1%.

The Company believes that the majority of these loans will ultimately be forgiven and repaid by the SBA in accordance with the terms of the program. As of

April 30, 2020,

the Company had closed or approved with the SBA

575

PPP loans, representing

$74.9

million in funding. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan losses through additional provision for loan losses charged to earnings.

Asset Quality

The Bank anticipates the pandemic to have an unfavorable impact on the financial condition of its customers, and as a result, has begun the process of identifying the related credit risk within its loan portfolio with the goal of mitigating the risk and minimizing potential loan charge-offs. We expect significant pressure on several sectors of the loan portfolio, including hospitality, retail/shopping and health care, among others.

The magnitude of the potential decline in the Bank’s loan quality will likely depend on the length and extent that the Bank’s customers experience business interruptions from the pandemic. In addition, the Bank’s loan deferral program could make it difficult to identify the extent that asset quality

may

be worsening in future periods until the payment deferral periods have ended and scheduled loan payments become due.

Derivative Financial Instruments

April 21, 2020,

the Company entered into

two

interest rate swap agreements related to its outstanding junior subordinated debt. The Company plans to recognize derivative financial instruments at fair value as either an other asset or other liability in its Consolidated Balance Sheets in future periods. The Company’s derivative financial instruments are comprised of interest rate swaps that qualify and are designated as cash flow hedges on the Company’s junior subordinated debt. Gains or losses on the Company’s cash flow hedges will be reported as a component of other comprehensive income, net of deferred income taxes, and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings. The Company’s derivative financial instruments are described more fully in Note

17.

Adoption of New Accounting Pronouncements

January 2017,

the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)

No.

2017

04,

“Intangibles - Goodwill and Other (Topic

350

) - Simplifying the Test for Goodwill Impairment” (ASU

2017

). ASU

2017

simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the

first

step in the previous

two

-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step

which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU

2017

was effective for the Company on

January 1, 2020.

The adoption of this standard did

not

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

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

). ASU

2018

modifies the disclosure requirements on fair value measurements by requiring that Level

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

fair value measurements. Certain disclosure requirements in Topic

820

were also removed or modified. ASU

2018

was effective for the Company on

January 1, 2020.

The adoption of this standard did

not

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

March 2020,

various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (the agencies) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification

310

40,

“Receivables – Troubled Debt Restructurings by Creditors,” (ASC

310

), 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-

to borrowers who were current prior to any relief, are

not

to be considered TDRs. This includes short-term (e.g.,

six

months) 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

days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have a material impact on the Company's financial statements; however, this impact cannot be quantified at this time. For further information about the Company's short-term modifications in response to COVID-

to borrowers who were current prior to any relief, see Note

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” (ASU

2016

). 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. The FASB has issued multiple updates to ASU

2016

as codified in Topic

326,

including ASU’s

2019

04,

2019

05,

2019

10,

2019

11,

2020

02,

and

2020

03.

These ASU’s 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 U.S. Securities and Exchange Commission (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.

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.

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.

December 2019,

the FASB issued ASU

No.

2019

12,

“Income Taxes (Topic

740

) – Simplifying the Accounting for Income Taxes” (ASU

2019

). 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 does

not

expect the adoption of ASU

2019

to have a material impact 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”

(ASU

2020

). 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.

March 2020,

the FASB issued ASU

No.

2020

“Reference Rate Reform (Topic

848

): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (ASU

2020

). 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 generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference 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 in the process of identifying loans and other financial instruments that are directly or indirectly influenced by LIBOR. The Company is assessing ASU

2020

and its impact on the Company's transition away from LIBOR for its loan and other financial instruments.

March 12, 2020,

the SEC finalized amendments to the definitions of its “accelerated filer” and “large accelerated filer” definitions. 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. Prior to these changes, the Company was required to comply with section

404

(b) of the Sarbanes Oxley Act concerning auditor attestation over internal control over financial reporting as an “accelerated filer” as it had more than

$75

million in public float but less than

$700

million at the end of the Company’s most recent

second

quarter. The rule change expands the definition of “smaller reporting companies” to include entities with public float of less than

$700

million and less than

$100

million in annual revenues. The Company expects to meet this expanded category of small reporting company and will

longer be considered an accelerated filer. If the Company’s annual revenues exceed

$100

million, its category will change back to “accelerated filer”. The classifications of “accelerated filer” and “large accelerated filer” require a public company to obtain an auditor attestation concerning the effectiveness of internal control over financial reporting (ICFR) and include the opinion on ICFR in its annual report on Form

-K. Smaller reporting companies also have additional time to file quarterly and annual financial statements. All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of internal control over financial reporting, but the external auditor attestation of internal control over financial reporting is

not

required for smaller reporting companies. These amendments will change the Company's reporting and audit requirements as it will have the additional time provided to file quarterly and annual financial statements and will

longer be required to obtain an auditor attestation concerning the internal controls over financial reporting.