Supervision and Regulation
The Company and the Bank are extensively regulated under federal and state law. The following description briefly addresses certain provisions of federal and state laws and regulations, and their potential effects on the Company and the Bank. Proposals to change the laws, regulations, and policies governing the banking industry are frequently raised in U.S. Congress, in state legislatures, and before the various bank regulatory agencies. The likelihood and timing of any changes and the impact such changes might have on the Company and the Bank are impossible to determine with any certainty. A change in applicable laws, regulations or policies, or a change in the way such laws, regulations or policies are interpreted by regulatory agencies or courts, may have a material impact on the business, operations, and earnings of the Company and the Bank.
American National Bankshares Inc.
American National Bankshares Inc. is qualified as a bank holding company ("BHC") within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is registered as such with the Board of Governors of the Federal Reserve System (the "FRB"). As a bank holding company, the Company is subject to supervision, regulation and examination by the FRB and is required to file various reports and additional information with the FRB. The Company is also registered under the bank holding company laws of Virginia and is subject to supervision, regulation and examination by the Bureau of Financial Institutions of the Virginia State Corporation Commission (the "SCC").
American National Bank and Trust Company
American National Bank and Trust Company is a federally chartered national bank and is a member of the Federal Reserve System. As a national bank, the Bank is subject to supervision, regulation and examination by the Office of the Comptroller of the Currency (the "OCC") and is required to file various reports and additional information with the OCC. The OCC has primary supervisory and regulatory authority over the operations of the Bank. Because the Bank accepts insured deposits from the public, it is also subject to examination by the FDIC.
Depository institutions, including the Bank, are subject to extensive federal and state regulations that significantly affect their business and activities. Regulatory bodies have broad authority to implement standards and initiate proceedings designed to prohibit depository institutions from engaging in unsafe and unsound banking practices. The standards relate generally to operations and management, asset quality, interest rate exposure, and capital. The bank regulatory agencies are authorized to take action against institutions that fail to meet such standards.
As with other financial institutions, the earnings of the Bank are affected by general economic conditions and by the monetary policies of the FRB. The FRB exerts a substantial influence on interest rates and credit conditions, primarily through open market operations in U.S. Government securities, setting the reserve requirements of member banks, and establishing the discount rate on member bank borrowings. The policies of the FRB have a direct impact on loan and deposit growth and the interest rates charged and paid thereon. They also impact the source, cost of funds, and the rates of return on investments. Changes in the FRB's monetary policies have had a significant impact on the operating results of the Bank and other financial institutions and are expected to continue to do so in the future; however, the exact impact of such conditions and policies upon the future business and earnings cannot accurately be predicted.
Deposit Insurance
The deposits of the Bank are insured up to applicable limits by the DIF and are subject to deposit insurance assessments to maintain the DIF. The deposit insurance assessment base of the Bank is based on its average total assets minus average tangible equity, pursuant to a rule issued by the FDIC as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The FDIC uses a "financial ratios method" based on CAMELS composite ratings to determine assessment rates for small established institutions with less than $10 billion in assets, such as the Bank. The CAMELS rating system is a supervisory rating system designed to take into account and reflect all financial and operational risks that a bank may face, including capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to market risk ("CAMELS"). CAMELS composite ratings set a maximum assessment for CAMELS 1 and 2 rated banks, and set minimum assessments for lower rated institutions.
In March 2016, the FDIC implemented by final rule certain Dodd-Frank Act provisions by raising the DIF's minimum reserve ratio from 1.15% to 1.35%. The FDIC imposed a 4.5 basis point annual surcharge on insured depository institutions with total consolidated assets of $10 billion or more. The rule granted credits to smaller banks, such as the Bank, for the portion of their regular assessments that contributed to increasing the reserve ratio from 1.15% to 1.35%. In 2021 and 2020, the Company recorded expense of $864,000 and $639,000, respectively, for FDIC insurance premiums.
Capital Requirements
The FRB, the OCC and the FDIC have issued substantially similar capital guidelines applicable to all banks and bank holding companies. In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth.
Effective January 1, 2015, the Company and the Bank became subject to rules implementing the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision (the "Basel Committee") and certain provisions of the Dodd-Frank Act (the "Basel III Capital Rules"). The Basel III Capital Rules require the Company and the Bank to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 to risk-weighted assets ("CET1") of at least 4.5%, plus a 2.5% "capital conservation buffer" (effectively resulting in a minimum CET1 ratio of at least 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer, which was phased in ratably over a four year period beginning January 1, 2016, is designed to absorb losses during periods of economic stress. Institutions with a CET1 ratio above the minimum (4.5%) but below the minimum plus the conservation buffer (7.0%) will face constraints on dividends, equity repurchases, and discretionary compensation paid to certain officers, based on the amount of the shortfall.
With respect to the Bank, the "prompt corrective action" regulations pursuant to Section 38 of the Federal Deposit Insurance Act (the "FDIA") were also revised, effective as of January 1, 2015, to incorporate a CET1 ratio and to increase certain other capital ratios. To be well capitalized under the revised regulations, a bank must have the following minimum capital ratios: (i) a CET1 ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%. See "Prompt Corrective Action" below.
The Tier 1 and total capital to risk-weighted asset ratios of the Company were 13.73% and 14.61%, respectively, as of December 31, 2021, thus exceeding the minimum requirements. The CET 1 ratio of the Company was 12.43% and the Bank was 13.15% as of December 31, 2021. The Tier 1 and total capital to risk-weighted asset ratios of the Bank were 13.15% and 14.03%, respectively, as of December 31, 2021, also exceeding the minimum requirements.
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. In July 2019, the federal banking agencies adopted final rules (the "Capital Simplification Rules") that, among other things, revised these deductions and adjustments. Following the adoption of the Capital Simplification Rules, certain deferred tax assets and significant investments in non-consolidated financial entities must be deducted from CET1 to the extent that any one such category exceeds 25% of CET1. Prior to the adoption of the Capital Simplification Rules, amounts were deducted from CET1 to the extent that any one such category exceeded 10% of CET1 or all such items, in the aggregate, exceeded 15% of CET1. The Capital Simplification Rules took effect for the Company as of January 1, 2020. These limitations did not impact regulatory capital during any of the reported periods.
The Basel III Capital Rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures (and higher percentages for certain other types of interests), and resulting in higher risk weights for a variety of asset categories. In November 2019, the federal banking agencies adopted a rule revising the scope of commercial real estate mortgages subject to a 150% risk weight.
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as "Basel IV"). Among other things, these standards revise the Basel Committee's standardized approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for certain "unconditionally cancellable commitments," such as unused credit card lines of credit) and provide a new standardized approach for operational risk capital. Under the current capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Company. The impact of Basel IV on the Company and the Bank will depend on the manner in which it is implemented by the federal bank regulatory agencies.
On September 17, 2019, the federal banking agencies jointly issued a final rule required by the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the "EGRRCPA") that permits qualifying banks and bank holding companies that have less than $10 billion in consolidated assets to elect to be subject to a 9% leverage ratio (commonly referred to as the community bank leverage ratio or "CBLR"). Under the final rule, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% are not subject to other risk-based and leverage capital requirements under the Basel III Capital Rules and are deemed to have met the well capitalized ratio requirements under the "prompt corrective action" framework. In addition, a community bank that falls out of compliance with the framework has a two-quarter grace period to come back into full compliance, provided its leverage ratio remains above 8%, and will be deemed well-capitalized during the grace period. The CBLR framework was first available for banking organizations to use in their March 31, 2020 regulatory reports. These CBLR rules were modified in response to the COVID-19 pandemic. See "Coronavirus Aid, Relief, and Economic Security Act and Consolidated Appropriations Act, 2021"below. The Company and the Bank do not currently expect to opt into the CBLR framework.
Dividends
The Company's principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank's payment of dividends to the Company. As a general rule, the amount of a dividend may not exceed, without prior regulatory approval, the sum of net income in the calendar year to date and the retained net earnings of the immediately preceding two calendar years. A depository institution may not pay any dividend if payment would cause the institution to become "undercapitalized" or if it already is "undercapitalized." The OCC may prevent the payment of a dividend if it determines that the payment would be an unsafe and unsound banking practice. The OCC also has advised that a national bank should generally pay dividends only out of current operating earnings.
Permitted Activities
As a bank holding company, the permitted activities of the Company are limited to managing or controlling banks, furnishing services to or performing services for its subsidiaries, and engaging in other activities that the FRB determines by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In determining whether a particular activity is permissible, the FRB must consider whether the performance of such an activity reasonably can be expected to produce benefits to the public that outweigh possible adverse effects. Possible benefits include greater convenience, increased competition, and gains in efficiency. Possible adverse effects include undue concentration of resources, decreased or unfair competition, conflicts of interest, and unsound banking practices. Despite prior approval, the FRB may order a bank holding company or its subsidiaries to terminate any activity or to terminate ownership or control of any subsidiary when the FRB has reasonable cause to believe that a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company may result from such an activity.
Banking Acquisitions; Changes in Control
The BHC Act and related regulations require, among other things, the prior approval of the FRB in any case where a bank holding company proposes to (i) acquire direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank or bank holding company (unless it already owns a majority of such voting shares), (ii) acquire all or substantially all of the assets of another bank or bank holding company, or (iii) merge or consolidate with any other bank holding company. In determining whether to approve a proposed bank acquisition, the FRB will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, any outstanding regulatory compliance issues of any institution that is a party to the transaction, the projected capital ratios and levels on a post-acquisition basis, the financial condition of each institution that is a party to the transaction and of the combined institution after the transaction, the parties' managerial resources and risk management and governance processes and systems, the parties' compliance with the Bank Secrecy Act and anti-money laundering requirements, and the acquiring institution's performance under the Community Reinvestment Act of 1977, as amended (the "CRA"), and compliance with fair housing and other consumer protection laws.
Subject to certain exceptions, the BHC Act and the Change in Bank Control Act, together with the applicable regulations, require FRB approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring "control" of a bank or bank holding company. A conclusive presumption of control exists if an individual or company acquires the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of any insured depository institution. A rebuttable presumption of control exists if a person or company acquires 10% or more but less than 25% of any class of voting securities of an insured depository institution and either the institution has registered its securities with the Securities and Exchange Commission (the "SEC") under Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") or no other person will own a greater percentage of that class of voting securities immediately after the acquisition. The Company's common stock is registered under Section 12 of the Exchange Act.
In addition, Virginia law requires the prior approval of the SCC for (i) the acquisition by a Virginia bank holding company of more than 5% of the voting shares of a Virginia bank or any holding company that controls a Virginia bank, or (ii) the acquisition by a Virginia bank holding company of a bank or its holding company domiciled outside Virginia.
Source of Strength
FRB policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Safety and Soundness
There are a number of obligations and restrictions imposed on bank holding companies and their subsidiary banks by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance fund in the event of a depository institution insolvency, receivership or default. For example, under the Federal Deposit Insurance Corporation Improvement Act of 1991, to avoid receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any subsidiary bank that may become "undercapitalized" with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal bank regulatory agency up to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.
Under the FDIA, the federal bank regulatory agencies have adopted guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to capital management, internal controls and information systems, internal audit systems, data security, loan documentation, credit underwriting, interest rate exposure, risk management, vendor management, corporate governance, asset growth, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines.
Prompt Corrective Action
The federal bank regulatory agencies possess broad powers to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized," as defined by the law. "Well capitalized" institutions may generally operate without additional supervisory restriction. With respect to "adequately capitalized" institutions, such banks cannot normally pay dividends or make any capital contributions that would leave the bank undercapitalized; they cannot pay a management fee to a controlling person if after paying the fee, it would be undercapitalized; and they cannot accept, renew, or rollover any brokered deposit unless the bank has applied for and been granted a waiver by the FDIC.
Immediately upon becoming "undercapitalized," a depository institution becomes subject to the provisions of Section 38 of the FDIA, which: (i) restrict payment of capital distributions and management fees; (ii) require that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital; (iii) require submission of a capital restoration plan; (iv) restrict the growth of the institution’s assets; and (v) require prior approval of certain expansion proposals. The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the DIF, subject in certain cases to specified procedures. These discretionary supervisory actions include: (i) requiring the institution to raise additional capital; (ii) restricting transactions with affiliates; (iii) requiring divestiture of the institution or the sale of the institution to a willing purchaser; and (iv) any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions. Management believes, as of December 31, 2021 and 2020, the Bank met the requirements for being classified as "well capitalized."
Transactions with Affiliates
Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the authority of the Bank to engage in transactions with related parties or "affiliates" or to make loans to insiders is limited. Loan transactions with an affiliate generally must be collateralized and certain transactions between the Bank and its affiliates, including the sale of assets, the payment of money, or the provision of services, must be on terms and conditions that are substantially the same, or at least as favorable to the Bank, as those prevailing for comparable nonaffiliated transactions. In addition, the Bank generally may not purchase securities issued or underwritten by affiliates.
Loans to executive officers, directors or to any person who directly or indirectly, or acting through or in concert with one or more persons, owns, controls or has the power to vote more than 10% of any class of voting securities of a bank, are subject to Sections 22(g) and 22(h) of the Federal Reserve Act and their corresponding regulations (Regulation O) and Section 13(k) of the Exchange Act relating to the prohibition on personal loans to executives (which exempts financial institutions in compliance with the insider lending restrictions of Section 22(h) of the Federal Reserve Act). Among other things, these loans must be made on terms substantially the same as those prevailing on transactions made to unaffiliated individuals and certain extensions of credit to those persons must first be approved in advance by a disinterested majority of the entire board of directors. Section 22(h) of the Federal Reserve Act prohibits loans to any of those individuals where the aggregate amount exceeds an amount equal to 15% of an institution's unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed the Bank's unimpaired capital and unimpaired surplus. Section 22(g) of the Federal Reserve Act identifies limited circumstances in which the Bank is permitted to extend credit to executive officers.
Consumer Financial Protection
The Company is subject to a number of federal and state consumer protection laws that extensively govern its relationship with its customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, laws governing flood insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws, and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing other services. If the Company fails to comply with these laws and regulations, it may be subject to various penalties. Failure to comply with consumer protection requirements may also result in failure to obtain any required bank regulatory approval for merger or acquisition transactions the Company may wish to pursue or being prohibited from engaging in such transactions even if approval is not required.
The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (the "CFPB"), and giving it responsibility for implementing, examining, and enforcing compliance with federal consumer protection laws. The CFPB focuses on (i) risks to consumers and compliance with the federal consumer financial laws, (ii) the markets in which firms operate and risks to consumers posed by activities in those markets, (iii) depository institutions that offer a wide variety of consumer financial products and services, and (iv) non-depository companies that offer one or more consumer financial products or services.
The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit "unfair, deceptive or abusive" acts and practices. Abusive acts or practices are defined as those that materially interfere with a consumer's ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer's (i) lack of financial savvy, (ii) inability to protect himself in the selection or use of consumer financial products or services, or (iii) reasonable reliance on a covered entity to act in the consumer's interests. The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or injunction. Further regulatory positions taken by the CFPB may influence how other regulatory agencies may apply the subject consumer financial protection laws and regulations.
Community Reinvestment Act
The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank's record in meeting the credit needs of the communities served by the bank, including low and moderate income neighborhoods. Furthermore, such assessment is also required of banks that have applied, among other things, to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch. In the case of a BHC applying for approval to acquire a bank or BHC, the record of each subsidiary bank of the applicant BHC is subject to assessment in considering the application. Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance." The Bank was rated "satisfactory" in its most recent CRA evaluation.
Anti-Money Laundering Legislation
The Company is subject to several federal laws that are designed to combat money laundering, terrorist financing, and transactions with persons, companies or foreign governments designated by U.S. authorities ("AML laws"). This category of laws includes the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, the USA PATRIOT Act of 2001, and the Anti-Money Laundering Act of 2020.
The AML laws and their implementing regulations require insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing. The AML laws and their regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. To comply with these obligations, the Company has implemented appropriate internal practices, procedures, and controls.
Office of Foreign Assets Control
The U.S. Treasury Department's Office of Foreign Assets Control ("OFAC") is responsible for administering and enforcing economic and trade sanctions against specified foreign parties, including countries and regimes, foreign individuals and other foreign organizations and entities. OFAC publishes lists of prohibited parties that are regularly consulted by the Company in the conduct of its business in order to assure compliance. The Company is responsible for, among other things, blocking accounts of, and transactions with, prohibited parties identified by OFAC, avoiding unlicensed trade and financial transactions with such parties and reporting blocked transactions after their occurrence. Failure to comply with OFAC requirements could have serious legal, financial and reputational consequences for the Company.
Privacy Legislation
Several recent laws, including the Right to Financial Privacy Act, and related regulations issued by the federal bank regulatory agencies, also provide new protections against the transfer and use of customer information by financial institutions. A financial institution must provide to its customers information regarding its policies and procedures with respect to the handling of customers' personal information. Each institution must conduct an internal risk assessment of its ability to protect customer information. These privacy provisions generally prohibit a financial institution from providing a customer's personal financial information to unaffiliated parties without prior notice and approval from the customer.
Incentive Compensation
In June 2010, the federal bank regulatory agencies issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging excessive risk-taking. The Interagency Guidance on Sound Incentive Compensation Policies, which covers all employees that have the ability to materially affect the risk profile of a financial institutions, either individually or as part of a group, is based upon the key principles that a financial institution's incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the institution's ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the financial institution's board of directors.
Section 956 of the Dodd-Frank Act requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities that encourage inappropriate risk-taking by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. The federal banking agencies issued such proposed rules in March 2011 and issued a revised proposed rule in June 2016 implementing the requirements and prohibitions set forth in Section 956. The revised proposed rule would apply to all banks, among other institutions, with at least $1 billion in average total consolidated assets, like the Bank, for which it would go beyond the existing Interagency Guidance on Sound Incentive Compensation Policies to (i) prohibit certain types and features of incentive-based compensation arrangements for senior executive officers, (ii) require incentive-based compensation arrangements to adhere to certain basic principles to avoid a presumption of encouraging inappropriate risk, (iii) require appropriate board or committee oversight, (iv) establish minimum recordkeeping, and (v) mandate disclosures to the appropriate federal banking agency. The proposed rules have not yet been finalized.
The FRB will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of financial institutions, such as the Company, that are not "large, complex banking organizations." These reviews will be tailored to each financial institution based on the scope and complexity of the institution's activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the institution's supervisory ratings, which can affect the institution's ability to make acquisitions and take other actions. Enforcement actions may be taken against a financial institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the institution's safety and soundness and the financial institution is not taking prompt and effective measures to correct the deficiencies. At December 31, 2021, the Company had not been made aware of any instances of non-compliance with the final guidance.
Mortgage Banking Regulation
In connection with making mortgage loans, the Bank is subject to rules and regulations that, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level. The Bank is also subject to rules and regulations that require the collection and reporting of significant amounts of information with respect to mortgage loans and borrowers. The Bank’s mortgage origination activities are subject to the FRB’s Regulation Z, which implements the Truth in Lending Act. Certain provisions of Regulation Z require creditors to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms.
Cybersecurity
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution's management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution's operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If the Company fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.
On November 18, 2021, the federal bank regulatory agencies issued a final rule, effective April 1, 2022, imposing new notification requirements for cybersecurity incidents. The rule requires financial institutions to notify their primary federal regulator as soon as possible and no later than 36 hours after the institution determines that a cybersecurity incident has occurred that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the institution’s: (i) ability to carry out banking operations, activities, or processes, or deliver banking products and services to a material portion of its customer base, in the ordinary course of business, (ii) business line(s), including associated operations, services, functions, and support, that upon failure would result in a material loss of revenue, profit, or franchise value, or (iii) operations, including associated services, functions and support, as applicable, the failure or discontinuance of which would pose a threat to the financial stability of the United States.
To date, the Company has not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, but its systems and those of its customers and third-party service providers are under constant threat and it is possible that the Company could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by the Company and its customers.
Coronavirus Aid, Relief, and Economic Security Act and Consolidated Appropriations Act, 2021
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law on March 27, 2020 and the Consolidated Appropriations Act, 2021 ("Appropriations Act") was signed into law on December 27, 2020. Among other things, the CARES Act and Appropriations Act include the following provisions impacting financial institutions:
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Future Legislation and Regulation
Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation could affect the regulatory structure under which the Company and the Bank operate and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require modifications to business strategy, and limit the ability to pursue business opportunities in an efficient manner. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material adverse effect on the business, financial condition and results of operations of the Company and the Bank.
Effect of Governmental Monetary Policies
The Company's operations are affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the FRB regulates money and credit conditions and interest rates to influence general economic conditions. These policies have a significant impact on overall growth and distribution of loans, investments and deposits; they affect interest rates charged on loans or paid for time and savings deposits. FRB monetary policies have had a significant effect on the operating results of commercial banks, including the Company, in the past and are expected to do so in the future. As a result, it is difficult for the Company to predict the potential effects of possible changes in monetary policies upon its future operating results.
Tax Reform
As a result of the enactment of the CARES Act in 2020, the Company recognized a tax benefit for the net operating loss ("NOL") five-year carryback provision for the NOL acquired in the HomeTown merger.
Human Capital Resources
At December 31, 2021, the Company employed 327 full-time persons and 44 part-time persons. In the opinion of the management of the Company, the relationship with employees of the Company and the Bank is good.
As a holding company for a community bank, the Company is a relationship-driven organization. A key aspect of the Company’s business strategy is for its senior officers to have primary contact with current and potential customers. The Company’s growth and development are in large part a result of these personalized relationships with the customer base. The success of the Company also often depends on its ability to hire and retain qualified banking officers. The Company’s senior officers have considerable experience in the banking industry and related financial services and are extremely valuable.
The Company’s senior officer compensation programs are designed to attract, retain, pay for performance, and motivate bankersthe leadership team, even during times of uncertainty, and include a mix of fixed and variable compensation with the abilityboth short- and long-term incentives used to generate strong business resultsdrive sustained growth and ensure the long-term successprofitability of the Company. The Company's compensation committeeprograms, levels, practices, and policies are consistent with the Company's values, culture, and mission. This section provides an overview and explanation of the Company’s board of directors has establishedmaterial information relevant to understanding the objectives, policies, and philosophy underlying the Company's executive compensation programs, that reflectfocusing on the named executive officers.
In addition, the Company’s strategic plan has dedicated objectives and tactics to ensure it recruits, retains, and develops a diverse and talented team, with a specific focus on enhancing diversity, equity, and inclusion.
Internet Access to Company Documents
The Company provides access to its SEC filings through a link on the Investor Relations page of the Company's website at www.amnb.com. Reports available at no cost include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are filed electronically with the SEC. The information on the Company's website is not incorporated into this Annual Report on Form 10-K or any other filing the Company makes with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
Executive Officers of the Company
The following table lists the executive officers of the Company, their ages,except for the compensation of the Chief Executive Officer, which is approved by the independent members of the Board of Directors. The Committee considers a variety of factors and their positions:
Named Executive Officers | Principal Position During 2023 |
|
Years of Service | ||
| Jeffrey V. Haley |
| President and Chief Executive Officer of the Company and the Bank | 27 | ||
| Jeffrey W. Farrar | Senior | ||||
|
|
| 5 | ||
| Edward C. Martin | Senior Executive Vice President and Chief Administrative Officer of the Company and the Bank and President of Virginia Banking | 8 | |||
| Rhonda P. Joyce |
| Executive Vice President and Co-Head of | 13 | ||
| Alexander Jung | Executive Vice President and Co-Head of | ||||
|
|
Institution Name | Ticker | State |
| Stock Yards Bancorp, Inc. | SYBT | KY |
| City Holding Co. | CHCO | WV |
| Community Trust Bancorp, Inc. | CTBI | KY |
| CNB Financial Corp. | CCNE | PA |
| Peoples Bancorp Inc. | PEBO | OH |
| SmartFinancial Inc. | SMBK | TN |
| HomeTrust Bancshares Inc. | HTBI | NC |
| Mid Penn Bancorp Inc. | MPB | PA |
| Primis Financial Corp. | FRST | VA |
| Summit Financial Group Inc. | SMMF | WV |
| Capstar Financial Holdings Inc. | CSTR | TN |
| First Community Bancshares, Inc. | FCBC | VA |
| Orrstown Financial Services | ORRF | PA |
| Southern First Bancshares, Inc. | SFST | SC |
| MetroCity Bankshares Inc. | MCBS | GA |
| Codorus Valley Bancorp Inc. | CVLY | PA |
| The Community Financial Corporation | TCFC | MD |
| C&F Financial Corporation | CFFI | VA |
CREDIT RISK
The Company's credit standards and its on-going credit assessment processes might not protect it from significant credit losses.
The Company takes credit risk by virtue of making loans and extending loan commitments and letters of credit. The Company manages credit risk through a program of underwriting standards, the review of certain credit decisions and an on-going process of assessment of the quality of the credit already extended. The Company's exposure to credit risk is managed through the use of consistent underwriting standards that emphasize local lending while avoiding highly leveraged transactions as well as excessive industry and other concentrations. The Company's credit administration function employs risk management techniques to help ensure that problem loans are promptly identified. While these procedures are designed to provide the Company with the information needed to implement policy adjustments where necessary and to take appropriate corrective actions, and have proven to be reasonably effective to date, there can be no assurance that such measures will be effective in avoiding future undue credit risk.
The Company's focus on lending to small to mid-sized community-based businesses may increase its credit risk.
Most of the Company's commercial business and commercial real estate loans are made to small business or middle market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. Additionally, these loans may increase concentration risk as to industry or collateral securing the loans. If general economic conditions in the market areas in which the Company operates negatively impact this important customer sector, the Company's results of operations and financial condition may be adversely affected. Moreover, a portion of these loans have been made by the Company in recent years, and the borrowers may not have experienced a complete business or economic cycle. The deterioration of the borrowers' businesses may hinder their ability to repay their loans with the Company, which could have a material adverse effect on the Company's financial condition and results of operations.
The Company depends on the accuracyPerformance Compensation and completeness of information about clients and counterparties, and its financial condition could be adversely affected if it relies on misleading information.
In deciding whether to extend credit or to enter into other transactions with clients and counterparties, the Company may rely on information furnished to it by or on behalf of clients and counterparties, including financial statements and other financial information, which the Company does not independently verify. The Company also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, the Company may assume that a customer's audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. The Company's financial condition and results of operations could be negatively impacted to the extent it relies on financial statements that do not comply with GAAP or are materially misleading.
The allowance for loan losses may not be adequate to cover actual losses.
In accordance with GAAP, an allowance for loan losses is maintained by the Company to provide for loan losses. The allowance for loan losses may not be adequate to cover actual credit losses, and future provisions for credit losses could materially and adversely affect operating results. The allowance for loan losses is based on prior experience, as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating, and other outside forces and conditions, including changes in interest rates, all of which are beyond the Company's control; and these losses may exceed current estimates. Federal bank regulatory agencies, as a part of their examination process, review the Company's loans and allowance for loan losses. While management believes that the allowance for loan losses is adequate to cover current losses, it cannot make assurances that it will not further increase the allowance for loan losses or that regulators will not require it to increase this allowance. Either of these occurrences could adversely affect earnings.
In addition, the adoption of Accounting Standards Update ("ASU") 2016-13, as amended, could result in a change in the amount of the allowance for loan losses as a result of changing from an "incurred loss" model, which encompasses allowances for current known and inherent losses within the portfolio, to an "expected loss" model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. As a smaller reporting company at the one-time evaluation date, the Company has elected to defer adoption of ASU 2016-13 until January 2023. Refer to Note 1 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of recent accounting pronouncements.
Nonperforming assets take significant time to resolve and adversely affect the Company's results of operations and financial condition.
The Company's nonperforming assets adversely affect its net income in various ways. The Company does not record interest income on nonaccrual loans, which adversely affects its income and increases credit administration costs. When the Company receives collateral through foreclosures and similar proceedings, it is required to mark the related asset to the then fair market value of the collateral less estimated selling costs, which may, and often does, result in a loss. An increase in the level of nonperforming assets also increases the Company's risk profile and may impact the capital levels regulators believe are appropriate in light of such risks. The Company utilizes various techniques such as workouts, restructurings, and loan sales to manage problem assets. Increases in or negative adjustments in the value of these problem assets, the underlying collateral, or in the borrowers' performance or financial condition, could adversely affect the Company's business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to the performance of their other responsibilities, including generation of new loans. There can be no assurance that the Company will avoid increases in nonperforming loans in the future.
A downturn in the local real estate market could materially and negatively affect the Company's business.
The Company offers a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity lines of credit, consumer and other loans. Many of these loans are secured by real estate (both residential and commercial) located in the Company's market area. A downturn in the real estate market in the areas in which the Company conducts its operations could negatively affect the Company's business because significant portions of its loans are secured by real estate. At December 31, 2021, the Company had approximately $1.9 billion in loans, of which approximately $1.6 billion (84.2%) were secured by real estate. The ability to recover on defaulted loans by selling the real estate collateral could then be diminished and the Company would be more likely to suffer losses.
Substantially all of the Company's real property collateral is located in its market area. If there is a decline in real estate values, especially in the Company's market area, the collateral for loans would deteriorate and provide significantly less security.
The Company relies upon independent appraisals to determine the value of the real estate which secures a significant portion of its loans, and the values indicated by such appraisals may not be realizable if the Company is forced to foreclose upon such loans.
A significant portion of the Company's loan portfolio consists of loans secured by real estate. The Company relies upon independent appraisers to estimate the value of such real estate. Appraisals are only estimates of value and the independent appraisers may make mistakes of fact or judgment which adversely affect the reliability of their appraisals. In addition, events occurring after the initial appraisal may cause the value of the real estate to increase or decrease. As a result of any of these factors, the real estate securing some of the Company's loans may be more or less valuable than anticipated at the time the loans were made. If a default occurs on a loan secured by real estate that is less valuable than originally estimated, the Company may not be able to recover the outstanding balance of the loan and will suffer a loss.
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company's net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Any substantial, unexpected, or prolonged change in market interest rates could have a material adverse effect on the Company's financial condition and results of operations.
The expected replacement or discontinuationterms of the London Interbank Offered Rate ("LIBOR") as a benchmark interest rate and a transition to an alternative reference interest rate could present operational problems and result in market disruption.
The administrator of LIBOR has announced its intention to extend the publication of most tenors of LIBOR for U.S. dollars through June 30, 2023 and ceased publishing other LIBOR tenors on December 31, 2021. Management cannot predict whether or when LIBOR will actually cease to be available, whether the Secured Overnight Funding Rate ("SOFR"), will become the market benchmark in its place or what impact such a transition may have on the Company’s business, financial condition and results of operations.
The FRB, based on the recommendations of the Federal Reserve Bank of New York’s Alternative Reference Rate Committee, has begun publishing SOFR, which is intended to replace LIBOR, and has encouraged banks to transition away from LIBOR as soon as practicable. Although SOFR appears to be the preferred replacement rate for LIBOR, it is unclear if other benchmarks may emerge or if other rates will be adopted outside of the United States. The replacement of LIBOR also may result in economic mismatches between different categories of instruments that now consistently rely on the LIBOR benchmark. Markets are slowly developing in response to these new rates, and questions around liquidity in these rates and how to appropriately adjust these rates to eliminate any economic value transfer at the time of transition remain a significant concern.
The Company has an insignificant number of loans, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition should not change the Company's market risk profiles but will require changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with customers could adversely impact the Company's reputation. Although the Company is currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have an adverse effect on the Company's business, financial condition and results of operations.
LIQUIDITY RISK
The Company may need to raise additional capital in the future to continue to grow, but may be unable to obtain additional capital on favorable terms or at all.
Federal and state banking regulators and safe and sound banking practices require the Company to maintain adequate levels of capital to support its operations. The Company's business strategy calls for it to continue to grow in its existing banking markets (internally and through additional offices) and to expand into new markets as appropriate opportunities arise. Continued growth in the Company's earning assets, which may result from internal expansion and new branch offices, at rates in excess of the rate at which its capital is increased through retained earnings, will reduce the Company's capital ratios. If the Company's capital ratios fell below "well capitalized" levels, the FDIC deposit insurance assessment rate would increase until capital was restored and maintained at a "well capitalized" level. A higher assessment rate would cause an increase in the assessments the Company pays for federal deposit insurance, which would have an adverse effect on the Company's operating results.
Management of the Company believes that its current and projected capital position is sufficient to maintain capital ratios significantly in excess of regulatory requirements for the next several years and allow the Company flexibility in the timing of any possible future efforts to raise additional capital. However, if, in the future, the Company needs to increase its capital to fund additional growth or satisfy regulatory requirements, its ability to raise that additional capital will depend on conditions at that time in the capital markets, economic conditions, the Company's financial performance and condition, and other factors, many of which are outside its control. There is no assurance that the Company will be able to raise additional capital on terms favorable to it or at all. Any future inability to raise additional capital on terms acceptable to the Company may have a material adverse effect on its ability to expand operations, and on its financial condition, results of operations and future prospects.
TECHNOLOGY RISK
The Company's operations may be adversely affected by cybersecurity risks.
The Company relies heavily on communications and information systems to conduct business. Any failure, interruption, or breach in security of these systems could result in failures or disruptions in the Company's internet banking, deposit, loan, and other systems. While the Company has policies and procedures designed to prevent or limit the effect of such failure, interruption, or security breach of the Company's information systems, there can be no assurance that they will not occur or, if they do occur, that they will be adequately addressed. Further, to access the Company's products and services, its customers may use computers and mobile devices that are beyond the Company's security control systems. The occurrence of any failure, interruption or security breach of the Company's communications and information systems could damage the Company's reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability. Additionally, the Company outsources its data processing to a third party. If the Company's third party provider encounters difficulties or if the Company has difficulty in communicating with such third party, it will significantly affect the Company's ability to adequately process and account for customer transactions, which would significantly affect its business operations.
In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information of its customers and employees in systems and on networks. The secure processing, maintenance and use of this information is critical to operations and the Company's business strategy. The Company has invested in accepted technologies, and annually reviews processes and practices that are designed to protect its networks, computers and data from damage or unauthorized access. Despite these security measures, the Company's computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach of any kind could compromise systems, and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to the Company's reputation, which could adversely affect the Company's business. Furthermore, as cyberattacks continue to evolve and increase, the Company may be required to expend significant additional resources to modify or enhance its protective measures, or to investigate and remediate any identified information security vulnerabilities.
Multiple major U.S. retailers, financial institutions, government agencies and departments have experienced data systems incursions reportedly resulting in the thefts of credit and debit card information, online account information, and other financial data of tens of millions of individuals and customers. Retailer incursions affect cards issued and deposit accounts maintained by many financial institutions, including the Bank. Although neither the Company's nor the Bank's systems are breached in government or retailer incursions, these events can cause the Bank to reissue a significant number of cards and take other costly steps to avoid significant theft loss to the Bank and its customers. In some cases, the Bank may be required to reimburse customers for the losses they incur. Other possible points of intrusion or disruption not within the Company's nor the Bank's control include internet service providers, electronic mail portal providers, social media portals, distant-server (so called "cloud") service providers, electronic data security providers, personal computers and mobile phones, telecommunications companies, and mobile phone manufacturers.
Consumers may increasingly decide not to use the Bank to complete their financial transactions because of technological and other changes, which would have a material adverse impact on the Company's financial condition and operations.
Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. In particular, the activity of fintech companies has grown significantly over recent years and is expected to continue to grow. Fintech companies have and may continue to offer bank or bank-like products and some fintech companies have applied for bank charters. In addition, other fintech companies have partnered with existing banks to allow them to offer deposit products to their customers. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as "disintermediation," could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on the Company's financial condition and results of operations.
OPERATIONAL RISK
The Company is dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect the Company's operations and prospects.
The Company is a relationship-driven organization. A key aspect of the Company's business strategy is for its senior officers to have primary contact with current and potential customers. The Company's growth and development are in large part a result of these personalized relationships with the customer base. The success of the Company also often depends on its ability to hire and retain qualified banking officers.
The Company's senior officers have considerable experience in the banking industry and related financial services and are extremely valuable and would be difficult to replace. The loss of the services of these officers could have a material adverse effect upon future prospects. Although the Company has entered into employment contracts with certain of its senior executive officers, and purchased key man life insurance policies to mitigate the risk of an unforeseen departure or death of certain of the senior executive officers, it cannot offer any assurance that they and other key employees will remain employed by the Company. The unexpected loss of services of one or more of these key employees could have a material adverse effect on operations and possibly result in reduced revenues.
Failure to maintain effective systems of internal and disclosure control could have a material adverse effect on the Company's results of operation and financial condition.
Effective internal and disclosure controls are necessary for the Company to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. If the Company cannot provide reliable financial reports or prevent fraud, its reputation and operating results would be harmed. As part of the Company's ongoing monitoring of internal control, it may discover material weaknesses or significant deficiencies in its internal control that require remediation. A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis.
The Company has in the past discovered, and may in the future discover, areas of its internal controls that need improvement. Even so, the Company is continuing to work to improve its internal controls. The Company cannot be certain that these measures will ensure that it implements and maintains adequate controls over its financial processes and reporting in the future. Any failure to maintain effective controls or to timely effect any necessary improvement of the Company's internal and disclosure controls could, among other things, result in losses from fraud or error, harm the Company's reputation or cause investors to lose confidence in the Company's reported financial information, all of which could have a material adverse effect on the Company's results of operation and financial condition.
The carrying value of goodwill may be adversely impacted.
When the Company completes an acquisition, generally goodwill is recorded on the date of acquisition as an asset. Current accounting guidance requires for goodwill to be tested for impairment, which the Company performs an impairment analysis at least annually, rather than amortizing it over a period of time. A significant adverse change in expected future cash flows or sustained adverse change in the Company's common stock could require the asset to become impaired. If impaired, the Company would incur a non-cash charge to earnings that would have a significant impact on the results of operations. The carrying value of goodwill was approximately $85.0 million at December 31, 2021.
The Company relies on other companies to provide key components of the Company's business infrastructure.
Third parties provide key components of the Company's business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, Internet connections and network access. While the Company has selected these third party vendors carefully, it does not control their actions. Any problem caused by these third parties, including those resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, cybersecurity breaches, failure of a vendor to provide services for any reason or poor performance of services, could adversely affect the Company's ability to deliver products and services to its customers and otherwise conduct its business. Financial or operational difficulties of a third party vendor could also hurt the Company's operations if those difficulties interface with the vendor's ability to serve the Company. Replacing these third party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to the Company's business operations.
LEGAL, REGULATORY AND COMPLIANCE RISK
The Company is subject to extensive regulation which could adversely affect its business.
The Company's operations as a publicly traded corporation, a bank holding company, and a parent company to an insured depository institution are subject to extensive regulation by federal, state, and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of the Company's operations. Because the Company's business is highly regulated, the laws, rules, and regulations applicable to it are subject to frequent and sometimes extensive change. Such changes could include higher capital requirements, increased insurance premiums, increased compliance costs, reductions of non-interest income and limitations on services that can be provided. Actions by regulatory agencies or significant litigation against the Company could cause it to devote significant time and resources to defend itself and may lead to liability or penalties that materially affect the Company and its shareholders. Any future changes in the laws, rules or regulations applicable to the Company may negatively affect the Company's business and results of operations.
Regulatory capital standards may have an adverse effect on the Company's profitability, lending, and ability to pay dividends on the Company's securities.
The Company is subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital that the Company and the Bank must maintain. From time to time, regulators implement changes to these regulatory capital adequacy guidelines. If the Company fails to meet these minimum capital guidelines and/or other regulatory requirements, its financial condition would be materially and adversely affected. The Basel III Capital Rules require bank holding companies and their subsidiaries to maintain significantly more capital as a result of higher required capital levels and more demanding regulatory capital risk weightings and calculations. The Bank must also comply with the capital requirements set forth in the "prompt corrective action" regulations pursuant to Section 38 of the FDIA. Satisfying capital requirements may require the Company to limit its banking operations, retain net income or reduce dividends to improve regulatory capital levels, which could negatively affect its business, financial condition and results of operations.
Regulations issued by the CFPB could adversely impact earnings due to, among other things, increased compliance costs or costs due to noncompliance.
The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers. The CFPB has also been directed to write rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. For example, the CFPB has issued a final rule requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms, or to originate "qualified mortgages" that meet specific requirements with respect to terms, pricing and fees. The rule also contains additional disclosure requirements at mortgage loan origination and in monthly statements. The requirements under the CFPB's regulations and policies could limit the Company's ability to make certain types of loans or loans to certain borrowers, or could make it more expensive and/or time consuming to make these loans, which could adversely impact the Company's profitability.
Changes in accounting standards could impact reported earnings.
From time to time, with increasing frequency, there are changes in the financial accounting and reporting standards that govern the preparation of the Company's financial statements. These changes can materially impact how the Company records and reports its financial condition and results of operations. In some instances, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. Refer to Note 1 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of recent accounting pronouncements.
Current and proposed regulation addressing consumer privacy and data use and security could increase the Company's costs and impact its reputation.
The Company is subject to a number of laws concerning consumer privacy and data use and security, including information safeguard rules under the Gramm-Leach-Bliley Act. These rules require that financial institutions develop, implement and maintain a written, comprehensive information securityincentive program containing safeguards that are appropriate to the financial institution's size and complexity, the nature and scope of the financial institution's activities, and the sensitivity of any customer information at issue. The United States has experienced a heightened legislative and regulatory focus on privacy and data security, including requiring consumer notification in the event of a data breach. In addition, most states have enacted security breach legislation requiring varying levels of consumer notification in the event of certain types of security breaches. New regulations in these areas may increase the Company's compliance costs, which could negatively impact earnings. In addition, failure to comply with the privacy and data use and security laws and regulations to which the Company is subject, including by reason of inadvertent disclosure of confidential information, could result in fines, sanctions, penalties or other adverse consequences and loss of consumer confidence, which could materially adversely affect the Company's results of operations, overall business, and reputation.
The Company is subject to claims and litigation pertaining to fiduciary responsibility.
From time to time, customers make claims and take legal action pertaining to the performance of the Company's fiduciary responsibilities. Whether customer claims and legal action related to the performance of the Company's fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company, they may result in significant financial liability and/or adversely affect the market perception of the Company and its products and services, as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Company's business, which, in turn, could have a material adverse effect on the Company's financial condition and results of operations.
Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to environmental, social and governance ("ESG") practices may impose additional costs on the Company or expose it to new or additional risks.
Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to ESG practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to climate risk, hiring practices, the diversity of the work force, and racial and social justice issues. Increased ESG related compliance costs could result in increases to the Company’s overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact the Company’s reputation, ability to do business with certain partners, and the Company’s stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.
STRATEGIC RISK
The Company faces strong competition from financial services companies and other companies that offer banking and other financial services, which could negatively affect the Company's business.
The Company encounters substantial competition from other financial institutions in its market area. Ultimately, the Company may not be able to compete successfully against current and future competitors. Many competitors offer the same banking services that the Company offers. These competitors include national, regional, and community banks. The Company also faces competition from many other types of financial institutions, including finance companies, mutual and money market fund providers, financial technology ("fintech") companies, brokerage firms, insurance companies, credit unions, financial subsidiaries of certain industrial corporations, and mortgage companies. In particular, competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and ATMs and conduct extensive promotional and advertising campaigns. Increased competition may result in reduced business for the Company.
Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers. These institutions also may have differing pricing and underwriting standards, which may adversely affect the Company through the loss of business or causing a misalignment in the Company's risk-return relationship. Areas of competition include interest rates for loans and deposits, efforts to obtain loans and deposits, and range and quality of products and services provided, including new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic financial services markets as technological advances enable more companies to provide financial services. If the Company is unable to attract and retain banking customers, it may be unable to continue to grow loan and deposit portfolios and its results of operations and financial condition may be adversely affected.
The inability of the Company to successfully manage its growth or implement its growth strategy may adversely affect the Company's results of operations and financial condition.
The Company may not be able to successfully implement its growth strategy if it is unable to identify attractive markets, locations or opportunities to expand in the future. In addition, the ability to manage growth successfully depends on whether the Company can maintain adequate capital levels, cost controls and asset quality, and successfully integrate any businesses acquired into the Company.
As the Company continues to implement its growth strategy by opening new branches or acquiring branches or banks, it expects to incur increased personnel, occupancy and other operating expenses. In the case of new branches, the Company must absorb those higher expenses while it begins to generate new deposits; there is also further time lag involved in redeploying new deposits into attractively priced loans and other higher yielding earning assets. The Company's plans to expand could depress earnings in the short run, even if it efficiently executes a growth strategy leading to long-term financial benefits.
Difficulties in combining the operations of acquired entities with the Company's own operations may prevent the Company from achieving the expected benefits from acquisitions.
The Company may not be able to achieve fully the strategic objectives and operating efficiencies expected in an acquisition. Inherent uncertainties exist in integrating the operations of an acquired entity. In addition, the markets and industries in which the Company and its potential acquisition targets operate are highly competitive. The Company may lose customers or the customers of acquired entities as a result of an acquisition; the Company may lose key personnel, either from the acquired entity or from itself; and the Company may not be able to control the incremental increase in noninterest expense arising from an acquisition in a manner that improves its overall operating efficiencies. These factors could contribute to the Company not achieving the expected benefits from its acquisitions within desired time frames, if at all. Future business acquisitions could be material to the Company and it may issue additional shares of common stock to pay for those acquisitions, which would dilute current shareholders' ownership interests. Acquisitions also could require the Company to use substantial cash or other liquid assets or to incur debt; the Company could therefore become more susceptible to economic downturns and competitive pressures.
RISKS RELATING TO OUR SECURITIES
While the Company’s common stock is currently traded on the Nasdaq Global Select Market, it has less liquidity than stocks for larger companies quoted on a national securities exchange.
The trading volume in the Company’s common stock on the Nasdaq Global Select Market has been relatively low when compared with larger companies listed on the Nasdaq Global Select Market or other stock exchanges. There is no assurance that a more active and liquid trading market for the common stock will exist in the future. Consequently, shareholders may not be able to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares. In addition, the Company cannot predict the effect, if any, that future sales of the Company’s common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of the common stock.
Economic and other conditions may cause volatility in the price of the Company’s common stock.
In the current economic environment, the prices of publicly traded stocks in the financial services sector have been volatile. However, even in a more stable economic environment the price of the Company’s common stock can be affected by a variety of factors such as expected or actual results of operations, changes in analysts’ recommendations or projections, announcements of developments related to its businesses, operating and stock performance of other companies deemed to be peers, news or expectations based on the performance of others in the financial services industry, and expected impacts of a changing regulatory environment. These factors not only impact the price of the Company’s common stock but could also affect the liquidity of the stock given the Company’s size, geographical footprint, and industry. The price for shares of the Company’s common stock may fluctuate significantly in the future, and these fluctuations may be unrelated to the Company’s performance. General market price declines or market volatility in the future could adversely affect the price for shares of the Company’s common stock, and the current market price of such shares may not be indicative of future market prices.
Future issuances of the Company’s common stock could adversely affect the market price of the common stock and could be dilutive.
The Company is not restricted from issuing additional shares of common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, shares of common stock. Issuances of a substantial number of shares of common stock, or the expectation that such issuances might occur, including in connection with acquisitions by the Company, could materially adversely affect the market price of the shares of the common stock and could be dilutive to shareholders. Because the Company’s decision to issue common stock in the future will depend on market conditions and other factors, it cannot predict or estimate the amount, timing or nature of possible future issuances of its common stock. Accordingly, the Company’s shareholders bear the risk that future issuances will reduce the market price of the common stock and dilute their stock holdings in the Company.
The primary source of the Company’s income from which it pays cash dividends is the receipt of dividends from its subsidiary bank.
The availability of dividends from the Company is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the OCC could assert that payment of dividends or other payments is an unsafe or unsound practice. In the event the Bank was unable to pay dividends to the Company, or be limited in the payment of such dividends, the Company would likely have to reduce or stop paying common stock dividends. The Company’s reduction, limitation. or failure to pay such dividends on its common stock could have a material adverse effect on the market price of the common stock.
The Company’s governing documents and Virginia law contain anti-takeover provisions that could negatively impact its shareholders.
The Company’s Articles of Incorporation and Bylaws and the Virginia Stock Corporation Act contain certain provisions designed to enhance the ability of the Company’s Board of Directors to deal with attempts to acquire control of the Company. These provisions and the ability to set the voting rights, preferences and other terms of any series of preferred stock that may be issued, may be deemed to have an anti-takeover effect and may discourage takeovers (which certain shareholders may deem to be in their best interest). To the extent that such takeover attempts are discouraged, temporary fluctuations in the market price of the Company’s common stock resulting from actual or rumored takeover attempts may be inhibited. These provisions also could discourage or make more difficult a merger, tender offer, or proxy contest, even though such transactions may be favorable to the interests of shareholders, and could potentially adversely affect the market price of the Company’s common stock.
GENERAL RISK
The COVID-19 pandemic could adversely affect the Company and the adverse impacts on its business, financial position, and operations could be significant. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted.
The COVID-19 pandemic has created global economic disruptions and disruptions to the lives of people around the world. Governments, businesses, and the public have taken and continue to take actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects continue to evolve, change and are not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged time period or result in sustained economic stress or recession, such effects could have a material adverse impact on the Company in terms of credit quality, collateral values, ability of customers to repay loans, product demand, funding, operations, interest rate risk and human capital.
In March 2020, the outbreak of COVID-19 was recognized as a global pandemic. The spread of the virus has created a global health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally. Governmental efforts in response to the outbreak in 2020 and 2021 have affected business operations and consumer activity. The Company responded during the periods with measures to ensure employee and customer safety, maintain customer service levels, and continue operations while complying with applicable laws and regulations. Mid-2020, the Company implemented a business continuity plan and protocols to continue to maintain a high level of care for its employees, customers and communities. The Company also transitioned a majority of its non-branch employees to working remotely and assisting customers by appointment only in branches or directing them to drive-thrus or ATMs. It cancelled all business travel, and has held all Company meetings through virtual platforms. In the fall of 2021, branches were re-opened with safety protocols in place but were from time to time reverted back to appointment only or drive-thru only as Covid-19 circulated. The Company continues to maintain remote work options for a portion of its employees, continues to limit non-essential business travel and continuesto hold meetings virtually. There is no guarantee these actions will be sufficient to successfully mitigate the risks presented by the COVID-19 pandemic and additional actions may be required. Future actions deemed necessary by local, state or national leaders could hinder its ability to operate going forward. Its business operations may be disrupted if key personnel or significant portions of the Company's employees are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. The Company's ability to serve its customers could be impacted if actions taken by vendors or business partners are unable to continue providing services the Company depends on.
COVID-19 continues to be a threat to the world. The extent, severity and duration of the current and future actions are unprecedented and, until normal economic conditions resume, the Company is unable to accurately predict or measure the effects. For this reason, the extent to which the COVID-19 pandemic affects its business, operations and financial conditions, as well as its regulatory capital and liquidity ratios is highly uncertain and unpredictable and depends on, among other things, new information that may emerge from the actions discussed above to combat the threats posed by the virus. If the pandemic is prolonged, the adverse impact on the markets served and on the Company's business, operations and financial condition could deepen.
Changes in economic conditions could materially and negatively affect the Company's business.
The Company's business is directly impacted by economic, political, and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies, and inflation, all of which are beyond the Company's control. A deterioration in economic conditions, whether caused by global, national or local events (including the COVID-19 pandemic, rising wages in a tight labor market, geopolitical instability and supply chain complications), especially within the Company's market area, could result in potentially negative material consequences such as the following, among others: loan delinquencies increasing; problem assets and foreclosures increasing; demand for products and services decreasing; low cost or noninterest bearing deposits decreasing; and collateral for loans, especially real estate, declining in value, in turn reducing customers' borrowing power, and reducing the value of assets and collateral associated with existing loans. Each of these consequences may have a material adverse effect on the Company's financial condition and results of operations.
Wealth management income is a major source of non-interest income for the Company. Trust and brokerage fee revenue is largely dependent on the fair market value of assets under management and on trading volumes in the brokerage business. General economic conditions and their subsequent effect on the securities markets tend to act in correlation. When general economic conditions deteriorate, securities markets generally decline in value, and the Company's trust and brokerage fee revenue is negatively impacted as asset values and trading volumes decrease.
The Company's exposure to operational, technological and organizational risk may adversely affect the Company.
The Company is exposed to many types of operational risks, including reputation, legal, and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, clerical or record-keeping errors, and errors resulting from faulty or disabled computer or telecommunications systems.
Negative public opinion can result from the actual or alleged conduct in any number of activities, including lending practices, corporate governance, and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect the Company's ability to attract and retain customers and can expose it to litigation and regulatory action.
Certain errors may be repeated or compounded before they are discovered and successfully rectified. The Company's necessary dependence upon automated systems to record and process its transactions may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. The Company may also be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. The Company is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as is the Company) and to the risk that the Company's (or its vendors') business continuity and data security systems prove to be inadequate.
The Company's risk-management framework may not be effective in mitigating risk and loss.
The Company maintains an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that it faces. These risks include, but are not limited to: strategic, interest-rate, credit, liquidity, operations, pricing, reputation, compliance, litigation and cybersecurity. While the Company assesses and improves this program on an ongoing basis, there can be no assurance that its approach and framework for risk management and related controls will effectively mitigate all risk and limit losses in its business. If conditions or circumstances arise that expose flaws or gaps in the Company's risk-management program, or if its controls break down, the Company's results of operations and financial condition may be adversely affected.
Negative perception of the Company through media may adversely affect the Company's reputation and business.
The Company's reputation is critical to the success of its business. The Company believes that its brand image has been well received by customers, reflecting the fact that the brand image, like the Company’s business, is based in part on trust and confidence. The Company’s reputation and brand image could be negatively affected by rapid and widespread distribution of publicity through social and traditional media channels. The Company’s reputation could also be affected by the Company’s association with clients affected negatively through social and traditional media distribution, or other third parties, or by circumstances outside of the Company’s control. Negative publicity, whether deserved or undeserved, could affect the Company’s ability to attract or retain customers, or cause the Company to incur additional liabilities or costs, or result in additional regulatory scrutiny.
Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact the Company’s business.
The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment. As a result, political and social attention to the issue of climate change has increased. Federal and state legislatures and regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change. The federal banking agencies, including the OCC, have emphasized that climate-related risks are faced by banking organizations of all types and sizes and are in the process of enhancing supervisory expectations regarding banks’ risk management practices. In December 2021, the OCC published proposed principles for climate risk management by banking organizations with more than $100 billion in assets. The OCC also has appointed its first ever Climate Change Risk Officer and established an internal climate risk implementation committee in order to assist with these initiatives and to support the agency’s efforts to enhance its supervision of climate change risk management. Similar and even more expansive initiatives are expected, including potentially increasing supervisory expectations with respect to banks’ risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change. To the extent that these initiatives lead to the promulgation of new regulations or supervisory guidance applicable to the Company, the Company would likely experience increased compliance costs and other compliance-related risks.
The lack of empirical data surrounding the credit and other financial risks posed by climate change render it impossible to predict how specifically climate change may impact the Company’s financial condition and results of operations; however, the physical effects of climate change may also directly impact the Company. Specifically, unpredictable and more frequent weather disasters may adversely impact the value of real property securing the loans in the Bank’s loan portfolio. Additionally, if insurance obtained by borrowers is insufficient to cover any losses sustained to the collateral, or if insurance coverage is otherwise unavailable to borrowers, the collateral securing loans may be negatively impacted by climate change, which could impact the Company’s financial condition and results of operations. Further, the effects of climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on customers and impact the communities in which the Company operates. Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on the Company’s financial condition and results of operations.
Severe weather, natural disasters, acts of war or terrorism, geopolitical instability, public health issues, and other external events could significantly impact the Company's business.
Severe weather, natural disasters, acts of war or terrorism, geopolitical instability, public health issues, and other adverse external events could have a significant impact on the Company's ability to conduct business. In addition, such events could affect the stability of the Company's deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue, and/or cause the Company to incur additional expenses. The occurrence of any such event in the future could have a material adverse effect on the Company's business, which, in turn, could have a material adverse effect on its financial condition and results of operations.
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.
As of December 31, 2021, the Company maintained 26 banking offices. The Company's Virginia banking offices are located in the cities of Danville, Lynchburg, Martinsville, Roanoke, and Salem and in the counties of Campbell, Franklin, Halifax, Henry, Montgomery, Pittsylvania and Roanoke. In North Carolina, the Company's banking offices are located in the cities of Burlington, Graham, Greensboro, Mebane, Raleigh, Winston-Salem, and Yanceyville, which are within the counties of Alamance, Caswell, Forsyth, Guilford, and Wake. The Company also operates one loan production office.
The principal executive offices of the Company are located at 628 Main Street in the business district of Danville, Virginia. This building, owned by the Company, has three floors totaling approximately 27,000 square feet.
The Company owns a building located at 103 Tower Drive in Danville, Virginia. This three-story facility serves as an operations center.
The Company has an office at 445 Mount Cross Road in Danville, Virginia, where it consolidated two banking offices in January 2009 and gained additional administrative space.
The Company leases certain space located at 202 S. Jefferson Street, Roanoke, Virginia as a result of the merger with HomeTown. This office serves as the Virginia banking headquarters and the center for its corporate credit function.
The Company leases an office at 703 Green Valley Road in Greensboro, North Carolina. This building serves as the head office for the Company's North Carolina banking headquarters.
The Company owns 20 other officesnamed executive officers, the officers had the opportunity to earn incentive payments for a total2023 performance, with the targeted payout for the Chief Executive Officer initially set at amount equal to 60% of 23 owned buildings. There are no mortgages or liens against any of the properties owned by the Company. The Company operates 37 ATMs on owned or leased facilities. The Company leases five other offices for a total of seven leased office locations and leases one storage warehouse. Management believes that upon expiration of each of the Company's leases it will be able to extend the lease on satisfactory terms or relocate to another acceptable location.
In the ordinary course of operations, the Companyhis base salary, and the Bank are parties to various legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition, or results of operations of the Company.
ITEM 4 – MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5 – MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market and Dividend Information
The Company's common stock is traded on the Nasdaq Global Select Market under the symbol "AMNB." At December 31, 2021, the Company had 4,104 shareholders of record.
The Company paid quarterly cash dividends of $0.27 per sharetargeted payout for each of the first three quartersother named executive officers initially set at an amount equal to 50% of 2021their respective base salaries. For 2023, for the Chief Executive Officer and $0.28each of the other named executive officers targeted incentive payment was based primarily on the achievement of a singular corporate goal of core earnings per share for("Core EPS"), defined as net income per diluted share, per generally accepted accounting principles, less the fourth quarterimpact of 2021.fair value and merger related adjustments. The Company's future dividend policy is subject toachievement of certain individual non-financial operational goals was also considered. Incentive payments are normally made in a combination of cash and restricted stock grants, with the discretionpercentage mix established by the Committee in its sole discretion. The participants have the option of taking a larger percentage of the Boards of Directors ofbonus payment in restricted stock and less in cash.
Stock Compensation Plans
The Company's 2018 Stock Incentive Plan was adopted by the Board of Directors of the Company on February 20, 2018 and approved by shareholders on May 15, 2018 at the Company's 2018 Annual Meeting of Shareholders. The plan and stock compensation in general are discussed in Note 13 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K.
The following table summarizes information, as of December 31, 2021, relating to the Company's equity based compensation plans, pursuant to which grants of options to acquire shares of common stock have been and may be granted from time to time.
December 31, 2021 | ||||||||||||
| Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Per Share Exercise Price of Outstanding Options, Warrants and Rights | Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans | ||||||||||
Equity compensation plans approved by shareholders | 4,863 | $ | 16.63 | 525,811 | ||||||||
Equity compensation plans not approved by shareholders | — | — | — | |||||||||
Total | 4,863 | $ | 16.63 | 525,811 | ||||||||
Stock Repurchase Program
Period Beginning on First Day of Month Ended | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs | ||||
October 31, 2021 | — | $ — | — | 102,001 | ||||
November 30, 2021 | 5,656 | 37.24 | 5,656 | 96,345 | ||||
December 31, 2021 | 12,284 | 37.09 | 12,284 | — | ||||
Total | 17,940 | $ 37.14 | 17,940 |
Comparative Stock Performance
The following graph compares the Company's cumulative total return to its shareholders with the returns of two indexes for the five-year period ended December 31, 2021. The cumulative total return was calculated taking into consideration changes in stock price, cash dividends, stock dividends, and stock splits since December 31, 2016. The indexes are the Nasdaq Composite Index and the SNL Bank $1 Billion - $5 Billion Index, which includes bank holding companies with assets of $1 billion to $5 billion and is published by SNL Financial, LC.
Period Ending | ||||||||||||||||||||||||
Index | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | ||||||||||||||||||
American National Bankshares Inc. | $ | 100.00 | $ | 112.95 | $ | 88.77 | $ | 123.44 | $ | 85.15 | $ | 126.32 | ||||||||||||
Nasdaq Composite | 100.00 | 129.64 | 125.96 | 172.18 | 249.51 | 304.85 | ||||||||||||||||||
SNL Bank $1B-$5B | 100.00 | 104.33 | 87.06 | 109.22 | 99.19 | 138.09 | ||||||||||||||||||
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The main purpose of this discussion is to focus on significant changes inreset both the financial conditiontargets and results of operations of the Company during the past three years. The discussion and analysis are intended to supplement and highlight information contained in the accompanying Consolidated Financial Statements and the selected financial data presented elsewhere in this Annual Report on Form 10-K.
RECLASSIFICATION
In certain circumstances, reclassifications have been made to prior period information to conform to the 2021 presentation. There were no material reclassifications.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies followed by the Company conform with GAAP and to general practices within the banking industry. The Company's critical accounting policies, which are summarized below, relate to (1) the allowancepayout ratios for loan losses, (2) mergers and acquisitions, (3) acquired loans with specific credit-related deterioration, (4) goodwill and intangible assets, (5) deferred tax assets and liabilities, and (6) other-than-temporary impairment of securities. A summary of the Company's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements.
The financial information contained within the Company's financial statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset, or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method.
Allowance for Loan Losses
The purpose of the allowance for loan losses ("ALLL") is to provide for probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance.
The goal of the Company is to maintain an appropriate, systematic, and consistently applied process to determine the amounts of the ALLL and the provision for loan loss expense.
The Company uses certain practices to manage its credit risk. These practices include (1) appropriate lending limits for loanthen named executive officers (2) a loan approval process, (3) careful underwriting of loan requests, including analysis of borrowers, cash flows, collateral, and market risks, (4) regular monitoring of the portfolio, including diversification by type and geography, (5) review of loans by the Loan Review department, which operates independently of loan production (the Loan Review function consists of a co-sourced arrangement using both internal personnel and external vendors to provide the Company with a more robust review function of the loan portfolio), (6) regular meetings of the Credit Committee to discuss portfolio and policy changes and make decisions on large or unusual loan requests, and (7) regular meetings of the Asset Quality Committee which reviews the status of individual loans.
Risk grades are assigned as part of the loan origination process. From time to time, risk grades may be modified as warranted by the facts and circumstances surrounding the credit.
Calculation and analysis of the ALLL is prepared quarterly by the Finance Department with input from the Credit Department. The Company's Credit Committee, Risk and Compliance Committee, Audit Committee, and the Board of Directors review the allowance for adequacy.
The Company's ALLL has two basic components: the formula allowance and the specific allowance. Each of these components is determined based upon estimates and judgments.
The formula allowance uses historical loss experience as an indicator of future losses, along with various qualitative factors, including levels and trends in delinquencies, nonaccrual loans, charge-offs and recoveries, trends in volume and terms of loans, effects of changes in underwriting standards, experience of lending staff, economic conditions, portfolio concentrations, regulatory, legal, competition, quality of loan review system, and value of underlying collateral. In the formula allowance for commercial and commercial real estate loans, the historical loss rate is combined with the qualitative factors, resulting in an adjusted loss factor for each risk-grade category of loans. The period-end balances for each loan risk-grade category are multiplied by the adjusted loss factor. Allowance calculations for residential real estate and consumer loans are calculated based on historical losses for each product category without regard to risk grade. This loss rate is combined with qualitative factors resulting in an adjusted loss factor for each product category.
The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified impaired loans. These include:
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The use of these computed values is inherently subjective and actual losses could be greater or less than the estimates.
No single statistic, formula, or measurement determines the adequacy of the allowance. Management makes subjective and complex judgments about matters that are inherently uncertain, and different amounts would be reported under different conditions or using different assumptions. For analytical purposes, management allocates a portion of the allowance to specific loan categories and specific loans. However, the entire allowance is used to absorb credit losses inherent in the loan portfolio, including identified and unidentified losses.
The relationships and ratios used in calculating the allowance, including the qualitative factors, may change from period to period as facts and circumstances evolve. Furthermore, management cannot provide assurance that in any particular period the Bank will not have sizable credit losses in relation to the amount reserved. Management may find it necessary to significantly adjust the allowance, considering current factors at the time.
Mergers and Acquisitions
Business combinations are accounted for under the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805, Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company will rely on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques. Under the acquisition method of accounting, the Company will identify the acquirer and the closing date and apply applicable recognition principles and conditions.
Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples of costs to the Company include systems conversions, integration planning, consultants, and advertising costs. The Company will account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities will be recognized in accordance with other applicable GAAP. These acquisition-related costs have been and will be included within the consolidated statements of income classified within the noninterest expense caption.
Acquired Loans with Specific Credit-Related Deterioration
Acquired loans with specific credit deterioration are accounted for by the Company in accordance with FASB ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality. Certain acquired loans, those for which specific credit-related deterioration since origination is identified, are recorded at the amount paid, such that there is no carryover of the seller's allowance for loan losses. Income recognition on these loans is based on a reasonable expectation aboutrevised forecast for the timing and amount of cash flows to be collected.
Goodwill and Intangible Assets
The Company follows ASC 350, Goodwill and Other Intangible Assets, which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. Goodwill resulting from business combinations prior to January 1, 2009 represents the excessremainder of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed.year. The Company records as goodwill the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Impairment testing is performed annually, as well as when an event triggering impairment may have occurred. The Company performs its annual analysis on June 30 of each fiscal year. No indicators of impairment were notedtargeted payout for the years ended December 31, 2021, 2020 or 2019. Intangible assets with definite useful lives are amortizing over their estimated useful lives of 5 to 10 years. Goodwill is the only intangible asset with an indefinite life on the Company's consolidated balance sheets.
Deferred Tax Assets and Liabilities
The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized. "More likely than not" is defined as greater than a 50% chance. Management considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed.
Other-than-temporary Impairment of 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 (1) the Company intends to sell the security or (2) 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 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 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 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.
NON-GAAP PRESENTATIONS
Non-GAAP presentations are provided because the Company believes these may be valuable to investors. These include (1) the calculation of the efficiency ratio, (2) the analysis of net interest income presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets, (3) return on average tangible common equity, (4) tangible common equity to tangible assets ratio, and (5) tangible book value per share.
The efficiency ratio is calculated by dividing noninterest expense excluding (1) gains or losses on the sale of other real estate owned ("OREO"), (2) core deposit intangible amortization and (3) merger related expense by net interest income including tax equivalent income on nontaxable loans and securities and noninterest income and excluding (x) gains or losses on securities and (y) gains or losses on sale or disposal of premises and equipment. The efficiency ratio for 2021, 2020, and 2019 was 51.05%, 52.80%, and 57.25%, respectively. The Company expects this ratio to increase in 2022 as the benefits of PPP related items decrease. The efficiency ratio is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. Such information is not prepared in accordance with GAAP and should not be construed as such. Management believes, however, such financial information is meaningful to the reader in understanding operating performance but cautions that such information not be viewed as a substitute for GAAP information. In addition, the Company's non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. The Company, in referring to its net income, is referring to income under GAAP. The components of the efficiency ratio calculation are summarized in the following table (dollars in thousands):
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Efficiency Ratio | ||||||||||||
Noninterest expense | $ | 59,008 | $ | 54,565 | $ | 66,074 | ||||||
Add/subtract: gain/loss on sale OREO, net of writedowns | (111 | ) | 4 | 52 | ||||||||
Subtract: core deposit intangible amortization | (1,464 | ) | (1,637 | ) | (1,398 | ) | ||||||
Subtract: merger related expenses | — | — | (11,782 | ) | ||||||||
| $ | 57,433 | $ | 52,932 | $ | 52,946 | |||||||
Net interest income | $ | 90,391 | $ | 83,820 | $ | 77,127 | ||||||
Tax equivalent adjustment | 241 | 288 | 369 | |||||||||
Noninterest income | 21,031 | 16,843 | 15,170 | |||||||||
Subtract: gain on securities | (35 | ) | (814 | ) | (607 | ) | ||||||
Add/subtract: loss/gain on sale of fixed assets | 885 | 110 | 427 | |||||||||
| $ | 112,513 | $ | 100,247 | $ | 92,486 | |||||||
Efficiency ratio | 51.05 | % | 52.80 | % | 57.25 | % | ||||||
Net interest margin is calculated by dividing tax equivalent net interest income by total average earning assets. Because a portion of interest income earned by the Company is nontaxable, the tax equivalent net interest income is considered in the calculation of this ratio. Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit is 21% for 2021, 2020, and 2019. The reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below (in thousands):
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income | ||||||||||||
Non-GAAP measures: | ||||||||||||
Interest income - loans | $ | 87,181 | $ | 87,881 | $ | 82,869 | ||||||
Interest income - investments and other | 8,856 | 8,247 | 10,355 | |||||||||
Interest expense - deposits | (3,645 | ) | (9,729 | ) | (13,143 | ) | ||||||
Interest expense - customer repurchase agreements | (22 | ) | (259 | ) | (596 | ) | ||||||
Interest expense - other short-term borrowings | — | — | (54 | ) | ||||||||
Interest expense - long-term borrowings | (1,738 | ) | (2,032 | ) | (1,935 | ) | ||||||
Total net interest income | $ | 90,632 | $ | 84,108 | $ | 77,496 | ||||||
Less non-GAAP measures: | ||||||||||||
Tax benefit realized on nontaxable interest income - loans | (141 | ) | (181 | ) | (185 | ) | ||||||
Tax benefit realized on nontaxable interest income - municipal securities | (100 | ) | (107 | ) | (184 | ) | ||||||
GAAP measures net interest income | $ | 90,391 | $ | 83,820 | $ | 77,127 | ||||||
Return on average tangible common equity is calculated by dividing net income available to common shareholders by average common equity.
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Return on Average Tangible Common Equity | ||||||||||||
Return on average common equity (GAAP basis) | 12.50 | % | 9.12 | % | 7.16 | % | ||||||
Impact of excluding average goodwill and other intangibles | 4.84 | % | 4.07 | % | 3.27 | % | ||||||
Return on average tangible common equity (non-GAAP) | 17.34 | % | 13.19 | % | 10.43 | % | ||||||
Tangible common equity to tangible assets ratio is calculated by dividing period-end common equity less period-end intangibles by period-end assets less period-end intangibles.
As of December 31, | ||||||||
2021 | 2020 | |||||||
Tangible Common Equity to Tangible Assets | ||||||||
Common equity to assets ratio (GAAP basis) | 10.64 | % | 11.08 | % | ||||
Impact of excluding goodwill and other intangibles | (2.47 | )% | (2.74 | )% | ||||
Tangible common equity to tangible assets ratio (non-GAAP) | 8.17 | % | 8.34 | % | ||||
The Company presents book value per share (period-end shareholders' equity divided by period-end common shares outstanding) and tangible book value per share. In calculating tangible book value, the Company excludes goodwill and other intangible assets.
As of December 31, | ||||||||
2021 | 2020 | |||||||
Tangible Book Value Per Share | ||||||||
Book value per share (GAAP basis) | $ | 32.95 | $ | 30.77 | ||||
Impact of excluding goodwill and other intangibles | (8.33 | ) | (8.30 | ) | ||||
Tangible book value per share (non-GAAP) | $ | 24.62 | $ | 22.47 | ||||
RESULTS OF OPERATIONS
Chief Executive Overview
The Company's 2021 financial highlights include the following:
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Net Income
Net income for 2021 was $43,526,000 compared to $30,045,000 for 2020, an increase of $13,481,000, or 44.9%. Basic earnings per share were $4.00 for 2021 compared to $2.74 for 2020. Diluted earnings per share were $4.00 for 2021 compared to $2.73 for 2020. This net income produced for 2021 a return on average assets of 1.37%, a return on average common equity of 12.50%, and a return on average tangible common equity of 17.34%.
Net income for 2020 was $30,045,000 compared to $20,906,000 for 2019, an increase of $9,139,000, or 43.7%. Basic earnings per share were $2.74 for 2020 compared to $1.99 for 2019. Diluted earnings per share were $2.73 for 2020 compared to $1.98 for 2019. This net income produced for 2020 a return on average assets of 1.08%, a return on average common equity of 9.12%, and a return on average tangible common equity of 13.19%.
The increase in earnings in 2021 was primarily the result of the recovery of provision of $2,825,000 in 2021 compared to the $8,916,000 provision expense in 2020, reduced costs of deposits year over year and an additional $2,000,000 of PPP net fees recognized in 2021 over 2020. The increase in earnings in 2020 was primarily related to the April 1, 2019 merger with HomeTown as the Company realized a full year of operations from the combined entities and the 2019 earnings were impacted adversely by $11,782,000 in one-time merger expenses.
Net Interest Income
Net interest income is the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest bearing liabilities, primarily deposits and borrowings. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income. Mergers, including the most recent 2019 acquisition of HomeTown, impacted net interest income positively for 2021, 2020, and 2019 through increased earning assets.
The following discussion of net interest income is presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets, such as certain state and municipal securities. A tax rate of 21% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent basis for 2021, 2020, and 2019. Net interest income divided by average earning assets is referred to as the net interest margin. The net interest spread represents the difference between the average rate earned on earning assets and the average rate paid on interest bearing liabilities. All references in this section relate to average yields and rates and average asset and liability balances during the periods discussed.
Net interest income on a taxable equivalent basis increased $6,524,000, or 7.8%, in 2021 from 2020, following a $6,612,000, or 8.5%, increase in 2020 from 2019. The increase in net interest income in 2021 was the result of reduced deposit costs from 2020 and additional net PPP fee income in 2021. Average interest bearing deposit balances for 2021 were up $201,691,000, or 12.6%, over 2020, but rates were down 41 basis points, significantly reducing the costs to carry the liabilities.
Yields on loans were 4.44% in 2021 compared to 4.36% in 2020. Cost of funds was 0.29% in 2021 compared to 0.72% in 2020. Between 2021 and 2020, deposit rates for demand accounts decreased to 0.03% from 0.09%, money market accounts decreased to 0.11% from 0.46%, and time deposits decreased to 0.74% from 1.52%. The net interest margin was 3.05% for 2021, compared to 3.30% for 2020. The decrease in net interest margin was driven by declining interest rates.
In March 2020, the FOMC, in response to the COVID-19 crisis, reduced the target federal funds rate by 1.50% taking the federal funds target rate down to 0.25% where it has remained.
Net interest income on a taxable equivalent basis increased $6,612,000, or 8.5%, in 2020 from 2019.
The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the last three years. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans, if recognized, is recorded on a cash basis or when the loan returns to accrual status.
Net Interest Income Analysis
(in thousands, except yields and rates)
Average Balance | Interest Income/Expense(1) | Average Yield/Rate | ||||||||||||||||||||||||||||||||||
2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||
Commercial | $ | 372,538 | $ | 475,068 | $ | 306,065 | $ | 18,819 | $ | 17,768 | $ | 14,125 | 5.05 | % | 3.74 | % | 4.62 | % | ||||||||||||||||||
Real estate | 1,584,856 | 1,531,195 | 1,388,188 | 67,887 | 69,525 | 68,050 | 4.28 | 4.54 | 4.90 | |||||||||||||||||||||||||||
Consumer | 6,984 | 8,998 | 10,046 | 475 | 588 | 694 | 6.80 | 6.53 | 6.91 | |||||||||||||||||||||||||||
Total loans(2) | 1,964,378 | 2,015,261 | 1,704,299 | 87,181 | 87,881 | 82,869 | 4.44 | 4.36 | 4.86 | |||||||||||||||||||||||||||
Securities: | ||||||||||||||||||||||||||||||||||||
U.S. Treasury | 57,048 | 9,010 | — | 507 | 51 | — | 0.89 | 0.57 | — | |||||||||||||||||||||||||||
Federal agencies and GSEs | 97,943 | 72,112 | 132,916 | 1,132 | 1,423 | 3,191 | 1.16 | 1.97 | 2.40 | |||||||||||||||||||||||||||
Mortgage-backed and CMOs | 308,158 | 200,612 | 134,458 | 4,142 | 4,060 | 3,350 | 1.34 | 2.02 | 2.49 | |||||||||||||||||||||||||||
State and municipal | 61,698 | 45,836 | 58,293 | 1,272 | 1,175 | 1,650 | 2.06 | 2.56 | 2.83 | |||||||||||||||||||||||||||
Other securities | 24,707 | 20,382 | 16,552 | 1,205 | 1,098 | 903 | 4.88 | 5.39 | 5.46 | |||||||||||||||||||||||||||
Total securities | 549,554 | 347,952 | 342,219 | 8,258 | 7,807 | 9,094 | 1.50 | 2.24 | 2.66 | |||||||||||||||||||||||||||
Deposits in other banks | 453,867 | 188,700 | 60,651 | 598 | 440 | 1,261 | 0.13 | 0.23 | 2.08 | |||||||||||||||||||||||||||
Total interest earning assets | 2,967,799 | 2,551,913 | 2,107,169 | 96,037 | 96,128 | 93,224 | 3.24 | 3.77 | 4.42 | |||||||||||||||||||||||||||
Nonearning assets | 208,765 | 221,094 | 196,455 | |||||||||||||||||||||||||||||||||
Total assets | $ | 3,176,564 | $ | 2,773,007 | $ | 2,303,624 | ||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||||
Demand | $ | 476,710 | $ | 386,790 | $ | 307,329 | 152 | 344 | 370 | 0.03 | 0.09 | 0.12 | ||||||||||||||||||||||||
Money market | 710,948 | 574,510 | 445,505 | 758 | 2,634 | 5,246 | 0.11 | 0.46 | 1.18 | |||||||||||||||||||||||||||
Savings | 243,123 | 198,313 | 166,842 | 26 | 117 | 284 | 0.01 | 0.06 | 0.17 | |||||||||||||||||||||||||||
Time | 366,604 | 436,081 | 457,746 | 2,709 | 6,634 | 7,243 | 0.74 | 1.52 | 1.58 | |||||||||||||||||||||||||||
Total interest bearing deposits | 1,797,385 | 1,595,694 | 1,377,422 | 3,645 | 9,729 | 13,143 | 0.20 | 0.61 | 0.95 | |||||||||||||||||||||||||||
Customer repurchase agreements | 37,632 | 42,937 | 39,134 | 22 | 259 | 596 | 0.06 | 0.60 | 1.52 | |||||||||||||||||||||||||||
Other short-term borrowings | — | 1 | 2,694 | — | — | 54 | 0.00 | 0.55 | 2.00 | |||||||||||||||||||||||||||
Long-term borrowings | 31,878 | 35,586 | 33,644 | 1,738 | 2,032 | 1,935 | 5.45 | 5.71 | 5.75 | |||||||||||||||||||||||||||
Total interest bearing liabilities | 1,866,895 | 1,674,218 | 1,452,894 | 5,405 | 12,020 | 15,728 | 0.29 | 0.72 | 1.08 | |||||||||||||||||||||||||||
Noninterest bearing demand deposits | 939,186 | 746,659 | 537,775 | |||||||||||||||||||||||||||||||||
Other liabilities | 22,325 | 22,777 | 20,933 | |||||||||||||||||||||||||||||||||
Shareholders' equity | 348,158 | 329,353 | 292,022 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 3,176,564 | $ | 2,773,007 | $ | 2,303,624 | ||||||||||||||||||||||||||||||
Interest rate spread | 2.95 | % | 3.05 | % | 3.34 | % | ||||||||||||||||||||||||||||||
Net interest margin | 3.05 | % | 3.30 | % | 3.68 | % | ||||||||||||||||||||||||||||||
Net interest income (taxable equivalent basis) | 90,632 | 84,108 | 77,496 | |||||||||||||||||||||||||||||||||
Less: Taxable equivalent adjustment(3) | 241 | 288 | 369 | |||||||||||||||||||||||||||||||||
Net interest income | $ | 90,391 | $ | 83,820 | $ | 77,127 | ||||||||||||||||||||||||||||||
______________________
(1) Interest income includes net accretion/amortization of acquired loan fair value adjustments and the net accretion/amortization of deferred loan fees/costs.
(2) Nonaccrual loans are included in the average balances.
(3) A tax rate of 21% in 2021, 2020, and 2019 was used in adjusting interest on tax-exempt assets to a fully taxable equivalent basis.
The following table presents the dollar amount of changes in interest income and interest expense, and distinguishes between changes resulting from fluctuations in average balances of interest earning assets and interest bearing liabilities (volume) and changes resulting from fluctuations in average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionately (dollars in thousands):
Changes in Net Interest Income (Rate / Volume Analysis)
2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||
Change | Change | |||||||||||||||||||||||
Increase | Attributable to | Increase | Attributable to | |||||||||||||||||||||
Interest income | (Decrease) | Rate | Volume | (Decrease) | Rate | Volume | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Commercial | $ | 1,051 | $ | 5,398 | $ | (4,347 | ) | $ | 3,643 | $ | (3,056 | ) | $ | 6,699 | ||||||||||
Real estate | (1,638 | ) | (4,022 | ) | 2,384 | 1,475 | (5,234 | ) | 6,709 | |||||||||||||||
Consumer | (113 | ) | 23 | (136 | ) | (106 | ) | (36 | ) | (70 | ) | |||||||||||||
Total loans | (700 | ) | 1,399 | (2,099 | ) | 5,012 | (8,326 | ) | 13,338 | |||||||||||||||
Securities: | ||||||||||||||||||||||||
U.S. Treasury | 456 | 44 | 412 | 51 | — | 51 | ||||||||||||||||||
Federal agencies and GSEs | (291 | ) | (703 | ) | 412 | (1,768 | ) | (495 | ) | (1,273 | ) | |||||||||||||
Mortgage-backed and CMOs | 82 | (1,645 | ) | 1,727 | 710 | (714 | ) | 1,424 | ||||||||||||||||
State and municipal | 97 | (259 | ) | 356 | (475 | ) | (145 | ) | (330 | ) | ||||||||||||||
Other securities | 107 | (111 | ) | 218 | 195 | (11 | ) | 206 | ||||||||||||||||
Total securities | 451 | (2,674 | ) | 3,125 | (1,287 | ) | (1,365 | ) | 78 | |||||||||||||||
Deposits in other banks | 158 | (255 | ) | 413 | (821 | ) | (1,819 | ) | 998 | |||||||||||||||
Total interest income | (91 | ) | (1,530 | ) | 1,439 | 2,904 | (11,510 | ) | 14,414 | |||||||||||||||
Interest expense | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Demand | (192 | ) | (258 | ) | 66 | (26 | ) | (109 | ) | 83 | ||||||||||||||
Money market | (1,876 | ) | (2,388 | ) | 512 | (2,612 | ) | (3,833 | ) | 1,221 | ||||||||||||||
Savings | (91 | ) | (113 | ) | 22 | (167 | ) | (213 | ) | 46 | ||||||||||||||
Time | (3,925 | ) | (2,997 | ) | (928 | ) | (609 | ) | (273 | ) | (336 | ) | ||||||||||||
Total deposits | (6,084 | ) | (5,756 | ) | (328 | ) | (3,414 | ) | (4,428 | ) | 1,014 | |||||||||||||
Customer repurchase agreements | (237 | ) | (208 | ) | (29 | ) | (337 | ) | (390 | ) | 53 | |||||||||||||
Other short-term borrowings | — | — | — | (54 | ) | (27 | ) | (27 | ) | |||||||||||||||
Long-term borrowings | (294 | ) | (89 | ) | (205 | ) | 97 | (14 | ) | 111 | ||||||||||||||
Total interest expense | (6,615 | ) | (6,053 | ) | (562 | ) | (3,708 | ) | (4,859 | ) | 1,151 | |||||||||||||
Net interest income | $ | 6,524 | $ | 4,523 | $ | 2,001 | $ | 6,612 | $ | (6,651 | ) | $ | 13,263 | |||||||||||
Fair Value Impact to Net Interest Margin
The Company's fully taxable equivalent net interest margin includes the impact of acquisition accounting fair value adjustments. The impact of net accretion for 2019, 2020, and 2021 and the remaining estimated net accretion are reflected in the following table (dollars in thousands):
Loans Accretion | Deposit Accretion | Borrowings Amortization | Total | |||||||||||||
For the year ended December 31, 2019 | $ | 3,101 | $ | 375 | $ | (89 | ) | $ | 3,387 | |||||||
For the year ended December 31, 2020 | 4,516 | 181 | (85 | ) | 4,612 | |||||||||||
For the year ended December 31, 2021 | 5,260 | 78 | (101 | ) | 5,237 | |||||||||||
For the years ending (estimated): | ||||||||||||||||
2022 | 1,100 | |||||||||||||||
2023 | 690 | |||||||||||||||
2024 | 429 | |||||||||||||||
2025 | 292 | |||||||||||||||
2026 | 171 | |||||||||||||||
Thereafter (estimated) | 234 | |||||||||||||||
Noninterest Income
For the year ended December 31, 2021, noninterest income increased $4,188,000, or 24.9%, compared to the year ended December 31, 2020.
Year Ended December 31, | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||
2021 | 2020 | $ Change | % Change | |||||||||||||
Noninterest income: | ||||||||||||||||
Trust and brokerage fees | $ | 6,019 | $ | 4,789 | $ | 1,230 | 25.7 | % | ||||||||
Service charges on deposit accounts | 2,611 | 2,557 | 54 | 2.1 | ||||||||||||
Interchange fees | 4,152 | 3,213 | 939 | 29.2 | ||||||||||||
Other fees and commissions | 801 | 712 | 89 | 12.5 | ||||||||||||
Mortgage banking income | 4,195 | 3,514 | 681 | 19.4 | ||||||||||||
Securities gains, net | 35 | 814 | (779 | ) | (95.7 | ) | ||||||||||
Income from Small Business Investment Companies | 1,972 | 270 | 1,702 | 630.4 | ||||||||||||
Income from insurance investments | 1,199 | 321 | 878 | 273.5 | ||||||||||||
Losses on premises and equipment, net | (885 | ) | (110 | ) | (775 | ) | (704.5 | ) | ||||||||
Other | 932 | 763 | 169 | 22.1 | ||||||||||||
Total noninterest income | $ | 21,031 | $ | 16,843 | $ | 4,188 | 24.9 | % | ||||||||
Trust and brokerage fees increased $1,230,000 for 2021 compared to 2020 caused by growth in clients and growth in market value. Interchange fees increased $939,000 year over year as consumers rely more heavily on debit cards for spending versus cash. Mortgage banking income increased $681,000 for 2021 compared to 2020. The increase in 2021 was the result of continued historically low rates in 2021 resulting in increased application volume for new purchases and refinancing of existing loans. Net securities gains decreased $779,000 in 2021 compared to 2020. Income from Small Business Investment Companies ("SBICs") investments increased $1,702,000 as the fund's investment companies improved their performance compared to 2020. The investments held by the SBICs were significantly impacted in 2020 from the pandemic. Income from insurance investments increased $878,000 in 2021 compared to 2020. The Company received an additional earnings distribution in 2021 not received in 2020. The year ended December 31, 2021 reflected losses on premises and equipment, net of $588,000 from the sale of two buildings acquired in the HomeTown acquisition and the write-down of $218,000 on an additional property based on a current valuation.
Year Ended December 31, | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||
2020 | 2019 | $ Change | % Change | |||||||||||||
Noninterest income: | ||||||||||||||||
Trust and brokerage fees | $ | 4,789 | $ | 4,568 | $ | 221 | 4.8 | % | ||||||||
Service charges on deposit accounts | 2,557 | 2,866 | (309 | ) | (10.8 | ) | ||||||||||
Interchange fees | 3,213 | 2,964 | 249 | 8.4 | ||||||||||||
Other fees and commissions | 712 | 729 | (17 | ) | (2.3 | ) | ||||||||||
Mortgage banking income | 3,514 | 2,439 | 1,075 | 44.1 | ||||||||||||
Securities gains, net | 814 | 607 | 207 | 34.1 | ||||||||||||
Income from Small Business Investment Companies | 270 | 211 | 59 | 28.0 | ||||||||||||
Income from insurance investments | 321 | 328 | (7 | ) | (2.1 | ) | ||||||||||
Losses on premises and equipment, net | (110 | ) | (427 | ) | 317 | (74.2 | ) | |||||||||
Other | 763 | 885 | (122 | ) | (13.8 | ) | ||||||||||
Total noninterest income | $ | 16,843 | $ | 15,170 | $ | 1,673 | 11.0 | % | ||||||||
Trust and brokerage fees increased $221,000 for 2020 compared to 2019. The Company saw decreases in overdraft and related fees, another component of service charge income, caused by consumer spending decreases due to the actions taken to combat COVID-19 primarily accounting for the $309,000 decrease in 2020 versus 2019. These actions, which included stay-at-home orders and restaurant and retail changes, caused an increase of $249,000 in interchange fees in 2020 compared to 2019. Mortgage banking income increased $1,075,000 for 2020 compared to 2019. The increase in 2020 is a result of historically low rates in 2020 resulting in increased application volume for new purchases and refinancing of existing loans. Net securities gains increased $207,000 in 2020 compared to 2019, while income from SBICs increased $59,000. The year ended December 31, 2020 benefitted from reduced losses on premises and equipment. Other noninterest income for 2020Officer was reduced by a loss on the sale of repossessed assets of $139,000.
Noninterest Expense
For the year ended December 31, 2021, noninterest expense increased $4,443,000, or 8.1%, as compared to the year ended December 31, 2020.
Year Ended December 31, | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||
2021 | 2020 | $ Change | % Change | |||||||||||||
Noninterest expense: | ||||||||||||||||
Salaries and employee benefits | $ | 32,342 | $ | 29,765 | $ | 2,577 | 8.7 | % | ||||||||
Occupancy and equipment | 6,032 | 5,586 | 446 | 8.0 | ||||||||||||
FDIC assessment | 864 | 639 | 225 | 35.2 | ||||||||||||
Bank franchise tax | 1,767 | 1,702 | 65 | 3.8 | ||||||||||||
Core deposit intangible amortization | 1,464 | 1,637 | (173 | ) | (10.6 | ) | ||||||||||
Data processing | 2,958 | 3,017 | (59 | ) | (2.0 | ) | ||||||||||
Software | 1,368 | 1,454 | (86 | ) | (5.9 | ) | ||||||||||
Other real estate owned, net | 131 | 60 | 71 | 118.3 | ||||||||||||
Other | 12,082 | 10,705 | 1,377 | 12.9 | ||||||||||||
Total noninterest expense | $ | 59,008 | $ | 54,565 | $ | 4,443 | 8.1 | % | ||||||||
Salaries and employee benefits increased $2,577,000 in 2021 as compared to 2020. The year ended December 31, 2021 reflected additional incentive accruals based on annual results and increased commissions as the result of increased mortgage production. Occupancy expense increased $446,000 in 2021 as compared to 2020 primarily related to the full-year costs of the Triangle (North Carolina) banking office in 2021, which opened in late 2020. FDIC assessment expense increased $225,000 in 2021 compared to 2020 due to balance sheet growth and 2020 benefitted from the final installment of a $75,000 credit for Small Bank Assessment Credits. Other expenses increased $1,377,000 for loan related expenses, investment related expenses, investments in technology and normal expense seasonality.
Year Ended December 31, | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||
2020 | 2019 | $ Change | % Change | |||||||||||||
Noninterest expense: | ||||||||||||||||
Salaries and employee benefits | $ | 29,765 | $ | 30,015 | $ | (250 | ) | (0.8 | )% | |||||||
Occupancy and equipment | 5,586 | 5,417 | 169 | 3.1 | ||||||||||||
FDIC assessment | 639 | 119 | 520 | 437.0 | ||||||||||||
Bank franchise tax | 1,702 | 1,644 | 58 | 3.5 | ||||||||||||
Core deposit intangible amortization | 1,637 | 1,398 | 239 | 17.1 | ||||||||||||
Data processing | 3,017 | 2,567 | 450 | 17.5 | ||||||||||||
Software | 1,454 | 1,295 | 159 | 12.3 | ||||||||||||
Other real estate owned, net | 60 | 31 | 29 | 93.5 | ||||||||||||
Merger related expenses | — | 11,782 | (11,782 | ) | (100.0 | ) | ||||||||||
Other | 10,705 | 11,806 | (1,101 | ) | (9.3 | ) | ||||||||||
Total noninterest expense | $ | 54,565 | $ | 66,074 | $ | (11,509 | ) | (17.4 | )% | |||||||
Salaries and employee benefits decreased $250,000 in 2020 as compared to 2019. Total full-time equivalent employees were 342 at end of 2020, down from 355 at the end of 2019; however, 2020 was impacted by salary expenses resulting from voluntary early retirement package costs. Contributing to the decrease was a reduction in salary expenses of $1.7 million for the deferral of loan costs related to PPP originations. The FDIC assessment expense in 2020 and 2019 was positively impacted by the Small Bank Assessment Credit, which reduced insurance expense $75,000 in 2020 and $492,000 in 2019. Core deposit intangible amortization increased $239,000 in 2020 compared to 2019 due to the HomeTown acquisition. Merger related expenses, which are related to the HomeTown acquisition and are nonrecurring in nature, totaled $11,782,000 during 2019. The increased expense for data processing in 2020 compared to 2019 of $450,000 was attributable to the increased costs as a result of a larger customer base after the HomeTown merger. The decrease in other noninterest expense in 2020 compared to 2019 was primarily due to reduced travel due to the COVID-19 pandemic and increased synergies from the HomeTown acquisition.
Income Taxes
Income taxes on 2021 earnings amounted to $11,713,000, resulting in an effective tax rate of 21.2%, compared to 19.2% in 2020 and 18.9% in 2019. As a result of the enactment of the CARES Act, the Company recognized in the first quarter of 2020 a tax benefit for the net operating loss ("NOL") five-year carryback provision for the NOL acquired in the HomeTown merger. This NOL carryback tax benefit was the reason for the decreased rate in 2020 compared to 2021.
The effective tax rate is lowered by income that is not taxable for federal income tax purposes. The primary nontaxable income is from state and municipal securities and loans.
Impact of Inflation and Changing Prices
The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. The most significant effect of inflation is on noninterest expenses that tend to rise during periods of inflation. Changes in interest rates have a greater impact on a financial institution's profitability than do the effects of higher costs for goods and services. Through its balance sheet management practices, the Company has the ability to react to those changes and measure and monitor its interest rate and liquidity risk.
Market Risk Management
Effectively managing market risk is essential to achieving the Company's financial objectives. Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. The Company is generally not subject to currency exchange risk or commodity price risk. The Company's primary market risk exposure is interest rate risk; however, market risk also includes liquidity risk. Both are discussed in the following sections.
Interest Rate Risk Management
Interest rate risk and its impact on net interest income is a primary market risk exposure. The Company manages its exposure to fluctuations in interest rates through policies approved by its Asset Liability Committee ("ALCO") and Board of Directors, both of which receive and review periodic reports of the Company's interest rate risk position.
The Company uses computer simulation analysis to measure the sensitivity of projected earnings to changes in interest rates. Simulation takes into account current balance sheet volumes and the scheduled repricing dates, instrument level optionality, and maturities of assets and liabilities. It incorporates numerous assumptions including growth, changes in the mix of assets and liabilities, prepayments, and average rates earned and paid. Based on this information, management uses the model to project net interest income under multiple interest rate scenarios.
A balance sheet is considered asset sensitive when its earning assets (loans and securities) reprice faster or to a greater extent than its liabilities (deposits and borrowings). An asset sensitive balance sheet will produce relatively more net interest income when interest rates rise and less net interest income when they decline. Based on the Company's simulation analysis, management believes the Company's interest sensitivity position at December 31, 2021 is asset sensitive.
Earnings Simulation
The table below shows the estimated impact of changes in interest rates on net interest income as of December 31, 2021 (dollars in thousands), assuming instantaneous and parallel changes in interest rates, and consistent levels of assets and liabilities. Net interest income for the following twelve months is projected to increase when interest rates are higher than current rates.
Estimated Changes in Net Interest Income
December 31, 2021 | ||||||||
Change in net interest income | ||||||||
Change in interest rates | Amount | Percent | ||||||
Up 4.0% | $ | 21,129 | 26.0 | % | ||||
Up 3.0% | 15,802 | 19.5 | ||||||
Up 2.0% | 10,428 | 12.8 | ||||||
Up 1.0% | 5,086 | 6.3 | ||||||
Flat | — | — | ||||||
Down 0.25% | (1,013 | ) | (1.2 | ) | ||||
Down 1.00% (1) | (3,294 | ) | (4.1 | ) | ||||
__________________________
(1) This scenario is deemed highly unlikely at this time due to the current low interest rate environment.
Management cannot predict future interest rates or their exact effect on net interest income. Computations of future effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results. Certain limitations are inherent in such computations. Assets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag changes in market interest rates. Interest rate shifts may not be parallel.
Changes in interest rates can cause substantial changes in the amount of prepayments of loans and mortgage-backed securities, which may in turn affect the Company's interest rate sensitivity position. Additionally, credit risk may rise if an interest rate increase adversely affects the ability of borrowers to service their debt.
Economic Value Simulation
Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in net economic value over different rate environments is an indication of the longer-term earnings capability of the balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation. The economic value simulation uses instantaneous rate shocks to the balance sheet.
The following table reflects the estimated change in net economic value over different rate environments using economic value simulation for the balances at the period ended December 31, 2021 (dollars in thousands):
Estimated Changes in Economic Value of Equity
December 31, 2021 | ||||||||||||
Change in interest rates | Amount | $ Change | % Change | |||||||||
Up 4.0% | $ | 530,564 | $ | 196,627 | 58.9 | % | ||||||
Up 3.0% | 494,139 | 160,202 | 48.0 | |||||||||
Up 2.0% | 451,739 | 117,802 | 35.3 | |||||||||
Up 1.0% | 398,702 | 64,765 | 19.4 | |||||||||
Flat | 333,937 | — | — | |||||||||
Down 0.25% | 312,684 | (21,253 | ) | (6.4 | ) | |||||||
Down 1.00% (1) | 236,244 | (97,693 | ) | (29.3 | ) | |||||||
__________________________
(1) This scenario is deemed highly unlikely at this time due to the current low interest rate environment.
Liquidity Risk Management
Liquidity is the ability of the Company in a timely manner to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Company's ability to meet the daily cash flow requirements of its customers, whether they are borrowers requiring funds or depositors desiring to withdraw funds. Additionally, the Company requires cash for various operating needs including dividends to shareholders, the servicing of debt, and the payment of general corporate expenses. The Company manages its exposure to fluctuations in interest rates and liquidity needs through policies approved by the ALCO and Board of Directors, both of which receive periodic reports of the Company's interest rate risk and liquidity position. The Company uses a computer simulation model to assist in the management of the future liquidity needs of the Company.
Liquidity sources include on balance sheet and off balance sheet sources.
Balance sheet liquidity sources include cash, amounts due from banks, loan repayments, bond maturities and calls, and increases in deposits. Further, the Company maintains a large, high quality, very liquid bond portfolio, which is generally 0% to 50% unpledged and would, accordingly, be available for sale if necessary.
Off balance sheet sources include lines of credit from the Federal Home Loan Bank of Atlanta ("FHLB"), federal funds lines of credit, and access to the Federal Reserve Bank of Richmond's discount window.
The Company has a line of credit with the FHLB, equal to 30% of the Company's assets, subject to the amount of collateral pledged. Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, home equity lines of credit, commercial real estate loans and commercial construction loans. In addition, the Company pledges as collateral its capital stock in and deposits with the FHLB. At December 31, 2021 and 2020, there were no principal advance obligations to the FHLB. The Company had outstanding $275,000,000 in FHLB letters of credit at December 31, 2021 compared to $245,000,000 in letters of credit at December 31, 2020. The letters of credit provide the Bank with additional collateral for securing public entity deposits above FDIC insurance levels, thereby providing less need for collateral pledging from the securities portfolio and accordingly increasing the Company's balance sheet liquidity.
Short-term borrowing is discussed in Note 10 and long-term borrowing is discussed in Note 11 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K.
The Company has federal funds lines of credit established with correspondent banks in the amount of $60,000,000 and has access to the Federal Reserve Bank of Richmond's discount window. There were no amounts outstanding under these facilities at December 31, 2021. The Company, through its subsidiary bank, has a relationship with IntraFi Promontory Network. The Company is able to provide deposit customers with access to aggregate FDIC insurance in amounts far exceeding $250,000. This gives the Company the ability, as and when needed, to attract and retain large deposits from insurance sensitive customers. Under the EGRRCPA signed into law on May 24, 2018, a well-capitalized bank with a CAMELS rating of 1 or 2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated as brokered deposits. With IntraFi, the Company has the option to keep deposits on balance sheet or sell them to other members of the network. Additionally, subject to certain limits, the Company can use IntraFi to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB. Thus,IntraFi serves as a deposit-gathering tool and an additional liquidity management tool. Deposits through the IntraFi program as of December 31, 2021 and 2020 were $550,000 and $4,342,000, respectively.
The Bank also participates with the IntraFi Insured Cash Sweep, a product which provides the Bank the capability of providing additional deposit insurance to customers in the context of a money market account arrangement. The product is analogous to the IntraFi product discussed above.
Average interest bearing deposits grew 12.6% in 2021. Customers have continued to maintain higher cash balances as future liquidity needs remain uncertain. This buildup of cash reserves primarily accounts for the significant increase over the same period of 2020. Management believes that the resources available to the Company will provide sufficient and timely liquidity, both on and off the balance sheet to support the programs and operations.
BALANCE SHEET ANALYSIS
Securities
The securities portfolio generates income, plays a strategic role in the management of interest rate sensitivity, provides a source of liquidity, and is used to meet collateral requirements. The securities portfolio consists of high quality investments, mostly federal agency, mortgage-backed, and state and municipal securities.
The Company is cognizant of the continuing historically low and currently steady rate environment and has elected to execute an asset liability strategy of purchasing high quality taxable securities with relatively low optionality and short and overall balanced duration.
The following table presents information on the maturities and taxable equivalent yields of available for sale securities (dollars in thousands):
| As of December 31, | ||||||||
| 2021 | 2020 | |||||||
Taxable | Taxable | |||||||
Equivalent | Equivalent | |||||||
Yield | Yield | |||||||
U. S. Treasury | ||||||||
Within 1 year | -0.02 | % | 0.08 | % | ||||
1 to 5 years | 0.71 | — | ||||||
5 to 10 years | 1.22 | — | ||||||
Over 10 years | — | — | ||||||
Total | 0.69 | 0.08 | ||||||
Federal Agencies: | ||||||||
Within 1 year | 0.29 | 2.68 | ||||||
1 to 5 years | 1.09 | 0.62 | ||||||
5 to 10 years | 1.68 | 1.99 | ||||||
Over 10 years | 2.23 | 2.18 | ||||||
Total | 1.12 | 1.15 | ||||||
Mortgage-backed: | ||||||||
Within 1 year | 3.09 | 2.42 | ||||||
1 to 5 years | 0.82 | 1.41 | ||||||
5 to 10 years | 1.47 | 1.40 | ||||||
Over 10 years | 1.61 | 1.61 | ||||||
Total | 1.35 | 1.53 | ||||||
State and Municipal: | ||||||||
Within 1 year | 2.02 | 2.47 | ||||||
1 to 5 years | 1.91 | 2.13 | ||||||
5 to 10 years | 1.87 | 2.02 | ||||||
Over 10 years | 3.01 | 2.93 | ||||||
Total | 2.01 | 2.23 | ||||||
Corporate Securities: | ||||||||
Within 1 year | — | — | ||||||
1 to 5 years | 2.42 | 2.42 | ||||||
5 to 10 years | 3.67 | 5.11 | ||||||
Over 10 years | — | — | ||||||
Total | 3.63 | 5.01 | ||||||
Common Stock: | ||||||||
No maturity | — | — | ||||||
Total | — | — | ||||||
Total portfolio | 1.29 | % | 1.52 | |||||
The Company had no equity securities at December 31, 2021 and 2020. During the year ended December 31, 2019, the Company sold $445,000 in equity securities at fair value and recognized in income $333,000.
Loans
The loan portfolio consists primarily of commercial and residential real estate loans, commercial loans to small and medium-sized businesses, construction and land development loans, and home equity loans. At December 31, 2021, the commercial real estate portfolio included concentrations of $81,241,000, $46,049,000 and $204,655, 000 in hotel, restaurants, and retail, respectively. The concentrations total 17.1% of total loans, excluding loans in process.
Average loans decreased $50,883,000, or 2.5%, from 2020 to 2021, primarily the result of PPP forgiveness. Average loans increased $310,962,000, or 18.2%, from 2019 to 2020, mostly impacted by the HomeTown merger.
At December 31, 2021, total loans, net of deferred fees and costs, were $1,946,580,000, a decrease of $68,476,000, or 3.4%, from the prior year. Excluding PPP loans of $12,239,000 and $211,275,000 at December 31, 2021 and 2020, respectively, loans held for investment grew by $130,598,000, or 7.2%.
Loans held for sale and associated with secondary mortgage activity totaled $8,481,000 at December 31, 2021 and $15,591,000 at December 31, 2020. Loan production volume was $191,232,000 and $178,459,000 for 2021 and 2020, respectively. These loans were approximately 35% purchase, 65% refinancing for the year ended December 31, 2021 compared to approximately 40% purchase, 60% refinancing for the year ended December 31, 2020.
Management of the loan portfolio is organized around portfolio segments. Each segment is comprised of various loan types that are reflective of operational and regulatory reporting requirements. The following table presents the Company's portfolio maturities as of the dates indicated by segment (dollars in thousands):
Loans
As of December 31, 2021 | ||||||||||||||||||||
Maturing within one year | Maturing after one but within five years | Maturing after five but within fifteen years | Maturing after fifteen years | Total | ||||||||||||||||
Real estate: | ||||||||||||||||||||
Construction and land development | $ | 26,554 | $ | 83,005 | $ | 24,368 | $ | 294 | $ | 134,221 | ||||||||||
Commercial real estate - owner occupied | 34,841 | 213,216 | 141,566 | 1,894 | 391,517 | |||||||||||||||
Commercial real estate - non-owner occupied | 53,051 | 407,480 | 245,829 | 24,674 | 731,034 | |||||||||||||||
Residential real estate | 20,908 | 135,926 | 100,842 | 32,081 | 289,757 | |||||||||||||||
Home equity | 5,105 | 29,772 | 58,326 | — | 93,203 | |||||||||||||||
Total real estate | 140,459 | 869,399 | 570,931 | 58,943 | 1,639,732 | |||||||||||||||
Commercial and industrial | 77,053 | 151,210 | 71,237 | 273 | 299,773 | |||||||||||||||
Consumer | 1,040 | 3,668 | 438 | 1,929 | 7,075 | |||||||||||||||
Total loans, net of deferred fees and costs | $ | 218,552 | $ | 1,024,277 | $ | 642,606 | $ | 61,145 | $ | 1,946,580 | ||||||||||
Interest rate sensitivity: | ||||||||||||||||||||
Fixed interest rates | $ | 134,104 | $ | 871,309 | $ | 544,894 | $ | 13,189 | $ | 1,563,496 | ||||||||||
Floating or adjustable rates | 84,448 | 152,968 | 97,712 | 47,956 | 383,084 | |||||||||||||||
Total loans, gross | $ | 218,552 | $ | 1,024,277 | $ | 642,606 | $ | 61,145 | $ | 1,946,580 | ||||||||||
The following table provides loan balance information by geographic regions. In some circumstances, loans may be originated in one region for borrowers located in other regions (dollars in thousands):
Loans by Geographic Region
December 31, 2021 | Percentage Change in Balance Since | |||||||||||
Percentage | December 31, | |||||||||||
Balance | of Portfolio | 2020 | ||||||||||
Danville region | $ | 182,225 | 9.4 | % | (27.3 | )% | ||||||
Central region | 129,704 | 6.7 | 1.7 | |||||||||
Southside region | 65,215 | 3.4 | (20.9 | ) | ||||||||
Eastern region | 107,013 | 5.5 | 2.4 | |||||||||
Franklin region | 109,292 | 5.6 | (20.0 | ) | ||||||||
Roanoke region | 391,695 | 20.1 | (8.8 | ) | ||||||||
New River Valley region | 121,409 | 6.2 | (7.3 | ) | ||||||||
Alamance region | 263,753 | 13.5 | (4.1 | ) | ||||||||
Guilford region | 307,451 | 15.8 | (1.7 | ) | ||||||||
Winston-Salem region | 148,337 | 7.6 | 27.7 | |||||||||
Triangle region | 120,486 | 6.2 | 145.9 | |||||||||
Total loans, net of deferred fees and costs | $ | 1,946,580 | 100.0 | % | (3.4 | )% | ||||||
The Danville region consists of offices in Danville, Virginia and Yanceyville, North Carolina. The Central region consists of offices in Lynchburg, and Campbell County, Virginia. The Southside region consists of offices in Martinsville and Henry County, Virginia. The Eastern region consists of offices in South Bostonhis base salary, and the counties of Halifax and Pittsylvania, Virginia. The Franklin region consists of offices in Rocky Mount and Hardy, Virginia. The Roanoke region consists of offices in Roanoke, Salem, and Roanoke County, Virginia. The New River Valley region consists of an office in Christiansburg, Virginia. The Alamance region consists of offices in Burlington, Graham, and Mebane, North Carolina. The Guilford region consists of offices in Greensboro, North Carolina. The Winston-Salem region consists of an office in Winston-Salem, North Carolina. The Triangle region consists of an office in Raleigh, North Carolina.
The Company does not participate in or have any highly leveraged lending transactions, as defined by bank regulations. The Company has no foreign loans. There were no concentrations of loans to any individual, group of individuals, business, or industry that exceeded 10% of total loans at December 31, 2021 or 2020.
Provision for Loan Losses
The Company had a negative provision (recovery) for loan losses of $2,825,000 for the year ended December 31, 2021, compared to a provision for loan losses of $8,916,000 and $456,000 for the years ended December 31, 2020 and 2019, respectively.
The negative provision (recovery) in 2021 was the result of improved economic data supporting changes to the qualitative factors. The larger provision for 2020 reflects an increase in allowance requirements in response to the declining and uncertain economic landscape caused by the COVID-19 pandemic during the period. The increase in 2020 can be attributed to a measurable increase in qualitative factors related to significant contractions in economic data for both national and local economies and a significant increase in unemployment rates. The provision for 2019 primarily related to a $156,000 increase in the impaired loan reserve and loan growth during the fourth quarter of 2019.
Allowance for Loan Losses
The purpose of the ALLL is to provide for probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance.
The ALLL was $18,678,000 and $21,403,000 at December 31, 2021 and 2020, respectively. The ALLL as a percentage of loans at each of those dates was 0.96%, 1.06%, and 0.72%, respectively. Excluding PPP loans, the allowance as a percentage of loans increased to 0.97% at December 31, 2021.
The decrease in the allowance as a percentage of loans during 2021 as compared to 2020 was primarily due to improvements in various qualitative factors, notably economic, used in the determination of the allowance. The increase in the allowance as a percentage of loans during 2020 as compared to 2019 was primarily due to the economic effects of the COVID-19 pandemic.
In an effort to better evaluate the adequacy of its ALLL, the Company computes its ASC 450, Contingencies, loan balance by reducing total loans by acquired loans and loans that were evaluated for impairment individually or smaller balance nonaccrual loans evaluated for impairment in homogeneous pools. It also adjusts its ASC 450 loan loss reserve balance total by removing allowances associated with these other pools of loans.
The general allowance, ASC 450 (FAS 5) reserves to ASC 450 loans, was 1.01% at December 31, 2021, compared to 1.16% at December 31, 2020. On a dollar basis, the reserve was $18,004,000 at December 31, 2021, compared to $20,534,000 at December 31, 2020. The percentage of the reserve to total loans has decreased due to improved qualitative factors as the economy continues to improve from 2020. This segment of the allowance represents by far the largest portion of the loan portfolio and the largest aggregate risk. There is no allowance for performing acquired loans in accordance with generally accepted accounting principles.
The Company was considered a small reporting company under the Accounting Standards Update No. 2016-13 "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments," and is not subject to adoption of this standard until January 1, 2023. Refer to "Note 1 - Summary of Significant Accounting Policies" of the consolidated financial statements for further information. The Company is working with a third-party vendor for implementation and running parallel models beginning with the first quarter of 2022. The adoption of the standard is not considered to materially impact the Company but the amount is not yet known.
The specific allowance, ASC 310-40 (FAS 114) reserves to ASC 310-40 loans is immaterial and does not include reserves related to acquired loans with deteriorated credit quality. This reserve was $667,000 at December 31, 2021, compared to $839,000 at December 31, 2020. This is the only portion of the reserve related to acquired loans. Cash flow expectations for these loans are reviewed on a quarterly basis and unfavorable changes in those estimates relative to the initial estimates can result in the need for specific loan loss provisions.
The following table presents the Company's loan loss and recovery experience for the years ended December 31, 2021 and 2020 (dollars in thousands):
Summary of Loan Loss Experience*
Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
Balance at beginning of period | $ | 21,403 | $ | 13,152 | ||||
Charge-offs: | ||||||||
Construction and land development | — | — | ||||||
Commercial real estate - owner occupied | 3 | 17 | ||||||
Commercial real estate - non-owner occupied | — | 165 | ||||||
Residential real estate | 53 | 90 | ||||||
Home equity | — | 27 | ||||||
Total real estate | 56 | 299 | ||||||
Commercial and industrial | — | 505 | ||||||
Consumer | 90 | 202 | ||||||
Total charge-offs | 146 | 1,006 | ||||||
Recoveries: | ||||||||
Construction and land development | — | 2 | ||||||
Commercial real estate - owner occupied | 7 | 12 | ||||||
Commercial real estate - non-owner occupied | 8 | 50 | ||||||
Residential real estate | 42 | 63 | ||||||
Home equity | 57 | 22 | ||||||
Total real estate | 114 | 149 | ||||||
Commercial and industrial | 40 | 65 | ||||||
Consumer | 92 | 127 | ||||||
Total recoveries | 246 | 341 | ||||||
Net (recoveries) charge-offs | (100 | ) | 665 | |||||
Provision for (recovery of) loan losses | (2,825 | ) | 8,916 | |||||
Balance at end of period | $ | 18,678 | $ | 21,403 | ||||
*Net charge-offs by category are insignificant.
The following table summarizes the allocation of the allowance for loan losses by major portfolio segments at December 31, 2021 and 2020 (dollars in thousands):
Allocation of Allowance for Loan Losses
Year Ended December 31, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Commercial | $ | 2,668 | 15.4 | % | $ | 3,373 | 24.4 | % | ||||||||
Construction and land development | 1,397 | 6.9 | 1,927 | 7.0 | ||||||||||||
Commercial real estate - owner occupied | 3,964 | 20.1 | 4,340 | 18.5 | ||||||||||||
Commercial real estate - non-owner occupied | 7,141 | 37.6 | 7,626 | 31.1 | ||||||||||||
Residential real estate | 3,458 | 19.7 | 4,067 | 18.6 | ||||||||||||
Consumer | 50 | 0.3 | 70 | 0.4 | ||||||||||||
Total | $ | 18,678 | 100.0 | % | $ | 21,403 | 100.0 | % | ||||||||
__________________________
% - represents the percentage of loans in each category to total loans.
Asset Quality Indicators
The following table provides certain qualitative indicators relevant to the Company's loan portfolio for the past three years.
Asset Quality Ratios
For the Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Allowance to loans (1) | 0.96 | % | 1.06 | % | 0.72 | % | ||||||
ASC 450/general allowance (2) | 1.01 | 1.16 | 0.87 | |||||||||
Net charge-offs (recoveries) to year-end allowance | (0.54 | ) | 3.11 | 0.83 | ||||||||
Net charge-offs (recoveries) to average loans | (0.01 | ) | 0.03 | 0.01 | ||||||||
Nonperforming assets to total assets | 0.07 | 0.12 | 0.15 | |||||||||
Nonperforming loans to loans | 0.11 | 0.13 | 0.13 | |||||||||
Provision to net charge-offs (recoveries) | 2,825.00 | 1,340.75 | 418.35 | |||||||||
Provision (recovery) to average loans | (0.14 | ) | 0.44 | 0.03 | ||||||||
Allowance to nonperforming loans | 840.59 | 793.88 | 570.59 | |||||||||
__________________________
(1) Excluding PPP loans, 0.97% and 1.19%, at December 31, 2021 and 2020, respectively.
(2) Excluding PPP loans, 1.01% and 1.32% at December 31, 2021 and 2020, respectively.
Nonperforming Assets (Loans and Other Real Estate Owned)
Nonperforming loans include loans on which interest is no longer accrued and accruing loans that are contractually past due 90 days or more. Nonperforming loans include loans originated and loans acquired exclusive of purchased credit impaired loans.
Nonperforming loans to total loans were 0.11% at December 31, 2021 and 0.13% at December 31, 2020. The decrease in nonperforming loans during 2021 was $474,000.
Nonperforming assets include nonperforming loans and foreclosed real estate. Nonperforming assets represented 0.07% of total assets at December 31, 2021 compared to 0.12% of total assets at December 31, 2020. The Company continues to monitor the significant impact to its borrowers caused by COVID-19 and anticipates increases in nonperforming assets as a result, but the total cannot be determined at this time.
In most cases, it is the policy of the Company that any loan that becomes 90 days past due will automatically be placed on nonaccrual loan status, accrued interest reversed out of income, and further interest accrual ceased. Any payments received on such loans will be credited to principal. In some cases, a loan in process of renewal may become 90 days past due. In these instances, the loan may still be accruing because of a delayed renewal process in which the customer has not been billed. In accounting for acquired impaired loans, such loans are not classified as nonaccrual when they become 90 days past due. They are considered to be accruing because their interest income relates to the accretable yield and not to contractual interest payments.
Loans will only be restored to full accrual status after six consecutive months of payments that were each less than 30 days delinquent. The Company strictly adheres with this policy before restoring a loan to normal accrual status.
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 the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Total impaired loans, exclusive of purchased credit impaired loans, at December 31, 2021 and 2020 were $2,232,000 and $2,852,000, respectively.
Troubled Debt Restructurings
TDRs exist whenever the Company makes a concession to a customer based on the customer's financial distress that would not have otherwise been made in the normal course of business.
There were $1,725,000 in TDRs at December 31, 2021 compared to $1,976,000 at December 31, 2020.
Other Real Estate Owned
OREO is carried on the consolidated balance sheets at $143,000 and $958,000 as of December 31, 2021 and 2020, respectively. Foreclosed assets are initially recorded at fair value, less estimated costs to sell, at the date of foreclosure. Loan losses resulting from foreclosure are charged against the ALLL at that time. Subsequent to foreclosure, valuations are periodically performed by management, and the assets are carried at the lower of the new cost basis or fair value, less estimated costs to sell, with any additional write-downs charged against earnings. For significant assets, these valuations are typically outside annual appraisals.
Deposits
The Company's deposits consist primarily of checking, money market, savings, and consumer and commercial time deposits. Average deposits increased $394,000,000, or 16.8%, in 2021, mostly a result of continued higher than average cash balances being maintained by customers as the uncertainty of the pandemic continues and is a trend that is consistent for all commercial banks.
Period-end total deposits increased $279,000,000, or 10.7%, during 2021. Customers have continued to maintain higher cash balances as future liquidity needs remain uncertain. The Company has only a relatively small portion of its time deposits provided by wholesale sources. These include time deposits through the IntraFi program, which at year-end totaled $550,000 for 2021 and $4,342,000 for 2020. Management considers the IntraFi deposits the functional equivalent of core deposits because they relate to balances derived from customers with long standing relationships with the Company.
Average deposits and rates for the years indicated (dollars in thousands):
Deposits
Year Ended December 31, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
Average | Average | |||||||||||||||
Balance | Rate | Balance | Rate | |||||||||||||
Noninterest bearing deposits | $ | 939,186 | — | % | $ | 746,659 | — | % | ||||||||
Interest bearing accounts: | ||||||||||||||||
NOW accounts | $ | 476,710 | 0.03 | % | $ | 386,790 | 0.09 | % | ||||||||
Money market | 710,948 | 0.11 | 574,510 | 0.46 | ||||||||||||
Savings | 243,123 | 0.01 | 198,313 | 0.06 | ||||||||||||
Time | 366,604 | 0.74 | 436,081 | 1.52 | ||||||||||||
Total interest bearing deposits | $ | 1,797,385 | 0.20 | % | $ | 1,595,694 | 0.61 | % | ||||||||
Average total deposits | $ | 2,736,571 | 0.13 | % | $ | 2,342,353 | 0.42 | % | ||||||||
Certificates of Deposit over $250,000
At December 31, 2021, certificates of deposit that meet or exceed the FDIC insurance limit held by the Company were $153,253,000. The following table provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limit at December 31, 2021. Amounts of $250,000 or more were classified by maturity as follows (dollars in thousands):
December 31, 2021 | ||||
3 months or less | $ | 29,186 | ||
Over 3 through 6 months | 76,129 | |||
Over 6 through 12 months | 22,113 | |||
Over 12 months | 25,825 | |||
Total | $ | 153,253 | ||
The Company's total uninsured deposits, which are the amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $1.2 billion and $1.1 billion at December 31, 2021 and 2020, respectively. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.
Borrowed Funds
In addition to internal deposit generation, the Company also relies on borrowed funds as a supplemental source of funding. Borrowed funds consist of customer repurchase agreements, overnight borrowings from the FHLB and longer-term FHLB advances, subordinated debt acquired in the HomeTown merger, and trust preferred capital notes. Customer repurchase agreements are borrowings collateralized by securities of the U.S. Government, its agencies, or Government Sponsored Enterprises ("GSEs") and generally mature daily. The Company considers these accounts to be a stable and low cost source of funds. The securities underlying these agreements remain under the Company's control. Refer to Note 11 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of long-term debt.
In the regular course of conducting its business, the Company takes deposits from political subdivisions of the states of Virginia and North Carolina. At December 31, 2021, the Bank's public deposits totaled $326,595,000. The Company is legally required to provide collateral to secure the deposits that exceed the insurance coverage provided by the FDIC. This collateral can be provided in the form of certain types of government agency bonds or letters of credit from the FHLB. At year-end 2021, the Company had $275,000,000 in letters of credit with the FHLB outstanding to supplement collateral for such deposits.
Shareholders' Equity
The Company's goal with capital management is to comply with all regulatory capital requirements and to support growth, while generating acceptable returns on equity and paying a high rate of dividends.
Shareholders' equity was $354,792,000 at December 31, 2021 and $337,894,000 at December 31, 2020.
The Company declared and paid quarterly dividends totaling $1.09 per share for 2021, $1.08 per share for 2020, and $1.04 per share for 2019. Cash dividends in 2021 totaled $11,827,000 and represented a 27.2%targeted payout of 2021 net income, compared to a 39.4% payout in 2020, and a 52.4% payout in 2019.
Effective January 1, 2015, the Company and the Bank became subject to the Basel III Capital Rules. The Basel III Capital Rules require the Company and the Bank to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. In addition, to be well capitalized under the "prompt corrective action" regulations pursuant to Section 38 of the FDIA, the Bank must have the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%.
On September 17, 2019, the federal banking agencies jointly issued a final rule required by the EGRRCPA that will permit qualifying banks and bank holding companies that have less than $10 billion in consolidated assets to elect to opt into the CBLR framework. Under the final rule, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% would not be subject to other risk-based and leverage capital requirements under the Basel III Capital Rules and will be deemed to have met the well capitalized ratio requirements under the "prompt corrective action" framework. In addition, a community bank that falls out of compliance with the framework will have a two-quarter grace period to come back into full compliance, provided its leverage ratio remains above 8%, and will be deemed well-capitalized during the grace period. The CBLR framework was first available for banking organizations to use in their March 31, 2020 regulatory reports. The Company and the Bank do not currently expect to opt into the CBLR framework.
The following table represents the major regulatory capital ratios for the Company as of the dates indicated:
As of December 31, | ||||||||
2021 | 2020 | |||||||
Risk-Based Capital Ratios: | ||||||||
Common equity tier 1 capital ratio | 12.43 | % | 12.36 | % | ||||
Tier 1 capital ratio | 13.73 | % | 13.78 | % | ||||
Total capital ratio | 14.61 | % | 15.18 | % | ||||
Leverage Capital Ratios: | ||||||||
Tier 1 leverage ratio | 9.13 | % | 9.48 | % | ||||
Management believes the Company is in compliance with all regulatory capital requirements applicable to it, and the Bank meets the requirements to be considered "well capitalized" under the prompt corrective action framework as of December 31, 2021 and 2020.
Stock Repurchase Programs
In 2021, the Company repurchased 265,939 shares at an average cost of $33.08 per share for a total cost of $8,810,000. In 2020, the Company repurchased 140,526 shares at an average cost of $35.44 per share for a total cost of $4,981,000. In 2019, the Company repurchased 85,868 shares at an average cost of $36.64 per share for a total cost of $3,146,000.
On January 20, 2022, the Company filed a Form 8-K with the SEC to announce the approval by its Board of Directors of another stock repurchase program. The program authorizes the repurchase of up to $13 million of the Company's common stock through December 31, 2022.
CONTRACTUAL OBLIGATIONS
The following items are contractual obligations of the Company as of December 31, 2021 (dollars in thousands):
Payments Due By Period | ||||||||||||||||||||
Total | Under 1 Year | 1-3 Years | 3-5 Years | More than 5 years | ||||||||||||||||
Time deposits | $ | 354,703 | $ | 246,629 | $ | 59,451 | $ | 42,163 | $ | 6,460 | ||||||||||
Repurchase agreements | 41,128 | 41,128 | — | — | — | |||||||||||||||
Operating leases | 4,521 | 1,043 | 1,458 | 731 | 1,289 | |||||||||||||||
Junior subordinated debt | 28,232 | — | — | — | 28,232 | |||||||||||||||
OFF-BALANCE SHEET ACTIVITIES
The Company enters into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance sheet transactions. Other than AMNB Statutory Trust I, formed in 2006 to issue trust preferred securities, and MidCarolina Trust I and MidCarolina Trust II, the Company does not have any off-balance sheet subsidiaries. Refer to Note 11 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of junior subordinated debt. Off-balance sheet transactions were as follows as of the dates indicated (dollars in thousands):
December 31, | ||||||||
Off-Balance Sheet Commitments | 2021 | 2020 | ||||||
Commitments to extend credit | $ | 654,436 | $ | 503,272 | ||||
Standby letters of credit | 10,201 | 17,355 | ||||||
Mortgage loan rate-lock commitments | 10,891 | 26,883 | ||||||
Commitments to extend credit to customers represent legally binding agreements with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future funding requirements. Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is incorporated herein by reference from Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K.
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly Financial Results (Unaudited)
(in thousands, except per share amounts)
First | Second | Third | Fourth | |||||||||||||||||
2021 | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||||
Interest income | $ | 24,204 | $ | 23,167 | $ | 24,277 | $ | 24,148 | $ | 95,796 | ||||||||||
Interest expense | 1,781 | 1,396 | 1,184 | 1,044 | 5,405 | |||||||||||||||
Net interest income | 22,423 | 21,771 | 23,093 | 23,104 | 90,391 | |||||||||||||||
Provision for (recovery of) loan losses | — | (1,352 | ) | 482 | (1,955 | ) | (2,825 | ) | ||||||||||||
Net interest income after provision for (recovery of) loan losses | 22,423 | 23,123 | 22,611 | 25,059 | 93,216 | |||||||||||||||
Noninterest income | 5,922 | 5,142 | 5,123 | 4,844 | 21,031 | |||||||||||||||
Noninterest expense | 14,065 | 14,637 | 14,843 | 15,463 | 59,008 | |||||||||||||||
Income before income taxes | 14,280 | 13,628 | 12,891 | 14,440 | 55,239 | |||||||||||||||
Income taxes | 2,991 | 2,862 | 2,713 | 3,147 | 11,713 | |||||||||||||||
Net income | $ | 11,289 | $ | 10,766 | $ | 10,178 | $ | 11,293 | $ | 43,526 | ||||||||||
Per common share: | ||||||||||||||||||||
Net income - basic | $ | 0.99 | $ | 1.03 | $ | 0.94 | $ | 1.05 | $ | 4.00 | ||||||||||
Net income - diluted | 0.99 | 1.03 | 0.94 | 1.05 | 4.00 | |||||||||||||||
Cash dividends | 0.27 | 0.27 | 0.27 | 0.28 | 1.09 | |||||||||||||||
First | Second | Third | Fourth | |||||||||||||||||
2020 | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||||
Interest income | $ | 23,866 | $ | 23,297 | $ | 24,179 | $ | 24,498 | $ | 95,840 | ||||||||||
Interest expense | 3,947 | 3,037 | 2,684 | 2,352 | 12,020 | |||||||||||||||
Net interest income | 19,919 | 20,260 | 21,495 | 22,146 | 83,820 | |||||||||||||||
Provision for (recovery of) loan losses | 953 | 4,759 | 2,619 | 585 | 8,916 | |||||||||||||||
Net interest income after provision for (recovery of) loan losses | 18,966 | 15,501 | 18,876 | 21,561 | 74,904 | |||||||||||||||
Noninterest income | 4,495 | 3,835 | 4,292 | 4,221 | 16,843 | |||||||||||||||
Noninterest expense | 13,334 | 12,432 | 14,140 | 14,659 | 54,565 | |||||||||||||||
Income before income taxes | 10,127 | 6,904 | 9,028 | 11,123 | 37,182 | |||||||||||||||
Income taxes | 1,585 | 1,422 | 1,801 | 2,329 | 7,137 | |||||||||||||||
Net income | $ | 8,542 | $ | 5,482 | $ | 7,227 | $ | 8,794 | $ | 30,045 | ||||||||||
Per common share: | ||||||||||||||||||||
Net income - basic | $ | 0.77 | $ | 0.50 | $ | 0.66 | $ | 0.80 | $ | 2.74 | ||||||||||
Net income - diluted | 0.77 | 0.50 | 0.66 | 0.80 | 2.73 | |||||||||||||||
Cash dividends | 0.27 | 0.27 | 0.27 | 0.27 | 1.08 | |||||||||||||||
First | Second | Third | Fourth | |||||||||||||||||
2019 | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||||
Interest income | $ | 18,096 | $ | 25,211 | $ | 24,958 | $ | 24,590 | $ | 92,855 | ||||||||||
Interest expense | 3,028 | 4,222 | 4,336 | 4,142 | 15,728 | |||||||||||||||
Net interest income | 15,068 | 20,989 | 20,622 | 20,448 | 77,127 | |||||||||||||||
Provision for (recovery of) loan losses | 16 | (10 | ) | (12 | ) | 462 | 456 | |||||||||||||
Net interest income after provision for (recovery of) loan losses | 15,052 | 20,999 | 20,634 | 19,986 | 76,671 | |||||||||||||||
Noninterest income | 3,451 | 3,682 | 4,171 | 3,866 | 15,170 | |||||||||||||||
Noninterest expense | 10,929 | 26,316 | 13,792 | 15,037 | 66,074 | |||||||||||||||
Income before income taxes | 7,574 | (1,635 | ) | 11,013 | 8,815 | 25,767 | ||||||||||||||
Income taxes | 1,571 | (405 | ) | 2,321 | 1,374 | 4,861 | ||||||||||||||
Net income | $ | 6,003 | $ | (1,230 | ) | $ | 8,692 | $ | 7,441 | $ | 20,906 | |||||||||
Per common share: | ||||||||||||||||||||
Net income - basic | $ | 0.69 | $ | (0.11 | ) | $ | 0.78 | $ | 0.67 | $ | 1.99 | |||||||||
Net income - diluted | 0.69 | (0.11 | ) | 0.78 | 0.67 | 1.98 | ||||||||||||||
Cash dividends | 0.25 | 0.25 | 0.27 | 0.27 | 1.04 | |||||||||||||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
American National Bankshares Inc.
Danville, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of American National Bankshares Inc. and Subsidiary (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three yearsother named executive officers initially was reduced to an amount equal to 22.5% of their respective base salaries.
Corporate Performance Measure | Weighting | Threshold | Target | Maximum | ||||||||||||
Core EPS – Original Target | 100% | $ | 3.37 | $ | 3.50 | $ | 3.63 | |||||||||
Core EPS – Revised Target | 100% | $ | 2.63 | $ | 2.74 | $ | 2.83 | |||||||||
We have also audited, in accordance with the standardsa target incentive payment equal to 22.5% of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013,respective base salaries for Messrs. Farrar, Martin Jung, and our report dated March 14, 2022 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to errorMs. Joyce. The target payment would have decreased or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements thatincreased proportionately if Core EPS was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses – Loans Collectively Evaluated for Impairment – Qualitative Factors
Description of the Matter
As described in Note 1 (Summary of Significant Accounting Policies) and Note 5 (Allowance for Loan Losses and Reserve for Unfunded Lending Commitments) to the consolidated financial statements, the Company maintains an allowance for loan losses to provide for probable losses inherent in the loan portfolio. The Company’s allowance for loan losses has two basic components, the formula allowance and the specific allowance. At December 31, 2021, the formula allowance represented $18,004,000 of the total allowance for loan losses of $18,678,000. For loans that are not specifically identified for impairment, the formula allowance uses historical loss experience along with various qualitative factors to develop adjusted loss factors for each loan segment. The qualitative adjustments to the historical loss experience are established by applying a loss percentage to the loan segments identified by management based on their assessment of shared risk characteristics within groups of similar loans. Qualitative factors are determined based on management’s continuing evaluation of inputs and assumptions underlying the quality of the loan portfolio. Management evaluates qualitative factors, primarily considering national, regional and local economic trends and conditions; concentrations of credit; trends in delinquencies, nonaccrual loans, and loss rates; trends in volume and terms of loans; effects of changes in risk selection, underwriting standards, and lending policies; experience of lending officers, other lending staff and loan review; and legal, regulatory and collateral factors.
Management exercised significant judgment when assessing the qualitative factors in estimating the allowance for loan losses. We identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.
How We Addressed the Matter in Our Audit
The primary audit procedures we performed to address this critical audit matter included:
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/s/ YOUNT, HYDE & BARBOUR, P.C.
We have served as the Company's auditor since 2002.
Winchester, Virginia
March 14, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
American National Bankshares Inc.
Danville, Virginia
Opinion on the Internal Control over Financial Reporting
We have audited American National Bankshares Inc. and Subsidiary’s (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the consolidated financial statements of the Company and our report dated March 14, 2022 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia
March 14, 2022
American National Bankshares Inc.
Consolidated Balance Sheets
As of December 31, 2021 and 2020
(Dollars in thousands, except per share data)
2021 | 2020 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 23,095 | $ | 30,767 | ||||
Interest-bearing deposits in other banks | 487,773 | 343,603 | ||||||
Securities available for sale, at fair value | 692,467 | 466,091 | ||||||
Restricted stock, at cost | 8,056 | 8,715 | ||||||
Loans held for sale | 8,481 | 15,591 | ||||||
Loans, net of deferred fees and costs | 1,946,580 | 2,015,056 | ||||||
Less allowance for loan losses | (18,678 | ) | (21,403 | ) | ||||
Net loans | 1,927,902 | 1,993,653 | ||||||
Premises and equipment, net | 35,564 | 39,723 | ||||||
Other real estate owned, net of valuation allowance | 143 | 958 | ||||||
Goodwill | 85,048 | 85,048 | ||||||
Core deposit intangibles, net | 4,627 | 6,091 | ||||||
Bank owned life insurance | 29,107 | 28,482 | ||||||
Other assets | 32,334 | 31,288 | ||||||
Total assets | $ | 3,334,597 | $ | 3,050,010 | ||||
LIABILITIES and SHAREHOLDERS' EQUITY | ||||||||
Liabilities: | ||||||||
Noninterest-bearing deposits | $ | 1,009,081 | $ | 830,094 | ||||
Interest-bearing deposits | 1,881,272 | 1,781,236 | ||||||
Total deposits | 2,890,353 | 2,611,330 | ||||||
Customer repurchase agreements | 41,128 | 42,551 | ||||||
Subordinated debt | 0 | 7,500 | ||||||
Junior subordinated debt | 28,232 | 28,130 | ||||||
Other liabilities | 20,092 | 22,605 | ||||||
Total liabilities | 2,979,805 | 2,712,116 | ||||||
Commitments and contingencies | ||||||||
Shareholders' equity: | ||||||||
Preferred stock, $5 par value, 2,000,000 shares authorized, none outstanding | 0 | 0 | ||||||
Common stock, $1 par value, 20,000,000 shares authorized, 10,766,967 shares outstanding at December 31, 2021 and 10,982,367 shares outstanding at December 31, 2020 | 10,710 | 10,926 | ||||||
Capital in excess of par value | 147,777 | 154,850 | ||||||
Retained earnings | 201,380 | 169,681 | ||||||
Accumulated other comprehensive income (loss), net | (5,075 | ) | 2,437 | |||||
Total shareholders' equity | 354,792 | 337,894 | ||||||
Total liabilities and shareholders' equity | $ | 3,334,597 | $ | 3,050,010 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
American National Bankshares Inc.
Consolidated Statements of Income
For the Years Ended December 31, 2021, 2020, and 2019
(Dollars in thousands, except per share data)
2021 | 2020 | 2019 | ||||||||||
Interest and Dividend Income: | ||||||||||||
Interest and fees on loans | $ | 87,040 | $ | 87,700 | $ | 82,684 | ||||||
Interest and dividends on securities: | ||||||||||||
Taxable | 7,309 | 6,764 | 7,682 | |||||||||
Tax-exempt | 385 | 433 | 777 | |||||||||
Dividends | 464 | 503 | 451 | |||||||||
Other interest income | 598 | 440 | 1,261 | |||||||||
Total interest and dividend income | 95,796 | 95,840 | 92,855 | |||||||||
Interest Expense: | ||||||||||||
Interest on deposits | 3,645 | 9,729 | 13,143 | |||||||||
Interest on short-term borrowings | 22 | 259 | 650 | |||||||||
Interest on subordinated debt | 203 | 489 | 367 | |||||||||
Interest on junior subordinated debt | 1,535 | 1,543 | 1,554 | |||||||||
Interest on long-term borrowings | 0 | 0 | 14 | |||||||||
Total interest expense | 5,405 | 12,020 | 15,728 | |||||||||
Net Interest Income | 90,391 | 83,820 | 77,127 | |||||||||
Provision for (recovery of) loan losses | (2,825 | ) | 8,916 | 456 | ||||||||
Net Interest Income after Provision for (Recovery of) Loan Losses | 93,216 | 74,904 | 76,671 | |||||||||
Noninterest Income: | ||||||||||||
Trust and brokerage fees | 6,019 | 4,789 | 4,568 | |||||||||
Service charges on deposit accounts | 2,611 | 2,557 | 2,866 | |||||||||
Interchange fees | 4,152 | 3,213 | 2,964 | |||||||||
Other fees and commissions | 801 | 712 | 729 | |||||||||
Mortgage banking income | 4,195 | 3,514 | 2,439 | |||||||||
Securities gains, net | 35 | 814 | 607 | |||||||||
Income from Small Business Investment Companies | 1,972 | 270 | 211 | |||||||||
Income from insurance investments | 1,199 | 321 | 328 | |||||||||
Losses on premises and equipment, net | (885 | ) | (110 | ) | (427 | ) | ||||||
Other | 932 | 763 | 885 | |||||||||
Total noninterest income | 21,031 | 16,843 | 15,170 | |||||||||
Noninterest Expense: | ||||||||||||
Salaries and employee benefits | 32,342 | 29,765 | 30,015 | |||||||||
Occupancy and equipment | 6,032 | 5,586 | 5,417 | |||||||||
FDIC assessment | 864 | 639 | 119 | |||||||||
Bank franchise tax | 1,767 | 1,702 | 1,644 | |||||||||
Amortization of intangible assets | 1,464 | 1,637 | 1,398 | |||||||||
Data processing | 2,958 | 3,017 | 2,567 | |||||||||
Software | 1,368 | 1,454 | 1,295 | |||||||||
Other real estate owned, net | 131 | 60 | 31 | |||||||||
Merger related expenses | 0 | 0 | 11,782 | |||||||||
Other | 12,082 | 10,705 | 11,806 | |||||||||
Total noninterest expense | 59,008 | 54,565 | 66,074 | |||||||||
Income Before Income Taxes | 55,239 | 37,182 | 25,767 | |||||||||
Income Taxes | 11,713 | 7,137 | 4,861 | |||||||||
Net Income | $ | 43,526 | $ | 30,045 | $ | 20,906 | ||||||
Net Income Per Common Share: | ||||||||||||
Basic | $ | 4.00 | $ | 2.74 | $ | 1.99 | ||||||
Diluted | $ | 4.00 | $ | 2.73 | $ | 1.98 | ||||||
Weighted Average Common Shares Outstanding: | ||||||||||||
Basic | 10,873,817 | 10,981,623 | 10,531,572 | |||||||||
Diluted | 10,877,231 | 10,985,790 | 10,541,337 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
American National Bankshares Inc.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2021, 2020, and 2019
(Dollars in thousands)
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Net income | $ | 43,526 | $ | 30,045 | $ | 20,906 | ||||||
Other comprehensive income (loss): | ||||||||||||
Unrealized gains (losses) on securities available for sale | (12,236 | ) | 7,213 | 9,095 | ||||||||
Tax effect | 2,643 | (1,557 | ) | (2,005 | ) | |||||||
Reclassification adjustment for gains on sale or call of securities | (35 | ) | (814 | ) | (274 | ) | ||||||
Tax effect | 7 | 176 | 59 | |||||||||
Unrealized gains (losses) on cash flow hedges | 2,068 | (2,210 | ) | (1,854 | ) | |||||||
Tax effect | (434 | ) | 448 | 394 | ||||||||
Change in unfunded pension liability | 590 | (413 | ) | (64 | ) | |||||||
Tax effect | (115 | ) | 77 | 1 | ||||||||
Other comprehensive income (loss) | (7,512 | ) | 2,920 | 5,352 | ||||||||
Comprehensive income | $ | 36,014 | $ | 32,965 | $ | 26,258 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
American National Bankshares Inc.
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2021, 2020, and 2019
(Dollars in thousands, except per share data)
Accumulated | ||||||||||||||||||||
Capital in | Other | Total | ||||||||||||||||||
Common | Excess of | Retained | Comprehensive | Shareholders' | ||||||||||||||||
Stock | Par Value | Earnings | Income (Loss) | Equity | ||||||||||||||||
Balance, December 31, 2018 | $ | 8,668 | $ | 78,172 | $ | 141,537 | $ | (5,835 | ) | $ | 222,542 | |||||||||
Net income | 0 | 0 | 20,906 | 0 | 20,906 | |||||||||||||||
Other comprehensive income | 0 | 0 | 0 | 5,352 | 5,352 | |||||||||||||||
Issuance of common stock for acquisition (2,361,686 shares) | 2,362 | 80,108 | 0 | 0 | 82,470 | |||||||||||||||
Issurance of replacement options/restricted stock | 0 | 870 | 0 | 0 | 870 | |||||||||||||||
Stock repurchased (85,868 shares) | (86 | ) | (3,060 | ) | 0 | 0 | (3,146 | ) | ||||||||||||
Stock options exercised (37,104 shares) | 37 | 651 | 0 | 0 | 688 | |||||||||||||||
Vesting of restricted stock (21,747 shares) | 22 | (22 | ) | 0 | 0 | 0 | ||||||||||||||
Equity based compensation (38,281 shares) | 16 | 1,525 | 0 | 0 | 1,541 | |||||||||||||||
Cash dividends paid, $1.04 per share | 0 | 0 | (10,965 | ) | 0 | (10,965 | ) | |||||||||||||
Balance, December 31, 2019 | 11,019 | 158,244 | 151,478 | (483 | ) | 320,258 | ||||||||||||||
Net income | 0 | 0 | 30,045 | 0 | 30,045 | |||||||||||||||
Other comprehensive income | 0 | 0 | 0 | 2,920 | 2,920 | |||||||||||||||
Stock repurchased (140,526 shares) | (141 | ) | (4,840 | ) | 0 | 0 | (4,981 | ) | ||||||||||||
Stock options exercised (2,573 shares) | 3 | 40 | 0 | 0 | 43 | |||||||||||||||
Vesting of restricted stock (18,487 shares) | 18 | (18 | ) | 0 | 0 | 0 | ||||||||||||||
Equity based compensation (48,780 shares) | 27 | 1,424 | 0 | 0 | 1,451 | |||||||||||||||
Cash dividends paid, $1.08 per share | 0 | 0 | (11,842 | ) | 0 | (11,842 | ) | |||||||||||||
Balance, December 31, 2020 | 10,926 | 154,850 | 169,681 | 2,437 | 337,894 | |||||||||||||||
Net income | 0 | 0 | 43,526 | 0 | 43,526 | |||||||||||||||
Other comprehensive loss | 0 | 0 | 0 | (7,512 | ) | (7,512 | ) | |||||||||||||
Stock repurchased (265,939 shares) | (266 | ) | (8,544 | ) | 0 | 0 | (8,810 | ) | ||||||||||||
Stock options exercised (5,346 shares) | 5 | 84 | 0 | 0 | 89 | |||||||||||||||
Vesting of restricted stock (23,968 shares) | 24 | (24 | ) | 0 | 0 | 0 | ||||||||||||||
Equity based compensation (45,193 shares) | 21 | 1,411 | 0 | 0 | 1,432 | |||||||||||||||
Cash dividends paid, $1.09 per share | 0 | 0 | (11,827 | ) | 0 | (11,827 | ) | |||||||||||||
Balance, December 31, 2021 | $ | 10,710 | $ | 147,777 | $ | 201,380 | $ | (5,075 | ) | $ | 354,792 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
American National Bankshares Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2021, 2020, and 2019
(Dollars in thousands)
2021 | 2020 | 2019 | ||||||||||
Cash Flows from Operating Activities: | ||||||||||||
Net income | $ | 43,526 | $ | 30,045 | $ | 20,906 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Provision for (recovery of) loan losses | (2,825 | ) | 8,916 | 456 | ||||||||
Depreciation | 2,243 | 2,188 | 2,064 | |||||||||
Net accretion of acquisition accounting adjustments | (5,236 | ) | (3,812 | ) | (3,387 | ) | ||||||
Core deposit intangible amortization | 1,464 | 1,637 | 1,398 | |||||||||
Net amortization of securities | 1,846 | 1,186 | 1,100 | |||||||||
Net gain on sale or call of securities available for sale | (35 | ) | (814 | ) | (274 | ) | ||||||
Net change in fair value of equity securities | 0 | 0 | (333 | ) | ||||||||
Gain on sale of loans held for sale | (4,195 | ) | (3,514 | ) | (2,439 | ) | ||||||
Proceeds from sales of loans held for sale | 154,041 | 155,705 | 103,760 | |||||||||
Originations of loans held for sale | (142,736 | ) | (165,755 | ) | (102,708 | ) | ||||||
Net (gain) loss on other real estate owned | 111 | (4 | ) | (120 | ) | |||||||
Valuation allowance on other real estate owned | 0 | 0 | 68 | |||||||||
Net loss on sale, write-down or disposal of premises and equipment | 885 | 110 | 427 | |||||||||
Equity based compensation expense | 1,432 | 1,451 | 1,541 | |||||||||
Earnings on bank owned life insurance | (625 | ) | (665 | ) | (630 | ) | ||||||
Deferred income tax (benefit) expense | 808 | (640 | ) | 1,068 | ||||||||
Net change in other assets | 245 | 29 | 11,137 | |||||||||
Net change in other liabilities | 146 | (2,387 | ) | (1,354 | ) | |||||||
Net cash provided by operating activities | 51,095 | 23,676 | 32,680 | |||||||||
Cash Flows from Investing Activities: | ||||||||||||
Proceeds from sales of equity securities | 0 | 0 | 445 | |||||||||
Proceeds from sales of securities available for sale | 561 | 5,811 | 29,878 | |||||||||
Proceeds from maturities, calls and paydowns of securities available for sale | 192,672 | 208,429 | 123,915 | |||||||||
Purchases of securities available for sale | (433,690 | ) | (295,109 | ) | (155,746 | ) | ||||||
Net change in restricted stock | 659 | (85 | ) | (795 | ) | |||||||
Proceeds from sales of purchased credit impaired loans | 0 | 4,939 | 0 | |||||||||
Net decrease (increase) in loans | 73,836 | (186,635 | ) | (26,257 | ) | |||||||
Proceeds from sale of premises and equipment | 2,031 | 1 | 0 | |||||||||
Purchases of premises and equipment | (1,000 | ) | (2,694 | ) | (3,555 | ) | ||||||
Proceeds from sales of other real estate owned | 704 | 195 | 1,289 | |||||||||
Cash paid in bank acquisition | 0 | 0 | (27 | ) | ||||||||
Cash acquired in bank acquisition | 0 | 0 | 26,283 | |||||||||
Net cash used in investing activities | (164,227 | ) | (265,148 | ) | (4,570 | ) | ||||||
Cash Flows from Financing Activities: | ||||||||||||
Net change in noninterest-bearing deposits | 178,987 | 251,488 | 23,310 | |||||||||
Net change in interest-bearing deposits | 100,114 | 299,476 | (12,241 | ) | ||||||||
Net change in customer repurchase agreements | (1,423 | ) | 2,076 | 5,232 | ||||||||
Net change in other short-term borrowings | 0 | 0 | (14,883 | ) | ||||||||
Net change in long-term borrowings | (7,500 | ) | 0 | (778 | ) | |||||||
Common stock dividends paid | (11,827 | ) | (11,842 | ) | (10,965 | ) | ||||||
Repurchase of common stock | (8,810 | ) | (4,981 | ) | (3,146 | ) | ||||||
Proceeds from exercise of stock options | 89 | 43 | 688 | |||||||||
Net cash provided by (used in) financing activities | 249,630 | 536,260 | (12,783 | ) | ||||||||
Net Increase in Cash and Cash Equivalents | 136,498 | 294,788 | 15,327 | |||||||||
Cash and Cash Equivalents at Beginning of Period | 374,370 | 79,582 | 64,255 | |||||||||
Cash and Cash Equivalents at End of Period | $ | 510,868 | $ | 374,370 | $ | 79,582 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
American National Bankshares Inc.
Notes to Consolidated Financial Statements
December 31, 2021, 2020, and 2019
Note 1 – Summary of Significant Accounting Policies
Nature of Operations and Consolidation
The consolidated financial statements include the accounts of American National Bankshares Inc. (the "Company") and its wholly owned subsidiary, American National Bank and Trust Company (the "Bank"). The Bank offers a wide variety of retail, commercial, secondary market mortgage lending, and trust and investment services which also include non-deposit products such as mutual funds and insurance policies.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the 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, goodwill and intangible assets, other-than-temporary impairment of securities, accounting for merger and acquisition activity, accounting for acquired loans with specific credit-related deterioration, and the valuation of deferred tax assets and liabilities.
In April 2006, AMNB Statutory Trust I, a Delaware statutory trust (the "AMNB Trust") and an unconsolidated wholly owned subsidiary of the Company, was formed for the purpose of issuing preferred securities (the "Trust Preferred Securities") in a private placement pursuant to an applicable exemption from registration. Proceeds from the securities were used to fund the acquisition of Community First Financial Corporation ("Community First") which occurred in April 2006.
In July 2011, and in connection with its acquisition of MidCarolina Financial Corporation ("MidCarolina"), the Company assumed liabilities of MidCarolina Trust I and MidCarolina Trust II, two separate unconsolidated Delaware statutory trusts (the "MidCarolina Trusts"), which were also formed for the purpose of issuing preferred securities. Refer to Note 11 for further details concerning these entities.
All significant inter-company transactions and accounts are eliminated in consolidation, with the exception of the AMNB Trust and the MidCarolina Trusts, as detailed in Note 11.
Cash and Cash Equivalents
Cash includes cash on hand, cash with correspondent banks, and cash on deposit at the Federal Reserve Bank of Richmond. Cash equivalents are short-term, highly liquid investments that are readily convertible to cash with original maturities of three months or less and are subject to an insignificant risk of change in value. Cash and cash equivalents are carried at cost.
Interest-bearing Deposits in Other Banks
Interest-bearing deposits in other banks mature within one year and are carried at cost.
Securities
Certain debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Debt securities not classified as held to maturity or trading are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities or to the earliest call with premiums. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
The Company does not currently have any securities in held to maturity or trading and has no plans to add any to either category. Management evaluates securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement and, (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
Equity securities with readily determinable fair values are carried at fair value with changes in fair value included in noninterest income.
Due to the nature and restrictions placed on the Company's investment in common stock of the Federal Home Loan Bank of Atlanta ("FHLB") and the Federal Reserve Bank of Richmond, these securities have been classified as restricted equity securities and carried at cost.
Loans Held for Sale
Secondary market mortgage loans are designated as held for sale at the time of their origination. These loans are pre-sold with servicing released and the Company does not retain any interest after the loans are sold. These loans consist primarily of fixed-rate, single-family residential mortgage loans which meet the underwriting characteristics of certain government-sponsored enterprises (conforming loans). In addition, the Company requires a firm purchase commitment from a permanent investor before a loan can be committed, thus limiting interest rate risk. Loans held for sale are carried at fair value. Gains on sales of loans are recognized at the loan closing date and are included in noninterest income.
Derivative Loan Commitments
The Company enters into mortgage loan commitments whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheets with net changes in their fair values recorded in other expenses.
The period of time between issuance of a loan commitment and sale of the loan generally ranges from 30 to 60 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery contracts, by committing to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed the interest rate risk on the loan. As a result, the Company is not generally exposed to significant 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 fair 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 Company determines the fair value of rate lock commitments and best efforts contracts by measuring the change in the estimated value of the underlying assets while taking into consideration the probability that the loans will be funded.
Loans
The Company makes mortgage, commercial, and consumer loans. A substantial portion of the loan portfolio is secured by real estate. The ability of the Company's debtors to honor their contracts is dependent upon the real estate market and general economic conditions in the Company's market 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 balance adjusted for the allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. The accrual of interest on loans is generally discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Loans are typically charged off when the loan is 120 days past due, unless secured and in process of collection. Loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.
Interest accrued but not collected for loans that are placed on nonaccrual status or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
A loan is considered past due when a payment of principal or interest or both is due but not paid. Management closely monitors past due loans in timeframes of 30-59 days, 60-89 days, and 90 or more days past due.
These policies apply to all loan portfolio classes and segments.
Substandard and doubtful risk graded commercial, commercial real estate, and construction loans are reviewed for impairment. All troubled debt restructurings ("TDRs"), regardless of dollar amount, are also evaluated for impairment. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment and establishing a specific allowance include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, commercial real estate, and construction loans 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 value of the collateral if the loan is collateral dependent.
Generally, large groups of smaller balance homogeneous loans (residential real estate and consumer loans) are collectively evaluated for impairment. The Company's policy for recognizing interest income on impaired loans is consistent with its nonaccrual policy.
The Company's loan portfolio is organized by major segment. These include: commercial, commercial real estate, residential real estate and consumer loans. Each segment has particular risk characteristics that are specific to the borrower and the generic category of credit. Commercial loan repayments are highly dependent on cash flows associated with the underlying business and its profitability. They can also be impacted by changes in collateral values. Commercial real estate loans share the same general risk characteristics as commercial loans but are often more dependent on the value of the underlying real estate collateral and, when construction is involved, the ultimate completion of and sale of the project. Residential real estate loans are generally dependent on the value of collateral and the credit worthiness of the underlying borrower. Consumer loans are very similar in risk characteristics to residential real estate.
In connection with mergers, certain loans were acquired which exhibited deteriorated credit quality since origination and for which the Company does not expect to collect all contractual payments. These purchased credit impaired loans are accounted for in accordance with Accounting Standards Codification ("ASC") 310-30,Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality, and are recorded at the amount paid, such that there is no carryover of the seller's allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses.
Such purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as, credit score, loan type, and date of origination. The Company estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan's or pool's contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount,target to a loss is recorded as a provision for loan losses. If the present valueminimum Core EPS of expected cash flows is greater$2.63 or more than the carrying amount, it is recognized as part of future interest income.
Troubled Debt Restructurings
In situations where, for economic or legal reasons relatedtarget to a borrower's financial condition, management may grantmaximum of Core EPS of $2.83. The revised maximum incentive payment eligibility, in combination of cash and restricted stock grants, for 2023 was 33.75% of base salary for Messrs. Farrar, Martin, Jung, and Ms. Joyce.
Allowance for Loan Losses
The purpose of the allowance for loan losses ("ALLL") is to provide for probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance.
The goal of the Company is to maintain an appropriate, systematic, and consistently applied process to determine the amounts of the ALLL and the provision for loan loss expense.
The Company uses certain practices to manage its credit risk. These practices include (1) appropriate lending limits for loan officers, (2) a loan approval process, (3) careful underwriting of loan requests, including analysis of borrowers, cash flows, collateral, and market risks, (4) regular monitoring of the portfolio, including diversification by type and geography, (5) review of loans by the Loan Review department, which operates independently of loan production (the Loan Review function consists of a co-sourced arrangement using both internal personnel and external vendors to provide the Company with a more robust review function of the loan portfolio), (6) regular meetings of the Credit Committees to discuss portfolio and policy changes and make decisions on large or unusual loan requests, and (7) regular meetings of the Asset Quality Committee which reviews the status of individual loans.
Risk grades are assigned as part of the loan origination process. From time to time risk grades may be modified as warranted by the facts and circumstances surrounding the credit.
Calculation and analysis of the allowance for loan losses is prepared quarterly by the Finance Department. The Company's Credit Committee, Risk and Compliance Committee, Audit Committee, and the Board of Directors review the allowance for adequacy.
The Company's allowance for loan losses has two basic components: the formula allowance and the specific allowance. Each of these components is determined based upon estimates and judgments.
The formula allowance uses historical loss experience as an indicator of future losses, along with various qualitative factors, including levels and trends in delinquencies, nonaccrual loans, charge-offs and recoveries, trends in volume and terms of loans, effects of changes in underwriting standards, experience of lending staff, economic conditions, and portfolio concentrations. In the formula allowance for commercial and commercial real estate loans, the historical loss rate is combined with the qualitative factors, resulting in an adjusted loss factor for each risk-grade category of loans. The period-end balances for each loan risk-grade category are multiplied by the adjusted loss factor. Allowance calculations for consumer loans are calculated based on historical losses for each product category without regard to risk grade. This loss rate is combined with qualitative factors resulting in an adjusted loss factor for each product category.
The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified impaired loans. These include:
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The use of these computed values is inherently subjective and actual losses could be greater or less than the estimates. No single statistic, formula, or measurement determines the adequacy of the allowance. Management makes subjective and complex judgments about matters that are inherently uncertain, and different amounts would be reported under different conditions or using different assumptions. For analytical purposes, management allocates a portion of the allowance to specific loan categories and specific loans. However, the entire allowance is used to absorb credit losses inherent in the loan portfolio, including identified and unidentified losses.
The relationships and ratios used in calculating the allowance, including the qualitative factors, may change from period to period as facts and circumstances evolve. Furthermore, management cannot provide assurance that in any particular period the Company will not have sizeable credit losses in relation to the amount reserved. Management may find it necessary to significantly adjust the allowance, considering current factorspayout at the time.
Premisesmaximum threshold for incentive payment eligibility under the program. Accordingly, Messrs. Farrar, Martin, Jung, and Equipment
Land is carried at cost. PremisesMs. Joyce received cash payments of $128,996, $118,058, $104,288, 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 thirty-nine years; leasehold improvements are amortized over the lives of the respective leases or the estimated useful lives of the improvements, whichever is less. Software is generally amortized over three 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.
Goodwill and Intangible Assets
Goodwill represents the excess of the cost of an acquired entity over the fair value of the identifiable net assets acquired. The Company performs its annual analysis as of June 30 each year. Goodwill is not amortized, but is subject to at least an annual assessment for impairment. Other acquired intangible assets with finite lives (such as core deposit intangibles) are initially recorded at estimated fair value and are amortized over their useful lives. Core deposit and other intangible assets are generally amortized using accelerated methods over their useful lives of five to ten years.
Trust Assets
Securities and other property held by the trust and investment services segment in a fiduciary or agency capacity are not assets of the Company and are not included in the accompanying consolidated financial statements.
Other Real Estate Owned ("OREO")
OREO represents real estate that has been acquired through loan foreclosures or deeds received in lieu of loan payments. Generally, such properties are appraised at the time acquired and are recorded at fair value less estimated selling costs. Subsequent to foreclosure, valuations are periodically performed by management, and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in noninterest expense.
Bank Owned Life Insurance
In connection with mergers, the Company has acquired bank owned life insurance ("BOLI"). The asset is reflected as the cash surrender value of the policies as provided by the insurer on a monthly basis.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company – put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) 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 (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Income Taxes
The Company uses the balance sheet method to account for deferred income tax assets and liabilities. 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.
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 50 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. The Company had no liability for unrecognized tax benefits as of December 31,2021 and 2020.
Stock-Based Compensation
Stock compensation accounting guidance ASC 718,Compensation - Stock Compensation, requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.
The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees' service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-Scholes model is used to estimate the fair value of stock options, while the market price of the Company's common stock at the date of grant is used for restricted stock awards.
Earnings Per Common Share
Basic earnings per common share represent income available to common shareholders divided by the average number of common shares outstanding during the period. Diluted earnings per common share reflect the impact of 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 consist solely of outstanding stock options and are determined using the treasury method. Nonvested shares of restricted stock are included in the computation of basic earnings per share because the holder has voting rights and shares in non-forfeitable dividends during the vesting period.
Comprehensive Income
Comprehensive income is shown in a two statement approach; the first statement presents total net income and its components followed by a second statement that presents all the components of other comprehensive income which include unrealized gains and losses on available for sale securities, unrealized gains and losses on cash flow hedges, and changes in the funded status of the defined benefit postretirement plan.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred, and were $506,000, $453,000, and $473,000 in 2021,2020, and 2019, respectively.
Mergers and Acquisitions
Business combinations are accounted for under ASC 805,Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company relies on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Under the acquisition method of accounting, the Company identifies the acquirer and the closing date and applies applicable recognition principles and conditions. Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples of costs to the Company include systems conversions, integration planning consultants and advertising costs. The Company accounts for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities is recognized in accordance with other applicable GAAP. These acquisition-related costs have been and will be included within the consolidated statements of income classified within the noninterest expense caption.
Derivative Financial Instruments
The Company uses derivatives primarily to manage risk associated with changing interest rates. The Company's derivative financial instruments consist of interest rate swaps that qualify as cash flow hedges of the Company's trust preferred capital notes. The Company recognizes derivative financial instruments at fair value as either an other asset or other liability in the consolidated balance sheets. The effective portion of the gain or loss on the Company's cash flow hedges is reported as a component of other comprehensive income, net of deferred income taxes, and is reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.
Reclassifications
Certain reclassifications have been made in prior years financial statements to conform to classifications used in the current year. There were no material reclassifications.
Recently Adopted Accounting Developments
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." 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, 2021. The adoption of ASU 2017-04 did not have a material effect on the Company's 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 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 adoption of ASU 2019-12 did not have a material effect on the Company's 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 2020-01 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, such as the Company, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The adoption of ASU 2020-01 did not have a material effect on the Company's consolidated financial statements.
In October 2020, the FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs." This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The adoption of ASU 2020-08 did not have a material effect on the Company's consolidated financial statements.
In December 2020, the Consolidated Appropriations Act of 2021 ("Appropriations Act") was passed. Under Section 541 of the Appropriations Act, Congress extended or modified many of the relief programs first created by the Coronavirus Aid, Relief, and Economic Security Act ('CARES Act"), including the Paycheck Protection Program ("PPP") and treatment of certain loan modifications related to the COVID-19 pandemic. The Act did not have a material effect on the Company's consolidated financial statements. The aggregate loan balances for the PPP at December 31, 2021 and 2020, respectively, were $12.2 million and $211.3 million. Loan modification balances outstanding at December 31, 2020 were $30.0 million and all remaining modifications expired during 2021 and all loans resumed making normal payments.
Recent Accounting Pronouncements and Other Authoritative Accounting Guidance
In June 2016, the FASB issued ASU 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. 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 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 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. At the one-time evaluation date, the Company qualified as a smaller reporting company and elected to defer the adoption of the standard. The Company began running parallel simulations with its historical loss model starting in the fourth quarter of 2021 and will continue this practice until adoption on January 1, 2023. The Company is working to ensure readiness and compliance with the standard. The Company has engaged with a vendor, validated data, analyzed correlations for forecasting, selected methodologies and begun running parallel models. Management will continue to refine assumptions that impact the calculation prior to the effective date.
Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin ("SAB") 119. SAB 119 updated portions of SEC interpretative guidance to align with 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 March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments in this ASU 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 the London Interbank 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. Subsequently, in January 2021, the FASB issued ASU 2021-01 "Reference Rate Reform (Topic 848): Scope." This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, "Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity." The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, "Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity – Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force)." The ASU addresses how an issuer should account for modifications or an exchange of freestanding written call options classified as equity that is not within the scope of another Topic. For both public and private companies, the ASU is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Transition is prospective. Early adoption is permitted. The Company does not expect the adoption of ASU 2021-04 to have a material impact on its consolidated financial statements.
In August 2021, the FASB issued ASU 2021-06, "Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No.33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants." This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No.33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The ASU is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2021-06 to have a material impact on its consolidated financial statements
In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers." The ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022. Entities should apply the amendments prospectively and early adoption is permitted. The Company does not expect the adoption of ASU 2021-08 to have a material impact on its consolidated financial statements.
Note 2 – Restrictions on Cash
The Company is a member of the Federal Reserve System and prior to March 2020 was required to maintain certain levels of its cash and cash equivalents as reserves based on regulatory requirements. The gross reserve requirement and the required balances with the Federal Reserve Bank of Richmond were zero at December 31, 2021 and 2020, respectively.
The Company maintains cash accounts in other commercial banks. The amount on deposit with correspondent institutions at December 31, 2021 exceeded the insurance limits of the FDIC by $1,871,000.
Note 3 - Securities
The amortized cost and estimated fair value of investments in securities at December 31,2021 and 2020 were as follows (dollars in thousands):
December 31, 2021 | ||||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
Securities available for sale: | ||||||||||||||||
U.S. Treasury | $ | 150,751 | $ | 0 | $ | 1,174 | $ | 149,577 | ||||||||
Federal agencies and GSEs | 104,518 | 993 | 931 | 104,580 | ||||||||||||
Mortgage-backed and CMOs | 357,981 | 2,854 | 4,525 | 356,310 | ||||||||||||
State and municipal | 65,939 | 1,021 | 488 | 66,472 | ||||||||||||
Corporate | 15,450 | 218 | 140 | 15,528 | ||||||||||||
Total securities available for sale | $ | 694,639 | $ | 5,086 | $ | 7,258 | $ | 692,467 | ||||||||
The Company had no equity securities at December 31, 2021 or December 31, 2020 but recognized in income $333,000 during 2019.
(Dollars in thousands) | December 31, 2020 | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
Securities available for sale: | ||||||||||||||||
U.S. Treasury | $ | 34,997 | $ | 1 | $ | 0 | $ | 34,998 | ||||||||
Federal agencies and GSEs | 104,092 | 1,976 | 45 | 106,023 | ||||||||||||
Mortgage-backed and CMOs | 246,770 | 6,117 | 105 | 252,782 | ||||||||||||
State and municipal | 57,122 | 1,979 | 2 | 59,099 | ||||||||||||
Corporate | 13,011 | 188 | 10 | 13,189 | ||||||||||||
Total securities available for sale | $ | 455,992 | $ | 10,261 | $ | 162 | $ | 466,091 | ||||||||
The amortized cost and estimated fair value of investments in debt securities at December 31, 2021, by contractual maturity, are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because mortgage-backed securities have both known principal repayment terms as well as unknown principal repayments due to potential borrower pre-payments, it is difficult to accurately predict the final maturity of these investments. Mortgage-backed securities are shown separately (dollars in thousands):
Available for Sale | ||||||||
Amortized | ||||||||
Cost | Fair Value | |||||||
Due in one year or less | $ | 52,314 | $ | 52,315 | ||||
Due after one year through five years | 185,555 | 185,333 | ||||||
Due after five years through ten years | 84,768 | 84,381 | ||||||
Due after ten years | 14,021 | 14,128 | ||||||
Mortgage-backed and CMOs | 357,981 | 356,310 | ||||||
| $ | 694,639 | $ | 692,467 | |||||
Gross realized gains and losses on, and the proceeds from the sale of, securities available for sale were as follows (dollars in thousands):
For the Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Gross realized gains | $ | 35 | $ | 814 | $ | 328 | ||||||
Gross realized losses | 0 | 0 | (54 | ) | ||||||||
Proceeds from sales of securities | 561 | 5,811 | 29,878 | |||||||||
Securities with a carrying value of approximately $150,400,000 and $189,791,000 at December 31, 2021 and 2020, respectively, were pledged to secure public deposits, repurchase agreements, and for other purposes as required by law. FHLB letters of credit were used as additional collateral in the amounts of $275,000,000 at December 31, 2021 and $245,000,000 at December 31,2020.
Temporarily Impaired Securities
The following table shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2021. The reference point for determining when securities are in an unrealized loss position is month-end. Therefore, it is possible that a security's market value exceeded its amortized cost on other days during the past twelve-month period.
Available for sale securities that have been in a continuous unrealized loss position are as follows (dollars in thousands):
Total | Less than 12 Months | 12 Months or More | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
U.S. Treasury | $ | 149,577 | $ | 1,174 | $ | 149,577 | $ | 1,174 | $ | 0 | $ | 0 | ||||||||||||
Federal agencies and GSEs | 73,640 | 931 | 63,042 | 512 | 10,598 | 419 | ||||||||||||||||||
Mortgage-backed and CMOs | 253,444 | 4,525 | 213,292 | 3,014 | 40,152 | 1,511 | ||||||||||||||||||
State and municipal | 26,646 | 488 | 23,341 | 354 | 3,305 | 134 | ||||||||||||||||||
Corporate | 7,611 | 140 | 7,611 | 140 | 0 | 0 | ||||||||||||||||||
Total | $ | 510,918 | $ | 7,258 | $ | 456,863 | $ | 5,194 | $ | 54,055 | $ | 2,064 | ||||||||||||
U.S. Treasury: The unrealized losses on the Company's investment in 17 U.S. Treasury securities were caused by normal market fluctuations. None of these securities was in an unrealized loss position for 12 months or more. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2021.
Federal agencies and GSEs: The unrealized losses on the Company's investment in 26 government sponsored entities ("GSEs") were caused by normal market fluctuations. Twelve of these securities were in an unrealized loss position for 12 months or more. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2021.
Mortgage-backed securities: The unrealized losses on the Company's investment in 18 GSE mortgage-backed securities were caused by normal market fluctuations. Four of these securities were in an unrealized loss position for 12 months or more. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2021.
Collateralized Mortgage Obligations: The unrealized losses associated with 33 GSE collateralized mortgage obligations ("CMOs") were due to normal market fluctuations. Four of these securities were in an unrealized loss position for 12 months or more. The contractual cash flows of these investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost bases, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at December 31, 2021.
State and municipal securities: The unrealized losses on 39 state and municipal securities were caused by normal market fluctuations. Two of these securities were in an unrealized loss position for 12 months or more. These securities are of high credit quality (rated A- or higher), and principal and interest payments have been made timely. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2021.
Corporate securities: The unrealized losses on 3 corporate securities were caused by normal market fluctuations and not credit deterioration. None of these securities was in an unrealized loss position for 12 months or more. These securities are not rated, but the Company conducted thorough internal credit reviews prior to purchase and conducts ongoing quarterly reviews of these companies as well, and the Company's analysis did not indicate the existence of credit loss. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2021.
Due to restrictions placed upon the Bank's common stock investment in the Federal Reserve Bank of Richmond and FHLB, these securities have been classified as restricted equity securities and carried at cost. These restricted securities are not subject to the investment security classification requirements and are included as a separate line item on the Company's consolidated balance sheet. Restricted equity securities consist of Federal Reserve Bank of Richmond stock in the amount of $6,500,000 and $6,458,000 as of December 31, 2021 and 2020, respectively, and FHLB stock in the amount of $1,556,000 and $2,257,000 as of December 31, 2021 and 2020, respectively.
The table below shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, at December 31,2020 (dollars in thousands):
Total | Less than 12 Months | 12 Months or More | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
U.S. Treasury | $ | 21,237 | $ | 45 | $ | 19,974 | $ | 26 | $ | 1,263 | $ | 19 | ||||||||||||
Federal agencies and GSEs | 46,640 | 105 | 46,640 | 105 | 0 | 0 | ||||||||||||||||||
Mortgage-backed and CMOs | 3,456 | 2 | 3,456 | 2 | 0 | 0 | ||||||||||||||||||
State and municipal | 5,990 | 10 | 5,990 | 10 | 0 | 0 | ||||||||||||||||||
Total | $ | 77,323 | $ | 162 | $ | 76,060 | $ | 143 | $ | 1,263 | $ | 19 | ||||||||||||
Other-Than-Temporary-Impaired Securities
As of December 31, 2021 and 2020, there were no securities classified as other-than-temporary impaired.
Note 4 – Loans
Loans, excluding loans held for sale, at December 31,2021 and 2020 were comprised of the following (dollars in thousands):
December 31, | ||||||||
2021 | 2020 | |||||||
Commercial | $ | 299,773 | $ | 491,256 | ||||
Commercial real estate: | ||||||||
Construction and land development | 134,221 | 140,071 | ||||||
Commercial real estate - owner occupied | 391,517 | 373,680 | ||||||
Commercial real estate - non-owner occupied | 731,034 | 627,569 | ||||||
Residential real estate: | ||||||||
Residential | 289,757 | 269,137 | ||||||
Home equity | 93,203 | 104,881 | ||||||
Consumer | 7,075 | 8,462 | ||||||
Total loans, net of deferred fees and costs | $ | 1,946,580 | $ | 2,015,056 | ||||
Commercial includes approximately $12.2 million and $211.3 million in net PPP loans at December 31, 2021 and 2020, respectively. The PPP loan balances at December 31, 2021 and 2020 included $(282,000) and $(4,439,000),$115,172, respectively in unamortized net PPP fees. Net deferred loan (fees) costs includedcash payments.
Overdraft deposits were reclassified to consumer loans in the amount of $90,000 and $59,000 for 2021 and 2020, respectively.
Acquired Loans
The outstanding principal balance and the carrying amount of these loans, including ASC 310-30 loans, included in the consolidated balance sheets at December 31,2021 and 2020 are as follows (dollars in thousands):
2021 | 2020 | |||||||
Outstanding principal balance | $ | 163,574 | $ | 251,730 | ||||
Carrying amount | 156,975 | 241,008 | ||||||
The outstanding principal balance and related carrying amount of purchased credit impaired loans, for which the Company applies ASC 310-30 to account for interest earned, at December 31,2021 and 2020 are as follows (dollars in thousands):
2021 | 2020 | |||||||
Outstanding principal balance | $ | 24,696 | $ | 37,417 | ||||
Carrying amount | 19,802 | 30,201 | ||||||
The following table presents changes in the accretable yield on purchased credit impaired loans, for which the Company applies ASC 310-30, for the years ended December 31,2021,2020, and 2019 (dollars in thousands):
2021 | 2020 | 2019 | ||||||||||
Balance at January 1 | $ | 6,513 | $ | 7,893 | $ | 4,633 | ||||||
Additions from merger with HomeTown | 0 | 0 | 4,410 | |||||||||
Accretion | (5,292 | ) | (3,553 | ) | (3,304 | ) | ||||||
Reclassification from nonaccretable difference | 2,780 | 2,233 | 736 | |||||||||
Other changes, net (1) | 901 | (60 | ) | 1,418 | ||||||||
Balance at December 31 | $ | 4,902 | $ | 6,513 | $ | 7,893 | ||||||
__________________________
(1) This line item represents changes in the cash flows expected to be collected due to the impact of non-credit changes such as prepayment assumptions, changes in interest rates on variable rate acquired impaired loans, and discounted payoffs that occurred in the period.
Past Due Loans
The following table shows an analysis by portfolio segment of the Company's past due loans at December 31,2021 (dollars in thousands):
90 Days + | ||||||||||||||||||||||||||||
Past Due | Non- | Total | ||||||||||||||||||||||||||
30- 59 Days | 60-89 Days | and Still | Accrual | Past | Total | |||||||||||||||||||||||
Past Due | Past Due | Accruing | Loans | Due | Current | Loans | ||||||||||||||||||||||
Commercial | $ | 120 | $ | 0 | $ | 0 | $ | 26 | $ | 146 | $ | 299,627 | $ | 299,773 | ||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||
Construction and land development | 0 | 0 | 0 | 0 | 0 | 134,221 | 134,221 | |||||||||||||||||||||
Commercial real estate - owner occupied | 0 | 0 | 0 | 12 | 12 | 391,505 | 391,517 | |||||||||||||||||||||
Commercial real estate - non-owner occupied | 0 | 0 | 0 | 1,093 | 1,093 | 729,941 | 731,034 | |||||||||||||||||||||
Residential: | ||||||||||||||||||||||||||||
Residential | 670 | 20 | 154 | 792 | 1,636 | 288,121 | 289,757 | |||||||||||||||||||||
Home equity | 12 | 30 | 47 | 80 | 169 | 93,034 | 93,203 | |||||||||||||||||||||
Consumer | 6 | 0 | 15 | 3 | 24 | 7,051 | 7,075 | |||||||||||||||||||||
Total | $ | 808 | $ | 50 | $ | 216 | $ | 2,006 | $ | 3,080 | $ | 1,943,500 | $ | 1,946,580 | ||||||||||||||
The following table shows an analysis by portfolio segment of the Company's past due loans at December 31,2020 (dollars in thousands):
90 Days + | ||||||||||||||||||||||||||||
Past Due | Non- | Total | ||||||||||||||||||||||||||
30- 59 Days | 60-89 Days | and Still | Accrual | Past | Total | |||||||||||||||||||||||
Past Due | Past Due | Accruing | Loans | Due | Current | Loans | ||||||||||||||||||||||
Commercial | $ | 153 | $ | 9 | $ | 0 | $ | 100 | $ | 262 | $ | 490,994 | $ | 491,256 | ||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||
Construction and land development | 168 | 0 | 0 | 5 | 173 | 139,898 | 140,071 | |||||||||||||||||||||
Commercial real estate - owner occupied | 62 | 0 | 209 | 304 | 575 | 373,105 | 373,680 | |||||||||||||||||||||
Commercial real estate - non-owner occupied | 0 | 0 | 0 | 1,158 | 1,158 | 626,411 | 627,569 | |||||||||||||||||||||
Residential: | ||||||||||||||||||||||||||||
Residential | 711 | 211 | 53 | 792 | 1,767 | 267,370 | 269,137 | |||||||||||||||||||||
Home equity | 0 | 0 | 0 | 69 | 69 | 104,812 | 104,881 | |||||||||||||||||||||
Consumer | 49 | 14 | 0 | 6 | 69 | 8,393 | 8,462 | |||||||||||||||||||||
Total | $ | 1,143 | $ | 234 | $ | 262 | $ | 2,434 | $ | 4,073 | $ | 2,010,983 | $ | 2,015,056 | ||||||||||||||
Impaired Loans
The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at December 31,2021 (dollars in thousands):
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Commercial | $ | 0 | $ | 0 | $ | — | $ | 4 | $ | 0 | ||||||||||
Commercial real estate: | ||||||||||||||||||||
Construction and land development | 0 | 0 | — | 0 | 0 | |||||||||||||||
Commercial real estate - owner occupied | 8 | 5 | — | 71 | 1 | |||||||||||||||
Commercial real estate - non-owner occupied | 1,185 | 1,186 | — | 1,107 | 23 | |||||||||||||||
Residential: | ||||||||||||||||||||
Residential | 1,021 | 1,031 | — | 1,217 | 41 | |||||||||||||||
Home equity | 4 | 4 | — | 5 | 1 | |||||||||||||||
Consumer | 0 | 0 | — | 0 | 0 | |||||||||||||||
| $ | 2,218 | $ | 2,226 | $ | — | $ | 2,404 | $ | 66 | |||||||||||
With a related allowance recorded: | ||||||||||||||||||||
Commercial | $ | 14 | $ | 7 | $ | 7 | $ | 25 | $ | 1 | ||||||||||
Commercial real estate: | ||||||||||||||||||||
Construction and land development | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Commercial real estate - owner occupied | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Commercial real estate - non-owner occupied | 0 | 0 | 0 | 30 | 0 | |||||||||||||||
Residential | ||||||||||||||||||||
Residential | 0 | 0 | 0 | 61 | 2 | |||||||||||||||
Home equity | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Consumer | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
| $ | 14 | $ | 7 | $ | 7 | $ | 116 | $ | 3 | |||||||||||
Total: | ||||||||||||||||||||
Commercial | $ | 14 | $ | 7 | $ | 7 | $ | 29 | $ | 1 | ||||||||||
Commercial real estate: | ||||||||||||||||||||
Construction and land development | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Commercial real estate - owner occupied | 8 | 5 | 0 | 71 | 1 | |||||||||||||||
Commercial real estate - non-owner occupied | 1,185 | 1,186 | 0 | 1,137 | 23 | |||||||||||||||
Residential: | ||||||||||||||||||||
Residential | 1,021 | 1,031 | 0 | 1,278 | 43 | |||||||||||||||
Home equity | 4 | 4 | 0 | 5 | 1 | |||||||||||||||
Consumer | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
| $ | 2,232 | $ | 2,233 | $ | 7 | $ | 2,520 | $ | 69 | |||||||||||
In the table above, recorded investment may be different than unpaid principal balance due to acquired loans with a premium or discount and loans with unearned costs or unearned fees.
The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at December 31,2020 (dollars in thousands):
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Commercial | $ | 18 | $ | 18 | $ | — | $ | 23 | $ | 6 | ||||||||||
Commercial real estate: | ||||||||||||||||||||
Construction and land development | 0 | 0 | — | 0 | 0 | |||||||||||||||
Commercial real estate - owner occupied | 286 | 283 | — | 357 | 27 | |||||||||||||||
Commercial real estate - non-owner occupied | 1,148 | 1,147 | — | 766 | 75 | |||||||||||||||
Residential: | ||||||||||||||||||||
Residential | 1,096 | 1,103 | — | 912 | 62 | |||||||||||||||
Home equity | 6 | 6 | — | 31 | 3 | |||||||||||||||
Consumer | 0 | 0 | — | 0 | 0 | |||||||||||||||
| $ | 2,554 | $ | 2,557 | $ | — | $ | 2,089 | $ | 173 | |||||||||||
With a related allowance recorded: | ||||||||||||||||||||
Commercial | $ | 39 | $ | 33 | $ | 29 | $ | 382 | $ | 15 | ||||||||||
Commercial real estate: | ||||||||||||||||||||
Construction and land development | 0 | 0 | — | 0 | 0 | |||||||||||||||
Commercial real estate - owner occupied | 0 | 0 | — | 0 | 0 | |||||||||||||||
Commercial real estate - non-owner occupied | 122 | 122 | — | 180 | 15 | |||||||||||||||
Residential: | ||||||||||||||||||||
Residential | 137 | 137 | 1 | 256 | 9 | |||||||||||||||
Home equity | 0 | 0 | — | 0 | 0 | |||||||||||||||
Consumer | 0 | 0 | — | 0 | 0 | |||||||||||||||
| $ | 298 | $ | 292 | $ | 30 | $ | 818 | $ | 39 | |||||||||||
Total: | ||||||||||||||||||||
Commercial | $ | 57 | $ | 51 | $ | 29 | $ | 405 | $ | 21 | ||||||||||
Commercial real estate: | ||||||||||||||||||||
Construction and land development | 0 | 0 | — | 0 | 0 | |||||||||||||||
Commercial real estate - owner occupied | 286 | 283 | — | 357 | 27 | |||||||||||||||
Commercial real estate - non-owner occupied | 1,270 | 1,269 | — | 946 | 90 | |||||||||||||||
Residential: | ||||||||||||||||||||
Residential | 1,233 | 1,240 | 1 | 1,168 | 71 | |||||||||||||||
Home equity | 6 | 6 | — | 31 | 3 | |||||||||||||||
Consumer | 0 | 0 | — | 0 | 0 | |||||||||||||||
| $ | 2,852 | $ | 2,849 | $ | 30 | $ | 2,907 | $ | 212 | |||||||||||
In the table above, recorded investment may be different than unpaid principal balance due to acquired loans with a premium or discount and loans with unearned costs or unearned fees.
The following table shows the detail of loans modified as TDRs during the years ended December 31,2021,2020, and 2019, included in the impaired loan balances (dollars in thousands):
Loans Modified as TDRs for the Year Ended December 31, 2021 | ||||||||||||
Pre-Modification | Post-Modification | |||||||||||
Number of | Outstanding Recorded | Outstanding Recorded | ||||||||||
Contracts | Investment | Investment | ||||||||||
Commercial | 0 | $ | 0 | $ | 0 | |||||||
Commercial real estate - owner occupied | 0 | 0 | 0 | |||||||||
Commercial real estate - non-owner occupied | 1 | 1,093 | 1,093 | |||||||||
Residential real estate | 0 | 0 | 0 | |||||||||
Home equity | 0 | 0 | 0 | |||||||||
Consumer | 0 | 0 | 0 | |||||||||
Total | 1 | $ | 1,093 | $ | 1,093 | |||||||
Loans Modified as TDRs for the Year Ended December 31, 2020 | ||||||||||||
Pre-Modification | Post-Modification | |||||||||||
Number of | Outstanding Recorded | Outstanding Recorded | ||||||||||
Contracts | Investment | Investment | ||||||||||
Commercial | 1 | $ | 106 | $ | 106 | |||||||
Commercial real estate - owner occupied | 0 | 0 | 0 | |||||||||
Commercial real estate - non-owner occupied | 2 | 1,311 | 1,311 | |||||||||
Residential real estate | 1 | 82 | 82 | |||||||||
Home equity | 1 | 6 | 6 | |||||||||
Consumer | 0 | 0 | 0 | |||||||||
Total | 5 | $ | 1,505 | $ | 1,505 | |||||||
Loans Modified as TDRs for the Year Ended December 31, 2019 | ||||||||||||
Pre-Modification | Post-Modification | |||||||||||
Number of | Outstanding Recorded | Outstanding Recorded | ||||||||||
Contracts | Investment | Investment | ||||||||||
Commercial | 0 | $ | 0 | $ | 0 | |||||||
Commercial real estate - owner occupied | 0 | 0 | 0 | |||||||||
Commercial real estate - non-owner occupied | 0 | 0 | 0 | |||||||||
Residential real estate | 1 | 207 | 207 | |||||||||
Home equity | 0 | 0 | 0 | |||||||||
Consumer | 0 | 0 | 0 | |||||||||
Total | 1 | $ | 207 | $ | 207 | |||||||
All loans modified as TDRs during the years ended December 31,2021,2020, and 2019 were structure modifications. There was no impact to the allowance for loan losses for the 1 commercial real estate-non-owner occupied TDR in 2021. The impact on the allowance for loan losses for the commercial loan modified as a TDR in 2020 was $88,000. The impact on the allowance for loan losses for one of the commercial real estate - non-owner occupied loans modified as a TDR in 2020 was $138,000; there was no impact on the allowance for loan losses for the other commercial real estate - non-owner occupied loan. There was no impact on the allowance for loan losses for the residential real estate loan and the home equity loan modified as TDRs in 2020. For the year ended December 31, 2020, the impact on the allowance was due to specific reserves that were charged-off prior to year-end. The impact on the allowance for loan losses for the residential real estate loan modified as a TDR in 2019 was $24,000.
During the years ended December 31,2021 and 2019, the Company had no loans that subsequently defaulted within 12 months of modification. During the year ended December 31, 2020, the Company had one commercial real estate - non-owner occupied loan with a recorded investment of $1,052,000 that subsequently defaulted within 12 months of modification. The Company defines default as one or more payments that occur more than 90 days past the due date, charge-off, or foreclosure subsequent to modification. Any charge-offs resulting in default were adjusted through the allowance for loan losses.
The loan portfolio consists primarily of commercial and residential real estate loans, commercial loans to small and medium-sized businesses, construction and land development loans, and home equity loans. At December 31, 2021, the commercial real estate portfolio included concentrations of $81,241,000, $46,049,000 and $204,655,000 in hotel, restaurants, and retail, respectively. The concentrations total 17.1% of total loans, excluding loans in process.
Risk Ratings
The following tables show the Company's loan portfolio broken down by internal risk grading as of December 31,2021 (dollars in thousands):
Commercial and Consumer Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Commercial | Construction and Land Development | Commercial Real Estate - Owner Occupied | Commercial Real Estate - Non-owner Occupied | Residential Real Estate | Home Equity | |||||||||||||||||||
Pass | $ | 290,823 | $ | 130,111 | $ | 372,177 | $ | 720,138 | $ | 285,188 | $ | 92,807 | ||||||||||||
Special Mention | 8,333 | 2,881 | 11,048 | 8,702 | 1,774 | 0 | ||||||||||||||||||
Substandard | 617 | 1,229 | 8,292 | 2,194 | 2,795 | 396 | ||||||||||||||||||
Doubtful | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Total | $ | 299,773 | $ | 134,221 | $ | 391,517 | $ | 731,034 | $ | 289,757 | $ | 93,203 | ||||||||||||
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
Consumer | ||||
Performing | $ | 7,057 | ||
Nonperforming | 18 | |||
Total | $ | 7,075 | ||
Loans classified in the Pass category typically are fundamentally sound, and risk factors are reasonable and acceptable.
Loans classified in the Special Mention category typically have been criticized internally, by loan review or the loan officer, or by external regulators under the current credit policy regarding risk grades.
Loans classified in the Substandard category typically have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are typically characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Loans classified in the Doubtful category typically have all the weaknesses inherent in loans classified as substandard, plus the added characteristic the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because2015, certain events may occur that may salvage the debt.
Consumer loans are classified as performing or nonperforming. A loan is nonperforming when payments of interest and principal are past due 90 days or more.
The following tables show the Company's loan portfolio broken down by internal risk grading as of December 31,2020 (dollars in thousands):
Commercial and Consumer Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Commercial | Construction and Land Development | Commercial Real Estate - Owner Occupied | Commercial Real Estate - Non-owner Occupied | Residential Real Estate | Home Equity | |||||||||||||||||||
Pass | $ | 479,416 | $ | 131,770 | $ | 350,376 | $ | 612,688 | $ | 262,677 | $ | 104,608 | ||||||||||||
Special Mention | 10,956 | 2,505 | 14,621 | 9,196 | 3,665 | 0 | ||||||||||||||||||
Substandard | 865 | 5,796 | 8,474 | 5,563 | 2,795 | 273 | ||||||||||||||||||
Doubtful | 19 | 0 | 209 | 122 | 0 | 0 | ||||||||||||||||||
Total | $ | 491,256 | $ | 140,071 | $ | 373,680 | $ | 627,569 | $ | 269,137 | $ | 104,881 | ||||||||||||
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
Consumer | ||||
Performing | $ | 8,456 | ||
Nonperforming | 6 | |||
Total | $ | 8,462 | ||
Note 5 – Allowance for Loan Losses and Reserve for Unfunded Lending Commitments
Changes in the allowance for loan losses and the reserve for unfunded lending commitments (included in other liabilities) for each of the years in the three-year period ended December 31,2021, are presented below (dollars in thousands):
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Allowance for Loan Losses | ||||||||||||
Balance, beginning of year | $ | 21,403 | $ | 13,152 | $ | 12,805 | ||||||
Provision for (recovery of) loan losses | (2,825 | ) | 8,916 | 456 | ||||||||
Charge-offs | (146 | ) | (1,006 | ) | (333 | ) | ||||||
Recoveries | 246 | 341 | 224 | |||||||||
Balance, end of year | $ | 18,678 | $ | 21,403 | $ | 13,152 | ||||||
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Reserve for Unfunded Lending Commitments | ||||||||||||
Balance, beginning of year | $ | 304 | $ | 329 | $ | 217 | ||||||
Provision for (recovery of) unfunded commitments | 82 | (25 | ) | 112 | ||||||||
Charge-offs | 0 | 0 | 0 | |||||||||
Balance, end of year | $ | 386 | $ | 304 | $ | 329 | ||||||
The reserve for unfunded loan commitments is included in other liabilities, and the provision for unfunded commitments is included in noninterest expense. The following table presents the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment for the year ended December 31,2021 (dollars in thousands):
Commercial (1) | Construction and Land Development | Commercial Real Estate - Owner Occupied | Commercial Real Estate - Non-owner Occupied | Residential Real Estate | Consumer | Total | ||||||||||||||||||||||
Allowance for Loan Losses | ||||||||||||||||||||||||||||
Balance at December 31, 2020 | $ | 3,373 | $ | 1,927 | $ | 4,340 | $ | 7,626 | $ | 4,067 | $ | 70 | $ | 21,403 | ||||||||||||||
Charge-offs | 0 | 0 | (3 | ) | 0 | (53 | ) | (90 | ) | (146 | ) | |||||||||||||||||
Recoveries | 40 | 0 | 7 | 8 | 99 | 92 | 246 | |||||||||||||||||||||
Provision recovery | (745 | ) | (530 | ) | (380 | ) | (493 | ) | (655 | ) | (22 | ) | (2,825 | ) | ||||||||||||||
Balance at December 31, 2021 | $ | 2,668 | $ | 1,397 | $ | 3,964 | $ | 7,141 | $ | 3,458 | $ | 50 | $ | 18,678 | ||||||||||||||
Balance at December 31, 2021: | ||||||||||||||||||||||||||||
Allowance for Loan Losses | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 7 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 7 | ||||||||||||||
Collectively evaluated for impairment | 2,642 | 1,365 | 3,767 | 6,778 | 3,402 | 50 | 18,004 | |||||||||||||||||||||
Purchased credit impaired loans | 19 | 32 | 197 | 363 | 56 | 0 | 667 | |||||||||||||||||||||
Total | $ | 2,668 | $ | 1,397 | $ | 3,964 | $ | 7,141 | $ | 3,458 | $ | 50 | $ | 18,678 | ||||||||||||||
Loans | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 14 | $ | 0 | $ | 8 | $ | 1,185 | $ | 1,025 | $ | 0 | $ | 2,232 | ||||||||||||||
Collectively evaluated for impairment | 299,470 | 133,984 | 382,562 | 724,180 | 377,290 | 7,060 | 1,924,546 | |||||||||||||||||||||
Purchased credit impaired loans | 289 | 237 | 8,947 | 5,669 | 4,645 | 15 | 19,802 | |||||||||||||||||||||
Total | $ | 299,773 | $ | 134,221 | $ | 391,517 | $ | 731,034 | $ | 382,960 | $ | 7,075 | $ | 1,946,580 | ||||||||||||||
__________________________
(1) Includes PPP loans, which are guaranteed by the SBA and have 0 related allowance.
The following table presents the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment for the year ended December 31,2020 (dollars in thousands):
Commercial (1) | Construction and Land Development | Commercial Real Estate - Owner Occupied | Commercial Real Estate - Non-owner Occupied | Residential Real Estate | Consumer | Total | ||||||||||||||||||||||
Allowance for Loan Losses | ||||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | 2,657 | $ | 1,161 | $ | 2,474 | $ | 3,781 | $ | 3,023 | $ | 56 | $ | 13,152 | ||||||||||||||
Charge-offs | (505 | ) | 0 | (17 | ) | (165 | ) | (117 | ) | (202 | ) | (1,006 | ) | |||||||||||||||
Recoveries | 65 | 2 | 12 | 50 | 85 | 127 | 341 | |||||||||||||||||||||
Provision | 1,156 | 764 | 1,871 | 3,960 | 1,076 | 89 | 8,916 | |||||||||||||||||||||
Balance at December 31, 2020 | $ | 3,373 | $ | 1,927 | $ | 4,340 | $ | 7,626 | $ | 4,067 | $ | 70 | $ | 21,403 | ||||||||||||||
Balance at December 31, 2020: | ||||||||||||||||||||||||||||
Allowance for Loan Losses | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 29 | $ | 0 | $ | 0 | $ | 0 | $ | 1 | $ | 0 | $ | 30 | ||||||||||||||
Collectively evaluated for impairment | 3,318 | 1,927 | 4,138 | 7,185 | 3,896 | 70 | 20,534 | |||||||||||||||||||||
Purchased credit impaired loans | 26 | 0 | 202 | 441 | 170 | 0 | 839 | |||||||||||||||||||||
Total | $ | 3,373 | $ | 1,927 | $ | 4,340 | $ | 7,626 | $ | 4,067 | $ | 70 | $ | 21,403 | ||||||||||||||
Loans | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 57 | $ | 0 | $ | 286 | $ | 1,270 | $ | 1,239 | $ | 0 | $ | 2,852 | ||||||||||||||
Collectively evaluated for impairment | 490,736 | 139,833 | 360,579 | 616,498 | 365,967 | 8,390 | 1,982,003 | |||||||||||||||||||||
Purchased credit impaired loans | 463 | 238 | 12,815 | 9,801 | 6,812 | 72 | 30,201 | |||||||||||||||||||||
Total | $ | 491,256 | $ | 140,071 | $ | 373,680 | $ | 627,569 | $ | 374,018 | $ | 8,462 | $ | 2,015,056 | ||||||||||||||
(1) Includes PPP loans, which are guaranteed by the SBA and have 0 related allowance.
The allowance for loan losses is allocated to loan segments based upon historical loss factors, risk grades on individual loans, portfolio analysis of smaller balance, homogenous loans, and qualitative factors. Qualitative factors include trends in delinquencies, nonaccrual loans, and loss rates; trends in volume and terms of loans, effects of changes in risk selection, underwriting standards, and lending policies; experience of lending officers, other lending staff and loan review; national, regional, and local economic trends and conditions; legal, regulatory and collateral factors; and concentrations of credit.
The provision for loan losses for the 2020 period reflected an increase in the allowance based on a qualitative assessment of the declining and uncertain economic landscape in the wake of the COVID-19 pandemic. Sharp declines in employment, gross national product, housing and auto sales, housing starts and business activity in general indicated a higher risk of probable losses in the Bank's loan portfolio. For the year ended December 31, 2021, the Company recorded a negative provision (recovery) as the credit issues anticipated in 2020 did not materialize and the economic landscape improved substantially. Management will continue to evaluate the adequacy of the Company's allowance for loan losses as more economic data becomes available and as changes within the Company's loan portfolio are known. The effects of the pandemic may require further changes in the level of allowance.
Note 6 – Premises and Equipment
Major classifications of premises and equipment at December 31,2021 and 2020 are summarized as follows (dollars in thousands):
December 31, | ||||||||
2021 | 2020 | |||||||
Land | $ | 10,084 | $ | 10,267 | ||||
Buildings | 33,262 | 36,173 | ||||||
Leasehold improvements | 1,524 | 1,160 | ||||||
Furniture and equipment | 18,494 | 19,424 | ||||||
| 63,364 | 67,024 | |||||||
Accumulated depreciation | (27,800 | ) | (27,301 | ) | ||||
Premises and equipment, net | $ | 35,564 | $ | 39,723 | ||||
Depreciation expense for the years ended December 31,2021,2020, and 2019 was $2,243,000, $2,188,000, and $2,064,000, respectively.
Note 7 – Goodwill and Other Intangible Assets
The Company records as goodwill the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Impairment testing is performed annually, as well as when an event triggering impairment may have occurred. In testing goodwill for impairment, the Company must first decide if circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, after assessing, it concludes that it is not more likely than not that the fair value of a reporting unit is greater than its carrying value, then no further testing is required and the goodwill is not impaired. In the wake of the COVID-19 pandemic, the Company determined a triggering event had occurred and evaluated goodwill each of the four quarters of 2020 and no indicators of impairment were noted. The Company performed its annual analysis for the years ended December 31, 2021 and 2020, respectively, and no indications of impairment were noted.
Core deposit intangibles resulting from the MidCarolina acquisition in July 2011 were $6,556,000 and became fully amortized at June 30, 2020. Core deposit intangibles resulting from the MainStreet Bankshares, Inc. acquisition in January 2015 were $1,839,000 and are being amortized on an accelerated basis over 120 months. Core deposit intangibles resulting from the acquisition of HomeTown Bankshares Corporation ("Hometown") in April 2019 were $8,200,000 and are being amortized on an accelerated basis over 120 months.
The changes in the carrying amount of goodwill and intangibles for the twelve months ended December 31,2021, are as follows (dollars in thousands):
Goodwill | Intangibles | |||||||
Balance at December 31, 2020 | $ | 85,048 | $ | 6,091 | ||||
Amortization | — | (1,464 | ) | |||||
Balance at December 31, 2021 | $ | 85,048 | $ | 4,627 | ||||
Goodwill and intangible assets at December 31,2021 and 2020 are as follows (dollars in thousands):
Gross Carrying | Accumulated | Net Carrying | ||||||||||
Value | Amortization | Value | ||||||||||
December 31, 2021 | ||||||||||||
Core deposit intangibles | $ | 19,708 | $ | (15,081 | ) | $ | 4,627 | |||||
Goodwill | 85,048 | — | 85,048 | |||||||||
December 31, 2020 | ||||||||||||
Core deposit intangibles | $ | 19,708 | $ | (13,617 | ) | $ | 6,091 | |||||
Goodwill | 85,048 | — | 85,048 | |||||||||
Amortization expense of core deposit intangibles for the years ended December 31,2021,2020, and 2019 was $1,464,000, $1,637,000, and $1,398,000, respectively. As of December 31,2021, the estimated future amortization expense of core deposit intangibles is as follows (dollars in thousands):
Year | Amount | |||
2022 | $ | 1,260 | ||
2023 | 1,069 | |||
2024 | 800 | |||
2025 | 617 | |||
2026 | 881 | |||
Total | $ | 4,627 | ||
Note 8 – Leases
The right-of-use assets and lease liabilities relate to banking offices and other space occupied by the Company under noncancelable operating lease agreements. The aggregate right-of-use assets and lease liabilities are included in other assets and other liabilities, respectively, in the Company's consolidated balance sheets. Lease liabilities represent the Company's obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company's incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company's right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.
The Company's long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term, and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably certain of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.
The following tables present information about the Company's leases as of December 31, 2021 and 2020 and for the years ended December 31,2021,2020 and 2019 (dollars in thousands):
December 31, 2021 | December 31, 2020 | |||||||
Lease liabilities | $ | 4,023 | $ | 4,940 | ||||
Right-of-use assets | $ | 3,939 | $ | 4,878 | ||||
Weighted average remaining lease term (in years) | 6.92 | 7.33 | ||||||
Weighted average discount rate | 3.09 | % | 3.03 | % | ||||
Year Ended December 31, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||
Lease cost | ||||||||||||
Operating lease cost | $ | 1,069 | $ | 993 | $ | 1,040 | ||||||
Short-term lease cost | 0 | 3 | 3 | |||||||||
Total lease cost | $ | 1,069 | $ | 996 | $ | 1,043 | ||||||
Cash paid for amounts included in the measurement of lease liabilities | $ | 1,047 | $ | 959 | $ | 1,013 | ||||||
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):
Lease payments due | As of December 31, 2021 | |||
2022 | $ | 1,043 | ||
2023 | 944 | |||
2024 | 514 | |||
2025 | 471 | |||
2026 | 260 | |||
2027 and after | 1,289 | |||
Total undiscounted cash flows | $ | 4,521 | ||
Discount | (498 | ) | ||
Lease liabilities | $ | 4,023 | ||
Lease expense, a component of occupancy and equipment expense, for the years ended December 31,2021,2020, and 2019 totaled $1,257,000, $1,158,000, and $1,187,000, respectively. The amounts recognized in lease expense include insurance, property taxes, and common area maintenance.
Note 9 - Deposits
The aggregate amount of time deposits in denominations of $250,000 or more at December 31,2021 and 2020 was $159,826,000 and $170,089,000, respectively.
At December 31,2021, the scheduled maturities and amounts of certificates of deposits (included in interest-bearing deposits on the consolidated balance sheets) were as follows (dollars in thousands):
Year | Amount | |||
2022 | $ | 246,629 | ||
2023 | 42,269 | |||
2024 | 17,182 | |||
2025 | 13,904 | |||
2026 | 28,259 | |||
2027 and after | 6,460 | |||
Total | $ | 354,703 | ||
There were no brokered time deposits at December 31,2021 or December 31,2020. Time deposits through the Certificate of Deposit Account Registry Service ("CDARS") program totaled $550,000 at December 31,2021 compared to $4,342,000 at December 31,2020. Deposits through the CDARS program are generated from major customers with substantial relationships with the Bank.
Note 10 – Short-term Borrowings
Short-term borrowings consist of customer repurchase agreements, overnight borrowings from the FHLB, and federal funds purchased. The Company has federal funds lines of credit established with correspondent banks in the amount of $60,000,000 and has access to the Federal Reserve Bank of Richmond's discount window. Customer repurchase agreements are collateralized by securities of the U.S. Government, its agencies or GSEs. They mature daily. The interest rates are generally fixed but may be changed at the discretion of the Company. The securities underlying these agreements remain under the Company's control. FHLB overnight borrowings contain floating interest rates that may change daily at the discretion of the FHLB. Short-term borrowings consisted solely of the following at December 31,2021 and 2020 (dollars in thousands):
December 31, 2021 | December 31, 2020 | |||||||||||||||
Amount | Weighted Average Rate | Amount | Weighted Average Rate | |||||||||||||
Customer repurchase agreements | $ | 41,128 | 0.03 | % | $ | 42,551 | 0.13 | % | ||||||||
Note 11 – Long-term Borrowings
Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, second mortgage loans, home equity lines of credit, and commercial real estate loans. In addition, the Company pledges as collateral its capital stock in the FHLB and deposits with the FHLB. The Company has a line of credit with the FHLB equal to 30% of the Company's assets, subject to the amount of collateral pledged. As of December 31,2021, $1,051,176,000 in eligible collateral was pledged under the blanket floating lien agreement which covers both short-term and long-term borrowings.
There were no FHLB long-term borrowings as of December 31,2021 or 2020. The Company had Junior Subordinated debt at December 31, 2021 and 2020, as noted below.
In the regular course of conducting its business, the Company takes deposits from political subdivisions of the states of Virginia and North Carolina. At December 31,2021, the Bank's public deposits totaled $326,595,000. The Company is required to provide collateral to secure the deposits that exceed the insurance coverage provided by the FDIC. This collateral can be provided in the form of certain types of government or agency bonds or letters of credit from the FHLB. At December 31,2021, the Company had $275,000,000 in letters of credit with the FHLB outstanding as well as $96,495,000 in agency, state, and municipal securities to provide collateral for such deposits.
Subordinated Debt
On April 1, 2019, in connection with the HomeTown merger, the Company assumed $7,500,000 in aggregate principal amount of fixed-to-floating rate subordinated notes issued to various institutional accredited investors. A fair value adjustment of $30,000 was recorded on the subordinated debt as a result of the acquisition and was amortized into interest expense through December 30, 2020. The notes had a maturity date of December 30,2025 and had an annual fixed interest rate of 6.75% until December 30, 2020. Thereafter, the notes had a floating interest rate based on LIBOR. Interest was paid semi-annually, in arrears, on June 30 and December 30 of each year during the fixed interest rate period. Interest was paid quarterly, in arrears, on March 30, June 30, September 30, and December 30 throughout the floating interest rate period. This debt was paid in full and the notes were redeemed on June 30, 2021.
Junior Subordinated Debt
On April 7, 2006, AMNB Statutory Trust I, a Delaware statutory trust and a wholly owned subsidiary of the Company, issued $20,000,000 of preferred securities in a private placement pursuant to an applicable exemption from registration. The Trust Preferred Securities mature on June 30,2036, but may be redeemed at the Company's option beginning on September 30, 2011. Initially, the securities required quarterly distributions by the trust to the holder of the Trust Preferred Securities at a fixed rate of 6.66%. Effective September 30, 2011, the rate resets quarterly at the three-month LIBOR plus 1.35%. Distributions are cumulative and accrue from the date of original issuance but may be deferred by the Company from time to time for up to 20 consecutive quarterly periods. The Company has guaranteed the payment of all required distributions on the Trust Preferred Securities. The proceeds of the Trust Preferred Securities received by the trust, along with proceeds of $619,000 received by the trust from the issuance of common securities by the trust to the Company, were used to purchase $20,619,000 of the Company's junior subordinated debt securities (the "Trust Preferred Capital Notes"), issued pursuant to a junior subordinated debenture entered into between the Company and Wilmington Trust Company, as trustee. The proceeds of the Trust Preferred Securities were used to fund the cash portion of the merger consideration to the former shareholders of Community First in connection with the Company's acquisition of that company, and for general corporate purposes.
On July 1, 2011, in connection with the MidCarolina merger, the Company assumed $8,764,000 in junior subordinated debentures to the MidCarolina Trusts, to fully and unconditionally guarantee the preferred securities issued by the MidCarolina Trusts. These long-term obligations, which currently qualify as Tier 1 capital, constitute a full and unconditional guarantee by the Company of the MidCarolina Trusts' obligations. The MidCarolina Trusts are not consolidated in the Company's financial statements.
In accordance with ASC 810-10-15-14,Consolidation - Overall - Scope and Scope Exceptions, the Company did not eliminate through consolidation the Company's $619,000 equity investment in AMNB Statutory Trust I or the $264,000 equity investment in the MidCarolina Trusts. Instead, the Company reflected these equity investments in other assets in the Company's consolidated balance sheets.
A description of the junior subordinated debt securities outstanding payable to the trusts is shown below (dollars in thousands):
Principal Amount | |||||||||||
As of December 31, | |||||||||||
Issuing Entity | Date Issued | Interest Rate | Maturity Date | 2021 | 2020 | ||||||
AMNB Trust I | 4/7/2006 | Libor plus 1.35% | 6/30/2036 | $ | 20,619 | $ | 20,619 | ||||
MidCarolina Trust I | 10/29/2002 | Libor plus 3.45% | 11/7/2032 | 4,545 | 4,489 | ||||||
MidCarolina Trust II | 12/3/2003 | Libor plus 2.95% | 10/7/2033 | 3,068 | 3,022 | ||||||
| $ | 28,232 | $ | 28,130 | ||||||||
The principal amounts reflected above for the MidCarolina Trusts are net of fair value adjustments of $610,000 and $541,000 at December 31, 2021 and $666,000 and $587,000 at December 31, 2020, respectively. The original fair value adjustments of $1,197,000 and $1,021,000 were recorded as a result of the acquisition of MidCarolina on July 1, 2011, and are being amortized into interest expense over the remaining lives of the respective borrowings.
Note 12 - Derivative Financial Instruments and Hedging Activities
The Company uses derivative financial instruments ("derivatives") primarily to manage risks associated with changing interest rates. The Company's derivatives are hedging instruments in a qualifying hedge accounting relationship (cash flow or fair value hedge).
The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Company's Trust Preferred Capital Notes. The Company uses interest rate swap agreements as part of its hedging strategy by exchanging variable-rate interest payments on a notional amount equal to the principal amount of the borrowings for fixed-rate interest payments, with such interest rates set based on benchmarked interest rates.
All interest rate swaps were entered into with counterparties that met the Company's credit standards and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in these derivative contracts is not significant.
Terms and conditions of the interest rate swaps vary and amounts receivable or payable are recognized as accrued under the terms of the agreements. The Company assesses the effectiveness of each hedging relationship on a periodic basis. In accordance with ASC 815,Derivatives and Hedging, the effective portions of the derivatives' unrealized gains or losses are recorded as a component of other comprehensive income. Based on the Company's assessment, its cash flow hedges are highly effective, but to the extent that any ineffectiveness exists in the hedge relationships, the amounts would be recorded in the Company's consolidated statements of income.
(Dollars in thousands) | December 31, 2021 | |||||||||||||||||||
Notional Amount | Positions | Assets | Liabilities | Cash Collateral Pledged | ||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||
Interest rate swaps: | ||||||||||||||||||||
Variable-rate to fixed-rate swaps with counterparty | $ | 28,500 | $ | 3 | $ | 0 | $ | 2,800 | $ | 4,050 | ||||||||||
(Dollars in thousands) | December 31, 2020 | |||||||||||||||||||
Notional Amount | Positions | Assets | Liabilities | Cash Collateral Pledged | ||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||
Interest rate swaps: | ||||||||||||||||||||
Variable-rate to fixed-rate swaps with counterparty | $ | 28,500 | $ | 3 | $ | 0 | $ | 4,868 | $ | 5,750 | ||||||||||
In addition, the Company has commitments to fund certain mortgage loans (interest rate lock commitments) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors which are considered derivatives. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of change in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships.
Note 13 – Stock-Based Compensation
The Company's 2018 Stock Incentive Plan (the "2018 Plan") was adopted by the Board of Directors of the Company on February 20, 2018 and approved by shareholders on May 15, 2018 at the Company's 2018 Annual Meeting of Shareholders. The 2018 Plan provides for the granting of restricted stock awards, incentive and non-statutory options, and other equity-based awards to employees and directors at the discretion of the Compensation Committee of the Board of Directors. The 2018 Plan authorizes the issuance of up to 675,000 shares of common stock.
Stock Options
Accounting guidance requires that compensation cost relating to share-based payment transactions be recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued.
A summary of stock option transactions for the year ended December 31,2021 is as follows:
Weighted | ||||||||||||||||
Weighted | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Option | Exercise | Contractual Term | Value | |||||||||||||
Shares | Price | (In Years) | ($000) | |||||||||||||
Outstanding at December 31, 2020 | 10,541 | $ | 16.63 | |||||||||||||
Granted | 0 | 0 | ||||||||||||||
Exercised | (5,346 | ) | 16.63 | |||||||||||||
Forfeited | (332 | ) | 16.63 | |||||||||||||
Expired | 0 | 0 | ||||||||||||||
Outstanding at December 31, 2021 | 4,863 | $ | 16.63 | 2.97 | $ | 102 | ||||||||||
Exercisable at December 31, 2021 | 4,863 | $ | 16.63 | 2.97 | $ | 102 | ||||||||||
The aggregate intrinsic value of stock options in the table above represents the total pre-tax intrinsic value (the amount by which the current fair value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31,2021. This amount changes based on changes in the fair value of the Company's common stock.
The total proceeds of the in-the-money options exercised during the years ended December 31,2021,2020, and 2019 were $89,000, $43,000, and $688,000, respectively. Total intrinsic value of options exercised during the years ended December 31,2021,2020, and 2019 was $96,000, $42,000, and $616,000, respectively.
In connection with the HomeTown acquisition, there was $147,000 in recognized stock compensation expense attributable to outstanding stock options in the year ended December 31,2019. There was 0 recognized stock compensation expense attributable to outstanding stock options in 2021 or 2020. As of December 31,2021,2020, and 2019, there was 0 unrecognized compensation expense attributable to the outstanding stock options.
The following table summarizes information related to stock options outstanding on December 31,2021:
Options Outstanding and Exercisable | ||||||||||||
Weighted-Average | ||||||||||||
Number of | Remaining | |||||||||||
Range of | Outstanding | Contractual Life | Weighted-Average | |||||||||
Exercise Prices | Options | (In Years) | Exercise Price | |||||||||
$15.00 to $20.00 | 4,863 | 2.97 | $ | 16.63 | ||||||||
NaN stock options were granted in 2021,2020 and 2019.
Restricted Stock
The Company from time-to-time grants shares of restricted stock to key employees and non-employee directors. These awards help align the interests of these employees and directors with the interests of the shareholders of the Company by providing economic value directly related to increases in the value of the Company's common stock. The value of the stock awarded is established as the fair market value of the stock at the time of the grant. The Company recognizes expense, equal to the total value of such awards, ratably over the vesting period of the stock grants. Restricted stock granted in 2021 cliff vests at the end of a 36-month period beginning on the date of grant. Nonvested restricted stock activity for the year ended December 31,2021 is summarized in the following table:
| Weighted | ||||||||
Average Grant | ||||||||
Shares | Date Value Per Share | |||||||
Nonvested at December 31, 2020 | 58,539 | $ | 34.81 | |||||
Granted | 27,712 | 29.39 | ||||||
Vested | (24,797 | ) | 36.04 | |||||
Forfeited | (2,993 | ) | 31.14 | |||||
Nonvested at December 31, 2021 | 58,461 | 31.91 | ||||||
As of December 31,2021,2020, and 2019, there was $782,000, $797,000, and $751,000, respectively, in unrecognized compensation cost related to nonvested restricted stock granted under the 2018 Plan. This cost is expected to be recognized over the next 12 to 36 months. The share based compensation expense for nonvested restricted stock was $749,000, $672,000, and $915,000 during 2021,2020, and 2019, respectively. The expense for 2019 included $257,000 of accelerated compensation expense as a result of the HomeTown merger.
The Company offers its outside directors alternatives with respect to director compensation. For 2021 and 2020, the regular quarterly board retainer could be received in the form of shares of immediately vested but restricted stock with a market value of $10,000. Monthly meeting fees could be received as $800 per meeting in cash or $1,000 in immediately vested but restricted stock. For 2019, the regular monthly board retainer could be received quarterly in the form of immediately vested but restricted stock with a market value of $7,500. Monthly meeting fees could be received as $725 in cash or $900 in immediately vested but restricted stock. Only outside directors receive board fees. The Company issued 20,474, 27,986 and 17,373 shares and recognized share based compensation expense of $683,000, $779,000, and $626,000 during 2021,2020 and 2019, respectively.
Note 14 – Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and the states of Virginia and North Carolina. With few exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years prior to 2018.
The components of the Company's net deferred tax assets were as follows (dollars in thousands):
December 31, | ||||||||
2021 | 2020 | |||||||
Deferred tax assets: | ||||||||
Allowance for loan losses | $ | 4,116 | $ | 4,636 | ||||
Nonaccrual loan interest | 250 | 507 | ||||||
Other real estate owned valuation allowance | 23 | 124 | ||||||
Deferred compensation | 1,183 | 159 | ||||||
Acquisition accounting adjustments | 1,258 | 3,404 | ||||||
Lease liability, net of right of use asset | 18 | 13 | ||||||
Accrued pension liability | 320 | 447 | ||||||
Net unrealized loss on cash flow hedges | 588 | 1,022 | ||||||
Net unrealized loss on securities available for sale | 469 | 0 | ||||||
Other | 253 | 318 | ||||||
Total deferred tax assets | 8,478 | 10,630 | ||||||
Deferred tax liabilities: | ||||||||
Depreciation | 1,094 | 1,352 | ||||||
Core deposit intangibles | 999 | 1,315 | ||||||
Prepaid pension | 0 | 213 | ||||||
Deferred loan origination costs, net | 72 | 533 | ||||||
Net unrealized gain on securities available for sale | 0 | 2,180 | ||||||
Other | 6 | 32 | ||||||
Total deferred tax liabilities | 2,171 | 5,625 | ||||||
Net deferred tax assets | $ | 6,307 | $ | 5,005 | ||||
The provision for income taxes consists of the following (dollars in thousands):
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Current tax expense | $ | 10,905 | $ | 7,777 | $ | 3,793 | ||||||
Deferred tax (benefit) expense | 808 | (640 | ) | 1,068 | ||||||||
Total income tax expense | $ | 11,713 | $ | 7,137 | $ | 4,861 | ||||||
A reconcilement of the "expected" federal income tax expense to reported income tax expense is as follows (dollars in thousands):
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Expected federal tax expense | $ | 11,600 | $ | 7,808 | $ | 5,411 | ||||||
Nondeductible interest expense | 8 | 31 | 67 | |||||||||
Tax-exempt interest | (198 | ) | (259 | ) | (478 | ) | ||||||
State income taxes | 326 | 207 | 149 | |||||||||
Other, net | (23 | ) | (650 | ) | (288 | ) | ||||||
Total income tax expense | $ | 11,713 | $ | 7,137 | $ | 4,861 | ||||||
Note 15 – Earnings Per Common Share
The following shows the weighted average number of shares used in computing earnings per common share and the effect on the weighted average number of shares of potentially dilutive common stock. Potentially dilutive common stock had no effect on income available to common shareholders. Nonvested restricted shares are included in the computation of basic earnings per share as the holder is entitled to full shareholder benefits during the vesting period including voting rights and sharing in nonforfeitable dividends.
Year Ended December 31, | ||||||||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||
Per Share | Per Share | Per Share | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||
Basic earnings per share | 10,873,817 | $ | 4.00 | 10,981,623 | $ | 2.74 | 10,531,572 | $ | 1.99 | |||||||||||||||
Effect of dilutive securities - stock options | 3,414 | 0 | 4,167 | (0.01 | ) | 9,765 | (0.01 | ) | ||||||||||||||||
Diluted earnings per share | 10,877,231 | $ | 4.00 | 10,985,790 | $ | 2.73 | 10,541,337 | $ | 1.98 | |||||||||||||||
There were 0 outstanding stock options that were excluded from the calculation of diluted earnings per share because their effects were anti-dilutive in 2021,2020, and 2019.
Note 16 – Off-Balance Sheet Activities
The Company is party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if applicable, is based on management's credit evaluation of the customer.
The Company's exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.
The following off-balance sheet financial instruments whose contract amounts represent credit risk were outstanding at December 31,2021 and 2020 (dollars in thousands):
December 31, | ||||||||
2021 | 2020 | |||||||
Commitments to extend credit | $ | 654,436 | $ | 503,272 | ||||
Standby letters of credit | 10,201 | 17,355 | ||||||
Mortgage loan rate lock commitments | 10,891 | 26,883 | ||||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally consist of unused portions of lines of credit issued to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
At December 31,2021, the Company had locked-rate commitments to originate mortgage loans amounting to approximately $10,891,000 and loans held for sale of $8,481,000. Risks arise from the possible inability of counterparties to meet the terms of their contracts, though the Company has never experienced a failure of one of its counterparties to perform. If a loan becomes past due 90 days within 180 days of sale, the Company would be required to repurchase the loan.
Note 17 – Related Party Transactions
In the ordinary course of business, loans are granted to executive officers, directors, and their related entities. Management believes that all such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans to similar, unrelated borrowers, and do not involve more than a normal risk of collectability or present other unfavorable features. As of December 31,2021 and 2020,none of these loans was restructured, past due, or on nonaccrual status.
An analysis of these loans for 2021 is as follows (dollars in thousands):
Balance at December 31, 2020 | $ | 8,522 | ||
Additions | 7,935 | |||
Repayments | (601 | ) | ||
Reclassifications(1) | (3 | ) | ||
Balance at December 31, 2021 | $ | 15,853 |
__________________________
(1) Includes loans to persons no longer affiliated with the Company and therefore not considered related party loans as of period end.
Related party deposits totaled $10,920,000 at December 31,2021 and $16,436,000 at December 31,2020.
Note 18 – Employee Benefit Plans
Defined Benefit Plan
The Company previously maintained a non-contributory defined benefit pension plan which covered substantially all employees who were 21 years of age or older and who had at least one year of service. The Company froze its pension plan to new participants and converted its pension plan to a cash balance plan effective December 31, 2009. Each year, existing participants will receive, with some adjustments, income based on the yield of the 10 year U.S. Treasury Note in December of the preceding year. Information pertaining to the activity in the plan is as follows (dollars in thousands):
As of and for the Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Change in Benefit Obligation: | ||||||||||||
Projected benefit obligation at beginning of year | $ | 5,821 | $ | 6,262 | $ | 5,812 | ||||||
Service cost | 0 | 0 | 0 | |||||||||
Interest cost | 91 | 152 | 209 | |||||||||
Actuarial (gain) loss | (259 | ) | 814 | 489 | ||||||||
Settlement gain (loss) | 6 | 44 | (12 | ) | ||||||||
Benefits paid | (646 | ) | (1,451 | ) | (236 | ) | ||||||
Projected benefit obligation at end of year | 5,013 | 5,821 | 6,262 | |||||||||
Change in Plan Assets: | ||||||||||||
Fair value of plan assets at beginning of year | 4,701 | 5,915 | 5,653 | |||||||||
Actual return on plan assets | 190 | 237 | 498 | |||||||||
Employer contributions | 800 | 0 | 0 | |||||||||
Benefits paid | (646 | ) | (1,451 | ) | (236 | ) | ||||||
Fair value of plan assets at end of year | 5,045 | 4,701 | 5,915 | |||||||||
Funded Status at End of Year | $ | 32 | $ | (1,120 | ) | $ | (347 | ) | ||||
Amounts Recognized in the Consolidated Balance Sheets | ||||||||||||
Other assets (liabilities) | $ | 32 | $ | (1,120 | ) | $ | (347 | ) | ||||
Amounts Recognized in Accumulated Other Comprehensive Loss | ||||||||||||
Net actuarial loss | $ | 1,481 | $ | 2,071 | $ | 1,658 | ||||||
Deferred income taxes | (320 | ) | (435 | ) | (358 | ) | ||||||
Amount recognized | $ | 1,161 | $ | 1,636 | $ | 1,300 | ||||||
As of and for the Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Components of Net Periodic Benefit Cost | ||||||||||||
Service cost | $ | 0 | $ | 0 | $ | 0 | ||||||
Interest cost | 91 | 152 | 209 | |||||||||
Expected return on plan assets | (230 | ) | (285 | ) | (269 | ) | ||||||
Recognized net loss due to settlement | 195 | 352 | 52 | |||||||||
Recognized net actuarial loss | 182 | 140 | 133 | |||||||||
Net periodic benefit cost | $ | 238 | $ | 359 | $ | 125 | ||||||
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Income) Loss | ||||||||||||
Net actuarial (gain) loss | $ | (590 | ) | $ | 413 | $ | 64 | |||||
Amortization of prior service cost | 0 | 0 | 0 | |||||||||
Total recognized in other comprehensive (income) loss | $ | (590 | ) | $ | 413 | $ | 64 | |||||
Total Recognized in Net Periodic Benefit Cost and Other Comprehensive (Income) Loss | $ | (352 | ) | $ | 772 | $ | 189 | |||||
The accumulated benefit obligation as of December 31,2021,2020, and 2019 was $5,014,000, $5,821,000, and $6,262,000, respectively. The rate of compensation increase is no longer applicable since the defined benefit plan was frozen and converted to a cash balance plan.
The plan sponsor selected the expected long-term rate-of-return-on-assets assumption in consultation with their investment advisors and actuary. This rate was intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience that may not continue over the measurement period, with higher significance placed on current forecasts of future long-term economic conditions.
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, solely for this purpose, the plan is assumed to continue in force and not terminate during the period in which assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).
Below is a description of the plan's assets. The plan's weighted-average asset allocations by asset category are as follows as of December 31,2021 and 2020:
Asset Category | December 31, | |||||||
2021 | 2020 | |||||||
Fixed Income | 56.5 | % | 65.6 | % | ||||
Equity | 22.9 | % | 31.5 | % | ||||
Cash and Accrued Income | 20.6 | % | 2.9 | % | ||||
Total | 100.0 | % | 100.0 | % | ||||
The investment policy and strategy for plan assets can best be described as a growth and income strategy. Diversification is accomplished by limiting the holding of any one equity issuer to no more than 5% of total equities. Exchange traded funds are used to provide diversified exposure to the small capitalization and international equity markets. All fixed income investments are rated as investment grade, with the majority of these assets invested in corporate issues. The assets are managed by the Company's Trust and Investment Services Division. No derivatives are used to manage the assets. Equity securities do not include holdings in the Company.
The fair value of the Company's pension plan assets at December 31,2021 and 2020, by asset category are as follows (dollars in thousands):
Fair Value Measurements at December 31, 2021 Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Balance as of | Markets for | Observable | Unobservable | |||||||||||||
December 31, | Identical Assets | Inputs | Inputs | |||||||||||||
Asset Category | 2021 | Level 1 | Level 2 | Level 3 | ||||||||||||
Cash | $ | 1,042 | $ | 1,042 | $ | 0 | $ | 0 | ||||||||
Fixed income securities | ||||||||||||||||
Government sponsored entities | 469 | 0 | 469 | 0 | ||||||||||||
Municipal bonds and notes | 2,067 | 0 | 2,067 | 0 | ||||||||||||
Corporate bonds and notes | 312 | 0 | 312 | 0 | ||||||||||||
Equity securities | ||||||||||||||||
U.S. companies | 964 | 964 | 0 | 0 | ||||||||||||
Foreign companies | 191 | 191 | 0 | 0 | ||||||||||||
| $ | 5,045 | $ | 2,197 | $ | 2,848 | $ | 0 | |||||||||
Fair Value Measurements at December 31, 2020 Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Balance as of | Markets for | Observable | Unobservable | |||||||||||||
December 31, | Identical Assets | Inputs | Inputs | |||||||||||||
Asset Category | 2020 | Level 1 | Level 2 | Level 3 | ||||||||||||
Cash | $ | 138 | $ | 138 | $ | 0 | $ | 0 | ||||||||
Fixed income securities | ||||||||||||||||
Government sponsored entities | 444 | 0 | 444 | 0 | ||||||||||||
Municipal bonds and notes | 2,147 | 0 | 2,147 | 0 | ||||||||||||
Corporate bonds and notes | 491 | 0 | 491 | 0 | ||||||||||||
Equity securities | ||||||||||||||||
U.S. companies | 1,259 | 1,259 | 0 | 0 | ||||||||||||
Foreign companies | 222 | 222 | 0 | 0 | ||||||||||||
| $ | 4,701 | $ | 1,619 | $ | 3,082 | $ | 0 | |||||||||
Projected benefit payments for the years 2022 to 2031 are as follows (dollars in thousands):
Year | Amount | ||||
2022 | $ | 142 | |||
2023 | 716 | ||||
2024 | 240 | ||||
2025 | 1,195 | ||||
2026 | 193 | ||||
| 2027 - 2031 | 2,324 | ||||
401(k) Plan
The Company maintains a 401(k) plan that covers substantially all full-time employees of the Company. The Company matches a portion of the contribution made by employee participants after at least one year of service. The Company contributed $1,121,000, $1,038,000, and $932,000 to the 401(k) plan in 2021,2020, and 2019, respectively. These amounts are included in employee benefits expense for the respective years.
Deferred Compensation Arrangements
Prior to 2015, the Company maintained deferred compensation agreements with former employees providing for annual payments to each ranging from $25,000 to $50,000 per year for 10 years upon their retirement. The liabilities under these agreements were accrued over the officers' remaining periods of employment so that, on the date of their retirement, the then-present value of the annual payments had been accrued. As of December 31,2021, the Company only had one remaining agreement under which payments are being made to a former officer. The liabilities were $150,000 and $200,000 at December 31,2021 and 2020, respectively. There was 0 expense for this agreement for the years ended December 31,2021,2020, and 2019. As a result of acquisitions, the Company has various agreements with current and former employees and executives with balances of $5,552,000 and $5,585,000 at December 31,2021 and 2020, respectively that accrue through eligibility and are payable upon retirement. The Company recognized expenses of $430,000, $422,000 and $194,000 for the years ended December 31, 2021, 2020, and 2019, respectively.
Certain named executive officers arebecame eligible to participate in a voluntary, nonqualified deferred compensation plan pursuant to which the officers may defer any portion of their annual cash incentive payments. The only eligible executive officer for 2023 was Mr. Jeffrey Haley. In addition, the Company may make discretionary cash bonus contributions to the deferred compensation plan. Such contributions, if any, are made on an annual basis after the Committee assesses the performance of each of the named executive officers and the Company during the most recently completed fiscal year. The contributions chargedgoal of the Committee is to salary expense were $184,000, $0award such discretionary bonus payments commensurate with the officer's performance during such year.
Incentive Arrangements
are not reasonably likely to have a material adverse effect on the Company, but rather will have a positive effect on the Company.
Note 19 – Fair Value Measurements
Fair Value Measurements at December 31, 2021 Using Quoted Prices Significant in Active Other Significant Balance as of Markets for Observable Unobservable December 31, Identical Assets Inputs Inputs Description 2021 Level 1 Level 2 Level 3 Assets: Securities available for sale: U.S. Treasury Federal agencies and GSEs Mortgage-backed and CMOs State and municipal Corporate Total securities available for sale Loans held for sale Liabilities: Derivative - cash flow hedges Fair Value Measurements at December 31, 2020 Using Quoted Prices Significant in Active Other Significant Balance as of Markets for Observable Unobservable December 31, Identical Assets Inputs Inputs Description 2020 Level 1 Level 2 Level 3 Assets: Securities available for sale: U.S. Treasury Federal agencies and GSEs Mortgage-backed and CMOs State and municipal Corporate Total securities available for sale Loans held for sale Liabilities: Derivative - cash flow hedgesDeterminationFair ValueThe Company uses fair value measurementsshares subject to record fair value adjustmentseach option, whether such options will be exercised by delivering other shares of common stock, and when such options become vested and exercisable. In general, the per share exercise price of an incentive stock option must be at least equal to certain assets and liabilities and to determine fair value disclosures. In accordance with the fair value measurements and disclosures topic of FASB ASC 825,Financial Instruments, the fairmarket value of a financial instrumentshare of common stock on the date the option is granted. Restricted stock is granted under terms and conditions established by the price that would be received to sell an asset or paid to transfer a liability (an exit price)Committee.principalmanner specified by the Committee. Each stock option or most advantageous market forportion thereof is exercisable at any time on or after it vests and is exercisable until ten years after its date of grant. No stock options can be backdated or repriced. As of December 31, 2023, there were no options outstanding or awarded under the asset or liability2018 Plan.an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices forof the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using presentcommon stock. The value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.Fair Value HierarchyIn accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.Level 1 –Valuation is based on quoted prices in active markets for identical assets and liabilities.Level 2 –Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.Level 3 –Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.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 financial statements:Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. 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. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).Loans held for sale: Loans held for sale are carried at fair value. These loans currently consist of residential loans originated for sale in the secondary market. Fair valuestock awarded is based on the price secondary markets are currently offering for similar loans using observablefair market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are recorded in current period earnings as a component of mortgage banking income on the Company's consolidated statements of income.Derivative asset (liability) - cash flow hedges: Cash flow hedges are recorded at fair value on a recurring basis. Cash flow hedges are valued by a third party using significant assumptions that are observable in the market and can be corroborated by market data. All of the Company's cash flow hedges are classified as Level 2. Unvested at January 1, 2023 71,707 $ 33.36 Granted 32,554 $ 35.78 Vested (19,805 ) $ 33.73 Forfeited (1,878 ) $ 34.16 Unvested at December 31, 2023 82,578 $ 33.39 balancesterm of financial assets and liabilities measured at fair valuethe agreement will be automatically extended on a recurringdaily basis duringby one day so that there will always be at least two years remaining in the period (dollars in thousands): $ 149,577 $ 0 $ 149,577 $ 0 104,580 0 104,580 0 356,310 0 356,310 0 66,472 0 66,472 0 15,528 0 15,528 0 $ 692,467 $ 0 $ 692,467 $ 0 $ 8,481 $ 0 $ 8,481 $ 0 $ 2,800 $ 0 $ 2,800 $ 0 $ 34,998 $ 0 $ 34,998 $ 0 106,023 0 106,023 0 252,782 0 252,782 0 59,099 0 59,099 0 13,189 0 13,189 0 $ 466,091 $ 0 $ 466,091 $ 0 $ 15,591 $ 0 $ 15,591 $ 0 $ 4,868 $ 0 $ 4,868 �� $ 0 Certain assets are measured at fair valueterm of the agreement upon such extension. Each agreement for Messrs. Farrar, Martin, and Jung, and Ms. Joyce has an initial term of two years from its effective date, January 1, 2022, and expires on December 31, 2023, provided that on and after January 1, 2023, the term of the agreement will be automatically extended on a nonrecurringdaily basis by one day so that there will always be at least one year remaining in the term of the agreement upon such extension. The Company may give each of the officers notice of nonrenewal of their respective agreements at any time on or after January 1, 2023, and Mr. Jeffrey Haley's agreement will terminate two years after the date of such notice and Messrs. Farrar, Martin, and Jung, and Ms. Joyce's agreements will terminate one year after the date of such notice. Each of the agreements automatically terminate on the first day of the month immediately following the month in which the officer turns 67.GAAP. Adjustmentsthe terms and conditions of the applicable short-term and long-term cash and equity incentive plans of the Company. Any incentive-based compensation or award that an officer receives is subject to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.The following describes the valuation techniques usedclawback by the Company as may be required by applicable law or, if applicable, any stock exchange listing requirement and on such basis as the Company determines. Each officer is expected to measure certain assets recorded at fair value onmaintain a nonrecurring basis in the financial statements:Impaired loans: Loans are designated as impaired when, in the judgmentlevel of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majorityshare ownership of the Company's collateralcommon stock in accordance with guidelines established by the Company.real estate. Theentitled as of the date of termination. In addition, subject to the officer's execution and non-revocation of a general release of claims, the Company will make a lump sum payment to the officer in an amount equal to the product of (x) the officer's "Total Annual Compensation" divided by 12 times (y) the number of months remaining between the date of termination and the last day of the then-current term of the agreement, including pro-rated credit for any partial month. As defined in the agreement for each officer, "Total Annual Compensation" means the sum of: (1) the officer's base salary in effect on the date of termination; (2) the greater of the officer's maximum annual bonus opportunity for the year in which the officer's employment terminates and the annual bonus earned for the most recently completed calendar year; (3) the grant date value of real estate collateralany equity awards granted to the officer over the 12 months immediately prior to the date of termination (the "prior 12 months"); (4) any tax-qualified or non-tax qualified plan contributions or allocations made on the officer's behalf over the prior 12 months; and (5) the value of any perquisites and other benefits, including the employer portion of benefit premiums, paid or made available to the officer or on the officer's behalf over the prior 12 months. Upon termination of employment under the above-described circumstances, Mr. Jeffrey Haley will be subject to certain non-competition and non-solicitation restrictions for 12 months, and Messrs. Farrar, Martin and Jung, and Ms. Joyce will be subject to certain non-competition restrictions for 6 months and non-solicitation restrictions for 12 months.determined utilizingterminated by him for Good Reason or by the Company on account of its failure to renew the agreement or without Cause, in each case within 24 months following the Change in Control, he will be entitled to receive, subject to his execution and non-revocation of a market valuation approachgeneral release of claims, a lump sum payment equal to the sum of: (1) any earned but unpaid incentive or bonus compensation with respect to any completed calendar year; (2) a pro-rated cash bonus amount based on an appraisal,his prior year's cash bonus amount; (3) any other benefits or awards which, pursuant to the terms of one yearany plans, policies or less, conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisalprograms of the propertyCompany, have been earned or become payable but which have not been paid; and (4) an amount equal to either (A) 2.99 times Mr. Haley's Total Annual Compensation, or (B) if his employment terminates between his 65th birthday and the date he attains his U.S. Social Security Administration ("Social Security") normal retirement age, the product of (x) his Total Annual Compensation divided by 12 times (y) the number of months remaining between the date of termination and the date he attains his Social Security normal retirement age.more than one year old and not solelyterminated by him or her for Good Reason or by the Company on account of its failure to renew the agreement or without Cause, in each case within 24 months following the Change in Control, the officer will be entitled to receive, subject to execution of a general release of claims, a lump sum payment equal to the sum of: (1) any earned but unpaid incentive or bonus compensation with respect to any completed calendar year; (2) a pro-rated cash bonus amount based on observable market comparablesthe officer's prior year's cash bonus amount; (3) any other benefits or management determinesawards which, pursuant to the fair valueterms of any plans, policies or programs of the collateral is further impaired belowCompany, have been earned or become payable but which have not been paid to the appraised value, then a Level 3 valuation is consideredofficer; and (4) an amount equal to measure the fair value. The valueproduct of business equipment is based upon an outside appraisal,(x) the officer's Total Annual Compensation divided by 12 times (y) the lesser of one year or less, if deemed significant,24 or the net book value onnumber of months remaining between the applicable business's financial statements if not considered significant using observable market data. Likewise, values for inventorydate of termination and accounts receivables collateral are based on financial statement balancesthe date the officer attains his or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.her Social Security normal retirement age.90
Other real estate owned: Measurement
The following table summarizes the Company's assets that were measured at fair value ondecision making with respect to executive compensation. To maintain flexibility in compensating executive officers in a nonrecurring basis duringmanner designed to promote varying corporate goals, the period (dollars in thousands):
Fair Value Measurements at December 31, 2021 Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Balance as of | Markets for | Observable | Unobservable | |||||||||||||
December 31, | Identical Assets | Inputs | Inputs | |||||||||||||
Description | 2021 | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: | ||||||||||||||||
Impaired loans, net of valuation allowance | $ | 7 | $ | 0 | $ | 0 | $ | 7 | ||||||||
Other real estate owned, net | 143 | 0 | 0 | 143 | ||||||||||||
Fair Value Measurements at December 31, 2020 Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Balance as of | Markets for | Observable | Unobservable | |||||||||||||
December 31, | Identical Assets | Inputs | Inputs | |||||||||||||
Description | 2020 | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: | ||||||||||||||||
Impaired loans, net of valuation allowance | $ | 268 | $ | 0 | $ | 0 | $ | 268 | ||||||||
Other real estate owned, net | 958 | 0 | 0 | 958 | ||||||||||||
Quantitative Information About Level 3 Fair Value Measurements as of December 31,2021 and 2020:
December 31, 2021 | December 31, 2020 | |||||||||
Assets | Valuation Technique | Unobservable Input | Range; Weighted Average (1) | Range; Weighted Average (1) | ||||||
Impaired loans | Discounted appraised value | Selling cost | 8.00% | 8.00% | ||||||
Discounted cash flow analysis | Market rate for borrower (discount rate) | 4.13% - 4.73%; 4.35% | 4.13% - 7.20%; 5.19% | |||||||
Other real estate owned | Discounted appraised value | Selling cost | 8.00% | 8.00% | ||||||
__________________________
(1) Unobservable inputs were weighted by the relative fair value of the impaired loans.
FASB ASC 825,Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are Committee has not required adopted a policy requiring all compensation to be measureddeductible. The Company did not have any nondeductible compensation in 2023.
Name and Principal Position | Year | Salary ($) | Bonus ($) (1) | Stock Awards ($) (2) | Non- Equity Incen- tive Plan Com- pen- sation ($) (3) | Change in Pension Value and Non- Qualified Deferred Compen- sation Earnings ($) (4) | All Other Compen- sation ($) (5) | Total ($) | ||||||||||||||||||||||
| Jeffrey V. Haley | 2023 | 599,039 | 90,000 | 182,250 | 243,000 | — | 2,692,006 | 3,806,295 | ||||||||||||||||||||||
Chairman, President and Chief | 2022 | 574,520 | 86,250 | 143,192 | 237,188 | — | 40,948 | 1,082,098 | ||||||||||||||||||||||
Executive Officer of | 2021 | 571,161 | 82,500 | 122,027 | 187,500 | — | 39,263 | 1,002,451 | ||||||||||||||||||||||
the Company and | ||||||||||||||||||||||||||||||
the Bank | ||||||||||||||||||||||||||||||
| Jeffrey W. Farrar | 2023 | 381,510 | 32,249 | 84,055 | 128,996 | — | 740,428 | 1,367,238 | ||||||||||||||||||||||
Senior Executive Vice | 2022 | 363,740 | — | 56,775 | 136,503 | — | 40,196 | 597,214 | ||||||||||||||||||||||
President and Chief | 2021 | 348,855 | 35,000 | 50,003 | 65,627 | — | 35,812 | 535,297 | ||||||||||||||||||||||
Operating and Chief | ||||||||||||||||||||||||||||||
Financial Officer of the | ||||||||||||||||||||||||||||||
Company and the Bank | ||||||||||||||||||||||||||||||
| Edward C. Martin | 2023 | 349,039 | — | 76,678 | 118,058 | — | 787,134 | 1,330,909 | ||||||||||||||||||||||
Senior Executive Vice | 2022 | 329,423 | — | 45,455 | 123,750 | — | 27,108 | 525,736 | ||||||||||||||||||||||
President and Chief | 2021 | 281,116 | 30,000 | 50,003 | 56,250 | — | 23,557 | 440,926 | ||||||||||||||||||||||
Administrative Officer of | ||||||||||||||||||||||||||||||
the Company and the Bank | ||||||||||||||||||||||||||||||
| Rhonda P. Joyce (6) | 2023 | 340,625 | — | 72,913 | 115,172 | — | 557,533 | 1,086,243 | ||||||||||||||||||||||
Executive Vice President | 2022 | 325,000 | — | 41,675 | 121,875 | — | 28,845 | 517,395 | ||||||||||||||||||||||
and Co-Head of Banking | 2021 | — | — | — | — | — | — | — | ||||||||||||||||||||||
- Commercial of the Bank | ||||||||||||||||||||||||||||||
| Alexander Jung (7) | 2023 | 308,654 | — | 66,661 | 104,288 | — | 419,252 | 898,855 | ||||||||||||||||||||||
Executive Vice President | 2022 | 300,000 | — | 36,002 | 91,950 | — | 24,944 | 452,896 | ||||||||||||||||||||||
and Co-Head of Banking | 2021 | — | — | — | — | — | — | — | ||||||||||||||||||||||
- Consumer and Financial | ||||||||||||||||||||||||||||||
Services of the Bank | ||||||||||||||||||||||||||||||
| (1) | The Human Resources and Compensation Committee assessed the performance of the eligible executive officer and the Company during the indicated year and awarded discretionary cash bonus payments commensurate with the officer's performance. For 2023, 2022, and 2021, the payments were made by contributions into an account established for the officer under the Company’s nonqualified deferred compensation plan for eligible executive officers of the Company. |
| (2) | Amounts shown represent the aggregate full grant date fair value of each award calculated in accordance with FASB ASC Topic 718. The assumptions made in the calculation of these amounts are contained in Note 13 to the Company's audited financial statements for the year ended December 31, 2023, included herein. |
| (3) | Represents cash award for individual and Company performance under the incentive program based upon achievement of specific goals approved by the Board. Achievement of specific goals and amounts of cash awards are determined by the Human Resources and Compensation Committee and submitted to the Board for approval. Participants have the option of taking a larger percentage in restricted stock and less in cash. |
| (4) | Because the pension plan was converted to a cash balance plan and frozen effective December 31, 2009, the assumptions used to determine the present value of accumulated benefit for each participant were changed so that the present value of accumulated benefit shown as of the end of that year was equal to the opening balance under the cash balance plan. This is the same amount that would have been payable under the prior plan had the participant terminated employment and elected a lump sum payment. There were no benefit increases for any participant attributable to the cash balance plan conversion. For the years ended December 31, 2023, 2022 and 2021, the present value of the accumulated benefits under such plan increased by $11,205, decreased by $81,231 and decreased by $379, respectively, for Mr. Haley, which amounts are not reflected in the table above. |
| (5) | Details of other compensation for each of the executive officers appear in the All Other Compensation table shown below. |
| (6) | Ms. Joyce was appointed an executive officer of the Bank on October 5, 2021 and was not a named executive officer for 2021. |
| (7) | Mr. Jung joined the Bank as an executive officer of the Bank on November 15, 2021 and was not a named executive officer for 2021. |
Name | Year | Company Contribution to 401(k) Plan ($) | Change In Control Payments ($) (1) | Other Benefits ($) (2) | Total ($) | |||||||||||||
| Jeffrey V. Haley | 2023 | 22,601 | 2,648,351 | 21,054 | 2,692,006 | |||||||||||||
| 2022 | 20,286 | — | 20,662 | 40,948 | ||||||||||||||
| 2021 | 19,654 | — | 19,609 | 39,263 | ||||||||||||||
| Jeffrey W. Farrar | 2023 | 15,845 | 702,205 | 22,378 | 740,428 | |||||||||||||
| 2022 | 19,322 | — | 20,874 | 40,196 | ||||||||||||||
| 2021 | 16,986 | — | 18,826 | 35,812 | ||||||||||||||
| Edward C. Martin | 2023 | 23,110 | 746,865 | 17,159 | 787,134 | |||||||||||||
| 2022 | 15,464 | — | 11,644 | 27,108 | ||||||||||||||
| 2021 | 14,559 | — | 8,998 | 23,557 | ||||||||||||||
| Rhonda P. Joyce | 2023 | 17,028 | 525,468 | 15,037 | 557,533 | |||||||||||||
| 2022 | 15,298 | — | 13,547 | 28,845 | ||||||||||||||
| 2021 | — | — | — | — | ||||||||||||||
| Alexander Jung | 2023 | 16,958 | 386,790 | 15,504 | 419,252 | |||||||||||||
| 2022 | 13,859 | — | 11,085 | 24,944 | ||||||||||||||
| 2021 | — | — | — | — | ||||||||||||||
| (1) | Includes the Change in Control Payments described in "Compensation Discussion and Analysis – Executive Employment Agreements and Change in Control Arrangements" beginning on page 14 as follows: Mr. Haley, $2,648,351, Mr. Farrar, $702,205, Mr. Martin, $746,865, Ms. Joyce, $525,468, and Mr. Jung, $386,790. |
| (2) | Other benefits include company paid insurance premiums for all named executive officers. |
Fair Value Measurements at December 31, 2021 Using | ||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | Fair Value | |||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | Balance | ||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 510,868 | $ | 510,868 | $ | 0 | $ | 0 | $ | 510,868 | ||||||||||
Securities available for sale | 692,467 | 0 | 692,467 | 0 | 692,467 | |||||||||||||||
Restricted stock | 8,056 | 0 | 8,056 | 0 | 8,056 | |||||||||||||||
Loans held for sale | 8,481 | 0 | 8,481 | 0 | 8,481 | |||||||||||||||
Loans, net of allowance | 1,927,902 | 0 | 0 | 1,914,887 | 1,914,887 | |||||||||||||||
Bank owned life insurance | 29,107 | 0 | 29,107 | 0 | 29,107 | |||||||||||||||
Accrued interest receivable | 5,822 | 0 | 5,822 | 0 | 5,822 | |||||||||||||||
Financial Liabilities: | ||||||||||||||||||||
Deposits | $ | 2,890,353 | $ | 0 | $ | 2,892,487 | $ | 0 | $ | 2,892,487 | ||||||||||
Repurchase agreements | 41,128 | 0 | 41,128 | 0 | 41,128 | |||||||||||||||
Junior subordinated debt | 28,232 | 0 | 0 | 26,635 | 26,635 | |||||||||||||||
Accrued interest payable | 392 | 0 | 392 | 0 | 392 | |||||||||||||||
Derivative - cash flow hedges | 2,800 | 0 | 2,800 | 0 | 2,800 | |||||||||||||||
The carrying values and estimated fair values of the Company's financial instruments at December 31,2020 are as follows (dollars in thousands):
Fair Value Measurements at December 31, 2020 Using | ||||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | Fair Value | |||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | Balance | ||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 374,370 | $ | 374,370 | $ | 0 | $ | 0 | $ | 374,370 | ||||||||||
Securities available for sale | 466,091 | 0 | 466,091 | 0 | 466,091 | |||||||||||||||
Restricted stock | 8,715 | 0 | 8,715 | 0 | 8,715 | |||||||||||||||
Loans held for sale | 15,591 | 0 | 15,591 | 0 | 15,591 | |||||||||||||||
Loans, net of allowance | 1,993,653 | 0 | 0 | 1,992,326 | 1,992,326 | |||||||||||||||
Bank owned life insurance | 28,482 | 0 | 28,482 | 0 | 28,482 | |||||||||||||||
Accrued interest receivable | 7,193 | 0 | 7,193 | 0 | 7,193 | |||||||||||||||
Financial Liabilities: | ||||||||||||||||||||
Deposits | $ | 2,611,330 | $ | 0 | $ | 2,615,157 | $ | 0 | $ | 2,615,157 | ||||||||||
Repurchase agreements | 42,551 | 0 | 42,551 | 0 | 42,551 | |||||||||||||||
Subordinated debt | 7,500 | 0 | 7,522 | 0 | 7,522 | |||||||||||||||
Junior subordinated debt | 28,130 | 0 | 0 | 21,696 | 21,696 | |||||||||||||||
Accrued interest payable | 778 | 0 | 778 | 0 | 778 | |||||||||||||||
Derivative - cash flow hedges | 4,868 | 0 | 4,868 | 0 | 4,868 | |||||||||||||||
Estimated Future Payouts Under Non- Equity Incentive Plan Awards (1) | All Other Stock | Grant Date Fair Value | ||||||||||||||||||||||
| Name | Grant Date | Threshold ($) | Target ($) | Maximum ($) | Awards: Number of Shares of Stock (2) | of Stock and Option Awards ($) (3) | ||||||||||||||||||
| Jeffrey V. Haley | 1/17/2023 | 6,504 | 237,201 | |||||||||||||||||||||
| N/A | 80,871 | 162,000 | 243,000 | — | — | |||||||||||||||||||
| Jeffrey W. Farrar | 1/17/2023 | 3,743 | 136,507 | |||||||||||||||||||||
| N/A | 42,920 | 85,840 | 128,996 | — | — | |||||||||||||||||||
| Edward C. Martin | 1/17/2023 | 3,394 | 123,779 | |||||||||||||||||||||
| N/A | 39,269 | 78,534 | 118,058 | — | — | |||||||||||||||||||
| Rhonda P. Joyce | 1/17/2023 | 3,342 | 121,883 | |||||||||||||||||||||
| N/A | 38,320 | 76,640 | 115,172 | — | — | |||||||||||||||||||
| Alexander Jung (4) | 1/17/2023 | 2,522 | 91,977 | |||||||||||||||||||||
| N/A | 34,724 | 69,447 | 104,288 | — | — | |||||||||||||||||||
| (1) | Represents cash award amounts for individual and Company performance under the incentive program based upon achievement of specific goals approved by the Board. Achievement of specific goals and amounts of cash awards are determined by the Human Resources and Compensation Committee and submitted to the Board for approval. Participants have the option of taking a larger percentage in restricted stock and less in cash. The actual annual cash incentive awards paid to the named executive officers earned in 2023 under the incentive plan are shown in the Summary Compensation Table under the column captioned "Non-Equity Incentive Plan Compensation." Maximum represents the potential payout for performance that exceeds expectations. |
| (2) | Restricted stock granted under the 2018 Equity Compensation Plan. The restricted stock awards vest at 36 months after the date of grant, contingent on continuous service through the applicable vesting date. Restricted stock has no express performance criteria other than continued employment (with limited exceptions for termination of employment due to death, disability, retirement, reduction-in-force, and change in control). |
| (3) | Amounts shown represent the aggregate full grant date fair value of each award calculated in accordance with FASB ASC Topic 718. The assumptions made in the calculation of these amounts are contained in Note 13 to the Company's audited financial statements for the year ended December 31, 2023.included herein. |
| (4) | Mr. Jung joined the Company in November 2021, so his awards in 2022 were pro-rated accordingly. |
Note 20 – Dividend RestrictionsOutstanding Equity Awards at Fiscal Year-EndRegulatory Capitalvest at 36 months after the date of grant, contingent on continuous service through the applicable vesting date. There were no stock options outstanding as of December 31, 2023 for the named executive officers. Jeffrey V. Haley 15,797 770,104 — — Jeffrey W. Farrar 7,283 355,046 — — Edward C. Martin 4,807 325,991 — — Rhonda P. Joyce 6,388 311,415 — — Alexander Jung 5,319 259,301 — — approvalfollowing table reflects shares acquired upon the vesting of restricted stock awards in 2023 by the named executive officers and the value realized on vesting. None of the Office of the Comptroller of the Currency is required if the total of all dividends declared by a national bank innamed executive officers holds any calendar year exceeds the bank's retained net income, as defined, for that year combined with its retained net income for the preceding two calendar years. Under this formula, the Bank can distribute as dividends to the Company, without the approval of the Office of the Comptroller of the Currency, up to $35,132,000 as of December 31,2021. Dividends paid by the Bank to the Company are the only significant source of funding for dividends paid by the Company to its shareholders.Federal bank regulators have issued substantially similar guidelines requiring banks and bank holding companies to maintain capital at certain levels. In addition, regulators may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth. 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.The FRB and Office of the Comptroller of the Currency have adopted rules to implement the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Basel III Capital Rules"). The Basel III Capital Rules require banks and bank holding companies to comply with certain minimum capital ratios, plus a "capital conservation buffer," as set forth in the table below. The capital conservation buffer requirement was phased in ratably over a four year period beginning on January 1, 2016, is designed to absorb losses during periods of economic stress and is applicable to all ratios except the leverage capital ratio. Institutions with a Common Equity Tier 1 ratio above the minimum (4.5%) but below the minimum plus the conservation buffer (7.0%) will face constraints on dividends, equity repurchases, and discretionary compensation paid to certain officers, based on the amount of the shortfall. The Bank must also comply with the capital requirements set forth in the "prompt corrective action" regulations pursuant to Section 38 of the Federal Deposit Insurance Act. The minimum capital ratios for the Bank to be considered "well capitalized" are set forth in the table below.On September 17, 2019, the federal banking agencies jointly issued a final rule required by the Economic Growth, Regulatory Relief, and Consumer Protection Act that permits qualifying banks and bank holding companies that have less than $10 billion in consolidated assets to elect to be subject to a 9% leverage ratio (commonly referred to as the community bank leverage ratio or "CBLR"). Under the final rule, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% are not subject to other risk-based and leverage capital requirements under the Basel III Capital Rules and are deemed to have met the well capitalized ratio requirements under the "prompt corrective action" framework. In addition, a community bank that falls out of compliance with the framework has a two-quarter grace period to come back into full compliance, provided its leverage ratio remains above 8%, and will be deemed well-capitalized during the grace period. The CBLR framework was first available for banking organizations to use in their March 31, 2020 regulatory reports. The Company and the Bank do mot currently expect to opt into the CBLR framework.Management believes that as of December 31,2021, the Company and Bank meet all capital adequacy requirements to which they are subject. At year-end 2021 and 2020, the most recent regulatory notifications categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's category. Jeffrey V. Haley 4,217 113,592 Jeffrey W. Farrar 570 20,127 Edward C. Martin 807 28,495 Rhonda P. Joyce 755 26,659 Alexander Jung — — (1) The value realized on vesting is based on the closing price of the Company's common stock on the date of vesting multiplied by the number of shares acquired. 93
Actual
To Be Well | ||||||||||||||||||||||||
Capitalized Under | ||||||||||||||||||||||||
Prompt Corrective | ||||||||||||||||||||||||
Actual | Required for Capital Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||
Common Equity Tier 1 | ||||||||||||||||||||||||
Company | $ | 270,192 | 12.43 | % | $ | 97,798 | >7.00% | N/A | N/A | |||||||||||||||
Bank | 285,260 | 13.15 | 151,845 | >7.00 | $ | 140,999 | >6.50% | |||||||||||||||||
Tier 1 Capital | ||||||||||||||||||||||||
Company | 298,424 | 13.73 | 130,397 | >8.50 | N/A | N/A | ||||||||||||||||||
Bank | 285,260 | 13.15 | 184,383 | >8.50 | 173,537 | >8.00 | ||||||||||||||||||
Total Capital | ||||||||||||||||||||||||
Company | 317,488 | 14.61 | 173,862 | >10.50 | N/A | N/A | ||||||||||||||||||
Bank | 304,324 | 14.03 | 277,767 | >10.50 | 216,921 | >10.00 | ||||||||||||||||||
Leverage Capital | ||||||||||||||||||||||||
Company | 298,424 | 9.13 | 130,722 | >4.00 | N/A | N/A | ||||||||||||||||||
Bank | 285,260 | 8.76 | 130,264 | >4.00 | 162,830 | >5.00 | ||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||
Common Equity Tier 1 | ||||||||||||||||||||||||
Company | $ | 244,318 | 12.36 | % | $ | 88,967 | >7.00% | N/A | N/A | |||||||||||||||
Bank | 252,748 | 12.86 | 137,530 | >7.00 | $ | 127,706 | >6.50% | |||||||||||||||||
Tier 1 Capital | ||||||||||||||||||||||||
Company | 272,448 | 13.78 | 118,623 | >8.50 | N/A | N/A | ||||||||||||||||||
Bank | 252,748 | 12.86 | 167,001 | >8.50 | 157,177 | >8.00 | ||||||||||||||||||
Total Capital | ||||||||||||||||||||||||
Company | 300,155 | 15.18 | 158,164 | >10.50 | N/A | N/A | ||||||||||||||||||
Bank | 274,455 | 13.97 | 206,295 | >10.50 | 196,471 | >10.00 | ||||||||||||||||||
Leverage Capital | ||||||||||||||||||||||||
Company | 272,448 | 9.48 | 114,902 | >4.00 | N/A | N/A | ||||||||||||||||||
Bank | 252,748 | 8.85 | 114,247 | >4.00 | 142,809 | >5.00 | ||||||||||||||||||
*Ratios includecredited under the conservation buffer.
Jeffrey V. Haley Pension 14 331,583 Jeffrey W. Farrar (1) Pension — — Edward C. Martin (1) Pension — — Rhonda P. Joyce (1) Pension — — Alexander Jung (1) Pension — — (1) Mr. Farrar joined the Company in 2019, Mr. Martin 2016, Ms. Joyce in 2011, and Mr. Jung in 2021. The pension plan was closed to new participants before the officers became eligible for any credited service or accumulated benefit under the plan. Note 21 – Segment and Related InformationNonqualified Deferred CompensationCompany has two reportable segments, community banking and wealth management.Community banking involves making loans to and generating deposits from individuals and businesses. All assets and liabilitiesexecutive officers of the Company are allocatedentitled to community banking. Investment income from securities is also allocatedparticipate in the American National Bank & Trust Company Deferred Compensation Plan. Pursuant to the community banking segment. Loan fee income, service charges from deposit accounts,Deferred Compensation Plan, eligible employees can defer up to 100% of base salary or annual cash bonus or both, on an annual basis. Deferral elections are made by eligible executives in December of each year for amounts to be earned in the following year. The plan is administered through the Virginia Bankers Association.non-deposit feesCompensation Committee assesses the performance of the officer and the Company with respect to the most recently completed fiscal year. The Company made discretionary contributions to the plan account of Mr. Jeffrey Haley in 2023 related to the Company's operational performance and financial results for 2023 as outlined below.as automated teller machine fees and insurance commissions generate additional incomecompensation, with respect to the named executive officers for the community banking segment.Wealth management include estate planning, trust account administration, investment management, and retail brokerage. Investment management include purchasing equity, fixed income, and mutual fund investments for customer accounts. The wealth management segment receives fees for investment and administrative services. Jeffrey V. Haley — 176,250 78,520 — 798,643 Jeffrey W. Farrar 32,249 — 12,145 — 92,111 Edward C. Martin — — 1,296 — 31,512 Rhonda P. Joyce (3) — — — — — Alexander Jung (3) — — — — — (1) Mr. Farrar made a voluntary deferral of a bonus payment in 2023. (2) The amounts in this column reflect the Company's contributions to the nonqualified deferred compensation plan. The compensation was earned in 2023, credited to the officer's account in December 2023, and is included in the "Bonus" column of the Summary Compensation Table on page 23. (3) Ms. Joyce and Mr. Jung, as executive officers of the Bank only, are not eligible to participate in the nonqualified deferred compensation plan. 94
Segment information as
2021 | ||||||||||||
Community Banking | Wealth Management | Total | ||||||||||
Interest income | $ | 95,796 | $ | 0 | $ | 95,796 | ||||||
Interest expense | 5,405 | 0 | 5,405 | |||||||||
Noninterest income | 15,012 | 6,019 | 21,031 | |||||||||
Noninterest expense | 56,251 | 2,757 | 59,008 | |||||||||
Income before income taxes | 51,977 | 3,262 | 55,239 | |||||||||
Net income | 40,949 | 2,577 | 43,526 | |||||||||
Depreciation and amortization | 3,697 | 10 | 3,707 | |||||||||
Total assets | 3,334,347 | 250 | 3,334,597 | |||||||||
Goodwill | 85,048 | 0 | 85,048 | |||||||||
Capital expenditures | 1,000 | 0 | 1,000 | |||||||||
2020 | ||||||||||||
Community Banking | Wealth Management | Total | ||||||||||
Interest income | $ | 95,840 | $ | 0 | $ | 95,840 | ||||||
Interest expense | 12,020 | 0 | 12,020 | |||||||||
Noninterest income | 12,054 | 4,789 | 16,843 | |||||||||
Noninterest expense | 52,245 | 2,320 | 54,565 | |||||||||
Income before income taxes | 34,714 | 2,468 | 37,182 | |||||||||
Net income | 28,052 | 1,993 | 30,045 | |||||||||
Depreciation and amortization | 3,815 | 10 | 3,825 | |||||||||
Total assets | 3,049,779 | 231 | 3,050,010 | |||||||||
Goodwill | 85,048 | 0 | 85,048 | |||||||||
Capital expenditures | 2,690 | 4 | 2,694 | |||||||||
2019 | ||||||||||||
Community Banking | Wealth Management | Total | ||||||||||
Interest income | $ | 92,855 | $ | 0 | $ | 92,855 | ||||||
Interest expense | 15,728 | 0 | 15,728 | |||||||||
Noninterest income | 10,602 | 4,568 | 15,170 | |||||||||
Noninterest expense | 63,794 | 2,280 | 66,074 | |||||||||
Income before income taxes | 23,479 | 2,288 | 25,767 | |||||||||
Net income | 19,050 | 1,856 | 20,906 | |||||||||
Depreciation and amortization | 3,454 | 8 | 3,462 | |||||||||
Total assets | 2,478,478 | 72 | 2,478,550 | |||||||||
Goodwill | 84,002 | 0 | 84,002 | |||||||||
Capital expenditures | 3,534 | 21 | 3,555 | |||||||||
Name | Severance ($) (1) | Accrued Bonus ($) (2) | Stock Awards ($) (3) | Total ($) | ||||||||||||
| Jeffrey V. Haley | 3,783,359 | — | 770,104 | 4,553,463 | ||||||||||||
| Jeffrey W. Farrar | 1,406,779 | — | 355,046 | 1,761,825 | ||||||||||||
| Edward C. Martin | 1,294,483 | — | 325,991 | 1,620,474 | ||||||||||||
| Rhonda P. Joyce | 1,254,893 | — | 311,415 | 1,566,308 | ||||||||||||
| Alexander Jung | 1,144,414 | — | 259,301 | 1,403,715 | ||||||||||||
| (1) | Based on "Total Annual Compensation" (see "Executive Employment Agreements and Change in Control Arrangements" for definition) multiplied by 2.99 for Mr. Jeffrey Haley and multiplied by 2 for all other NEOs. Each NEO's employment agreement includes a "best-net" provision regarding Section 280G of the Internal Revenue Code, which could result in a reduction in the amounts paid by the Company following a change in control. The amounts shown do not reflect the potential impact of those provisions. |
| (2) | 2023 incentive compensation earned for 2023 performance was paid in 2023. (see "Performance Compensation and Bonus Program"). |
| (3) | Market value as of December 31, 2023 of unvested restricted stock awards that would vest as a result of a termination following a change in control (see "Outstanding Equity Awards at Fiscal Year-End"). |
Value of Initial Fixed $100 Investment on: 12/31/2019 | ||||||||||||||||||||||||||||||||
| Year | Summary Compensation Table Total for PEO (1) | Compensation Actually Paid to PEO (2) | Average Summary Compensation Table Total for Non-PEO NEOs (1) | Average Compensation Actually Paid to Non-PEO NEOs (2) | Total Shareholder Return (3) | Peer Group Total Shareholder Return (4) | Net Income (in millions) | Core EPS (less PPP) (5) | ||||||||||||||||||||||||
| 2023 | $ | 3,806,295 | $ | 4,056,898 | $ | 1,170,811 | $ | 1,290,778 | $ | 141.45 | $ | 107.99 | $ | 26.16 | $ | 2.70 | ||||||||||||||||
| 2022 | $ | 1,082,098 | $ | 1,077,764 | $ | 523,305 | $ | 520,550 | $ | 103.51 | $ | 107.95 | $ | 34.43 | $ | 3.17 | ||||||||||||||||
| 2021 | $ | 1,002,451 | $ | 1,123,925 | $ | 468,054 | $ | 513,444 | $ | 102.34 | $ | 119.79 | $ | 43.53 | $ | 3.00 | ||||||||||||||||
| 2020 | $ | 754,799 | $ | 579,539 | $ | 398,606 | $ | 354,370 | $ | 68.98 | $ | 89.23 | $ | 30.05 | $ | 2.10 | ||||||||||||||||
| (1) | The Company's PEO is Mr. Jeffery V. Haley, who has served as Chief Executive Officer for all four years covered in the table. For 2020 and 2021, the Non-PEO NEOs were Mr. H. Gregg Strader, Mr. Jeffery W. Farrar, Mr. Edward C. Martin, and Mr. John H. Settle Jr. For 2022 and 2023, the Non-PEO NEOs were Ms. Joyce, Mr. Farrar, Mr. Martin, and Mr. Jung. The dollar amounts reported are total compensation in the Summary Compensation Table for the PEO and the average for Non-PEO NEOs for each reported fiscal year. |
| (2) | The dollar amounts reported represent CAP for the PEO and the average for Non-CEO PEOs for each reported year. The dollar amounts do not reflect actual amounts of compensation paid or earned during the covered year, but reflect the Summary Compensation Table total compensation amounts as adjusted in each covered year for (i) the year-end fair values of unvested equity awards granted in the current year, (ii) the year-over-year difference of year-end fair values for unvested awards granted in prior years, (iii) the fair values at vest date for awards granted and vested in the current year, (iv) the difference between prior year-end fair values and vest date fair values for awards granted in prior years, (v) the value of dividends or dividend equivalents no otherwise included in compensation, and (vi) the year-over-year increase in fair value of accumulated pension benefits. These calculations are shown in further detail in the tables below. |
| (3) | Reflects the cumulative TSR of the Company's common stock over the four-year period. The reporting is based on a theoretical $100 invested on the last day of 2019 and valued as of the last trading day of 2023, 2022, 2021, and 2020, assuming reinvestment of dividends. |
| (4) | Reflects the cumulative total shareholder return of the S&P SmallCap Banking Index. The S&P SmallCap Banking Index is the peer group used by the company for purposes of Item 201(e) of Regulation S-K in our Annual Report on Form 10K for the year ended December 31, 2023. |
| (5) | Core EPS is a measure not calculated in accordance with U.S. generally accepted accounting principles. |
December 31, Condensed Balance Sheets 2021 2020 Cash Securities available for sale, at fair value Investment in subsidiaries Due from subsidiaries Other assets Total Assets Subordinated debt Junior subordinated debt Other liabilities Shareholders' equity Total Liabilities and Shareholders' Equity Year Ended December 31, Condensed Statements of Income 2021 2020 2019 Dividends from subsidiary Other income Expenses Income tax benefit Income before equity in undistributed earnings of subsidiary Equity in undistributed (distributed) earnings of subsidiary Net Income Year Ended December 31, Condensed Statements of Cash Flows 2021 2020 2019 Cash Flows from Operating Activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: (Equity in earnings) distributions in excess of earnings of subsidiary Net amortization of securities Net change in other assets Net change in other liabilities Net cash operating activities Cash Flows from Investing Activities: Purchases of securities available for sale Sales, cal1s and maturities of equity securities Cash paid in bank acquisition Cash acquired in bank acquisition Net cash provided by (used in) investing activities Cash Flows from Financing Activities: Common stock dividends paid Repurchase of common stock Proceeds from exercise of stock options Net change in subordinated debt Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of periodNote 22 – ParentCalculation of Compensation Actually Paid ("CPT") $ 3,806,295 $ 1,170,811 Adjustment for grant date values in the Summary Compensation Table $ (182,250 ) $ (75,077 ) Year-end fair value of unvested awards granted in the current year $ 317,070 $ 158,450 Year-over-year difference of year-end fair values for unvested awards granted in prior years $ 109,843 $ 37,458 Fair values at vest date for awards granted and vested in current year $ - $ - Difference in fair values between prior year-end fair values and vest date fair values for awards granted in prior years $ (5,212 ) $ (863 ) Dividends or dividend equivalents not otherwise included in total compensation $ 11,152 $ - $ 250,603 $ 119,967 $ 4,056,898 $ 1,290,778 Financial InformationCondensed Parent Company financial information is as follows (dollarsperformance. Core EPS was used in thousands): $ 10,560 $ 17,759 1,766 8,534 372,902 351,033 128 143 607 1,062 $ 385,963 $ 378,531 $ 0 $ 7,500 28,232 28,130 2,939 5,007 354,792 337,894 $ 385,963 $ 378,531 $ 16,000 $ 25,500 $ 25,000 411 512 823 3,057 3,369 4,232 (556 ) (600 ) (601 ) 13,910 23,243 22,192 29,616 6,802 (1,286 ) $ 43,526 $ 30,045 $ 20,906 $ 43,526 $ 30,045 $ 20,906 (29,616 ) (6,802 ) 1,286 10 0 0 27 84 (382 ) 102 85 (35 ) 14,049 23,412 21,775 0 0 (2,220 ) 6,800 0 445 0 0 (27 ) 0 0 981 6,800 0 (821 ) (11,827 ) (11,842 ) (10,965 ) (8,810 ) (4,981 ) (3,146 ) 89 43 688 (7,500 ) 0 0 (28,048 ) (16,780 ) (13,423 ) (7,199 ) 6,632 7,531 17,759 11,127 3,596 $ 10,560 $ 17,759 $ 11,127 • Core EPS – PPP (Company Selected Measure) • GAAP Diluted Earnings Per Share • Return on Tangible Common Equity • Company and peer group TSR versus CAP for the PEO and average for other NEOs for each covered year. • Company Net Income versus CAP for the PEO and average for other NEOs for each covered year. • Company Core EPS minus PPP versus CAP for the PEO and average for other NEOs for each covered year. 96
Note 23 – Supplemental Cash Flow Information
(dollars in thousands) | As of or for the Year Ended December 31, | |||||||||||
2021 | 2020 | 2019 | ||||||||||
Supplemental Schedule of Cash and Cash Equivalents: | ||||||||||||
Cash and due from banks | $ | 23,095 | $ | 30,767 | $ | 32,505 | ||||||
Interest-bearing deposits in other banks | 487,773 | 343,603 | 47,077 | |||||||||
| $ | 510,868 | $ | 374,370 | $ | 79,582 | |||||||
Supplemental Disclosure of Cash Flow Information: | ||||||||||||
Cash paid for: | ||||||||||||
Interest on deposits and borrowed funds | $ | 5,791 | $ | 12,455 | $ | 15,310 | ||||||
Income taxes | 3,102 | 7,609 | 4,698 | |||||||||
Noncash investing and financing activities: | ||||||||||||
Transfer of loans to other real estate owned | 0 | 95 | 234 | |||||||||
Transfer of loans to repossessions | 0 | 411 | 0 | |||||||||
Transfer from premises and equipment to other assets | 1,316 | 0 | 445 | |||||||||
Increase (decrease) in operating lease right-of-use asset | (21 | ) | 371 | 4,453 | ||||||||
Increase (decrease) in operating lease liabilities | (21 | ) | 371 | 4,453 | ||||||||
Unrealized gains (losses) on securities available for sale | (12,271 | ) | 6,399 | 8,821 | ||||||||
Unrealized gains (losses) on cash flow hedges | 2,068 | (2,210 | ) | (1,854 | ) | |||||||
Change in unfunded pension liability | 590 | (413 | ) | (64 | ) | |||||||
Non-cash transactions related to acquisitions: | ||||||||||||
Assets acquired: | ||||||||||||
Investment securities | 0 | 0 | 34,876 | |||||||||
Restricted stock | 0 | 0 | 2,588 | |||||||||
Loans | 0 | 0 | 444,324 | |||||||||
Premises and equipment | 0 | 0 | 12,554 | |||||||||
Deferred income taxes | 0 | 0 | 2,960 | |||||||||
Core deposit intangible | 0 | 0 | 8,200 | |||||||||
Other real estate owned | 0 | 0 | 1,442 | |||||||||
Bank owned life insurance | 0 | 0 | 8,246 | |||||||||
Other assets | 0 | 0 | 14,244 | |||||||||
Liabilities assumed: | ||||||||||||
Deposits | 0 | 0 | 483,626 | |||||||||
Short-term FHLB advances | 0 | 0 | 14,883 | |||||||||
Long-term FHLB advances | 0 | 0 | 778 | |||||||||
Subordinated debt | 0 | 0 | 7,530 | |||||||||
Other liabilities | 0 | 0 | 5,780 | |||||||||
Consideration: | ||||||||||||
Issuance of common stock | 0 | 0 | 82,470 | |||||||||
Fair value of replacement stock options/restricted stock | 0 | 0 | 753 | |||||||||
Unrealized Adjustments Accumulated Net Unrealized Losses on Related to Other Gains (Losses) Cash Flow Pension Comprehensive on Securities Hedges Benefits Income (Loss) Balance at Balance at December 31, 2018 Net unrealized gains on securities available for sale, net of tax, $2,005 Reclassification adjustment for realized gains on securities, net of tax, $(59) Net unrealized losses on cash flow hedges, net of tax, $(394) Change in unfunded pension liability, net of tax, $(1) Balance at December 31, 2019 Net unrealized gains on securities available for sale, net of tax, $1,557 Reclassification adjustment for realized gains on securities, net of tax, $(176) Net unrealized losses on cash flow hedges, net of tax, $(448) Change in unfunded pension liability, net of tax, $(77) Balance at December 31, 2020 Net unrealized losses on securities available for sale, net of tax, $(2,643) Reclassification adjustment for realized gains on securities, net of tax, $(7) Net unrealized gains on cash flow hedges, net of tax, $434 Change in unfunded pension liability, net of tax, $115 Balance at December 31, 2021 Details about AOCI Components Amount Reclassified from AOCI Affected Line Item in the Statement of Where Net Income is Presented Year Ended December 31, 2021 2020 2019 Available for sale securities: Realized gain on sale of securities Securities gains, net Income taxes Net of tax
$ 34,373 $ 43,362 $ 55,239 $ 37,183 Loan Accretion 1,968 1,650 5,333 3,812 CD Valuation 31 49 77 (1,637 ) TPS Accretion (102 ) (96 ) (96 ) - Amortization CDI (1,069 ) (1,260 ) (1,464 ) - Merger expenses (2,577 ) - - - PCI exp (recover) - 88 78 (631 ) (1,749 ) 431 3,928 1,544 Core Earnings 36,122 42,931 51,311 35,639 Less PPP income/exp (6 ) (288 ) (9,820 ) (7,146 ) 36,116 42,643 41,491 28,493 Tax effected NI 28,661 33,857 32,675 23,024 Avg O/S shares 10,627,709 10,672,314 10,873,817 10,982,000 Core EPS less PPP $ 2.70 $ 3.17 $ 3.00 $ 2.10 Note 24 – Accumulated Other Comprehensive Income (Loss)Director CompensationChangescomponentcommittee meeting was $1,000 in cash or restricted stock with a market value of accumulated other comprehensive income (loss)$1,000, also paid quarterly. In addition, the chairs of the five standing board committees of the Company, the Chair of the Bank's Trust Committee, and the Chair of the Subcommittee on Technology and Information Security received annual retainers in 2023 of $4,000 in cash or shares of restricted stock with a market value of $4,000.as follows (dollarscredited to a bookkeeping reserve account maintained by the Company. Such reserve accounts rise and fall with the value of the underlying restricted stock held and any dividends are reinvested in thousands): $ (3,973 ) $ (624 ) $ (1,238 ) $ (5,835 ) 7,090 0 0 7,090 (215 ) 0 0 (215 ) 0 (1,460 ) 0 (1,460 ) 0 0 (63 ) (63 ) 2,902 (2,084 ) (1,301 ) (483 ) 5,656 0 0 5,656 (638 ) 0 0 (638 ) 0 (1,762 ) 0 (1,762 ) 0 0 (336 ) (336 ) 7,920 (3,846 ) (1,637 ) 2,437 (9,593 ) 0 0 (9,593 ) (28 ) 0 0 (28 ) 0 1,634 0 1,634 0 0 475 475 $ (1,701 ) $ (2,212 ) $ (1,162 ) $ (5,075 ) TheCompany stock. Amounts credited to the participant's account will be payable in lump sum in Company stock on the first business day following table provides information regarding reclassifications outthe 30th day after the director's separation of accumulated other comprehensive income (loss) (dollarsservice. Three of the current outside directors elected this option in thousands):Reclassifications Outprior years. Beginning in 2019, this option is no longer available for deferral of Accumulated Other Comprehensive Income (Loss)For the Three Years Ending December 31,2021 $ 35 $ 814 $ 274 (7 ) (176 ) (59 ) $ 28 $ 638 $ 215 98
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A – CONTROLS AND PROCEDURES
Disclosure Controls
thereby, further align the interests of each director with the interests of the shareholders at large. The Board of Directors sets the retainer and attendance fee based upon recommendation from the Corporate Governance and Nominating Committee. In making its recommendation, the Committee reviews the director compensation of peer banks and received a comparison of peer bank compensation for directors provided by PM&P. There is no tax gross-up provided by the Company for any director compensation. Non-employee directors living outside the Danville, Virginia area are reimbursed for meeting-related travel and lodging expenses. Non-employee directors were excluded from the Company's management, includingretirement plan and, therefore, do not qualify for pension benefits. Directors who are employees of the Company do not receive any director compensation.
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) (1) (2) (3) | Total ($) | |||||||||
| Nancy Howell Agee | — | 73,576 | 73,576 | |||||||||
| Rickey J. Barker (4) | — | 52,054 | 52,054 | |||||||||
| J. Nathan Duggins III | — | 66,056 | 66,056 | |||||||||
| William J. Farrell II | — | 70,070 | 70,070 | |||||||||
| Tammy Moss Finley | — | 77,030 | 77,030 | |||||||||
| Jeffrey V. Haley (5) | — | — | — | |||||||||
| Michael P. Haley | — | 84,562 | 84,562 | |||||||||
| F.D. Hornaday, III | 16,000 | 61,105 | 77,105 | |||||||||
| John H. Love | 15,000 | 64,105 | 79,105 | |||||||||
| Charles H. Majors | 80,000 | — | 80,000 | |||||||||
| Ronda M. Penn | — | 77,070 | 77,070 | |||||||||
| Dan M. Pleasant | — | 74,074 | 74,074 | |||||||||
| Joel R. Shepherd | — | 77,070 | 77,070 | |||||||||
| Adrian T. Smith (4) | — | 47,041 | 47,041 | |||||||||
| Total | 111,000 | 823,813 | 934,813 | |||||||||
| (1) | Restricted stock was awarded with a market value of $5,000 for the quarterly retainer and $1,000 per committee meeting as previously described, issued quarterly based on the closing price of the Company's common stock on the first market day of the third month of the quarter. In addition, restricted stock was awarded with a market value of $4,000 for the annual retainer for the chairs of the Company and Bank Board committees and subcommittees, issued annually based on the closing price of the Company's common stock on the first market day of the sixth month of the year. |
| (2) | Restricted stock awarded in 2023, as follows: Ms. Agee, 2,109 shares; Mr. Barker, 1,504 shares; Mr. Duggins, 1,878 shares; Mr. Farrell, 2,037 shares; Ms. Finley, 2,265 shares; Mr. Michael Haley, 2,503 shares; Mr. Hornaday, 1,734 shares; Mr. Love, 1,880 shares; Ms. Penn, 2,249 shares; Mr. Pleasant, 2,194 shares; Mr. Shepherd, 2,249 shares; and Mr. Smith, 1,332 shares. |
| (3) | Amounts shown represent the aggregate full grant date fair value of each award calculated in accordance with FASB ASC Topic 718. The assumptions made in the calculation of these amounts are contained in Note 13 to the Company's audited financial statements for the year ended December 31, 2023, included herein. |
| (4) | Messrs. Barker and Smith were appointed to the Board of Directors effective May 2023. |
| (5) | Mr. Jeffrey Haley, as an employee of the Company, does not receive any compensation for his service as a director. |
Name and Address of | Shares of Common Stock Beneficially Owned | Investment Power (1) | Voting Power (1) | Percent of Class | ||||||||||||||||||||||||||||
Beneficial Owner | (#) (1) | Shared | Sole | None | Shared | Sole | None | (%) | ||||||||||||||||||||||||
| BlackRock, Inc. | 786,336 | — | 786,336 | — | — | 786,336 | — | 7.4 | % | |||||||||||||||||||||||
| 55 East 52nd Street | ||||||||||||||||||||||||||||||||
| New York, New York 10055 (2) | ||||||||||||||||||||||||||||||||
| (1) | For purposes of this table, beneficial ownership has been determined in accordance with the provisions of Rule 13d-3 of the Securities Exchange Act of 1934 under which, in general, a person or entity is deemed to be the beneficial owner of a security if he or it has or shares the power to vote or direct the voting of the security or the power to dispose of or direct the disposition of the security, or if he or it has the right to acquire beneficial ownership of the security within 60 days. |
| (2) | This information is based solely upon information as of December 31, 2023 contained in a Schedule 13G/A filed by BlackRock, Inc. with the SEC on February 13, 2024 relating to the beneficial ownership of the Company's common stock by BlackRock, Inc. and entities affiliated with BlackRock, Inc. |
Name of Beneficial Owner | Shares of Common Stock Beneficially Owned (#) (1) | Percent of Class (%) | ||||||
| Nancy Howell Agee | 23,269 | (2) | * | |||||
| Rickey J. Barker | 10,430 | * | ||||||
| J. Nathan Duggins III | 4,159 | (2) | * | |||||
| Jeffrey W. Farrar | 10,538 | (3) | * | |||||
| William J. Farrell II | 2,600 | * | ||||||
| Tammy Moss Finley | 13,362 | (2) | * | |||||
| Jeffrey V. Haley | 85,126 | (2) (3) | * | |||||
| Michael P. Haley | 30,451 | (4) | * | |||||
| F. D. Hornaday, III | 40,623 | (2) | * | |||||
| Rhonda P. Joyce | 17,179 | (2) (3) | * | |||||
| Alexander Jung | 5,644 | (3) | * | |||||
| John H. Love | 33,727 | * | ||||||
| Edward C. Martin | 11,569 | (2) (3) | * | |||||
| Ronda M. Penn | 16,226 | * | ||||||
| Dan M. Pleasant | 37,586 | (2) (4) | * | |||||
| Joel R. Shepherd | 80,157 | (2) (4) | * | |||||
| Adrian T. Smith | 1,659 | * | ||||||
| All directors and executive officers as a group (17) | 424,305 | (5) | 3.99% | |||||
| * | Represents less than 1% ownership. |
| (1) | For purposes of this table, beneficial ownership has been determined in accordance with the provisions of Rule 13d-3 of the Securities Exchange Act of 1934 under which, in general, a person is deemed to be the beneficial owner of a security if he or she has or shares the power to vote or direct the voting of the security or the power to dispose of or direct the disposition of the security, or if he or she has the right to acquire beneficial ownership of the security within 60 days. |
| (2) | Includes shares held by affiliated companies, close relatives, minor children, and shares held jointly with spouses or as custodians or trustees, as follows: Ms. Agee, 3,452 shares; Mr. Duggins, 1,150 shares; Ms. Finley, 1,074 shares; Mr. Jeffrey Haley, 28,173 shares; Mr. Hornaday, 2,072 shares; Ms. Joyce, 406 shares; Mr. Martin, 1,148 shares; Mr. Pleasant, 1,685 shares; and Mr. Shepherd, 39,364 shares. |
| (3) | Includes shares of restricted stock awarded, as follows: Mr. Farrar, 7,283 shares; Mr. Jeffrey Haley, 15,797 shares; Ms. Joyce, 6,388 shares; Mr. Jung, 5,319 shares; Mr. Martin, 4,807 shares; and all executive officers as a group, 39,594 shares. The shares are subject to a vesting schedule, forfeiture risk and other restrictions. |
| (4) | Includes stock awards held under a nonqualified deferred compensation plan for directors, as follows: Mr. Michael Haley, 10,043 shares; Mr. Pleasant, 9,089 shares; and Mr. Shepherd, 3,335 shares. |
| (5) | None of the individuals named in the table have pledged their shares as collateral. |
December 31, 2023 | ||||||||||||
Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Per Share Exercise Price of Outstanding Options, Warrants and Rights | Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans | ||||||||||
| Equity compensation plans approved by shareholders | — | $ | — | 423,148 | ||||||||
| Equity compensation plans not approved by shareholders | — | — | — | |||||||||
| Total | — | $ | — | 423,148 | ||||||||
Management's Annual Reportquarterly reports on Internal Control over Financial Reporting
ManagementForm 10-Q during the years ended December 31, 2023 and 2022; and audited management's assessment of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Management regularly monitors its internal control over financial reporting, and actions are taken to correct deficiencies as they are identified.
Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting. This assessment was based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation under the framework in Internal Control – Integrated Framework, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2021, as such term is defined in Exchange Act Rule 13a-15(f).
Because of its inherent limitations, internal control over financial reporting may not prevent2023 and 2022. The following table presents aggregate fees paid or detect misstatements. Further, because of changes in conditions, internal control effectiveness may vary over time.
The Company's independent registered public accounting firm,to be paid by the Company and the Bank for professional services rendered by Yount, Hyde and Barbour, P.C., has audited the Company's internal control over financial reporting as of December 31, 2021, as stated in their report included in Item 8 of this Form 10-K. Yount, Hyde and Barbour, P.C. also audited the Company's consolidated financial statements as of and for the yearyears ended December 31, 2021.
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None
ITEM 9C – DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable
2023 | 2022 | |||||||
| Audit Fees | $ | 263,325 | $ | 218,400 | ||||
| Audit-related Fees | 7,950 | 7,550 | ||||||
| Tax Fees | 16,750 | 17,170 | ||||||
| Total | $ | 288,025 | $ | 243,320 | ||||
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EXHIBIT INDEX | |
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| Section 302 Certification of Jeffrey V. Haley, President and Chief Executive Officer | Filed herewith |
| Filed herewith | |
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101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, |
The registrant has not selected the option to provide the summary information of the Form 10-K.
Date: March | AMERICAN NATIONAL BANKSHARES INC. | |
By: | /s/ Jeffrey V. Haley | |
President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 14, 2022.
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