Note 6. Borrowings
The Company classifies all borrowings that will mature within a year from the date on which the Company enters into them as short-term borrowings. Short-term borrowings sources consist of federal funds purchased, overnight repurchase agreements (which are secured transactions with customers that generally mature within one to four days), and advances from the FHLB.
The Company maintains federal funds lines with several correspondent banks to address short-term borrowing needs. At March 31, 20202021 and December 31, 2019,2020, the remaining credit available from these lines totaled $55.0$100.0 million. The Company has a collateral dependent line of credit with the FHLB with remaining credit availability of $272.4$365.6 million and $276.3$374.7 as of March 31, 20202021 and December 31, 2019,2020, respectively.
The following table presents total short-term borrowings as of the dates indicated:
The Company also obtained a loan maturing on April 1, 2023 from a correspondent bank during the second quarter of 2018 to provide partial funding for the Citizens National Bank acquisition. The terms of the loan includeincluded a LIBOR based interest rate that adjusts monthly and quarterly principal curtailments. At MarchDecember 31, 2020, the outstanding balance was $1.8$1.4 million, as compared to $2.0 million at December 31, 2019, and the then-current interest rate was 4.02%2.61%. The Company elected to pay the loan in full during the first quarter of 2021.
Note 7. Commitments and Contingencies
The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial 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’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making such commitments as it does for on-balance-sheet instruments.
The following financial instruments whose contract amounts represent credit risk were outstanding at March 31, 20202021 and December 31, 2019:2020:
| | | March 31, | | December 31, | |
(dollars in thousands) | | March 31, 2020 | | | December 31, 2019 | | | 2021 | | 2020 | |
Commitments to extend credit: | | | | | | | | | | | |
Home equity lines of credit | | $ | 62,904 | | | $ | 62,267 | | | $ | 69,138 | | $ | 66,999 | |
Commercial real estate, construction and development loans committed but not funded | | 17,619 | | | 15,637 | | | 22,967 | | 20,258 | |
Other lines of credit (principally commercial) | | 48,435 | | | 62,321 | | | | 67,681 | | | 64,329 | |
Total | | $ | 128,958 | | | $ | 140,225 | | | $ | 159,786 | | $ | 151,586 | |
| | | | | | | | | | | |
Letters of credit | | $ | 8,451 | | | $ | 7,724 | | | $ | 4,796 | | $ | 4,841 | |
Note 8. Share-Based Compensation
The Company has adopted an employee stock purchase plan and offers share-based compensation through its equity compensation plan. Share-based compensation arrangements may include stock options, restricted and unrestricted stock awards, restricted stock units, performance units and stock appreciation rights. Accounting standards require all share-based payments to employees to be valued using a fair value method on the date of grant and to be expensed based on that fair value over the applicable vesting period. The Company accounts for forfeitures during the vesting period as they occur.
The 2016 Incentive Stock Plan (the Incentive Stock Plan) permits the issuance of up to 300,000 shares of common stock for awards to key employees and non-employee directors of the Company and its subsidiaries in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards and performance units. As of March 31, 20202021 only restricted stock has been granted under the Incentive Stock Plan.
Restricted stock activity for the three months ended March 31, 20202021 is summarized below:
| | Shares | | | Weighted Average Grant Date Fair Value | | | Shares | | Weighted Average Grant Date Fair Value | |
Nonvested, January 1, 2020 | | 19,933 | | | $ | 22.70 | | |
Nonvested, January 1, 2021 | | | 29,576 | | $ | 18.46 | |
Issued | | - | | | - | | | - | | - | |
Vested | | (7,258 | ) | | 22.17 | | | - | | - | |
Forfeited | | (290 | ) | | 21.68 | | | - | | - | |
Nonvested, March 31, 2020 | | 12,385 | | | $ | 23.03 | | |
Nonvested, March 31, 2021 | | | | 29,576 | | $ | 18.46 | |
The weighted average period over which nonvested awards are expected to be recognized in compensation expense is 1.341.04 years.
There was no restricted stock granted during the three months ended March 31, 2021 and 2020. The fair value of restricted stock granted during the three months ended March 31, 2019 was $361 thousand.
The remaining unrecognized compensation expense for nonvested restricted stock shares totaled $216 thousand as of March 31, 2021 and $134 thousand as of March 31, 2020.
Stock-based compensation expense was $86$61 thousand and $50$86 thousand for the three months ended March 31, 20202021 and 2019,2020, respectively.
Under the Company’s Employee Stock Purchase Plan (ESPP), substantially all employees of the Company and its subsidiaries can authorize a specific payroll deduction from their base compensation for the periodic purchase of the Company’s common stock. Shares of stock are issued quarterly at a discount to the market price of the Company’s stock on the day of purchase, which can range from 0-15% and was set at 5% for 20192020 and for the first three months of 2020.2021.
8581,276 shares were purchased under the ESPP during the three months ended March 31, 2020.2021. At March 31, 2020,2021, the Company had 237,412231,175 remaining shares reserved for issuance under the ESPP.
Note 9. Stockholders’ Equity and Earnings per Share
STOCKHOLDERS’ EQUITY – Accumulated Other Comprehensive Income (Loss)
The following table presents information on amounts reclassified out of accumulated other comprehensive income (loss), by category, during the periods indicated:
| | Three Months Ended March 31, | | | Affected Line Item on
| | Three Months Ended March 31, | | Affected Line Item on Consolidated Statement of Income |
(dollars in thousands) | | 2020 | | | 2019 | | | Consolidated Statement of Income | | 2021 | | 2020 | |
Available-for-sale securities | | | | | | | | | | | | | | |
Realized gains on sales of securities | | $ | - | | | $ | 26 | | | Gain on sale of available-for-sale securities, net | | $ | - | | $ | - | | Gain on sale of available-for-sale securities, net |
Tax effect | | - | | | 5 | | | Income tax expense | | - | | - | | Income tax expense |
| | $ | - | | | $ | 21 | | | | | $ | - | | $ | - | | |
The following tables present the changes in accumulated other comprehensive income (loss), by category, net of tax, for the periods indicated:
(dollars in thousands) | | Unrealized Gains (Losses) on Available-for-Sale Securities | | | Accumulated Other Comprehensive Loss | | | Unrealized Gains (Losses) on Available-for-Sale Securities | | | Accumulated Other Comprehensive Income (Loss) | |
| | | | | | | |
Three Months Ended March 31, 2021 | | | | | | | |
Balance at beginning of period | | | $ | 4,069 | | $ | 4,069 | |
Net other comprehensive loss | | | (1,694 | ) | | (1,694 | ) |
Balance at end of period | | | $ | 2,375 | | $ | 2,375 | |
| | | | | | | | | | | |
Three Months Ended March 31, 2020 | | | | | | | | | | | | | |
Balance at beginning of period | | $ | (79 | ) | | $ | (79 | ) | | $ | (79 | ) | | $ | (79 | ) |
Net other comprehensive loss | | (445 | ) | | (445 | ) | | (445 | ) | | (445 | ) |
Balance at end of period | | $ | (524 | ) | | $ | (524 | ) | | $ | (524 | ) | | $ | (524 | ) |
| | | | | | | |
Three Months Ended March 31, 2019 | | | | | | | |
Balance at beginning of period | | $ | (2,156 | ) | | $ | (2,156 | ) | |
Net other comprehensive income | | 1,540 | | | 1,540 | | |
Balance at end of period | | $ | (616 | ) | | $ | (616 | ) | |
The following tables present the change in each component of accumulated other comprehensive income (loss) on a pre-tax and after-tax basis for the periods indicated.
| | Three Months Ended March 31, 2020 | | | Three Months Ended March 31, 2021 | |
(dollars in thousands) | | Pretax | | | Tax | | | Net-of-Tax | | | Pretax | | Tax | | Net-of-Tax | |
Unrealized losses on available-for-sale securities: | | | | | | | | | | | | | | | | |
Unrealized holding losses arising during the period | | $ | (563 | ) | | $ | (118 | ) | | $ | (445 | ) | | $ | (2,144 | ) | | $ | (450 | ) | | $ | (1,694 | ) |
| | | | | | | | | | | | | | | | |
Total change in accumulated other comprehensive income, net | | $ | (563 | ) | | $ | (118 | ) | | $ | (445 | ) | | $ | (2,144 | ) | | $ | (450 | ) | | $ | (1,694 | ) |
| | Three Months Ended March 31, 2019 | |
(dollars in thousands) | | Pretax | | | Tax | | | Net-of-Tax | |
Unrealized gains on available-for-sale securities: | | | | | | | | | |
Unrealized holding gains arising during the period | | $ | 1,976 | | | $ | 415 | | | $ | 1,561 | |
Reclassification adjustment for gains recognized in income | | | (26 | ) | | | (5 | ) | | | (21 | ) |
| | | | | | | | | | | | |
Total change in accumulated other comprehensive loss, net | | $ | 1,950 | | | $ | 410 | | | $ | 1,540 | |
| | Three Months Ended March 31, 2020 | |
(dollars in thousands) | | Pretax | | | Tax | | | Net-of-Tax | |
Unrealized losses on available-for-sale securities: | | | | | | | | | | | | |
Unrealized holding losses arising during the period | | $ | (563 | ) | | $ | (118 | ) | | $ | (445 | ) |
| | | | | | | | | | | | |
Total change in accumulated other comprehensive income, net | | $ | (563 | ) | | $ | (118 | ) | | $ | (445 | ) |
EARNINGS PER COMMON SHARE
Basic earnings per shareEPS is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per shareEPS is computed using the weighted average number of common shares outstanding during the period, including the effect of dilutive potential common shares attributable to the employee stock purchase plan.
The following is a reconciliation of the denominators of the basic and diluted EPS computations for the three months ended March 31, 20202021 and 2019:2020:
(dollars in thousands except per share data) | | Net Income Available to Common Shareholders (Numerator) | | | Weighted Average Common Shares (Denominator) | | | Per Share Amount | | | Net Income Available to Common Shareholders (Numerator) | | | Weighted Average Common Shares (Denominator) | | | Per Share Amount | |
Three Months Ended March 31, 2021 | | | | | | | | |
Net income, basic | | | $ | 3,012 | | 5,225 | | $ | 0.58 | |
Potentially dilutive common shares - employee stock purchase program | | | - | | - | | - | |
Diluted | | | $ | 3,012 | | | 5,225 | | $ | 0.58 | |
| | | | | | | | |
Three Months Ended March 31, 2020 | | | | | | | | | | | | | | | | |
Net income, basic | | $ | 1,250 | | | 5,200 | | | $ | 0.24 | | | $ | 1,250 | | 5,200 | | $ | 0.24 | |
Potentially dilutive common shares - employee stock purchase program | | - | | | 1 | | | - | | | | - | | | 1 | | | - | |
Diluted | | $ | 1,250 | | | 5,201 | | | $ | 0.24 | | | $ | 1,250 | | 5,201 | | $ | 0.24 | |
| | | | | | | | | | |
Three Months Ended March 31, 2019 | | | | | | | | | | |
Net income, basic | | $ | 2,027 | | | 5,187 | | | $ | 0.39 | | |
Potentially dilutive common shares - employee stock purchase program | | - | | | - | | | - | | |
Diluted | | $ | 2,027 | | | 5,187 | | | $ | 0.39 | | |
The Company had no antidilutive shares outstanding in the three months ended March 31, 20202021 and 2019,2020, respectively. Nonvested restricted common shares, which carry all rights and privileges of a common share with respect to the stock, including the right to vote, were included in the basic and diluted per common share calculations.
Note 10. Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurements and Disclosures” topics of FASB ASU No. 2010-06, FASB ASU No. 2011-04, and FASB ASU No. 2016-01, the fair value of a financial instrument is the price that would be received in the sale of an asset or transfer of a liability (an exit price) in the principal or most advantageous market for the asset or liability in 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 for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate 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 can be a reasonable point within a range that is most representative of fair value under current market conditions.
In estimating the fair value of assets and liabilities, the Company relies mainly on two sources. The first source is the Company’s bond accounting service provider, which uses a model to determine the fair value of securities. Securities are priced based on an evaluation of observable market data, including benchmark yield curves, reported trades, broker/dealer quotes, and issuer spreads. Pricing is also impacted by credit information about the issuer, perceived market movements, and current news events impacting the individual sectors. The second source is a third party vendor the Company utilizes to provide fair value exit pricing for loans and interest bearing deposits in accordance with guidance.
In accordance with ASC 820, “Fair Value Measurements and Disclosures,” the Company groups its financial assets and financial liabilities generally measured at fair value into 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 or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2: Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3: Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
An instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS
Debt securities with readily determinable fair values that are classified as “available-for-sale” are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. 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). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s available-for-sale securities are considered to be Level 2 securities.
The following tables present the balances of certain assets measured at fair value on a recurring basis as of the dates indicated:
| | | | | Fair Value Measurements at March 31, 2020 Using | | | | | Fair Value Measurements at March 31, 2021 Using | |
(dollars in thousands) | | Balance | | | Quoted Prices in Active Markets for
Identical Assets (Level 1) | | |
Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Balance | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Available-for-sale securities | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | $ | 7,125 | | | $ | - | | | $ | 7,125 | | | $ | - | | | $ | 7,016 | | | $ | - | | | $ | 7,016 | | | $ | - | |
Obligations of U.S. Government agencies | | 33,700 | | | - | | | 33,700 | | | - | | | 35,432 | | | - | | | 35,432 | | | - | |
Obligations of state and political subdivisions | | 28,236 | | | - | | | 28,236 | | | - | | | 53,159 | | | - | | | 53,159 | | | - | |
Mortgage-backed securities | | 74,889 | | | - | | | 74,889 | | | - | | | 75,939 | | | - | | | 75,939 | | | - | |
Money market investments | | 3,948 | | | - | | | 3,948 | | | - | | | 4,558 | | | - | | | 4,558 | | | - | |
Corporate bonds and other securities | | 4,710 | | | - | | | 4,710 | | | - | | | 18,414 | | | - | | | 18,414 | | | - | |
Total available-for-sale securities | | $ | 152,608 | | | $ | - | | | $ | 152,608 | | | $ | - | | | $ | 194,518 | | | $ | - | | | $ | 194,518 | | | $ | - | |
| | | | | Fair Value Measurements at December 31, 2019 Using | | | | | Fair Value Measurements at December 31, 2020 Using | |
(dollars in thousands) | | Balance | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant
Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Balance | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Available-for-sale securities | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | $ | 7,003 | | | $ | - | | | $ | 7,003 | | | $ | - | | | $ | 7,043 | | | $ | - | | | $ | 7,043 | | | $ | - | |
Obligations of U.S. Government agencies | | 33,604 | | | - | | | 33,604 | | | - | | | 36,696 | | | - | | | 36,696 | | | - | |
Obligations of state and political subdivisions | | 24,742 | | | - | | | 24,742 | | | - | | | 45,995 | | | - | | | 45,995 | | | - | |
Mortgage-backed securities | | 71,908 | | | - | | | 71,908 | | | - | | | 73,501 | | | - | | | 73,501 | | | - | |
Money market investments | | 3,825 | | | - | | | 3,825 | | | - | | | 4,743 | | | - | | | 4,743 | | | - | |
Corporate bonds and other securities | | 4,633 | | | - | | | 4,633 | | | - | | | 18,431 | | | - | | | 18,431 | | | - | |
Total available-for-sale securities | | $ | 145,715 | | | $ | - | | | $ | 145,715 | | | $ | - | | | $ | 186,409 | | | $ | - | | | $ | 186,409 | | | $ | - | |
ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS
Under certain circumstances, adjustments are made to the fair value for assets and liabilities although they are not measured at fair value on an ongoing basis.
Impaired loans
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts when due from the borrower in accordance with the contractual terms of the loan agreement. The measurement of fair value and loss associated with impaired loans can be based on the observable market price of the loan, the fair value of the collateral securing the loan, or the present value of the loan’s expected future cash flows, discounted at the loan’s effective interest rate. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable, with the vast majority of the collateral in real estate.
The value of real estate collateral is determined utilizing an income, market, or cost valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company. In the case of loans with lower balances, the Company may obtain a real estate evaluation instead of an appraisal. Evaluations utilize many of the same techniques as appraisals, and are typically performed by independent appraisers. Once received, appraisals and evaluations are reviewed by trained staff independent of the lending function to verify consistency and reasonability. Appraisals and evaluations are based on significant unobservable inputs, including but not limited to: adjustments made to comparable properties, judgments about the condition of the subject property, the availability and suitability of comparable properties, capitalization rates, projected income of the subject or comparable properties, vacancy rates, projected depreciation rates, and the state of the local and regional economy. The Company may also elect to make additional reductions in the collateral value based on management’s best judgment, which represents another source of unobservable inputs. Because of the subjective nature of collateral valuation, impaired loans are considered Level 3.
Impaired loans may be secured by collateral other than real estate. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). If a loan is not collateral-dependent, its impairment may be measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate. Because the loan is discounted at its effective rate of interest, rather than at a market rate, the loan is not considered to be held at fair value and is not included in the tables below. Collateral-dependent 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 part of the provision for loan losses on the Consolidated Statements of Income.
Other Real Estate Owned (OREO)
Loans are transferred to OREO when the collateral securing them is foreclosed on. The measurement of gain or loss associated with OREO is based on the fair value of the collateral compared to the unpaid loan balance and anticipated costs to sell the property. If there is a contract for the sale of a property, and management reasonably believes the transaction will be consummated in accordance with the terms of the contract, fair value is based on the sale price in that contract (Level 1). If management has recent information about the sale of identical properties, such as when selling multiple condominium units on the same property, the remaining units would be valued based on the observed market data (Level 2). Lacking either a contract or such recent data, management would obtain an appraisal or evaluation of the value of the collateral as discussed above under Impaired Loans (Level 3). After the asset has been booked, a new appraisal or evaluation is obtained when management has reason to believe the fair value of the property may have changed and no later than two years after the last appraisal or evaluation was received. Any fair value adjustments to OREO below the original book value are recorded in the period incurred and expensed against current earnings.
Loans Held For Sale
Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are reported on a separate line item on the Company’s Consolidated Statements of Income.
The following table presents the assets carried in the consolidated balance sheets for which a nonrecurring change in fair value has been recorded. Assets are shown by class of loan and by level in the fair value hierarchy, as of the dates indicated. Certain impaired loans are valued by the present value of the loan’s expected future cash flows, discounted at the loan’s effective interest rate rather than at a market rate. These loans are not carried in the consolidated balance sheets at fair value and, as such, are not included in the tables below.
| | | | | Carrying Value at March 31, 2020 | |
(dollars in thousands) | | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Impaired loans | | | | | | | | | | | | |
Mortgage loans on real estate: | | | | | | | | | | | | |
Residential 1-4 family | | $ | 83 | | | $ | - | | | $ | - | | | $ | 83 | |
Commercial | | | 1,247 | | | | - | | | | - | | | | 1,247 | |
Construction | | | 74 | | | | - | | | | - | | | | 74 | |
Total mortgage loans on real estate | | $ | 1,404 | | | $ | - | | | $ | - | | | $ | 1,404 | |
Commercial loans | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 1,404 | | | $ | - | | | $ | - | | | $ | 1,404 | |
| | | | | | | | | | | | | | | | |
Loans | | | | | | | | | | | | | | | | |
Loans held for sale | | $ | 2,309 | | | $ | - | | | $ | 2,309 | | | $ | - | |
| | | | | | | | | | | | | | | | |
Other real estate owned | | | | | | | | | | | | | | | | |
Residential 1-4 family | | $ | 236 | | | $ | - | | | $ | - | | | $ | 236 | |
Total | | $ | 236 | | | $ | - | | | $ | - | | | $ | 236 | |
| | | | | Carrying Value at March 31, 2021 | |
(dollars in thousands) | | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Loans | | | | | | | | | | | | |
Loans held for sale | | $ | 9,291 | | | $ | - | | | $ | 9,291 | | | $ | - | |
| | | | | Carrying Value at December 31, 2020 | |
(dollars in thousands) | | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Loans | | | | | | | | | | | | |
Loans held for sale | | $ | 14,413 | | | $ | - | | | $ | 14,413 | | | $ | - | |
| | | | | Carrying Value at December 31, 2019 | |
(dollars in thousands) | | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | |
Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Impaired loans | | | | | | | | | | | | |
Mortgage loans on real estate: | | | | | | | | | | | | |
Residential 1-4 family | | $ | 74 | | | $ | - | | | $ | - | | | $ | 74 | |
Commercial | | | 1,294 | | | | - | | | | - | | | | 1,294 | |
Construction | | | 74 | | | | - | | | | - | | | | 74 | |
Total mortgage loans on real estate | | | 1,442 | | | | - | | | | - | | | | 1,442 | |
Commercial loans | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 1,442 | | | $ | - | | | $ | - | | | $ | 1,442 | |
| | | | | | | | | | | | | | | | |
Loans | | | | | | | | | | | | | | | | |
Loans held for sale | | $ | 590 | | | $ | - | | | $ | 590 | | | $ | - | |
The following tables display quantitative information aboutCompany did not have any Level 3 Fair Value Measurements as of the dates indicated:at December 31, 2021 or 2020.
| | | | Quantitative Information About Level 3 Fair Value Measurements | |
(dollars in thousands) | | Fair Value at March 31, 2020 | | Valuation Techniques | Unobservable Input | | Range (Weighted Average) | |
Impaired loans | | | | | | | | |
Residential 1-4 family real estate | | $ | 83 | | Market comparables | Selling costs | | | 7.25 | % |
| | | | | | Liquidation discount | | | 4.00 | % |
Commercial real estate | | $ | 1,247 | | Market comparables | Selling costs | | | 6.00 | % |
| | | | | | Liquidation discount | | | 35.00 | % |
Construction | | $ | 74 | | Market comparables | Selling costs | | | 7.25 | % |
| | | | | | Liquidation discount | | | 4.00 | % |
Other real estate owned | | | | | | | | | | |
Residential 1-4 family | | $ | 236 | | Market comparables | Selling costs | | | 7.25 | % |
| | | | | | Liquidation discount | | | 4.00 | % |
| | | | Quantitative Information About Level 3 Fair Value Measurements | |
(dollars in thousands) | | Fair Value at December 31, 2019 | | Valuation Techniques | Unobservable Input | | Range (Weighted Average) | |
Impaired loans | | | | | | | | |
Residential 1-4 family real estate | | $ | 74 | | Market comparables | Selling costs | | | 7.25 | % |
| | | | | | Liquidation discount | | | 4.00 | % |
Commercial real estate | | $ | 1,294 | | Market comparables | Selling costs | | | 6.00 | % |
| | | | | | Liquidation discount | | | 35.00 | % |
Construction | | $ | 74 | | Market comparables | Selling costs | | | 7.25 | % |
| | | | | | Liquidation discount | | | 4.00 | % |
The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments as of the dates indicated are as follows:
| | | | | Fair Value Measurements at March 31, 2020 Using | | | | | Fair Value Measurements at March 31, 2021 Using | |
(dollars in thousands) | | Carrying Value | | | Active Markets for Identical Assets (Level 1) | | |
Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Carrying Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 78,130 | | | $ | 78,130 | | | $ | - | | | $ | - | | | $ | 177,404 | | $ | 177,404 | | $ | - | | $ | - | |
Securities available-for-sale | | 152,608 | | | - | | | 152,608 | | | - | | | 194,518 | | | - | | 194,518 | | | - | |
Restricted securities | | 3,152 | | | - | | | 3,152 | | | - | | | 1,033 | | | - | | 1,033 | | | - | |
Loans held for sale | | 2,309 | | | - | | | 2,309 | | | - | | | 9,291 | | | - | | 9,291 | | | - | |
Loans, net of allowances for loan losses | | 750,550 | | | - | | | - | | | 739,303 | | | 798,000 | | | - | | - | | | 801,357 | |
Bank owned life insurance | | 27,777 | | | - | | | 27,777 | | | - | | | 28,612 | | | - | | 28,612 | | | - | |
Accrued interest receivable | | 2,756 | | | - | | | 2,756 | | | - | | | 3,302 | | | - | | 3,302 | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 902,536 | | | $ | - | | | $ | 905,120 | | | $ | - | | | $ | 1,111,558 | | $ | - | | $ | 1,114,120 | | $ | - | |
Overnight repurchase agreements | | 4,817 | | | - | | | 4,817 | | | - | | | 6,204 | | | - | | 6,204 | | | - | |
Federal Home Loan Bank advances | | 42,000 | | | - | | | 41,353 | | | - | | |
Other borrowings | | 1,800 | | | - | | | 1,800 | | | - | | |
Federal Reserve Bank borrowings | | | 10,995 | | | - | | 10,995 | | | - | |
Accrued interest payable | | 549 | | | - | | | 549 | | | - | | | 311 | | | - | | 311 | | | - | |
| | | | | Fair Value Measurements at December 31, 2019 Using | | | | | Fair Value Measurements at December 31, 2020 Using | |
(dollars in thousands) | | Carrying Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Carrying Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 89,865 | | | $ | 89,865 | | | $ | - | | | $ | - | | | $ | 120,437 | | $ | 120,437 | | $ | - | | $ | - | |
Securities available-for-sale | | 145,715 | | | - | | | 145,715 | | | - | | | 186,409 | | | - | | 186,409 | | | - | |
Restricted securities | | 2,926 | | | - | | | 2,926 | | | - | | | 1,367 | | | - | | 1,367 | | | - | |
Loans held for sale | | 590 | | | - | | | 590 | | | - | | | 14,413 | | | - | | 14,413 | | | - | |
Loans, net of allowances for loan losses | | 738,205 | | | - | | | - | | | 734,932 | | | 826,759 | | | - | | - | | | 826,083 | |
Bank owned life insurance | | 27,547 | | | - | | | 27,547 | | | - | | | 28,386 | | | - | | 28,386 | | | - | |
Accrued interest receivable | | 2,762 | | | - | | | 2,762 | | | - | | | 3,613 | | | - | | 3,613 | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 889,496 | | | $ | - | | | $ | 893,584 | | | $ | - | | | $ | 1,067,236 | | $ | - | | $ | 1,070,236 | | $ | - | |
Overnight repurchase agreements | | 11,452 | | | - | | | 11,452 | | | - | | | 6,619 | | | - | | 6,619 | | | - | |
Federal Home Loan Bank advances | | 37,000 | | | - | | | 36,747 | | | - | | |
Federal Reserve Bank borrowings | | | 28,550 | | | - | | 28,550 | | | - | |
Other borrowings | | 1,950 | | | - | | | 1,950 | | | - | | | 1,350 | | | - | | 1,350 | | | - | |
Accrued interest payable | | 620 | | | - | | | 620 | | | - | | | 384 | | | - | | 384 | | | - | |
Note 11. Segment Reporting
The Company operates in a decentralized fashion in three principal business segments: The Old Point National Bank of Phoebus (the Bank), Old Point Trust & Financial Services, N. A. (Trust), and the Company as a separate segment (for purposes of this Note, the Parent). Revenues from the Bank’s operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Trust’s operating revenues consist principally of income from fiduciary activities.and asset management fees. The Parent’s revenues are mainly fees and dividends received from the Bank and Trust companies. The Company has no other segments.
The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and, accordingly, requires different technologies and marketing strategies.
Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the three months ended March 31, 20202021 and 20192020 follows:
| | Three Months Ended March 31, 2021 | |
(dollars in thousands) | | Bank | | | Trust | | | Parent | | | Eliminations | | | Consolidated | |
Revenues | | | | | | | | | | | | | | | |
Interest and dividend income | | $ | 10,973 | | | $ | 5 | | | $ | 3,148 | | | $ | (3,148 | ) | | $ | 10,978 | |
Income from fiduciary activities | | | - | | | | 1,027 | | | | - | | | | - | | | | 1,027 | |
Other income | | | 2,866 | | | | 256 | | | | 50 | | | | (65 | ) | | | 3,107 | |
Total operating income | | | 13,839 | | | | 1,288 | | | | 3,198 | | | | (3,213 | ) | | | 15,112 | |
| | | | | | | | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | 818 | | | | - | | | | 4 | | | | - | | | | 822 | |
Provision for loan losses | | | 150 | | | | - | | | | - | | | | - | | | | 150 | |
Salaries and employee benefits | | | 5,320 | | | | 743 | | | | 164 | | | | - | | | | 6,227 | |
Other expenses | | | 4,063 | | | | 279 | | | | 54 | | | | (65 | ) | | | 4,331 | |
Total operating expenses | | | 10,351 | | | | 1,022 | | | | 222 | | | | (65 | ) | | | 11,530 | |
| | | | | | | | | | | | | | | | | | | | |
Income before taxes | | | 3,488 | | | | 266 | | | | 2,976 | | | | (3,148 | ) | | | 3,582 | |
| | | | | | | | | | | | | | | | | | | | |
Income tax expense (benefit) | | | 550 | | | | 56 | | | | (36 | ) | | | - | | | | 570 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 2,938 | | | $ | 210 | | | $ | 3,012 | | | $ | (3,148 | ) | | $ | 3,012 | |
| | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 121 | | | $ | 5 | | | $ | - | | | $ | - | | | $ | 126 | |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,250,353 | | | $ | 7,003 | | | $ | 117,956 | | | $ | (117,674 | ) | | $ | 1,257,638 | |
| | Three Months Ended March 31, 2020 | |
(dollars in thousands) | | Bank | | | Trust | | | Parent | | | Eliminations | | | Consolidated | |
Revenues | | | | | | | | | | | | | | | |
Interest and dividend income | | $ | 9,963 | | | $ | 23 | | | $ | 1,439 | | | $ | (1,439 | ) | | $ | 9,986 | |
Income from fiduciary activities | | | - | | | | 1,017 | | | | - | | | | - | | | | 1,017 | |
Other income | | | 1,990 | | | | 286 | | | | 50 | | | | (65 | ) | | | 2,261 | |
Total operating income | | | 11,953 | | | | 1,326 | | | | 1,489 | | | | (1,504 | ) | | | 13,264 | |
| | | | | | | | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | 1,548 | | | | - | | | | 20 | | | | - | | | | 1,568 | |
Provision for loan losses | | | 300 | | | | - | | | | - | | | | - | | | | 300 | |
Salaries and employee benefits | | | 4,988 | | | | 814 | | | | 192 | | | | - | | | | 5,994 | |
Other expenses | | | 3,682 | | | | 342 | | | | 77 | | | | (65 | ) | | | 4,036 | |
Total operating expenses | | | 10,518 | | | | 1,156 | | | | 289 | | | | (65 | ) | | | 11,898 | |
| | | | | | | | | | | | | | | | | | | | |
Income before taxes | | | 1,435 | | | | 170 | | | | 1,200 | | | | (1,439 | ) | | | 1,366 | |
| | | | | | | | | | | | | | | | | | | | |
Income tax expense (benefit) | | | 129 | | | | 37 | | | | (50 | ) | | | - | | | | 116 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 1,306 | | | $ | 133 | | | $ | 1,250 | | | $ | (1,439 | ) | | $ | 1,250 | |
| | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 368 | | | $ | - | | | $ | - | | | $ | - | | | $ | 368 | |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,058,955 | | | $ | 6,774 | | | $ | 111,861 | | | $ | (112,313 | ) | | $ | 1,065,277 | |
| | Three Months Ended March 31, 2019 | |
(dollars in thousands) | | Bank | | | Trust | | | Parent | | | Eliminations | | | Consolidated | |
Revenues | | | | | | | | | | | | | | | |
Interest and dividend income | | $ | 9,847 | | | $ | 29 | | | $ | 725 | | | $ | (725 | ) | | $ | 9,876 | |
Income from fiduciary activities | | | - | | | | 959 | | | | - | | | | - | | | | 959 | |
Other income | | | 2,188 | | | | 284 | | | | 50 | | | | (65 | ) | | | 2,457 | |
Total operating income | | | 12,035 | | | | 1,272 | | | | 775 | | | | (790 | ) | | | 13,292 | |
| | | | | | | | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | 1,486 | | | | - | | | | 31 | | | | - | | | | 1,517 | |
Provision for loan losses | | | 226 | | | | - | | | | - | | | | - | | | | 226 | |
Salaries and employee benefits | | | 4,818 | | | | 767 | | | | 114 | | | | - | | | | 5,699 | |
Other expenses | | | 3,348 | | | | 249 | | | | 60 | | | | (65 | ) | | | 3,592 | |
Total operating expenses | | | 9,878 | | | | 1,016 | | | | 205 | | | | (65 | ) | | | 11,034 | |
| | | | | | | | | | | | | | | | | | | | |
Income before taxes | | | 2,157 | | | | 256 | | | | 570 | | | | (725 | ) | | | 2,258 | |
| | | | | | | | | | | | | | | | | | | | |
Income tax expense (benefit) | | | 209 | | | | 55 | | | | (33 | ) | | | - | | | | 231 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 1,948 | | | $ | 201 | | | $ | 603 | | | $ | (725 | ) | | $ | 2,027 | |
| | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 498 | | | $ | - | | | $ | - | | | $ | - | | | $ | 498 | |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,021,007 | | | $ | 6,310 | | | $ | 107,427 | | | $ | (107,864 | ) | | $ | 1,026,880 | |
The accounting policies of the segments are the same as those described in the summary of significant accounting policies reported in the Company’s 20192020 Annual Report on Form 10-K. The Company evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains or losses.
| Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Old Point Financial Corporation and its subsidiaries (collectively, the Company). This discussion and analysis should be read with the consolidated financial statements, the notes to the financial statements, and the other financial data included in this report, as well as the Company’s 20192020 Annual Report on Form 10-K and management’s discussion and analysis for the year ended December 31, 2019.2020. Highlighted in the discussion are material changes from prior reporting periods and certain identifiable trends affecting the Company. Results of operations for the three months ended March 31, 20202021 and 20192020 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes while some of the percentages presented are computed based on unrounded amounts.
Caution AboutCautionary Statement Regarding Forward-Looking Statements
In addition to historical information, certainThis report contains statements in this report which use language such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” and similar expressions, may identify forward-looking statements. For this purpose, any statement that is not a statement of historical fact may be deemed to be a forward-looking statement. These forward-looking statements are based on the beliefs ofconcerning the Company’s management, as well as estimates and assumptions made by, and information currently available to, management. These statements are inherently uncertain, and there can be no assurance that the underlying estimates, assumptionsexpectations, plans, objectives or beliefs will prove to be accurate. Actual results could differ materially from historical results or those anticipated by such statements. Forward-looking statements in this report may include, without limitation: statements regarding future financial performance and profitability;other statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws and may include, but are not limited to: statements regarding expected future operations and financial performance; the acquisitionCompany’s technology and efficiency initiatives and anticipated completion timelines; potential effects of Citizensthe COVID-19 pandemic, including on asset quality, the allowance for loan losses, provision for loan losses, interest rates, and results of operations, certain items that management does not expect to have an ongoing impact on consolidated net income, future dividend payments, net interest margin compression and items affecting net interest margin, strategic business initiatives and the performanceanticipated effects thereof, lending under the Paycheck Protection Program (PPP) of the purchasedSmall Business Administration (SBA), margin compression, asset quality, adequacy of allowances for loan portfolio; performancelosses and the level of future chargeoffs, liquidity and capital levels, the investmentCompany’s assessment of and loan portfolios, including performance of the purchased student loan portfolio and expected trends in the quality of the loan portfolio; the ability of the Company to manage and remediate the impact of cyber incidents, including those involving theft and fraudulent activity directed at the COVID-19 pandemic;Bank and its customers and employees, perpetrated by third-party cybercriminals, the effect of future market and industry trends and the effects of diversifying the loan portfolio; strategic business and growth initiatives; management’s efforts to reposition the balance sheet; deposit growth;future interest rate levels and sources of liquidity; the securities portfolio; use of proceeds from the sale of securities; future levels of charge-offs or net recoveries; the impact of changes in NPAs on future earnings; write-downsfluctuations. These forward-looking statements are subject to significant risks and expected sales of other real estate owned; income taxes; monetary policy actions of the Federal Open Market Committee; and changes in interest rates.
Factorsuncertainties due to factors that could have a material adverse effect on the operations and future prospects of the Company include,including, but are not limited to, changes in:
interest rates, such as volatility in short-term interest rates or yields on U.S. Treasury bonds and yields; increases or volatility in mortgage interest rates
general business conditions, as well as conditions within the financial markets
general economic and business conditions, including unemployment levels and slowdowns in economic growth, especiallyand particularly related to further and sustained economic impacts of the COVID-19 pandemic; pandemic
the effectseffectiveness of the Company’s efforts to respond to COVID-19, the severity and duration of the pandemic, the impact of loosening of governmental restrictions, the uncertainty regarding new variants, the pace and efficacy of vaccinations and treatment developments, the pace of recovery when the pandemic subsides and the heightened impact it has on among other things,many of the Company’s business, financial condtion, results of operations, liquidity, and credit quality and risks described herein
potential claims, damages and fines related to litigation or government actions, including litigation or actions arising from the Company’s participation in theand administration of programs related to the COVID-19, pandemic (including,including, among other things, the PPP under the CARES Act); demand for loan products; Act, as subsequently amended
the Company’s branch realignment initiatives
the Company’s technology, efficiency, and other strategic initiatives
the legislative/regulatory climate, regulatory initiatives with respect to financial institutions, products and services, the Consumer Financial Protection Bureau (the CFPB) and the regulatory and enforcement activities of the CFPB
monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System (the Federal Reserve Board), and the effect of these policies on interest rates and business in our markets
future levels of government defense spending particularly in the Company’s service area; uncertainty over future federal spendingarea
the impact of potential changes in the political landscape and related policy changes, including monetary, regulatory and trade policies
the US. Government’s guarantee of repayment of student or budget prioritiessmall business loans purchased by the Company
the value of the current administration, particularlysecurities held in connection with the Department of Defense, on the Company’s service area; the performance of the Company’s dealer lending program; the legislative/regulatory climate; monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasuryinvestment portfolios
demand for loan products and the Federal Reserve Board and anyimpact of changes associated with the current administration; in demand on loan growth
the quality or composition of the loan or securities portfolios; portfolios and the value of the collateral securing those loans
changes in the volume and mix of interest-earning assets and interest-bearing liabilities; liabilities
the effects of management’s investment strategy and strategy to manage the net interest margin; the U.S. government’s guarantee of repayment of student or small business loans purchased by the Company; margin
the level of net charge-offs on loans; loans and the adequacy of our allowance for loan and lease losses
performance of the Company’s dealer lending program
deposit flows; competition; flows
the strength of the Company’s counterparties
competition from both banks and non-banks
demand for financial services in the Company’s market area; area
implementation of new technologies; technologies
the Company’s ability to develop and maintain secure and reliable electronic systems; systems
any interruption or breach of security in the Company’s information systems or those of the Company’s third partythird-party vendors or othertheir service providers; providers
reliance on third parties for key services; services
cyber threats, attacks or events
the use of inaccurate assumptions in management’s modeling systems; systems
technological risks and developments
the commercial and cyber-attacks, threats and events; theresidential real estate market; markets
the demand in the secondary residential mortgage loan markets
expansion of the Company’s product offerings
accounting principles, policies and guidelines;guidelines and other factors detailed inelections made by the Company’s publicly filed documents, including the Company’s 2019 Annual Report on Form 10-K. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of date of the report.Company thereunder
These risks and uncertainties, in addition to the risks and uncertainties identified in the Company’s 20192020 Annual Report on Form 10-K, the Company’s Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K should be considered in evaluating the forward-looking statements contained herein,herein. Forward-looking statements generally can be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could,” or similar expressions, are not statements of historical fact, and readersare based on management’s beliefs, assumptions and expectations regarding future events or performance as of the date of this report, taking into account all information currently available. Readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which it is made.made, except as otherwise required by law. In addition, past results of operations are not necessarily indicative of future results.We undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after the date on which the statement was made, except as otherwise required by law.
Available Information
The Company maintains a website on the Internet at www.oldpoint.com. The Company makes available free of charge, on or through its website, its proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC). This reference to the Company’s Internet address shall not, under any circumstances, be deemed to incorporate the information available at such Internet address into this Form 10-Q or other SEC filings. The information available on the Company’s Internet website is not part of this Form 10-Q or any other report filed by the Company with the SEC. The Company’s SEC filings can also be obtained on the SEC’s website on the Internet at www.sec.gov.
About Old Point Financial Corporation
The Company is the parent company of The Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services, N. A. (Trust). The Bank is a locally managed community bank serving the Hampton Roads localities of Chesapeake, Hampton, Isle of Wight County, Newport News, Norfolk, Virginia Beach, Williamsburg/James City County and York County. The Bank currently has 1916 branch offices. The Bank also has a loan production office in Richmond and a mortgage loan origination office in Charlotte, NC. Trust is a wealth management services provider.
On April 1, 2018, the Company acquired Citizens National Bank (Citizens). Under the terms of the merger agreement, Citizens stockholders received 0.1041 shares of Company stock and $2.19 in cash for each share of Citizens stock. Systems integration was completed in May 2018.
On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The effects of COVID-19 did not have a material impact on the financial results of the Company as of March 31, 2020. Due to orders issued by the Governor of Virginia and in an abundance of caution for the health of our customers and employees, during 2020 the Company closed lobbies of all branches but remained fully operational through appointments. appointments and drive thru capabilities. Beginning on May 3, 2021, the Company’s branch lobbies have fully re-opened for service. The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and impaired their ability to fulfill their financial obligations to the Company. The impact of the COVID-19 pandemic is fluid and continues to evolve. The COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets, and has had an adverse effect on the Company’s business, financial condition and results of operations due to net interest margin compression. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently not yet estimable and the Company believes that it will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees and vendors.
The Company is actively assistingassisted both customers and non-customers in obtaining loans through the PPP administered by the SBA. Additionally, the Company is working with customers affected by COVID-19 through payment deferrals and is tracking all payment accommodations to customers to identify and quantify any impact they might have on the Company. As of April 30, 2020, payment deferralsMarch 31, 2021, the Company had loan modifications on $7.1 million, or 0.9% of gross loans, down from approximately $7.4 million, or 0.9% of gross loans as of December 31, 2020. Of the loans still under modifications at March 31, 2021, $2.4 million were under initial modification with the remaining $4.7 million under a subsequent modification. Initial and subsequent modifications consisted primarily of 60- or 90-day principal and interest have been granted on $125.9 million, or 16.6%payment deferral periods. Continued uncertainty regarding the duration and scope of the total loan portfolio. Effectspandemic and related effects of COVID-19 may negatively impact management assumptions and estimates, such as the allowance for loan losses. Management considered the COVID-19 pandemic a triggering eventlosses and resulting provision for an interim impairment evaluation of goodwill and determined no impairment should be recorded as of March 31, 2020. loan losses.
The Company currently expects to be able to manage the economic risks and uncertainties associated with the COVID-19 pandemic with sufficient liquidity and capital levels. However, the ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition, results of operations, liquidity position and resources, credit quality, and capital levels is currently not yet estimable and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees and vendors.
Critical Accounting Policies and Estimates
The accounting and reporting policies of the Company are in accordance with U.S. GAAP and conform to general practices within the banking industry. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses, and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them, as needed. Management has discussed the Company’s critical accounting policies and estimates with the Audit Committee of the Board of Directors.
The critical accounting and reporting policies include the Company’s accounting for the allowance for loan losses. Accordingly, the Company’s significant accounting policies are discussed in Note 31 of the Notes to the Consolidated Financial Statements included in this quarterly report on Form 10-Q, and are discussed in further detail in the Company’s 20192020 Annual Report on Form 10-K.
Executive Overview
For the three months ended March 31, 20202021 net income was $1.3$3.0 million,, or $0.24$0.58 earnings per diluted common share. This compares to net income of $2.0$1.3 million,, or $0.39$0.24 earnings per diluted common share, for the first three monthsquarter of 2020. 2019. This decreaseincrease was principally attributable to increased net interest income, decreased noninterest incomeprovision for loan losses, and increased noninterest expenseincome driven by increased mortgage banking income.
Highlights forof the quarter are as follows:
Return on average assets (ROA) was 0.99% compared to 0.17% in the prior quarter and 0.48% in the first quarter of 2020.
Return on average equity (ROE) was 10.3% compared to 1.8% in the prior quarter and 4.5% in the first quarter of 2020.
Net interest margin (NIM) improved to 3.58% from 3.52% in the first quarter of 2020 and 3.16% in the prior quarter. NIM on a fully tax-equivalent basis (FTE) improved to 3.60% from 3.53% in the first quarter of 2020 and 3.18% in the prior quarter
Total assets were $1.3 billion at March 31, 2021, growing $31.4 million or 2.6% from December 31, 2020.
Deposits grew $44.3 million to $1.1 billion at March 31, 2021 from December 31, 2020.
Non-performing assets totaled(NPAs) increased slightly to $2.2 million at March 31, 2021 compared to $2.0 million at December 31, 2020, but decreased significantly from $7.0 million as of March 31, 2020, down from $12.9 million at March 31, 2019. Non-performing assets2020. NPAs as a percentage of total assets improvedwas 0.18% at March 31, 2021, which compared to 0.16% at December 31, 2020 and 0.65% at March 31, 2020 which compared to 0.72% at December 31, 2019.2020.
Net interest income remained essentially steady atimproved to $10.2 million for the first quarter of 2021, compared to $9.4 million for the fourth quarter of 2020 and $8.4 million for the first quarter of 2020 compared to the first and fourth quarters of 2019.2020.
The net interest margin (on a fully tax-equivalent basis)Noninterest income was $4.1 million for the first quarter of 2020 compressed to 3.53%2021, increasing from 3.67% for the same period of 2019 but improved slightly from 3.51%$3.8 million for the fourth quarter of 2019.
Net loans grew $12.32020 and $3.3 million or 6.7% annualized, from December 31, 2019 to March 31,for the first quarter of 2020.
Deposits grew $13.0 million to $902.5 million at March 31, 2020 from December 31, 2019.
Net Interest Income
The principal source of earnings for the Company is net interest income. Net interest income is the difference between interest and fees generated by earning assets and interest expense paid to fund them. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. The net interest margin is calculated by dividing tax-equivalent net interest income by average earning assets.
For the first quarter of 2020,2021, net interest income was $8.4$10.2 million, an increase of $59 thousand$1.7 million or 0.7%20.7% from the first quarter of 2019. Net interest income, on a fully tax-equivalent basis, for2020. The increase was primarily due to the first quarters of 2020 and 2019 was $8.5 million and $8.4 million, respectively. The impact of highersignificant growth in average earning asset balances wasat lower average earning yields partially offset by higher average interest bearing liabilities balances at lower yieldsaverage interest bearing costs. The compression on earning assetsyield and cost was primarily due to the falling rate environment as the Federal Reserve droppedreduction of the federal funds target rate by 75 basis points from July, 2019 to October, 2019. During March, 2020, the Federal Reserve further reduced the federal funds target rate 150 basis points to a range of 0.00% to 0.25% in March 2020 in response to the COVID-19 pandemic.
pandemic, but is also impacted by PPP loan originations (which bear interest at a rate of 1%) and higher levels of liquidity. Average earning assets increased year-over-year $30.2by $187.2 million, or 3.2%19.4%. The average tax-equivalent yield on earning assets for the first quarter of 20202021 decreased by 1430 basis points compared to the same period of 2019. The2020 but was positively impacted by accelerated recognition of deferred fees and costs related to PPP forgiveness in the first quarter of 2021. Average interest bearing liabilities increased $54.1 million, or 7.9%, and the average rate on interest-bearing liabilities for the quarter ended March 31, 20202021 was 0.92%0.45%, updown from 0.90%0.92% for the same period of 2019. Higher deposit2020, benefiting from the lower rate environment and repurchase agreement borrowing ratesreduced interest expense related to repayment of higher-cost long-term borrowings during 2020.
The NIM for the first quarter of 2021 was 3.58%, an increase from 3.52% for the first quarter of 2020. On a fully tax-equivalent basis, (FTE), NIM increased to 3.60% for the first quarter of 2021, up from 3.53% for the prior year quarter. Average loan yields were responsiblelower for this increase.the first quarter of 2021 compared to the same period of 2020 due to the lower interest rate environment which resulted in lower average yields on new loan originations and repricing within the existing loan portfolio. PPP loans earn at a fixed interest rate of 1%. Loan fees and costs related to PPP loans are deferred at time of loan origination, are amortized into interest income over the remaining term of the loans and accelerated upon forgiveness or repayment of the PPP loans. Net PPP fees of $1.6 million were recognized in the first quarter of 2021. High levels of liquidity invested at lower yielding short-term levels in the low interest rate environment also continue to impact the NIM. For more information about these FTE financial measures, please see “Non-GAAP- Financial Measures” and “Reconciliation of Certain Non-GAAP Financial Measures,” below.
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The Company believes NIM may be affected in future periods by several factors that are difficult to predict, including (1) changes in interest rates, which may depend on the severity of adverse economic conditions, the timing and extent of any economic recovery, and the extent of government stimulus measures, which are inherently uncertain, (2) possible changes in the composition of earning assets which may result from decreased loan demand as a result of the current economic environment (3) the recognition of net deferred fees on PPP loans, which is subject to the timing of repayment or forgiveness.
The following tables show analyses of average earning assets, interest-bearing liabilities and rates and yields for the periods indicated. Nonaccrual loans are included in loans outstanding.
AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES
AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES | |
| | For the quarter ended March 31, | |
| | 2021 | | | 2020 | |
(dollars in thousands) | | | | | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | | |
Loans* | | $ | 835,349 | | | $ | 9,965 | | | | 4.84 | % | | $ | 754,710 | | | $ | 8,839 | | | | 4.71 | % |
Investment securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 159,516 | | | | 770 | | | | 1.96 | % | | | 142,853 | | | | 863 | | | | 2.43 | % |
Tax-exempt* | | | 29,696 | | | | 229 | | | | 3.12 | % | | | 11,223 | | | | 110 | | | | 3.93 | % |
Total investment securities | | | 189,212 | | | | 999 | | | | 2.14 | % | | | 154,076 | | | | 973 | | | | 2.54 | % |
Interest-bearing due from banks | | | 124,347 | | | | 43 | | | | 0.14 | % | | | 47,931 | | | | 151 | | | | 1.27 | % |
Federal funds sold | | | 4 | | | | - | | | | 0.04 | % | | | 3,367 | | | | 12 | | | | 1.45 | % |
Other investments | | | 1,319 | | | | 30 | | | | 9.16 | % | | | 2,991 | | | | 46 | | | | 6.15 | % |
Total earning assets | | | 1,150,231 | | | $ | 11,037 | | | | 3.89 | % | | | 963,075 | | | $ | 10,021 | | | | 4.19 | % |
Allowance for loan losses | | | (9,648 | ) | | | | | | | | | | | (9,636 | ) | | | | | | | | |
Other non-earning assets | | | 97,123 | | | | | | | | | | | | 103,101 | | | | | | | | | |
Total assets | | $ | 1,237,706 | | | | | | | | | | | $ | 1,056,540 | | | | | | | | | |
| | For the quarter ended March 31, | |
| | 2020 | | | 2019 | |
(dollars in thousands) | | | | | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | | |
Loans* | | $ | 754,710 | | | $ | 8,839 | | | | 4.71 | % | | $ | 771,143 | | | $ | 8,876 | | | | 4.67 | % |
Investment securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 142,853 | | | | 863 | | | | 2.43 | % | | | 103,264 | | | | 620 | | | | 2.43 | % |
Tax-exempt* | | | 11,223 | | | | 110 | | | | 3.93 | % | | | 43,648 | | | | 337 | | | | 3.13 | % |
Total investment securities | | | 154,076 | | | | 973 | | | | 2.54 | % | | | 146,912 | | | | 957 | | | | 2.64 | % |
Interest-bearing due from banks | | | 47,931 | | | | 151 | | | | 1.27 | % | | | 9,933 | | | | 57 | | | | 2.31 | % |
Federal funds sold | | | 3,367 | | | | 12 | | | | 1.45 | % | | | 1,124 | | | | 7 | | | | 2.38 | % |
Other investments | | | 2,991 | | | | 46 | | | | 6.15 | % | | | 3,783 | | | | 64 | | | | 6.91 | % |
Total earning assets | | | 963,075 | | | $ | 10,021 | | | | 4.19 | % | | | 932,895 | | | $ | 9,961 | | | | 4.33 | % |
Allowance for loan losses | | | (9,636 | ) | | | | | | | | | | | (10,462 | ) | | | | | | | | |
Other non-earning assets | | | 103,101 | | | | | | | | | | | | 102,043 | | | | | | | | | |
Total assets | | $ | 1,056,540 | | | | | | | | | | | $ | 1,024,476 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | |
Time and savings deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing transaction accounts | | $ | 49,222 | | | $ | 3 | | | | 0.02 | % | | $ | 28,145 | | | $ | 3 | | | | 0.04 | % |
Money market deposit accounts | | | 280,955 | | | | 317 | | | | 0.45 | % | | | 251,086 | | | | 227 | | | | 0.37 | % |
Savings accounts | | | 86,607 | | | | 20 | | | | 0.09 | % | | | 87,949 | | | | 22 | | | | 0.10 | % |
Time deposits | | | 223,126 | | | | 972 | | | | 1.75 | % | | | 230,091 | | | | 870 | | | | 1.53 | % |
Total time and savings deposits | | | 639,910 | | | | 1,312 | | | | 0.82 | % | | | 597,271 | | | | 1,122 | | | | 0.76 | % |
Federal funds purchased, repurchase agreements and other borrowings | | | 8,595 | | | | 22 | | | | 1.03 | % | | | 25,220 | | | | 37 | | | | 0.60 | % |
Federal Home Loan Bank advances | | | 38,484 | | | | 234 | | | | 2.45 | % | | | 58,222 | | | | 359 | | | | 2.50 | % |
Total interest-bearing liabilities | | | 686,989 | | | | 1,568 | | | | 0.92 | % | | | 680,713 | | | | 1,518 | | | | 0.90 | % |
Demand deposits | | | 253,429 | | | | | | | | | | | | 235,381 | | | | | | | | | |
Other liabilities | | | 4,093 | | | | | | | | | | | | 4,896 | | | | | | | | | |
Stockholders’ equity | | | 112,029 | | | | | | | | | | | | 103,486 | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 1,056,540 | | | | | | | | | | | $ | 1,024,476 | | | | | | | | | |
Net interest margin | | | | | | $ | 8,453 | | | | 3.53 | % | | | | | | $ | 8,443 | | | | 3.67 | % |
*Computed on a fully tax-equivalent basis using a 21% rate, adjusting interest income by $35 thousand and $84 thousand, respectively.
**Annualized
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | |
Time and savings deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing transaction accounts | | $ | 67,759 | | | $ | 3 | | | | 0.02 | % | | $ | 49,222 | | | $ | 3 | | | | 0.02 | % |
Money market deposit accounts | | | 347,530 | | | | 201 | | | | 0.24 | % | | | 280,955 | | | | 317 | | | | 0.45 | % |
Savings accounts | | | 108,262 | | | | 11 | | | | 0.04 | % | | | 86,607 | | | | 20 | | | | 0.09 | % |
Time deposits | | | 191,298 | | | | 584 | | | | 1.24 | % | | | 223,126 | | | | 972 | | | | 1.75 | % |
Total time and savings deposits | | | 714,849 | | | | 799 | | | | 0.45 | % | | | 639,910 | | | | 1,312 | | | | 0.82 | % |
Federal funds purchased, repurchase agreements and other borrowings | | | 26,253 | | | | 23 | | | | 0.35 | % | | | 8,595 | | | | 22 | | | | 1.03 | % |
Federal Home Loan Bank advances | | | - | | | | - | | | | 0.00 | % | | | 38,484 | | | | 234 | | | | 2.45 | % |
Total interest-bearing liabilities | | | 741,102 | | | | 822 | | | | 0.45 | % | | | 686,989 | | | | 1,568 | | | | 0.92 | % |
Demand deposits | | | 368,073 | | | | | | | | | | | | 253,429 | | | | | | | | | |
Other liabilities | | | 9,906 | | | | | | | | | | | | 4,093 | | | | | | | | | |
Stockholders’ equity | | | 118,625 | | | | | | | | | | | | 112,029 | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 1,237,706 | | | | | | | | | | | $ | 1,056,540 | | | | | | | | | |
Net interest margin | | | | | | $ | 10,215 | | | | 3.60 | % | | | | | | $ | 8,453 | | | | 3.53 | % |
*Computed on a fully tax-equivalent basis (non-GAAP) using a 21% rate, adjusting interest income by $59 thousand and $35 thousand for March 31, 2021 and 2020, respectively. **Annualized |
Provision for Loan Losses and Credity Quality
The provision for loan losses is a charge against earnings necessary to maintain the allowance for loan losses at a level consistent with management’s evaluation of the portfolio. This expense is based on management’s estimate of probable credit losses inherent to the loan portfolio. Management’s evaluation included credit quality trends, collateral values, discounted cash flow analysis, loan volumes, geographic, borrower and industry concentrations, the findings of internal credit quality assessments and results from external regulatory examinations. These factors, as well as identified impaired loans, historical losses and current economic and business conditions including uncertainties associated with the COVID-19 pandemic, were used in developing estimated loss factors for determining the loan loss provision. Based on its analysis of the adequacy of the allowance for loan losses, management concluded that the provision was appropriate.
For the three months ended March 31, 2020,2021, the Company recorded $300$150 thousand for the provision for loan losses compared to $226losses. For the first quarter of 2020, the Company recognized $300 thousand provision for the comparative 2019 period. loan losses.
The allowance for loan and lease losses (ALLL) was $9.7 million at March 31, 20202021 and $9.5 million at December 31, 2019.2020. The ALLL as a percentage of loans held for investment was 1.27%1.20% at March 31, 20202021 compared to 1.29%1.14% at December 31, 2019.2020. The increase from December 31, 2020 to March 31, 2021 is primarily related to lower outstanding loan balances and increased qualititative reserves. The decrease in the ALLL as a percentage of loans held for investment at March 31, 2021 compared to March 31, 2020 was primarily attributable to PPP loan originations, creating a 0.10% compression at March 31, 2021. Excluding PPP loans, which are 100% guaranteed by the SBA, the ALLL as a percentage of loans held for investment was 1.30% at March 31, 2021 and 1.27% at December 31, 2020. Historical annualized net charge offs as a percentage of average loans outstanding increased 2 basis pointsdecreased to 0.15%0.01% for the first quarter of 20202021 compared 0.13%to 0.15% in the first quarter of 2019. Overall improving asset2020. For more information about financial measures that are not calculated in accordance with GAAP, please see “Non-GAAP Financial Measures” and “Reconciliation of Certain Non-GAAP Financial Measures,” below.
As of March 31, 2021, compared to December 31, 2020, there have not been significant changes in the overall credit quality combined with continuedof the loan portfolio, however the effects of government stimulus, including PPP loans, may be delaying signs of credit deterioration. Low levels of NPAs and year-over-year quantitative historical loss rates continue to demonstrate improvement, in non-performing assets resultedresulting in a 76 basis point reduction in the historical loss rate as a percentage of loans evaluated collectively for impairment overall. The overall, but are being offset by a 6 basis point increase in qualitative factor components for loans evaluated collectively for impairment increased 6 basis points duringprimarily related to economic uncertainty stemming from the first quarter of 2020 based primarily on adjustments for economic condtions. The Company continues to have higher levels of reserve in relation to peer.COVID-19 pandemic. As the economic impact of the COVID-19 pandemic and the related federal relief efforts materialize,continues to evolve, elevated levels of risk within the loan portfolio may require additional increases in the allowance for loan losses.
Noninterest Income
Noninterest income was $3.3$4.1 million in the three months ended March 31, 2020,2021, an decreaseincrease of $138$856 thousand or 4.0%26.1% from the first quarter of 2019.2020. The quarter over quarter increase was primarily driven by an increase in mortgage banking income primarily due to (i) higher volume resulting from the current interest rate environment, (ii) higher gains on sales of loans as a result of higher margins on loan originated for resale and (iii) expansion of the mortgage lending team. This increase was slightly offset by decreases in service charges on deposit accounts. The decrease in service charges on deposit accounts was primarily impacted by lower nonsufficient funds, or NSF, fees which historically trend downward during periods of economic uncertainty and lower service charges due to higher deposit balances.
Noninterest Expense
Noninterest expense was $10.6 million for the first quarter of 2020 was primarily driven by decreased service charges on deposit accounts and mortgage banking income, partially offset by higher fiduciary and asset management fees and bank owned life insurance.
Service charges on deposit accounts declined $1582021, an increase of $528 thousand, or 15.0%5.3%, when comparing the first quarters of 2020 and 2019. The year over year decrease is primarily attributable to personal checking service charges and nonsufficient fund and overdraft charges. Mortgage banking income decreased $59 thousand, or 27.3%, when comparing the first quarters of 2020 and 2019, primarily due to a first quarter 2020 vendor conversion. Net gains on sales of securities infrom the first quarter of 2019 were $26 thousand2020. The quarter-over-quarter and there were no gains or losses on sales of securities in the first quarter of 2020.
Noninterest Expense
Noninterest expense increased $739 thousand or 8.0% when comparing the first quarters of 2020 and 2019. Year-over-year first quarteryear-over-year increases wereare primarily related to salaries and employee benefits, data processing, and other operating expenses,taxes expense, partially offset by decreases in occupancy and equipment.equipment, customer development, and employee professional development.
Total salaries and benefits costs increased $295$233 thousand, or 5.2%3.9%, when comparing the first quarters of 20202021 and 2019.2020. The year over year increase wasin salaries and employee benefits is primarily impacted byattributable to (i) the addition of quality staffhighly skilled bankers in lending, creditinformation technology, and operations management and executive management in the later part of 2019. Occupancy and equipment expenses decreased $127 thousand, or 9.1%, in the first quarter of 2020 relative to the first quarterteam later in 2020; and (ii) increased commission expense related to higher mortgage loan origination volume in 2021 which were partially offset by the deferral of 2019. Bank-widecosts related to PPP loan origination. The costs related to PPP loan originations were deferred at time of origination and are being amortized to interest income over the remaining lives of the loans, which may be 24 or 60 months at origination. These costs are amortized against the related loan fees received for the origination of the PPP loans. Recognition of the deferred costs and related fees will be accelerated upon forgiveness or repayment of the PPP loans.
The Company’s 2021 roadmap for implementation of bank-wide technology and efficiency initiatives wereincludes the driversfull roll-out of the year-over-year increase in data processing. These included outsourcing of the Bank’s core application,a new loan origination system, upgrades to critical infrastructure software related to imaging, digital platform migration toand implementations of a new vendor,data analytics solution, deposit origination platform, teller systems, online appointment scheduling, and final stagesonline account opening. These initiatives have driven an increase of implementing a new loan origination system. Additionally,$224 thousand from the quarter ended March 31, 2020 to the quarter ended March 31, 2021 and are expected to continue to contribute to increased noninterest expenses during the implementation and transition timeframes as our operational structure pivoted from in-house to outsourced environments and shifted costs previously included in occupancy and equipment costs associated with operating an in-house core environment duringexpense. The Company expects to continue its bank-wide technology initiative implementations throughout 2021.
Decreases in customer development and employee professional development expenses for the first quarter of 2019 have migrated to data processing costs in the first quarter of 2020 as the operational structure was outsourced. Other operating expense increased $130 thousand, or 17.0%,three months ended 2021 over the first quarter of 2019 and was primarilycomparative 2020 period is directly related to directors fees and a single loss eventthe COVID-19 pandemic. The increase in other tax expenses was driven by resolution of $85 thousand in the first quarercertain tax credits related to bank franchise tax of 2020.$94 thousand.
The Company’s income tax expense for the first quarter 2020 decreased $115of 2021 increased $454 thousand when compared to the same period in 2019. The Company’s effective tax rate remains low2020 primarily due to its investments in tax-exempt securitiesoverall higher net income and bank-owned life insurance and its receipt oflower federal income tax credits for its investment in certain housing projects. The effective federal income tax rates for the three months ended March 31, 2021 was 15.9% and the effective tax rates for the three months ended March 31, 2020 and 2019 werewas 8.5% and 10.2%, respectively..
Balance Sheet Review
Unless otherwise noted, all comparisons in this section are between balances at December 31, 20192020 and March 31, 2020.2021.
Total assets as of March 31, 2020 and2021 were $1.3 billion, an increase of $31.4 million or 2.6%, compared to $1.2 billion at December 31, 2019 were $1.1 billion.2020. Net loans held for investment increased $12.3decreased $28.8 million, or 1.7%3.5%, from December 31, 20192020 to $750.6$798.0 million. NetThe change in net loans held for investment was primarily attributed to declines of $19.2 million in the PPP loan growth in real estate secured portfolio segments were partially offset by pay-downssegment and $3.2 million in the indirect automobile and commercial and industrial segments.segment. PPP loan forgiveness of $55.0 million was partially offset by originations of new PPP loans of $35.8 million. Cash and cash equivalents decreased $11.7increased $57.0 million, or 13.1%, and securities47.3%. Securities available-for-sale increased $6.9$8.1 million, or 4.7%.4.4% from December 31, 2020 to $194.6 million at March 31, 2021, as additional liquidity provided by growth in deposit accounts continues to be deployed in the Company’s investment portfolio.
Total deposits increased $13.0$44.3 million, or 1.5%4.2%, to $902.5 million$1.1 billion at March 31, 2020.2021. Noninterest-bearing deposits decreased $4.5increased $24.5 million, or 1.7%6.8%, savings deposits increased $29.8$26.4 million, or 7.5%5.2%, and time deposits decreased $12.3$6.6 million, or 5.4%3.4%. The Company focused on repricing strategies for expanding lower costimpact of government stimulus, PPP loan related deposits, and shortening timehigher levels of consumer savings were primary drivers of the increase in total deposits. Expanding the low cost deposit maturities.base and re-pricing to reduce interest expense continue to be key strategies to buffer NIM compression during the current low rate environment. Total borrowings decreased $1.6$19.3 million. The primary driver of the decrease was repayment of borrowing under the Paycheck Protection Program Liquidity Facility (PPPLF) initiated by the Federal Reserve to partially fund PPP loan originations, resulting in the Company borrowing $11.0 million or 3.4% due primarilyas of March 31, 2021 as compared to a reduction$28.6 million at December 31, 2020. PPPLF borrowings are fully collateralized by PPP loans and will mature in concert with the underlying collateral, all of overnight repurchase agreements offset by an increase in FHLB borrowings.which will mature within 24 months of origination.
Average assets for the first three months of 20202021 increased $32.1$181.2 million, or 3.1%17.2%, compared to the first three months of 2019.2020. Comparing the first three months of 20202021 to the first three months of 2019,2020, average loans decreased $16.4increased $80.6 million, and average investment securities increased $7.2$35.1 million. Total average deposits increased $60.7$189.6 million with year-over-year average balance increases of 7.7%45.2% in non-interest bearing deposits and 13.5%25.6% in savings deposits, including interest-bearing transaction and money market accounts. Average borrowings decreased $36.7$20.8 million.
Liquidity
Liquidity is the ability of the Company to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments in securities and loans maturing within one year. The Company’s internal sources of such liquidity are deposits, loan and investment repayments and securities available-for-sale. As of March 31, 2020,2021, the Bank’s unpledged, available-for-sale securities totaled $91.0$116.3 million. The Company’s primary external source of liquidity is advances from the FHLB. In addition, the Company had cash and cash equivalents of $177.4 million at March 31, 2021, including interest-bearing deposits in other banks of $150.0 million, that could provide additional liquidity to the Company
A major source of the Company’s liquidity is its large, stable deposit base. In addition, secondary liquidity sources are available through the use of borrowed funds if the need should arise, including secured advances from the FHLB.FHLB and FRB. As of the end of the first quarter of 2020,2021, the Company had $272.5$365.6 million in additional FHLB borrowing availability based on loans and securities currently available for pledging, less advances currently outstanding.pledging. The Company believes that the availability at the FHLB is sufficient to meet future cash-flow needs. The Company also has available short-term, unsecured borrowed funds in the form of federal funds lines of credit with correspondent banks. As of the end of the first quarter of 2020,2021, the Company had $55.0$100.0 million available in federal funds lines to address any short-term borrowing needs.
As disclosed in the Company’s consolidated statements of cash flows, net cash used inprovided by operating activities was $1.3$14.2 million, net cash used inprovided by investing activities was $21.1$18.4 million, and net cash provided by financing activities was $10.7$24.4 million for the three months ended March 31, 2020.2021. Combined, this contributed to an $11.7a $57.0 million decreaseincrease in cash and cash equivalents for the three months ended March 31, 2020.2021.
Management is not aware of any market or institutional trends, events or uncertainties, other than potential impacts from the COVID-19 pandemic, that are expected to have a material effect on the liquidity, capital resources or operations of the Company. Nor is management aware of any current recommendations by regulatory authorities that would have a material effect on liquidity, capital resources or operations.
Based on the Company’s management of liquid assets, the availability of borrowed funds, and the Company’s ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and to meet its customers’ future borrowing needs.
Notwithstanding the foregoing, the Company’s ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in the Company’s markets. Depending on its liquidity levels, its capital position, conditions in the capital markets and other factors, the Company may from time to time consider the issuance of debt, equity, other securities or other possible capital markets transactions, the proceeds of which could provide additional liquidity for the Company’s operations.
Nonperforming Assets
Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more and accruing interest, restructured loans that are accruing interest and not performing according to their modified terms, and OREO. OREO consists of real estate from a foreclosure on loan collateral. The Company had no OREO as of March 31, 2021 and December 31, 2019.2020.
The majority of the loans past due 90 days or more and accruing interest at March 31, 20202021 are student and small business loans with principal and interest amounts that are 97 - 98%100% guaranteed by the federal government. When a loan changes from “past due 90 days or more and accruing interest” status to “nonaccrual” status, the loan is reviewed for impairment. In most cases, if the loan is considered impaired, then the difference between the value of the collateral and the principal amount outstanding on the loan is charged off. If the Company is waiting on an appraisal to determine the collateral’s value or is in negotiations with the borrower or other parties that may affect the value of the collateral, management allocates funds to the allowance for loan losses to cover the anticipated deficiency, based on information available to management at that time.
In the case of TDRs, the restructuring may be to modify to an unsecured loan (e.g., a short sale) that the borrower can afford to repay. In these circumstances, the entire balance of the loan would be specifically allocated for, unless the present value of expected future cash flows was more than the current balance on the loan. It would not be charged off if the loan documentation supports the borrower’s ability to repay the modified loan.
The following table presents information on nonperforming assets, as of the dates indicated:
NONPERFORMING ASSETS | NONPERFORMING ASSETS | | NONPERFORMING ASSETS | |
(dollars in thousands) | | March 31, 2020 | | | December 31, 2019 | | | Increase (Decrease) | | | | | | | | |
Nonaccrual loans | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 253 | | | $ | 257 | | | $ | (4 | ) | |
Real estate-mortgage (1) | | 5,218 | | | 5,780 | | | (562 | ) | | $ | 251 | | $ | 311 | | $ | (60 | ) |
Real estate-commercial | | | 878 | | 903 | | (25 | ) |
Total nonaccrual loans | | $ | 5,471 | | | $ | 6,037 | | | $ | (566 | ) | | $ | 1,129 | | $ | 1,214 | | $ | (85 | ) |
| | | | | | | | | | | | | | | | |
Loans past due 90 days or more and accruing interest | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 9 | | | $ | - | | | $ | 9 | | |
Real estate-construction | | | $ | 88 | | $ | - | | $ | 88 | |
Real estate-mortgage (1) | | 53 | | | - | | | 53 | | | 50 | | - | | 50 | |
Real estate-commercial | | | - | | - | | - | |
Consumer loans (2) | | 1,188 | | | 1,091 | | | 97 | | | $ | 981 | | $ | 744 | | $ | 237 | |
Other | | 5 | | | - | | | 5 | | |
Total loans past due 90 days or more and accruing interest | | $ | 1,255 | | | $ | 1,091 | | | $ | 164 | | | $ | 1,119 | | $ | 744 | | $ | 375 | |
| | | | | | | | | | | | | | | | |
Restructured loans | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 253 | | | $ | 257 | | | $ | (4 | ) | |
Real estate-construction | | 86 | | | 88 | | | (2 | ) | | $ | 82 | | $ | 83 | | $ | (1 | ) |
Real estate-mortgage (1) | | 6,613 | | | 6,754 | | | (141 | ) | | 481 | | 492 | | (11 | ) |
Real estate-commercial | | | 1,318 | | 1,352 | | (34 | ) |
Total restructured loans | | $ | 6,952 | | | $ | 7,099 | | | $ | (147 | ) | | $ | 1,881 | | $ | 1,927 | | $ | (46 | ) |
Less nonaccrual restructured loans (included above) | | 4,568 | | | 4,693 | | | (125 | ) | | 1,088 | | 1,120 | | (32 | ) |
Less restructured loans currently in compliance (3) | | 2,384 | | | 2,406 | | | (22 | ) | | 793 | | 807 | | (14 | ) |
Net nonperforming, accruing restructured loans | | $ | - | | | $ | - | | | $ | - | | | $ | - | | $ | - | | $ | - | |
Nonperforming loans | | $ | 6,726 | | | $ | 7,128 | | | $ | (402 | ) | | $ | 2,248 | | $ | 1,958 | | $ | 290 | |
| | | | | | | | | | | | | | | | |
Other real estate owned | | | | | | | | | | |
1-4 family residential properties | | $ | 236 | | | - | | | 236 | | |
Total other real estate owned | | $ | 236 | | | $ | - | | | $ | 236 | | |
| | | | | | | | | | |
Total nonperforming assets | | $ | 6,962 | | | $ | 7,128 | | | $ | (166 | ) | | $ | 2,248 | | $ | 1,958 | | $ | 290 | |
(1) The real estate-mortgage segment includes residential 1 – 4 family, second mortgages and equity lines of credit. (2) Amounts listed include student loans and small business loans with principal and interest amounts that are 97 - 100% guaranteed by the federal government. The portion of these guaranteed loans that is past due 90 days or more totaled $693 thousand at March 31, 2021 and $547 thousand at December 31, 2020. (3) As of March 31, 2021 and December 31, 2020, all of the Company’s restructured accruing loans were performing in compliance with their modified terms. | | (1) The real estate-mortgage segment includes residential 1 – 4 family, second mortgages and equity lines of credit. (2) Amounts listed include student loans and small business loans with principal and interest amounts that are 97 - 100% guaranteed by the federal government. The portion of these guaranteed loans that is past due 90 days or more totaled $693 thousand at March 31, 2021 and $547 thousand at December 31, 2020. (3) As of March 31, 2021 and December 31, 2020, all of the Company’s restructured accruing loans were performing in compliance with their modified terms. | |
(1) The real estate-mortgage segment includes residential 1 – 4 family, commercial real estate, second mortgages and equity lines of credit.
(2) Amounts listed include student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The portion of these guaranteed loans that is past due 90 days or more totaled $923 thousand at March 31, 2020 and $885 thousand at December 31, 2019.
(3) As of March 31, 2020 and December 31, 2019, all of the Company’s restructured accruing loans were performing in compliance with their modified terms.
Nonperforming assets as of March 31, 20202021 were $7.0$2.2 million,, $166 $291 thousand lower than nonperforming assets as of December 31, 2019.2020. Nonaccrual loans decreased $566$85 thousand when comparing the balances as of March 31, 20202021 to December 31, 2019.2020. See Note 3 of the Notes to the Consolidated Financial Statements included in this quarterly report on Form 10-Q for additional information about the change in nonaccrual loans. Management has set aside specific allocations on those loans where it is deemed appropriate based on the information available to management at this time regarding the cash flow, anticipated financial performance, and collateral securing these loans. Management believes that the collateral and/or discounted cash flow on these loans will be sufficient to cover balances for which it has no specific allocation.
The majority of the balance of nonaccrual loans at March 31, 20202021 was related to a fewone large credit relationships. Ofrelationship of $878 thousand, representing 77.8% of the $5.5$1.1 million of nonaccrual loans at March 31, 2020, $4.1 million, or approximately 75.3%, was comprised of three credit relationships. All loans in these relationships have2021. This relationship has been analyzed to determine whether the cash flow of the borrower and the collateral pledged to secure the loans is sufficient to cover the outstanding principal balances.balance. The Company has set aside specific allocations for those loans without sufficient cash flow or collateral and charged off any balance that management does not expect to collect.
Loans past due 90 days or more and accruing interest increased $164 thousand.$376 thousand. As of March 31, 2020, $9232021, $693 thousand of the $1.3$1.1 million of loans past due 90 days or more and accruing interest were government-guaranteed student loans on which the Company expects to experience minimal losses. Because the federal government has provided guarantees of repayment of these loans in an amount ranging from 97% to 98% of the total principal and interest of the loans, management does not expect even significant increases in past due student loans to have a material effect on the Company.
Total restructured loans decreased by $147$46 thousand from December 31, 20192020 to March 31, 20202021 primarily due to paydownspay-offs and pay-offs.paydowns. All accruing TDRs are performing in accordance with their modified terms and have been evaluated for impairment, with any necessary reserves recorded as needed.
Management believes the Company has excellent credit quality review processes in place to identify problem loans quickly. This allows management to work with problem loan relationships to identify any payment shortfall and assist these borrowers to improve performance or correct the problems.
Allowance for Loan Losses
The allowance for loan losses is based on several components. The first component of the allowance for loan losses is determined based on specifically identified loans that may become impaired. These loans are individually analyzed for impairment and include nonperforming loans and both performing and nonperforming TDRs. This component may also include loans considered impaired for other reasons, such as outdated financial information on the borrower or guarantors or financial problems of the borrower, including operating losses, marginal working capital, inadequate cash flow, or business interruptions. Changes in TDRs and nonperforming loans affect the dollar amount of the allowance. Increases in the impairment allowance for TDRs and nonperforming loans are reflected as an increase in the allowance for loan losses except in situations where the TDR or nonperforming loan does not require a specific allocation (i.e. the discounted present value of expected future cash flows or the collateral value is considered sufficient).
The majority of the Company’s TDRs and nonperforming loans are collateralized by real estate. When reviewing loans for impairment, the Company obtains current appraisals when applicable. If the Company is waiting on an appraisal to determine the collateral’s value or is in negotiations with the borrower or other parties that may affect the value of the collateral, any loan balance that is in excess of the estimated appraised value is allocated in the allowance. As of March 31, 20202021 and December 31, 2019,2020, the impaired loan component of the allowance for loan losses was $456$55 thousand and $481$11 thousand, respectively.
The second component of the allowance consists of qualitative factors and includes items such as economic conditions, growth trends, loan concentrations, changes in certain loans, changes in underwriting, changes in management and legal and regulatory changes.changes, and as of March 31, 2021 and December 31, 2020 included factors related to the COVID-19 pandemic.
Historical loss is the final component of the allowance for loan losses and is calculated based on the migration of loans from performing to charge-off over a period of time that management deems appropriate to provide a reasonable estimate of losses inherent in the loan portfolio. Historical loss is based on eight migration periods of twelve quarters each.
Both the historical loss and qualitative factor components of the allowance are applied to loans evaluated collectively for impairment. The portfolio is segmented based on the loan classifications set by the Federal Financial Institutions Examination Council in the instructions for the call report applicable to the Bank. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on whether the loan’s payments are current (including loans 1 – 29 days past due), or are 30 – 59 days past due, 60 – 89 days past due, or 90 days or more past due. All other loans, including loans to consumers that are secured by real estate, are segmented by the Company’s internally assigned risk grades: substandard, other assets especially mentioned (OAEM, rated just above substandard), and pass (all other loans). The Company may also assign loans to the risk grades of Doubtful or Loss, but as of March 31, 20202021 and December 31, 20192020 the Company had no loans in these categories.
The overall historical loss rate from December 31, 20192020 to March 31, 2020, improved 72021, decreased 6 basis points as a percentage of loans evaluated collectively for impairment.impairment as a result of overall improving asset quality combined with continued improvement in non-performing assets. For the same period, the qualitative factor components increased 6 basis points as a percentage of loans evaluated collectively for impairment overall. This increase was primarily due to segment adjustments for economic conditions and uncertainty related to the COVID-19 pandemic.pandemic and change in volume for certain segments. While there have not been significant changes in overall credit quality of the loan portfolio from December 31, 2020 to March 31, 2021, the economic impact of the COVID-19 pandemic and the effects of government stimulus, including PPP loans, may be delaying signs of credit deterioration, potentially resulting in elevated levels of risk within the loan portfolio which may require additional increases in the allowance for loan losses.
On a combined basis, the historical loss and qualitative factor components amounted to $9.2$9.7 million as of March 31, 20202021 and $9.5 million at December 31, 2019. The allowance for loan losses at March 31, 2020 included $48 thousand, or 0.5%, of unallocated reserve, which is within Company policy. Management felt the unallocated reserve was prudent as of March 31, 2020 in light of current economic uncertainty related to the COVID-19 pandemic.2020. Management is monitoring portfolio activity, such as levels of deferral and/or modification requests, deferral and/or modification concentration levels by collateral, as well as industry concentration levels to identify areas within the loan portfolio which may create elevated levels of risk should the economic environment created by the COVID-19 pandemic or limited positive impact fromeffects of federal government relief programs present indications of economic instability that is other than temporary in nature.
The allowance for loan losses was 1.27%1.20% of total loans held for investment on March 31, 20202021 and 1.29%1.14% on December 31, 2019.2020. The increase from December 31, 2020 to March 31, 2021 is primarily related to lower outstanding loan balances and increased qualititative reserves. The decrease in the ALLL as a percentage of loans held for investment at March 31, 2021 compared to March 31, 2020 was primarily attributable to PPP loan originations, creating a 0.10% compression at March 31, 2021. Excluding PPP loans, the ALLL as a percentage of loans held for investment was 1.30% at March 31, 2021 and 1.27% at December 31, 2020. Loans held for investment excluding PPP loans is a non-GAAP financial measure. For more information about financial measures that are not calculated in accordance with GAAP, please see “Non-GAAP Financial Measures” and “Reconciliation of Certain Non-GAAP Financial Measures,” below. As of March 31, 2020,2021, the allowance for loan losses was 143.8%429.95% of nonperforming loans and 138.9% of nonperforming assets;assets, respectively; this compares to 127.9%487.3% of both nonperforming loans and nonperforming assets as of December 31, 2019.2020. Management believes it has provided an adequate reserve for nonperforming loans at March 31, 2020.2021.
Acquired loans are recorded at their fair value at acquisition date without carryover of the acquiree’s previously established ALLL, as credit discounts are included in the determination of fair value. The fair value of the loans is determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and then applying a market-based discount rate to those cash flows. During evaluation upon acquisition, acquired loans are also classified as either purchased credit-impaired (or PCI) or purchased performing.
Purchased credit-impaired loans reflect credit quality deterioration since origination, as it is probable at acquisition that the Company will not be able to collect all contractually required payments. These purchased credit-impaired loans are accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality. The purchased credit-impaired loans are segregated into pools based on loan type and credit risk. Loan type is determined based on collateral type, purpose, and lien position. Credit risk characteristics include risk rating groups, nonaccrual status, and past due status. For valuation purposes, these pools are further disaggregated by maturity, pricing characteristics, and re-payment structure. Purchased credit-impaired loans are written down at acquisition to fair value using an estimate of cash flows deemed to be collectible. Accordingly, such loans are no longer classified as nonaccrual even though they may be contractually past due because the Company expects to fully collect the new carrying values of such loans, which is the new cost basis arising from purchase accounting.
A PCI loan will be removed from a pool (at its carrying value) only if the loan is sold, foreclosed, or assets are received in full satisfaction of the loan. For purposes of removing the loan from the pool, the carrying value is deemed to equal the amount of principal cash flows received in lieu of the loan balance. This treatment ensures that the percentage yield calculation used to recognize accretable yield on the pool of loans is not affected.
Quarterly, management will evaluate purchased credit-impaired loans based on updated future expected cash flows. The excess of the cash flows expected to be collected over a pool’s carrying value is considered to be the accretable yield and is recognized as interest income over the estimated life of the loan or pool using the effective yield method. The accretable yield may change due to changes in the timing and amounts of expected cash flows; these changes are disclosed in Note 3 “Loans and Allowance for Loan Losses.”
The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable difference, which represents the estimate of credit losses expected to occur and was considered in determining the fair value of loan at the acquisition date. Any subsequent increases in expected cash flows over those expected at the acquisition date in excess of fair value are adjusted through an increase in the accretable yield on a prospective basis; any decreases in expected cash flows attributable to credit deterioration are recognized by recording a provision for loan losses.
The Company’s policy is to remove an individual loan from a pool based on comparing the amount received from its resolution with its contractual amount. Any difference between these amounts is absorbed by the nonaccretable difference for the entire pool. This removal method assumes that the amount received from resolution approximates pool performance expectations. The remaining accretable yield balance is unaffected and any material change in remaining effective yield caused by this removal method is addressed by the quarterly cash flow evaluation process for each pool. For loans that are resolved by payment in full, there is no release of the nonaccretable difference for the pool because there is no difference between the amount received at resolution and the contractual amount of the loan.
The purchased credit-impaired loans are and will continue to be subject to the Company’s internal and external credit review and monitoring. If further credit deterioration is experienced, such deterioration will be measured and the provision for loan losses will be increased.
Purchased performing loans are accounted for under ASC 310-20, Receivables – Nonrefundable Fees and Other Costs. The difference between the fair value and unpaid principal balance of the loan at acquisition date (premium or discount) is amortized or accreted into interest income over the life of the loans. If the purchased performing loan has revolving privileges, it is accounted for using the straight-line method; otherwise, the effective interest method is used. The adequacy of the remaining discount as compared to the reserve that would be required under the Company’s allowance for loan loss methodology is evaluated quarterly. Should the methodology reserve exceed the remaining discount, additional provision would be recognized.
Capital Resources
Total stockholders’ equity as of March 31, 20202021 was $110.0$117.9 million, an increase of $288$778 thousand or 0.3%0.7% from $110.0$117.1 million at December 31, 2019.2020. The increase was the result of increased retained earnings partially offset by an increase in net unrealized loss on available-for-sale securities, a component of accumulated other comprehensive income (loss) on the consolidated balance sheets. The changemovement in the unrealized gain/loss position was driven by changes in market rates.rates and shift in portfolio composition.
The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. The Company’s principal goals related to the maintenance of capital are to provide adequate capital to support the Company’s risk profile consistent with the board approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, and provide a competitive return to stockholders. Risk-based capital ratios, which include CET1 capital, Tier 1 capital and Total for the Bank capital are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.
In June 2013, the federal bank regulatory agencies adopted the Basel III Capital Rules (i) to implement the Basel III capital framework and (ii) for calculating risk-weighted assets. These rules became effective January 1, 2015, subject to limited phase-in periods. The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (EGRRCPA),EGRRCPA, enacted in May 2018, contains a variety of provisions that will affect regulations applicable to the Company and the Bank. Certain provisions of the EGRRCPA were effective immediately, while others depend upon future rulemaking by federal banking regulatory agencies. The EGRRCPA required action by the Federal Reserve BoardFRB to expand the applicability of its small bank holding company policy statement, which, among other things, exempts certain bank holding companies from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements that apply to other bank holding companies. In August 2018, the Federal Reserve BoardFRB issued an interim final rule provisionally expanding the applicability of the small bank holding company policy statement to bank holding companies with consolidated total assets of less than $3 billion. The statement previously applied only to bank holding companies with consolidated total assets of less than $1 billion. As a result of the interim final rule, which was effective upon its issuance, the Company expects that it will be treated as a small bank holding company and will no longer be subject to regulatory capital requirements. At March 31, 2020,For an overview of the Basel III Capital Rules and the EGRRCPA, refer to “Regulation and Supervision” included in Item 1, “Business” of the Company’s capital ratios exceed all minimum capital requirements that would apply to the Company if it were not a small bank holding company.2020 Annual Report on Form 10-K.
On September 17, 2019 the Federal Deposit Insurance Corporationfederal bank regulatory agencies finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the EGRRCPA. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.
In order to qualify for the CBLR framework, a community banking organization must have a Tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.
The CBLR framework will bewas available for banks to usebegin using in their March 31, 2020, Call Report. The CompanyBank did not opt into the CBLR framework.
The following is a summary of the Bank’s capital ratios at March 31, 2020.2021. As shown below, these ratios were all well above the recommended regulatory minimum levels.
| | 2020 Regulatory Minimums | | | March 31, 2020 | | | Regulatory Minimums | | March 31, 2021 | |
Common Equity Tier 1 Capital to Risk-Weighted Assets | | 4.500 | % | | 11.67 | % | | 4.500 | % | | 12.02 | % |
Tier 1 Capital to Risk-Weighted Assets | | 6.000 | % | | 11.67 | % | | 6.000 | % | | 12.02 | % |
Tier 1 Leverage to Average Assets | | 4.000 | % | | 9.73 | % | | 4.000 | % | | 8.79 | % |
Total Capital to Risk-Weighted Assets | | 8.000 | % | | 12.79 | % | | 8.000 | % | | 13.13 | % |
Capital Conservation Buffer | | 2.500 | % | | 4.79 | % | | 2.500 | % | | 5.13 | % |
Risk-Weighted Assets (in thousands) | | | | | $ | 871,624 | | | | | $ | 880,840 | |
Book value per share was $21.21$22.57 at March 31, 20202021 as compared to $20.31$21.16 at March 31, 2019.2020. Cash dividends were $626 thousand and $624 thousand or $0.12 per share in the first three months of 2021 and 2020, and $623 thousand or $0.12 per share in the first three months of 2019.respectively.
Contractual Obligations
In the normal course of business there are various outstanding contractual obligations of the Company that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit that may or may not require cash outflows.
The Company obtained a loan maturing on April 1, 2023 from a correspondent bank during the second quarter of 2018 to provide partial funding for the Citizens acquisition. The terms ofCompany elected to pay the loan include a LIBOR based interest rate that adjusts monthly and quarterly principal curtailments. At March 31, 2020in full during the outstanding balance was $1.8 million, and the then-current interest rate was 4.02%.first quarter of 2021.
The loan agreement with the lender contains financial covenants including minimum return on average asset ratio and Bank capital leverage ratio, maintenance of a well-capitalized position as defined by regulatory guidance and a maximum level of non-performing assets as a percentage of capital plus the allowance for loan losses. The Company was in compliance with each covenant at March 31, 2020.
As of March 31, 2020,2021, there have been no material changes outside the ordinary course of business in the Company’s contractual obligations disclosed in the Company’s 20192020 Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As of March 31, 2020,2021, there were no material changes in the Company’s off-balance sheet arrangements disclosed in the Company’s 20192020 Annual Report on Form 10-K.
Non-GAAP Financial Measures
In reporting the results of the quarter ended March 31, 2021, the Company has provided supplemental financial measures on a tax equivalent or an adjusted basis. These non-GAAP financial measures are a supplement to GAAP, which is used to prepare the Company’s financial statements, and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, the Company’s non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. The Company uses the non-GAAP financial measures discussed herein in its analysis of the Company’s performance. The Company’s management believes that these non-GAAP financial measures provide additional understanding of ongoing operations and enhance comparability of results of operations with prior periods presented without the impact of items or events that may obscure trends in the Company’s underlying performance. A reconciliation of the non-GAAP financial measures used by the Company to evaluate and measure the Company’s performance to the most directly comparable GAAP financial measures is presented below.
| | Three Months Ended March 31, | |
(dollar in thousands, except per share data) | | 2021 | | | 2020 | |
Fully Taxable Equivalent Net Interest Income | | | | | | |
Net interest income (GAAP) | | $ | 10,156 | | | $ | 8,418 | |
FTE adjustment | | | 59 | | | | 35 | |
Net interest income (FTE) (non-GAAP) | | $ | 10,215 | | | $ | 8,453 | |
Noninterest income (GAAP) | | | 4,134 | | | | 3,278 | |
Total revenue (FTE) (non-GAAP) | | $ | 14,349 | | | $ | 11,731 | |
Noninterest expense (GAAP) | | | 10,558 | | | | 10,030 | |
| | | | | | | | |
Average earning assets | | $ | 1,150,231 | | | $ | 963,075 | |
Net interest margin | | | 3.58 | % | | | 3.52 | % |
Net interest margin (FTE) (non-GAAP) | | | 3.60 | % | | | 3.53 | % |
| | | | | | | | |
Efficiency ratio | | | 73.88 | % | | | 85.76 | % |
Efficiency ratio (FTE) (non-GAAP) | | | 73.58 | % | | | 85.50 | % |
| | | | | | | | |
ALLL as a Percentage of Loans Held for Investment | | March 31, 2021 | | | December 31, 2020 | |
Loans held for investment (net of deferred fees and costs) (GAAP) | | $ | 807,661 | | | $ | 836,300 | |
Less PPP originations | | | 66,805 | | | | 85,983 | |
Loans held for investment, (net of deferred fees and costs), excluding PPP (non-GAAP) | | $ | 740,856 | | | $ | 750,317 | |
| | | | | | | | |
ALLL | | $ | 9,961 | | | $ | 9,541 | |
| | | | | | | | |
ALLL as a Percentage of Loans Held for Investment | | | 1.20 | % | | | 1.14 | % |
ALLL as a Percentage of Loans Held for Investment, net of PPP originations | | | 1.30 | % | | | 1.27 | % |
| Quantitative and Qualitative Disclosures About Market Risk. |
Not required.
Disclosure Controls and Procedures.Management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) underof the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, concluded that the Company did not maintain effective disclosure controls and procedures as of March 31, 2020 dueappropriate, to a material weakness in internal controls over financial reporting that was identified and reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The material weakness was related to controls surrounding the Company’s primary correspondent bank account reconciliation that did not allow for the timely idenfication of stale-dated and other reconciling items that began with the Company’s conversion to an outsourced core provider platform on December 9, 2019. This material weakness did not result in any material misstatements and adjustments to the Consolidated Statemenst of Income fo the three months ended March 31, 2020 or for the twelve months ended December 31, 2019. decisions regarding required disclosure.
In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Remediation Plan for Material Weakness in Internal Control Over Financial Reporting. 38As a result of our conversion to an outsourced core provider platform, certain transactions were processed inconsistently with the manner in which they were previously processed. This change created reconciliation issues in our correspondent bank account. Management has determined the root cause and is working with the outsourced vendor to convert processing of these transactions to a consistent and efficient manner. In addition, Management has engaged an independent third party to assist with tracing outstanding reconciling items and with subsequent reconciliations in order to develop a streamlined process. Remediation is expected to be completed as of June 30, 2020.
Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Other than the remediation discussed above, no changes in the Company’s internal control over financial reporting occurred during the fiscal quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Management assessed the impact of the remote work practices related to the COVID-19 pandemic and determined they did not materially affect the Company’s internal control environment at March 31, 2020. Because of its inherent limitations, a system of 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.
Changes in Internal Controls. There were no changes in the Company’s internal control over financial reporting during the Company’s first quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
There are no pending legal proceedings to which the Company, or any of its subsidiaries, is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.
The Company is providing these additional risk factors to supplementThere have been no material changes in the risk factors faced by the Company from those disclosed in the Company’s 20192020 Annual Report on Form 10-K.
The COVID-19 pandemic has adversely affected (and may mateirally adversly affect) our business, financial condition and results of operations, and the ultimate impacts of the pandemic on our business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain and will be impacted by the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets and has had an adverse effect on our business, financial condition and results of operations and will continue to have a significant impact on our business, finacial condition and results of operations. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. In response to the COVID-19 pandemic, the State of Virginia has taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These restrictions and other consequences of the pandemic have resulted in significant adverse effects for many different types of businesses, including, among others, those in the travel, hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the region in which we operate.
The ultimate effects of the COVID-19 pandemic on the broader economy and the markets we serve are not known nor is the ultimate length of the restrictions described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect our interest income and, therefore, earnings, financial condition and results of operation. Additional impacts of the COVID-19 pandemic on our business could be widespread and material, and may include, or exacerbate, among other consequences, the following:
| ● | employees contracting COVID-19; |
| ● | reductions in our operating effectiveness as our employees work from home;
cybersecurity risks increasing as a result of an increased number of employees working from home;
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| ● | a work stoppage, forced stay-at-home and shelter-in-place orders, or other interruption of our business; |
| ● | unavailability of key personnel necessary to conduct our business activities; |
| ● | effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating our financial reporting and internal controls; |
| ● | sustained closures of our branch lobbies or the offices of our customers; |
| ● | declines in demand for loans and other banking services and products; |
| ● | reduced consumer spending due to both job losses and other effects attributable to the COVID-19 pandemic; |
| ● | unprecedented volatility in United States financial markets; |
| ● | volatile performance of our investment securities portfolio; |
| ● | decline in the credit quality of our loan portfolio, owing to the effects of the COVID-19 pandemic in the markets we serve, leading to a need to increase our allowance for credit losses; |
| ● | declines in value of collateral for loans, including real estate collateral;
the potential unavailability of services from third party vendors;
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| ● | declines in the net worth and liquidity of borrowers and loan guarantors, impairing their ability to honor commitments to us; and |
| ● | declines in demand resulting from businesses being deemed to be “non-essential” by governments in the markets we serve, and from “non-essential” and “essential” businesses suffering adverse effects from reduced levels of economic activity in our markets. |
These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, financial condition and results of operations.
The ongoing COVID-19 pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for many other securities. Additionally, mitigating the pandemic’s effects have included and may include further market volatility, including lower interest rates, disrupted trade and supply chains, increased unemployment and reduced economic activity, inlcuding an economic recession, The further spread of the COVID-19 outbreak, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which we operate. This could result in further decline in demand for our banking products and services, and could negatively impact, among other things, our liquidity, regulatory capital and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.
We are taking precautions to protect the safety and well-being of our employees and customers. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can we predict the level of disruption which will occur to our employee’s ability to provide customer support and service. If we are unable to recover from a business disruption on a timely basis, our business, financial condition and results of operations could be materially and adversely affected. We may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect our business, financial condition and results of operations.
As a participating lender in the SBA Paycheck Protection Program (PPP), the Company and the Bank are subject to additional risks regarding the Bank’s processing of PPP loans and risks that the SBA may not fund some or all PPP loan guaranties.
The Bank is a participating lender in the PPP. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks followed in accepting and processing applications for the PPP. We may be exposed to the risk of similar litigation, from both customers and non-customers that contacted the Bank regarding obtaining PPP loans with respect to the processes and procedures we used in processing applications for the PPP. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability to us or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our reputation, business, financial condition and results of operations.
The Company may have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Company, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Pursuant to the Company’s equity compensation plans, participants may pay the exercise price of certain awards or satisfy tax withholding requirements associated with awards by surrendering shares of the Company’s common stock that the participants already own. Additionally, participants may also surrender shares upon vesting of restricted stock awards to satisfy tax withholding requirements. Shares surrendered by participants of these plans are repurchased at current market value pursuant to the terms of the applicable awards. During the three months ended March 31, 2020,2021, the Company did not repurchase any shares related to the exercise ofequity compensation plan awards.
None.
None.
The Company has made no changes to the process by which security holders may recommend nominees to its boardBoard of directors,Directors, which is discussed in the Company’s Proxy Statement for the Company’s 20202021 Annual Meeting of Stockholders.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.