New Peoples Bankshares Inc 10-K for FY2021
New Peoples Bankshares Inc (NWPP)
About this 10-K
New Peoples Bankshares Inc filed this 10-K on March 31, 2022, covering the fiscal year ended December 31, 2021 (FY2021).
Headline figures
Fiscal year ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $3.72M
- up 15.8% from $3.22M a year earlier
- Net income
- $7.01M
- up 142.6% from net income of $2.89M a year earlier
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the fiscal year ended
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission
File Number
(Exact name of registrant as specified in its charter)
(State
or other jurisdiction of |
(I.R.S.
Employer |
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(Zip Code) |
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(Address of principal executive offices) |
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Registrant’s
telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Securities registered pursuant to Section 12(g) of the Act:
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes [ ]
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ]
The
aggregate market value of the common stock held by non-affiliates, based on the last reported sales price of $2.07 per share on the last
business day of the second quarter of 2021, was $
The number of shares outstanding of the registrant’s common stock was as of March 23, 2022.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 2022 Annual Meeting of Shareholders – Part III
TABLE OF CONTENTS
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PART I |
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Item 1. |
Business |
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Item 1A. |
Risk Factors |
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Item 1B. |
Unresolved Staff Comments |
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Item 2. |
Properties |
16 |
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Item 3. |
Legal Proceedings |
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Item 4. |
Mine Safety Disclosures |
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PART II |
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Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
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Item 6. |
[Reserved] |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
36 |
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Item 8. |
Financial Statements and Supplementary Data |
37 |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 9A. |
Controls and Procedures |
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Item 9B. |
Other Information |
73 |
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
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PART III |
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Item 10. |
Directors, Executive Officers and Corporate Governance |
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Item 11. |
Executive Compensation |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
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Item 14. |
Principal Accounting Fees and Services |
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PART IV |
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Item 15. |
Exhibits, Financial Statement Schedules |
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Item 16. |
Form 10-K Summary |
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| SIGNATURES | 75 |
PART I
Item 1. Business
General
New Peoples Bankshares, Inc. (New Peoples, the Company, we, us or our) is a Virginia financial holding company headquartered in Honaker, Virginia. Our business is conducted primarily through New Peoples Bank, Inc., a Virginia banking corporation (the Bank). The Bank has a division doing business as New Peoples Financial Services which offers investment services through its broker-dealer relationship with Infinex Investments, Inc. NPB Insurance Services, Inc. (NPB Insurance) is a subsidiary of the Bank and generates revenue through the referral of insurance services.
The Bank, headquartered in Honaker, Virginia, offers a range of banking and related financial services focused primarily on serving individuals, small to medium size businesses, and the professional community. We strive to serve the banking needs of our customers while developing personal, hometown relationships with them. Our board of directors believes that marketing customized banking services enables us to establish a niche in the financial services marketplace where we do business.
We provide professionals and small and medium size businesses in our market area with responsive and technologically enabled banking services. These services include loans that are priced on a deposit relationship basis, easy access to our decision makers, and quick and innovative action necessary to meet a customer’s banking needs. Our capitalization and lending limit enable us to satisfy the credit needs of a large portion of the targeted market segment. When a customer needs a loan that exceeds our lending limit, we try to find other financial institutions to participate in the loan with us.
Our History
The Bank was incorporated under the laws of the Commonwealth of Virginia on December 9, 1997 and began operations on October 28, 1998. On September 27, 2001, the shareholders of the Bank approved a plan of reorganization under which they exchanged their shares of Bank common stock for shares of New Peoples common stock. On November 30, 2001, the reorganization was completed and the Bank became New Peoples’ wholly-owned subsidiary.
In June 2003, New Peoples formed two new wholly-owned subsidiaries, NPB Financial Services, Inc. (renamed NPB Insurance Services, Inc. in June 2012) and NPB Web Services, Inc., an inactive web design and hosting company.
The Bank, through its division New Peoples Financial Services, offers fixed and variable annuities, fee-based asset management and other investment products through a broker/dealer relationship with Infinex Investments, Inc.
In July 2004, NPB Capital Trust I was formed by New Peoples to issue $11.3 million in trust preferred securities.
In September 2006, NPB Capital Trust 2 was formed by New Peoples to issue $5.2 million in trust preferred securities.
On June 7, 2017, NPB Insurance Services, Inc. purchased a 39% membership interest in Lonesome Pine Title Agency, LLC, which provides title insurance. Another member of the agency is a related party to the Company.
Branch Locations
In addition to our headquarters in Honaker, Virginia we have 19 full-service branches located in three states: Virginia - Abingdon, Big Stone Gap, Bluefield, Bristol (2), Castlewood, Chilhowie, Clintwood, Gate City, Grundy, Haysi, Lebanon, Pounding Mill, Tazewell and Wise; West Virginia - Princeton (2); and Tennessee – Kingsport. Additionally, we have a loan production office in Boone, North Carolina; and a former loan production office in Jonesborough, Tennessee which is currently being used as a hub to meet prospective loan customers.
Renovations to a building we purchased in Bristol, Virginia in 2019, were suspended in 2020 due to impacts of the COVID-19 pandemic. We resumed these renovations in January 2021 and opened this new office in the fourth quarter of 2021. We believe this expansion fits our stated objective of expanding our presence in the Tri-Cities market area. The Bristol location is within the business district and is allowing us to provide retail consumer, commercial banking and financial services within Bristol and the surrounding area.
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Our Market Areas
Our primary market area consists of southwestern Virginia, southern West Virginia, northeastern Tennessee, and western North Carolina. Specifically, we operate in the southwestern Virginia counties of Russell, Scott, Washington, Tazewell, Buchanan, Dickenson, Wise, and Smyth; in the southern West Virginia county of Mercer and the northeastern Tennessee county of Sullivan (collectively, the “Tri-State Area”). In North Carolina, our loan production office is in the county of Watauga. The close proximity and mobile nature of individuals and businesses in adjoining counties and nearby cities in Virginia, West Virginia, Tennessee and North Carolina place these markets within our Bank’s targeted trade area, as well.
Accessibility to Interstates I-77, I-81, I-26, I-64, I40 and I-75, as well as major state and U.S. highways including US 19, US 23, US 58, US 460 and US 421, make the area an ideal location for businesses to serve markets in the Mid-Atlantic, Southeast and Midwest. The area is strategically located midway between Atlanta-Pittsburgh, Charlotte-Cincinnati, and Richmond-Louisville, and is within a day’s drive of more than half of the U.S. population. A regional airport located in Bristol, Tennessee serves the area with commercial flights to and from major cities in the United States. Commercial rail service providers include CSX Transportation and Norfolk Southern Railways.
The Tri-State Area has a diversified economy supported by natural resources, which include coal, natural gas, limestone, and timber; agriculture; healthcare; education; technology; manufacturing and services industries. Predominantly, the market is comprised of locally owned and operated small businesses. Considerable investments in high-technology communications, high-speed broadband network and infrastructure have been made which has opened the area to large technology companies and future business development potential for new and existing businesses. Businesses are taking advantage of the low cost of doing business, training opportunities, available workforce and an exceptional quality of life experience for employers and employees alike.
Internet Site
Our internet banking site can be accessed at www.newpeoples.bank. The site includes a customer service area that contains branch and Interactive Teller Machine (ITM) locations, product descriptions and current interest rates offered on deposit accounts. Customers with internet access can apply for loans, open deposit accounts online, access account balances, make transfers between accounts, enter stop payment orders, order checks, and use an optional bill paying service.
Available Information
We file annual, quarterly, and current reports, proxy statements and other information with the Securities and Exchange Commission (the SEC). The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers, like us, that file electronically with the SEC. Our SEC filings are filed electronically and are available to the public online at the SEC’s web site at www.sec.gov. We also provide a link to our filings on the SEC website, free of charge, through our internet website https://newpeoples.bank/Bankshares-About-Us under "Investor Relations." Information on the websites of the Company and the Bank is not a part of, and is not incorporated into, this report or any other filings the Company makes with the SEC.
COVID-19 Pandemic
The outbreak of the novel coronavirus (COVID-19) has adversely impacted and continues to impact certain industries in which the Company's customers operate and may have impaired their ability to fulfill their outstanding obligations due to continued financial distress. The spread of COVID-19 has caused unprecedented uncertainty, volatility and disruption in the U.S. and global economy at large. The Company’s business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions. With the easing of restrictions during the latter part of 2020 and into 2021, and the availability and distribution of vaccines, the U.S. economy has begun to improve as consumer and business spending has rebounded in recent months. However, the lasting effects are uncertain as government aid programs and stimulus packages taper, and the ultimate long-term impact of the business shutdowns that occurred as a result of COVID-19 remains uncertain in many sectors of the economy, such as the travel, hospitality and entertainment industries. This may cause business sectors that have had better recoveries not to be able to maintain those recoveries in the long term. Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will continue to be effective
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To help address the impact of the pandemic the Bord of Governors of the Federal Reserve System (Federal Reserve) lowered the federal funds target rate to a range of between zero and 0.25% during the first quarter of 2020. Throughout 2021, the Federal Reserve maintained the targeted federal funds rate at these in response to the pandemic related risks to the economy. The Company’s earnings and related cash flows are largely dependent upon net interest income, representing the difference between interest income received on interest-earnings assets, primarily loans and securities, and the interest paid on interest-bearing liabilities, primarily customer deposits and borrowed funds. As a result of the significant decline in interest rates and prepayments on higher yielding existing loans, the yield on the total loan portfolio has decreased. Additionally, with significant cash inflows realized from a growth in deposits and the forgiveness of Paycheck Protection Program (PPP) loans, the current yields on funds reinvested into the purchase of securities are lower than existing portfolio yields. However, the fees arising from the PPP loan program have mitigated some of this decline during 2020 and 2021. As economic conditions have started to improve, the Federal Reserve has begun to shift its focus to limiting the inflationary and other potentially adverse effects of the expiration of government aid programs and stimulus packages. Since the Company's balance sheet is asset sensitive and rate sensitive assets reprice more quickly than rate sensitive liabilities, margin compression may be somewhat mitigated during 2022 in the event that the Federal Reserve begins to raise rates.
The U.S. government also enacted certain fiscal stimulus measures in several phases to assist in counteracting the economic disruptions caused by the pandemic. On March 6, 2020, the Coronavirus Preparedness and Response Supplemental Appropriations Act was enacted to authorize funding for research and development of vaccines and to allocate money to state and local governments for response and containment measures. On March 18, 2020, the Families First Coronavirus Response Act was put in place to provide for paid sick/medical leave, no-cost coverage for testing, expanded unemployment benefits and additional funding to states for the ongoing economic consequences of the pandemic. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. Among other measures, the CARES Act provided $349 billion for the PPP administered by the U.S. Small Business Administration (SBA) to assist qualified small businesses with certain operational expenses, certain credits for individuals and their dependents against their 2020 personal income tax and expanded eligibility for unemployment benefits. This legislation was later amended on April 24, 2020, by the PPP and Healthcare Enhancement Act which provided an additional $310 billion of funding for PPP loans.
Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by the pandemic. Under these provisions, loan modifications deemed to be COVID-19 related would not be considered a troubled debt restructuring (TDR) if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of the termination of the COVID-19 national emergency or December 31, 2020. This provision was extended, and expired on January 1, 2022 under the Consolidated Appropriations Act, 2021. The banking regulators issued a similar guidance, which also clarified that a COVID-19 related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered to be short-term. The Company implemented a short-term modification program to provide relief to consumer and commercial customers following the guidelines of these provisions. Most modifications fall into the 90 to 180-day range with deferred principal and interest due and payable on the maturity date of the existing loans. Specific detail describing these modifications made in relation to the CARES Act can be found in the Loans and Troubled Debt Restructurings discussions in Notes 6 and 8 to the Consolidated Financial Statements contained in Item 8 of this Form 10-K.
Following the enactment of these provisions, in December 2020, the Consolidated Appropriations Act, 2021 was enacted to provide additional economic stimulus to individuals and businesses in response to the extended economic distress caused by the pandemic. This included additional stimulus payments to individuals and their dependents, and extension of enhanced unemployment benefits, $284 billion of additional funds for a second round of PPP loans and a new simplified forgiveness procedure for PPP loans of $150,000 or less. The Bank was a lender for the initial SBA program and closed 665 PPP loans totaling $44.5 million. During the second round of PPP funding, the Bank closed an additional 568 loans, totaling $25.3 million.
As the pandemic entered its second year, the Company continued practices implemented at the outset of the pandemic to support the safety and well-being of the employees, customers and shareholders including the following measures:
| · | The pandemic response team continued to meet regularly to address the various aspects of the pandemic and formulate the Bank’s response to pandemic-related issues that impact customers, employees and the communities we serve. |
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| · | The 2021 annual shareholder meeting was held virtually, as will the 2022 meeting. |
| · | Non-essential travel and large external gatherings continued to be restricted and mandatory quarantine periods and testing remained in place for anyone that had known exposure to COVID-19. |
| · | Remote-access availability continued to enable, where possible, work at home or alternate locations, in order to segregate employees in operational areas to mitigate possible spread of illness to an entire department. |
| · | Drive-thru services, along with the use of ITMs, internet banking and mobile banking services were encouraged, during periods where lobby services were temporarily discontinued. Full lobby services were reinstituted in late 2021. |
As the COVID-19 virus mutated, waves of new global infections impacted our local communities, with hospitalizations and deaths reaching and exceeding levels experienced during the initial spread of the virus. As with much of the country, a sharp decrease in infections and hospitalizations has been experienced since the beginning of March, 2022. While we cannot rule out another wave of infections from a new variant of the virus, it does appear that there is a sense of normalcy returning to the country that should allow for a return to a more business as usual function of our operations.
Banking Services
General. We accept deposits, make consumer and commercial loans, issue drafts, and provide other services customarily offered by a commercial bank, such as business and personal checking and savings accounts, walk-up tellers, drive-in windows, and 24-hour interactive teller machines. The Bank is a member of the Federal Reserve System and its deposits are insured under the Federal Deposit Insurance Act (the FDIA) to the maximum limit.
Loans. Generally, we offer a full range of short-to-medium term commercial, 1-4 family residential mortgages and personal loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements) and purchase of equipment and machinery. Consumer loans may include secured and unsecured loans for financing automobiles, home improvements, education, personal investments and other purposes.
Our lending activities are subject to a variety of lending limits imposed by state law. While differing limits may apply in certain circumstances based on the type of loan or the nature of the borrower (including the borrower’s relationship to the Bank), the Bank generally is subject to a loans-to-one-borrower limit of an amount equal to 15% of its capital and surplus plus the allowance for loan losses. The Bank voluntarily may choose to impose a policy limit on loans to a single borrower that is less than the legal lending limit.
We obtain short-to-medium term commercial and personal loans through direct solicitation of business owners and continued business from existing customers. Completed loan applications are reviewed by our loan officers. As part of the application process, information is obtained concerning the income, financial condition, employment and credit history of the applicant. If commercial real estate is involved, information is also obtained concerning cash flow after debt service. Loan quality is analyzed based on the Bank’s experience and its credit underwriting guidelines.
Commercial Loans. We make commercial loans to qualified businesses in our market area. Our commercial lending consists primarily of commercial and industrial loans to finance accounts receivable, inventory, property, plant and equipment. Commercial business loans generally have a higher degree of risk than residential mortgage loans, but have commensurately higher yields. Residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be easily ascertainable. In contrast, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself.
In 2020 and 2021, commercial loans also include PPP loans that were made to assist small businesses and non-profit organizations during the pandemic to cover payroll costs and other permitted expenses. These loans are fully guaranteed by the SBA.
Further, the collateral for commercial business loans may depreciate over time and cannot be appraised with as much precision as residential real estate. To manage these risks, our underwriting guidelines generally require us to secure commercial loans with both the assets of the borrowing business and other additional collateral and guarantees that may be available. In addition, we actively monitor certain measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors.
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Residential Mortgage Loans. Our residential mortgage loans consist of residential first and second mortgage loans, residential construction loans, home equity lines of credit and term loans secured by first and second mortgages on the residences of borrowers for home improvements, education and other personal expenditures. We make mortgage loans with a variety of terms, including fixed and floating or variable rates and a variety of maturities.
Under our underwriting guidelines, residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be easily ascertainable. These loans are made consistent with our appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities.
Construction Loans. Construction lending entails significant additional risks compared to residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers. Construction loans also involve additional risks attributable to the fact that loan funds are advanced upon the security of property under construction, which is of uncertain value prior to the completion of construction. Thus, it is more difficult to evaluate the total loan funds required to complete a project and related loan-to-value ratios accurately. To minimize the risks associated with construction lending, loan-to-value limitations for residential, multi-family and non-residential construction loans are in place. These are in addition to the usual credit analyses of borrowers. Management feels that the loan-to-value ratios help to minimize the risk of loss and to compensate for normal fluctuations in the real estate market. Maturities for construction loans generally range from 4 to 12 months for residential property and from 6 to 18 months for non-residential and multi-family properties.
Consumer Loans. Our consumer loans consist primarily of installment loans to individuals for personal, family and household purposes. The specific types of consumer loans that we make include home improvement loans, debt consolidation loans and general consumer lending. Consumer loans entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured, such as lines of credit, or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance due to the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. A borrower may also be able to assert against the Bank as an assignee any claims and defenses that it has against the seller of the underlying collateral.
Our underwriting policy for consumer loans seeks to limit risk and minimize losses, primarily through a careful analysis of the borrower’s creditworthiness. In evaluating consumer loans, we require our lending officers to review the borrower’s level and stability of income, past credit history and the impact of these factors on the ability of the borrower to repay the loan in a timely manner. In addition, we maintain an appropriate margin between the loan amount and collateral value.
Deposits. We offer a variety of deposit products for both individual and business customers. These include demand deposit, interest-bearing demand deposit, savings deposit, money market, health savings and individual retirement (IRA) deposit accounts. In addition, we offer certificates of deposit with terms ranging from 7 days to 60 months, including IRAs with terms ranging from 12 months to 60 months.
Investment Services. We offer a variety of investment services for both individual and business customers. These services include fixed income products, variable annuities, mutual funds, indexed certificates of deposit, individual retirement accounts, long term care insurance, employee group benefit plans, college savings plans, financial planning, managed money accounts, and estate planning. We offer these services through our broker-dealer relationship with Infinex Investments, Inc.
Other Bank Services. Other bank services include safe deposit boxes, cashier’s checks, certain cash management services, direct deposit of payroll and social security checks and automatic drafts for various accounts. We offer ITM and debit card services that can be used by our customers throughout our service area and other regions. We also offer consumer and commercial VISA credit card services. Electronic banking services include debit cards, internet banking, telephone banking, mobile banking, remote deposit capture; merchant transaction processing and wire transfers.
We do not presently anticipate obtaining trust powers, but we are able to provide similar services through our affiliation with Infinex Investments, Inc. Additionally, we have initiated programs of differentiator presentations focusing on such issues as financial literacy and elder abuse. We believe that these types of programs assist our local communities and highlight the skills of our financial service providers.
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Competition
The financial services business is highly competitive. We compete as a financial intermediary with other commercial banks, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in the southwestern Virginia, southern West Virginia, eastern Tennessee, and western North Carolina market areas and elsewhere, including online financial services providers. Our market area is a highly competitive, highly branched banking market.
Competition in the market area for loans to small businesses and professionals, the Bank’s target market, is intense, and pricing is important. Many of our larger competitors have substantially greater resources and lending limits than we have. They offer certain services, such as extensive and established branch networks and trust services that we do not provide or do not expect to provide in the near future. Moreover, larger institutions operating in the market area have access to borrowed funds at lower costs than are available to us. Prior to the pandemic, deposit competition among institutions in our market area also was strong, resulting in the possibility of our paying above-market rates to attract or retain deposits. As the pandemic wanes, and funds received into our customers’ deposit accounts from PPP loans and stimulus payments are drawn down, we anticipate more intense deposit competition to return.
While pricing is important, our principal method of countering the competition is service. As a community banking organization, we strive to serve the banking needs of our customers while developing personal, hometown relationships with them. Additionally, we worked to implement and enhance digital banking services prior to the onset of the pandemic. As a result, we provide a significant amount of service and a range of products through multiple channels at reasonable fees.
According to a market share report prepared by the Federal Deposit Insurance Corporation (the FDIC), as of June 30, 2021, the most recent date for which market share information is available, the Bank’s deposits as a percentage of total deposits in its major market areas were as follows:
| County or City | % of Market | |
| Scott County, VA | 34.19% | |
| Dickenson County, VA | 33.93% | |
| Russell County, VA | 25.99% | |
| Buchanan County, VA | 11.57% | |
| Wise County, VA | 10.01% | |
| Tazewell County, VA | 9.15% | |
| Mercer County, WV | 5.98% | |
| Washington County, VA | 5.32% | |
| Smyth County, VA | 4.02% | |
| City of Bristol, VA | 3.65% | |
| City of Kingsport, TN | 2.43% |
Employees
As of December 31, 2021, we had 205 total employees, of which 198 were full-time employees. None of our employees is covered by a collective bargaining agreement, and we consider relations with employees to be excellent.
Supervision and Regulation
General. As a financial holding company, we are subject to regulation under the Bank Holding Company Act of 1956, as amended (BHCA), and the examination and reporting requirements of the Federal Reserve. We are also subject to the provisions of the Code of Virginia governing bank holding companies. As a state-chartered commercial bank, the Bank is subject to regulation, supervision and examination by the Virginia State Corporation Commission’s Bureau of Financial Institutions (BFI). As a member of the Federal Reserve System, the Bank is also subject to regulation, supervision and examination by the Federal Reserve. Other federal and state laws, including various consumer protection and compliance laws, also govern the activities of the Bank.
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The following description summarizes the most significant federal and state laws applicable to New Peoples and its subsidiaries. To the extent that statutory or regulatory provisions are described, the description is qualified in its entirety by reference to that particular statutory or regulatory provision.
The Bank Holding Company Act. Under the BHCA, the Federal Reserve examines New Peoples periodically. New Peoples is also required to file periodic reports and provide any additional information that the Federal Reserve may require. Activities at the bank holding company level are generally limited to:
• banking, managing or controlling banks;
• furnishing services to or performing services for its subsidiaries; and
• engaging in other activities that the Federal Reserve has determined by
regulation or order to be so closely related to banking as to be a proper
incident to these activities.
Thus, the activities we can engage in are restricted as a matter of law.
With some limited exceptions, the BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before:
• acquiring substantially all the assets of any bank;
• acquiring direct or indirect ownership or control of any voting shares
of any bank if after such acquisition it would own or control more than 5%
of the voting shares of such bank (unless it already owns or controls the
majority of such shares); or
• merging or consolidating with another bank holding company.
As a result, our ability to engage in certain strategic activities is conditioned on regulatory approval.
In addition, and subject to some exceptions, the BHCA and the Change in Bank Control Act require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company as defined in the statutes and regulations. These requirements make it more difficult for control of our company to change or for us to acquire substantial investments.
Financial Holding Company. As of March 4, 2016, the Company elected to become qualified as a financial holding company (FHC). The Gramm-Leach-Bliley Act (GLBA) created this category of bank holding companies. FHC’s may directly or indirectly through subsidiaries engage in financial activities and activities “incidental” or “complementary” to financial activities. Generally, an FHC need not give prior notice of such activities, but must notify the Federal Reserve within 30 days after an event.
The BHCA provides a long list of “financial” activities that may be engaged in by FHCs such as underwriting, brokering or selling insurance; providing financial or investment advice or underwriting, dealing in or making a market in securities.
There are other potential “financial” activities in which the Federal Reserve is permitted to designate as permitted financial or incidental to financial activities.
We do not currently undertake activities specifically permitted to us as an FHC that are not otherwise permissible for bank holding companies not qualified as FHCs.
Bureau of Financial Institutions (BFI). As a bank holding company registered with the Commonwealth of Virginia State Corporation Commission’s BFI, we must provide the BFI with information concerning our financial condition, operations and management, among other reports required by the BFI. New Peoples is also examined by the BFI in addition to its Federal Reserve examinations. Similar to the BHCA, the Code of Virginia requires that the BFI approve the acquisition of direct or indirect ownership or control of more than 5% of the voting shares of any Virginia bank or bank holding company like us.
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Payment of Dividends. New Peoples is a separate legal entity that derives the majority of its revenues from dividends paid to it by its subsidiaries. The Bank is subject to laws and regulations that limit the amount of dividends it can pay. In addition, both New Peoples and the Bank are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated that banking organizations should generally pay dividends only if the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. The FDIC has the general authority to limit the dividends paid by FDIC insured banks if the FDIC deems the payment to be an unsafe and unsound practice. The FDIC has indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice.
Capital Adequacy. The federal banking regulators have issued substantially similar capital requirements applicable to all banks and bank holding companies. In addition, those regulators may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth.
The Company meets the eligibility criteria to be considered a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February, 2015 and does not report consolidated regulatory capital. With respect to the Bank, the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act (FDIA) are set forth in the following table:
| Total Risk | Tier 1 Risk | CET1 Risk | |||||
| Based Capital | Based Capital | Based Capital | Leverage | ||||
| Ratio | Ratio | Ratio | Ratio | ||||
| Well Capitalized | ≥ 10% | ≥ 8% | ≥ 6.5% | ≥ 5% | |||
| Adequately Capitalized | ≥ 8% | ≥ 6% | ≥ 4.5% | ≥ 4% | |||
| Undercapitalized | < 8% | < 6% | < 4.5% | < 4% | |||
| Significantly Undercapitalized | < 6% | < 4% | < 3% | < 3% | |||
| Critically Undercapitalized | Tangible equity to total assets ≤ 2% | ||||||
The FDIA requires the federal banking regulators to take “prompt corrective action” if a depository institution does not meet minimum capital requirements as set forth above. Generally, a receiver or conservator for a bank that is “critically undercapitalized” must be appointed within specific time frames. The regulations also provide that a capital restoration plan must be filed within 45 days of the date a bank is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company for a bank required to submit a capital restoration plan must guarantee the lesser of (i) an amount equal to 5% of the bank’s assets at the time it was notified or deemed to be undercapitalized by a regulator, or (ii) the amount necessary to restore the bank to adequately capitalized status. This guarantee remains in place until the bank is notified that it has maintained adequately capitalized status for specified time periods. Additional measures with respect to undercapitalized institutions include a prohibition on capital distributions, growth limits and restrictions on activities.
The Bank is also subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). The final rules established minimum capital ratios plus a “capital conservation buffer” designed to absorb losses during periods of economic stress. The phase-in of the capital conservation buffer requirement began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. The final provisions for banks with $250 billion or less in total assets, such as the Bank, are set forth in the following table:
| Minimum Leverage Ratio | 4.00% | |||||
| Minimum CET1 Risk Based Capital Ratio | 4.50% | |||||
| Capital Conservation Buffer (1) | 2.50% | |||||
| Minimum Tier CET1 Risk Based Capital Ratio with Capital Conservation Buffer | 7.00% | |||||
| Minimum Tier 1 Risk Based Capital Ratio | 6.00% | |||||
| Minimum Tier 1 Risk Based Capital Ratio with Capital Conservation Buffer | 8.50% | |||||
| Minimum Total Risk Based Capital Ratio | 8.00% | |||||
| Minimum Total Risk Based Capital Ratio with Capital Conservation Buffer | 10.50% |
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| (1) | The capital conservation buffer must be maintained in order for a banking organization to avoid being subject to limitations on capital distributions, including dividend payments, and discretionary bonus payments to executive officers. |
The final rules include comprehensive guidance with respect to the measurement of risk-weighted assets. For residential mortgages, Basel III retains the risk-weights contained in the prior capital rules, which assign a risk-weight of 50% to most first-lien exposures and 100% to other residential mortgage exposures. The final rule increased the risk-weights associated with certain on-balance sheet assets, such as high volatility commercial real estate loans, and loans that are more than 90 days past due or in nonaccrual status. Capital requirements also increased for certain off-balance sheet exposures including, for example, loan commitments with an original maturity of one year or less.
Under the final rules, certain banking organizations, including the Company and the Bank, were permitted to make a one-time election to continue the prior treatment of excluding from regulatory capital most accumulated other comprehensive income (AOCI) components, including amounts relating to unrealized gains and losses on available-for-sale debt securities and amounts attributable to defined benefit post-retirement plans. Institutions that elected to exclude most AOCI components from regulatory capital under Basel III will be able to avoid volatility that would otherwise be caused by things such as the impact of fluctuations in interest rates on the fair value of available-for-sale debt securities. The Company and the Bank elected to exclude AOCI components from regulatory capital under Basel III.
Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on taking brokered deposits and certain other restrictions on its business. As described below, the FDIC can impose substantial additional restrictions upon FDIC-insured depository institutions that fail to meet applicable capital requirements as set forth above.
On September 17, 2019, the federal banking regulators jointly issued a final rule required by the Economic Growth, Regulatory Reform and Consumer Protection Act (EGRRCPA) that permits qualifying banks and bank holding companies that have less than $10 billion in consolidated assets, such as New Peoples and the Bank, to elect to be subject to a 9% leverage ratio that would be applied using less complex leverage calculations (commonly referred to as the community bank leverage ratio or CBLR). Under the rule, which became effective on January 1, 2020, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% are not subject to other risk-based and leverage capital requirements under the Basel III rules and would be deemed to have met the well capitalized ratio requirements under the “prompt corrective action” framework. The CARES Act directed federal banking agencies to adopt interim final rules to lower the threshold under the CBLR from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020. In April 2020, the federal bank regulatory agencies issued two interim final rules implementing this directive. One interim final rule provided that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) could elect to use the CBLR framework. It also established a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provided a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It established a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintained a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement. We have not adopted the CBLR framework.
For further detail on capital and capital ratios, see discussion contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” sections “Capital Resources” and “Liquidity,” and in Item 8, “Financial Statements and Supplementary Data,” “Consolidated Financial Statements and Notes,” Note 21, “Capital.”
Other Safety and Soundness Regulations. There are a number of obligations and restrictions imposed on banks and financial or bank holding companies and their bank subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event that the depository institution is insolvent or is in danger of becoming insolvent. For example, the Federal Reserve requires a bank or financial or bank holding company to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. These requirements can restrict the ability of bank holding companies to deploy their capital as they otherwise might.
Interstate Banking and Branching. Banks in Virginia may branch without geographic restriction. Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Bank holding companies may acquire banks in any state without regard to state law except for state laws requiring a minimum time a bank must be in existence to be acquired. The Code of Virginia generally permits out of state bank holding companies or banks to acquire Virginia banks or bank holding companies subject to regulatory approval. These laws have the effect of increasing competition in banking markets.
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Monetary Policy. The commercial banking business is affected not only by general economic conditions but also by the monetary policies of the Federal Reserve. The Federal Reserve’s monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of unsettled conditions in the national and international political environment, economy and money markets, as well as governmental fiscal and monetary policies, their impact on interest rates, deposit levels, loan demand or the business and earnings of the Bank is unpredictable.
Federal Reserve System. Depository institutions that maintain transaction accounts or nonpersonal time deposits are subject to reserve requirements. These reserve requirements are subject to adjustment by the Federal Reserve. Because required reserves must be maintained in the form of vault cash or in a non-interest-bearing account at, or on behalf of, a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution’s interest-earning assets.
Transactions with Affiliates. Transactions between banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. These provisions restrict the amount of, and provide conditions with respect to, loans, investments, transfers of assets and other transactions between New Peoples and the Bank.
Loans to Insiders. The Bank is subject to rules on the amount, terms and risks associated with loans to executive officers, directors, principal shareholders and their related interests.
Community Reinvestment Act. Under the Community Reinvestment Act, depository institutions have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practices. The Community Reinvestment Act emphasizes the delivery of bank products and services through branch locations in a bank’s market areas and requires banks to keep data reflecting their efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance with the Community Reinvestment Act and are assigned ratings in this regard. Banking regulators consider a depository institution’s Community Reinvestment Act rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiaries. A bank holding company will not be permitted to become a financial holding company and no new activities authorized under the GLBA (see below) may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a “Satisfactory” rating in its latest Community Reinvestment Act examination. The Bank received a rating of “Satisfactory” at its last Community Reinvestment Act performance evaluation, as of July 22, 2019.
Gramm-Leach-Bliley Act of 1999. The GLBA covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies. For example, the GLBA permits unrestricted affiliations between banks and securities firms. It also permits bank holding companies to elect to become FHCs, which can engage in a broad range of financial services as described above. In order to become an FHC, a bank holding company and all of its affiliated depository institutions must be well-capitalized, well-managed and have at least a satisfactory Community Reinvestment Act rating. On March 4, 2016 the Federal Reserve Bank of Richmond approved New Peoples’ election to become an FHC.
The GLBA also provides that the states continue to have the authority to regulate insurance activities, but prohibits the states, in most instances, from preventing or significantly interfering with the ability of a bank, directly or through an affiliate, to engage in insurance sales, solicitations or cross-marketing activities.
Anti-Money Laundering Legislation. New Peoples is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the Money Laundering Control Act of 1986, the USA PATRIOT Act of 2001, and the Anti-Money Laundering Act of 2020. Among other things, these laws and regulations require New Peoples to take steps to prevent the use of New Peoples for facilitating the flow of illegal or illicit money, to report large currency transactions, and to file suspicious activity reports. The Company is also required to carry out a comprehensive anti-money laundering compliance program. Violations can result in substantial civil and criminal sanctions. In addition, provisions of the USA Patriot Act require the federal bank regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.
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Privacy and Fair Credit Reporting. Financial institutions, such as the Bank, are required to disclose their privacy policies to customers and consumers and require that such customers or consumers be given a choice (through an opt-out notice) to forbid the sharing of nonpublic personal information about them with nonaffiliated third persons. The Bank also requires business partners with whom it shares such information to assure the Bank that they have adequate security safeguards and to abide by the redisclosure and reuse provisions of applicable law. In addition to adopting federal requirements regarding privacy, individual states are authorized to enact more stringent laws relating to the use of customer information. To date, Virginia has not done so. These privacy laws create compliance obligations and potential liability for the Bank.
Mortgage Banking Regulation. The Bank is subject to rules and regulations related to mortgage loans that, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level. The Bank is also subject to rules and regulations that require the collection and reporting of significant amounts of information with respect to mortgage loans and borrowers. The Bank’s mortgage origination activities are subject to the Federal Reserve’s Regulation Z, which implements the Truth in Lending Act. Certain provisions of Regulation Z require creditors to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. To the extent that we make mortgage loans, we are required to comply with these rules, subject to available exceptions.
Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) is intended to increase corporate responsibility, provide enhanced penalties for accounting and auditing improprieties by publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities law. The changes required by the Sarbanes-Oxley Act and its implementing regulations are intended to allow shareholders to monitor the performance of companies and their directors more easily and effectively.
The Sarbanes-Oxley Act generally applies to all domestic companies, such as New Peoples, that file periodic reports with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended. The Sarbanes-Oxley Act includes significant additional disclosure requirements and expanded corporate governance rules and the SEC has adopted extensive additional disclosures, corporate governance provisions and other related rules pursuant to it. New Peoples has expended, and will continue to expend, considerable time and money in complying with the Sarbanes-Oxley Act.
Federal Deposit Insurance Corporation. The Bank’s deposits are insured by the Deposit insurance Fund, as administered by the FDIC, to the maximum amount permitted by law, which is $250,000 per depositor. The FDIC uses a “financial ratios method” based on “CAMELS” composite ratings to determine deposit insurance assessment rates for small established institutions with less than $10 billion in assets, such as the Bank. The CAMELS rating system is a supervisory rating system designed to take into account and reflect all financial and operational risks that a bank may face, including capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to market risk (CAMELS). CAMELS composite ratings set a maximum assessment for banks rated CAMELS 1 and 2, and set minimum assessments for lower rated institutions. In 2021 and 2020, the Company recorded expense of $266 thousand and $393 thousand, respectively, for FDIC insurance premiums.
Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act was signed into law on July 21, 2010. Its wide-ranging provisions affect all federal financial regulatory agencies and nearly every aspect of the American financial services industry. Among the provisions of the Dodd-Frank Act that directly impacted the Company was the creation of an independent Consumer Financial Protection Bureau (CFPB), which has the ability to write rules for consumer protections governing all financial institutions. All consumer protection responsibility formerly handled by other banking regulators is consolidated in the CFPB. It also oversees the enforcement of all federal laws intended to ensure fair access to credit. For smaller financial institutions, such as the Company and the Bank, the CFPB coordinates its examination activities through their primary regulators.
The Dodd-Frank Act contains provisions designed to reform mortgage lending, which includes the requirement of additional disclosures for consumer mortgages. The EGRRCPA modified a number of these requirements, including, for smaller institutions (under $10 billion in total assets) that qualify, a safe harbor for compliance with the “ability to pay” requirements for consumer mortgage loans. The CFPB has implemented mortgage lending regulations to carry out its mandate. In addition, the Federal Reserve has issued rules limiting the fees charged to merchants by credit card companies for debit card transactions. The result of these rules is to limit the amount of interchange fee income available explicitly to larger banks and indirectly to us. The Dodd-Frank Act also contains provisions that affect corporate governance and executive compensation.
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The Dodd-Frank Act has had, and may in the future have, a material impact on New Peoples’ operations, particularly through increased compliance costs resulting from new and possible future consumer and fair lending regulations. Any future changes resulting from the Dodd-Frank Act may affect the profitability of business activities, require changes to certain business practices, impose more stringent regulatory requirements or otherwise adversely affect the business and financial condition of New Peoples and the Bank. These changes may also require New Peoples to invest significant management attention and resources to evaluate and make necessary changes to comply with new statutory and regulatory requirements.
The Economic Growth, Regulatory Reform and Consumer Protection Act of 2018. The EGRRCPA, which became effective in May 2018, amended provisions of the Dodd-Frank Act and other statutes administered by banking regulators. Among these amendments are provisions exempting insured depository institutions (and their parent companies) with less than $10 billion in consolidated assets and meeting certain other asset and liabilities trading tests from the Volker Rule, which prohibits banks from conducting certain investment activities with their own accounts. The EGRRCPA required the regulators to promulgate rules establishing the new CBLR, as described above. The Act increased the asset threshold from $1 billion to $3 billion for financial institutions to qualify for a less burdensome 18-month on-site examination schedule. The EGRRCPA made numerous other changes in regulatory requirements based on the size and complexity of financial institutions, particularly benefiting smaller institutions like the Company.
Cyber Security. Federal regulators expect that financial institutions design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. Additionally, a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is expected to maintain appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or any of its critical service providers fall victim to this type of cyber-attack. If the Company fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.
Federal bank regulators recently issued a joint rule establishing computer-security incident notification requirements for banking organizations and their bank service providers, which takes effect on April 1, 2022, with full compliance extended to May 1, 2022. The rule requires a banking organization to notify its primary federal regulator of any significant computer-security incident as soon as possible and no later than 36 hours after the banking organization determines that a cyber incident has occurred. In addition, the final rule requires a bank service provider to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect banking organization customers for four or more hours. The rule defines computer-security incident as an occurrence that results in actual harm to the confidentiality, integrity, or availability of an information system or the information that the system processes, stores, or transmits.
Limitations on Incentive Compensation. The federal bank regulatory agencies have issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging excessive risk-taking. The Interagency Guidance on Sound Incentive Compensation Policies, which covers all employees that have the ability to materially affect the risk profile of financial institutions, either individually or as part of a group, is based upon the key principles that a financial institution’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the institution’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the financial institution’s board of directors.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of financial institutions, such as the Company and the Bank, that are not “large, complex banking organizations.” These reviews will be tailored to each financial institution based on the scope and complexity of the institution’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a financial institution if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the institution’s safety and soundness, and the financial institution is not taking prompt and effective measures to correct the deficiencies. At December 31, 2021, the Company and the Bank have not been made aware of any instances of noncompliance with this guidance.
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Other Laws. Banks and other depository institutions also are subject to other numerous consumer-oriented laws and regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Fair and Accurate Credit Transactions Act of 2003 and the Fair Housing Act, require compliance by depository institutions with various disclosure and consumer information handling requirements. These and other similar laws result in significant costs and create potential liability for financial institutions, including the imposition of regulatory penalties for inadequate compliance.
Future Regulatory Uncertainty. Because federal and state regulation of financial institutions changes regularly and is the subject of constant legislative debate, New Peoples cannot forecast how regulation of financial institutions may change in the future and impact its operations. New Peoples fully expects that the financial institution industry will remain heavily regulated notwithstanding the regulatory relief that has been recently adopted.
Item 1A. Risk Factors
Not required.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
At December 31, 2021, the Company's net investment in premises and equipment was $20.7 million. Our main office and operations center are in Honaker, Virginia, which includes a full-service branch, and a separate administration and operations center.
The Bank owns 14 of its 18 full-service branch offices, including its headquarters office, plus its one limited-service branch. In addition to the headquarters in Honaker, Virginia we own or lease branch offices located in Virginia, West Virginia, Tennessee, and a loan production office in North Carolina. Additionally, the Bank owns two operations buildings, one housing its network operations and another that serves as our call center and ITM network operations center. The facility housing ITM network operations was closed on December 31, 2021, and those operations were transferred to our Abingdon, Virginia branch. We also own a warehouse facility in Honaker, Virginia. Our loan production office operates from a building in Boone, North Carolina under a short-term lease executed in November 2020.
A former branch office located in Jonesborough, Tennessee is being used as a hub for meeting with prospective loan customers.
During 2021, two branch locations were closed, Weber City, Virginia and Pound, Virginia, with customer accounts transferred to nearby offices. The renovation of the Bristol – W. State Street office was completed in 2021 and the office opened during the fourth quarter of 2021. Four former branch offices, Weber City, Virginia, Bristol, Virginia, Dungannon, Virginia, and Kingsport, Tennessee were sold in 2021. Three other former branch offices located in Pound, Virginia, Jonesville, Virginia and Bluewell, West Virginia, were transferred to other real estate owned in September 2021.
We continue to assess our branch network as we look to improve the efficiency of our branch operations while seeking to increase market share.
We believe that all of our properties are maintained in good operating condition and are suitable and adequate for our operational needs.
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Item 3. Legal Proceedings
In the normal course of operations, we may become a party to legal proceedings, as discussed in Note 20 Legal Contingencies to the consolidated financial statements contained in Item 8 of this form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Market Information
Computershare Investor Services is the stock transfer agent for New Peoples Bankshares, Inc. The common stock of New Peoples is quoted on the OTC Market’s Pink Open Market under the symbol “NWPP”. The volume of trading of shares of common stock is very limited. Trades in our common stock occur sporadically on a local basis and typically in small volumes. Over-the-Counter market quotations reflect inter-dealer prices without retail mark up, mark down or commissions and may not necessarily represent actual transactions.
The most recent sales price of which management is aware was $2.35 per share on March 23, 2022.
(b) Holders
On March 23, 2022, there were approximately 4,321 shareholders of record.
(c) Dividends
Any declaration of dividends in the future will depend on our earnings, capital requirements, growth strategies, and compliance with regulatory mandates principally at the Bank level since the Company’s primary source of income is dividends which it would receive from the Bank. While no dividend was paid in 2021, on February 28, 2022, the Company declared its first ever cash dividend of $0.05 per share, payable on March 31, 2022 to shareholders of record as of March 15, 2022.
We are subject to certain dividend restrictions and capital requirements imposed by the Federal Reserve Bank as well as Virginia statutes and regulations. See Note 16 Dividend Limitation on Subsidiary Bank and Note 21 Capital to the consolidated financial statements contained in Item 8 of this Form 10-K.
Item 6. [Reserved]
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Caution About Forward Looking Statements
We make forward looking statements in this annual report on Form 10-K that are subject to risks and uncertainties. These forward-looking statements include statements regarding expectations, intentions, projections and beliefs concerning our profitability, liquidity, and allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. The forward-looking information is based on various factors and was derived using numerous assumptions.
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Important factors that may cause actual results to differ from projections include:
- the success or failure of our efforts to implement our business plan;
- any required increase in our regulatory capital ratios;
- satisfying other regulatory requirements that may arise from examinations, changes in the law and other similar factors;
- deterioration of asset quality;
- changes in the level of our nonperforming assets and charge-offs;
- fluctuations of real estate values in our markets;
- our ability to attract and retain talent;
- demographical changes in our markets which negatively impact the local economy;
- the uncertain outcome of current or future legislation or regulations or policies of state and federal regulators;
- the successful management of interest rate risk;
- the successful management of liquidity;
- changes in general economic and business conditions in our market area and the United States in general;
- credit risks inherent in making loans such as changes in a borrower’s ability to repay and our management of such risks;
- competition with other banks and financial institutions, and companies outside of the banking industry, including online lenders and those companies that have substantially greater access to capital and other resources;
- demand, development and acceptance of new products and services we have offered or may offer;
- the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation, interest rate, market and monetary fluctuations;
- the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues (including the ongoing novel coronavirus (COVID-19) outbreak and the associated efforts to limit the spread of the disease), and other catastrophic events;
- geopolitical conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad;
- technology utilized by us;
- our ability to successfully manage cyber security;
- our reliance on third-party vendors and correspondent banks;
- changes in generally accepted accounting principles;
- changes in governmental regulations, tax rates and similar matters; and,
- other risks, which may be described, from time to time, in our filings with the SEC.
Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
General
The following commentary discusses major components of our business and presents an overview of our consolidated financial position at December 31, 2021 and 2020, as well as results of operations for the years ended December 31, 2021 and 2020. This discussion should be reviewed in conjunction with the consolidated financial statements and accompanying notes and other statistical information presented elsewhere in this Form 10-K.
New Peoples generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the volume of interest-earning assets outstanding during the period and the interest rates earned thereon. The Bank's interest expense is a function of the average amount of interest-bearing deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets further influences the amount of interest income lost on nonaccruing loans and the amount of provision expense added to the allowance for loan losses. The Bank also generates noninterest income from service charges on deposit accounts, debit and credit card interchange income, and commissions on insurance and investment products sold.
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Critical Accounting Policies
Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting estimates relate to our provision for loan losses and the calculation of our deferred tax asset and any related valuation allowance.
The provision for loan losses reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional provisions could be required. For further discussion of the estimates used in determining the allowance for loan losses, we refer you to the section on “Allowance for Loan Losses” in this discussion.
Deferred tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. A valuation allowance on net deferred tax assets would be provided if it was deemed more likely than not such assets would not be realized. At December 31, 2021 and 2020, the Company had no valuation allowance on its net deferred tax assets.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. For further discussion of the deferred tax asset and valuation allowance, we refer you to the section on “Income Taxes and Deferred Tax Assets” in this discussion.
For further discussion of our other critical accounting policies, see Note 2, Summary of Significant Accounting Policies, to our Consolidated Financial Statements, found in Item 8 to this annual report on Form 10-K.
Cyber Security
The Company, primarily through the Bank, depends on its ability to continuously process, record and monitor a large number of customer transactions, and customer, public and regulatory expectations regarding operational and information security have increased over time. Accordingly, the Company’s and its subsidiaries’ operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Although the Company has business continuity plans and other safeguards in place, disruptions or failures in the physical infrastructure or operating systems that support its businesses and customers, or cyber-attacks or security breaches of the networks, systems or devices on which customers’ personal information is stored and that customers use to access the Company’s and its subsidiaries’ products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect the Company’s results of operations or financial condition.
Although to date the Company has not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no assurance that it or its subsidiaries will not suffer such losses in the future. The Company’s risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, our plans to continue to implement our e-banking and mobile banking channel strategies and develop additional remote connectivity solutions to serve our customers when and how they want to be served. As a result, cyber security and the continued development and enhancement of the Company’s controls, processes and practices, designed to protect its and its subsidiaries’ systems, computers, software, data and networks from attack, damage or unauthorized access, remain a priority for the Company. As cyber threats continue to evolve, the Company may be required to expend significant additional resources to continue to modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities.
19
As discussed in the Supervision and Regulation section, the federal banking agencies have issued a joint rule that requires banking organizations to notify their primary regulator as soon as possible and no later than 36 hours after any cyber-security incident has occurred. The new rule takes effect on April 1, 2022, with full compliance extended to May 1, 2022.
To date, we have not experienced a significant compromise, significant data loss or any material financial losses related to cyber-attacks, but our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future.
Recent Events
Since March 2020, the COVID-19 pandemic has adversely affected our communities and the way we do business, as well as, economic activity globally, nationally and locally. Among other things, interest rates declined, unemployment increased and economic output slowed dramatically during 2020.
Within the last year, as restrictions related to the pandemic eased, employment increased and pent-up demand was released, creating global supply chain issues and shortages of goods, which in turn has triggered price inflation we have not seen in over 30 years. In an effort to address inflation, the Federal Open Market Committee (the “FOMC”) has slowed monetary accommodation and on March 16, 2022 increased the federal funds rate 25 bps, in the first of what is expected to be a series of rate increases during 2022.
Adding to economic uncertainty and increased inflationary pressures are military actions taken by Russia against Ukraine commencing in February 2022, which have added stress to existing supply chain concerns and placed upward pressure on oil and natural gas prices.
At this time, we cannot reasonably estimate the term or intensity of any possible adverse impact on our financial position, operations or liquidity, resulting from economic disruption and uncertainty related to COVID-19 variants, trade and supply chain disruption, continuing inflationary pressures, ongoing military actions against Ukraine, and the uncertainty of the timing and extent of potential actions that might be taken by the FOMC.
Overview
The Company made significant progress during 2021 resulting in a record consolidated net income for the year ended December 31, 2021, of $7.0 million, or basic income per share of $0.29, as compared to a net income of $2.9 million, or basic income per share of $0.12, for the year ended December 31, 2020, an improvement of $4.1 million, or 142.6%. Retained earnings stood at $2.0 million at December 31, 2021, the first time it has been positive since 2010.
The improvement is due to an increase of $2.1 million in net interest income, a decrease of $1.9 million in provision for loan loss expense, and an increase of $1.8 million in noninterest income, offset by an $870 thousand increase in noninterest expense. The increase of $2.1 million in net interest income was due primarily to a decrease of $2.0 million in interest expense on deposits, plus an increase of $329 thousand in interest income on investments, partially offset by a $315,000 decrease in interest income on loans, including fees. The reduction in both interest income and interest expense was driven mainly by lower market rates, which remained low throughout 2020 and 2021. The decrease of $1.9 million in provision for loan loss expense is due to improving asset quality, as exhibited by reductions in past due loans, classified loans and nonaccrual loans, along with improving employment and non-inflation related economic conditions. The $1.8 million increase in noninterest income was driven by an additional $507 thousand in service charges and fees, a $557 thousand increase in card processing and interchange income, a $313 thousand increase in financial services fees, plus nonrecurring gains on sales of investment securities of $322 thousand. Noninterest expense grew by $870 thousand primarily due to valuation adjustments of $1.1 million on three former branch office locations, which were transferred into other real estate owned, offset by a $566 thousand reduction in salaries and benefit expense.
During the year ended December 31, 2021, total assets grew $38.3 million, or 5.1%, to $794.6 million. Loan balances increased $18.2 million, or 3.2%. Excluding the net impact of $25.3 million in PPP loan originations and $53.6 million of PPP loan repayments, the remaining loan portfolio grew $46.6 million, due largely to our new Boone loan production office, which opened during the fourth quarter of 2020. Deposits grew $39.5 million, or 5.9%, due to the impact of stimulus payments and PPP loan funds during the first half of the year, combined with residual liquidity that remains in the financial markets. This deposit growth, combined with a decrease of $30.3 million in interest bearing deposits in other banks, funded a net increase in the investment portfolio of $59.0 million.
20
The Company’s key performance indicators are as follows:
| Year ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Return on average assets | 0.88 | % | 0.39 | % | ||||
| Return on average equity | 11.52 | % | 5.18 | % | ||||
| Average equity to average assets ratio | 7.62 | % | 7.51 | % | ||||
Highlights from the year 2021 include:
| · | Net income improved 142.6% to a historical Company record of $7.0 million, or $0.29 per share, in 2021 compared to $2.9 million, or $0.12 per share, in 2020; |
| · | Total assets increased $38.3 million, or 5.1%, to $794.6 million at December 31, 2021 compared to $756.3 million at December 31, 2020; |
| · | Book value per share was $2.66 as of December 31, 2021 and $2.43 as of December 31, 2020; |
| · | Net interest income was $27.2 million, an increase of $2.1 million compared to 2020, as described above; |
| · | Our net interest margin was 3.64%, a reduction of 1 basis points compared to 3.65% for the year ended December 31, 2020; |
| · | Total loans increased $18.2 million, or 3.2%, to $593.7 million during the year ended December 31, 2021; |
| · | Securities available for sale increased $59.0 million, or 121.8%, to $107.4 million during the year ended December 31, 2021; |
| · | Total deposits increased $39.5 million, or 5.9%, to $707.5 million during the year ended December 31, 2021, primarily due to PPP loan funds and federal stimulus payments; |
| · | Noninterest income was $10.0 million, an increase of $1.8 million compared to 2020; |
| · | Salaries and employee benefits expense was $12.7 million, a reduction of $566 thousand compared to 2020, which was due mainly to the restructuring announced in May of 2020 and the overall reduction in staff; |
| · | During the fourth quarter of 2021, we began implementing a plan to increase our minimum wage to $15.00 per hour.; |
| · | Nonperforming assets, which include nonaccrual loans and other real estate owned, totaled $4.3 million at December 31, 2021, a decrease of $4.6 million, or 51.6% during the year ended December 31, 2021; |
| · | Nonperforming assets as a percentage of total assets was 0.54% at December 31, 2021, compared to 1.17% at December 31,2020; |
| · | Annualized net charge offs as a percentage of average loans were 0.14% during 2021, compared to 0.08% during 2020; and |
| · | The allowance for loan losses as a percentage to total loans was 1.13% at December 31, 2021, as compared to 1.25% at December 31, 2020. |
For detail on the above highlighted items, refer to their related following sections.
Net Interest Income and Net Interest Margin
The Company’s primary source of income is net interest income, which increased $2.1 million, or 8.2% in 2021 compared to 2020, due primarily to a decrease of $2.0 million in interest expense on deposits, plus an increase of $329,000 in interest income on investments, partially offset by a $315,000 decrease in interest income on loans, including fees. The reduction in interest expense on deposits is due to reduced rates on time deposits and a reduction of $34.7 million in average time deposit balances. The increase in interest income on investments is due to an increase in average balances of $33.6 million, as we redeployed excess funds into investment securities, which generally provide higher yields than federal funds or interest-earning correspondent accounts. The decrease in interest income on loans, including fees, was driven by a decrease of $1.4 million in interest on loans, offset by an increase in fees of $1.1 million, resulting from PPP loan forgiveness.
The following table shows the rates paid on earning assets and deposit liabilities for the periods indicated.
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Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates
| |||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| For the Year Ended | For the Year Ended | ||||||||||||||||
| December 31, 2021 | December 31, 2020 | ||||||||||||||||
| Average | Income/ | Yields/ | Average | Income/ | Yields/ | ||||||||||||
| Balance | Expense | Rates | Balance | Expense | Rates | ||||||||||||
| ASSETS | |||||||||||||||||
| Loans (1) (2) | $ | 586,963 | $ | 28,323 | 4.83% | $ | 578,979 | $ | 28,638 | 4.95% | |||||||
| Federal funds sold | 212 | - | 0.10% | 244 | 1 | 0.36% | |||||||||||
| Interest bearing deposits in other banks | 78,583 | 95 | 0.12% | 61,083 | 208 | 0.34% | |||||||||||
| Taxable investment securities | 81,635 | 1,494 | 1.83% | 48,072 | 1,189 | 2.47% | |||||||||||
| Total earning assets | 747,393 | 29,912 | 4.00% | 688,378 | 30,036 | 4.37% | |||||||||||
| Less: Allowance for loans losses | (7,034) | (6,512) | |||||||||||||||
| Non-earning assets | 58,398 | 61,411 | |||||||||||||||
| Total Assets | $ | 798,757 | $ | 743,277 | |||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||
| Interest-bearing demand deposits | $ | 59,154 | $ | 59 | 0.10% | $ | 45,302 | $ | 70 | 0.15% | |||||||
| Savings and money market deposits | 181,736 | 148 | 0.08% | 148,320 | 360 | 0.24% | |||||||||||
| Time deposits | 214,937 | 2,041 | 0.95% | 252,074 | 3,854 | 1.53% | |||||||||||
| Short-term borrowings | 2,474 | 33 | 1.33% | 5,000 | 68 | 1.36% | |||||||||||
| Trust preferred securities | 16,496 | 420 | 2.55% | 16,496 | 541 | 3.28% | |||||||||||
| Total interest-bearing liabilities | 474,797 | 2,701 | 0.57% | 467,192 | 4,893 | 1.05% | |||||||||||
| Non-interest-bearing deposits | 254,911 | - | -% | 210,831 | - | - % | |||||||||||
| Total deposit liabilities and cost of funds | 729,708 | 2,701 | 0.37% | 678,023 | 4,893 | 0.72% | |||||||||||
| Other liabilities | 8,178 | 9,431 | |||||||||||||||
| Total Liabilities | 737,886 | 687,454 | |||||||||||||||
| Stockholders’ Equity | 60,871 | 55,823 | |||||||||||||||
| Total Liabilities and Stockholders’ Equity | $ | 798,757 | $ | 743,277 | |||||||||||||
| Net Interest Income | $ | 27,211 | $ | 25,143 | |||||||||||||
| Net Interest Margin | 3.64% | 3.65% | |||||||||||||||
| Net Interest Spread | 3.43% | 3.32% | |||||||||||||||
| (1) Nonaccrual loans have been included in average loan balances. | |||||||||||||||||
| (2) Tax exempt income is not significant and has been treated as fully taxable. | |||||||||||||||||
Net interest income is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing liabilities. The following tables set forth the amounts of the total changes in interest income and interest expense which can be attributed to rates, volume and a combination of rates and volume, for the periods indicated.
22
Volume and Rate Analysis
Increase (decrease)
| Year 2021 Compared to 2020 | ||||||||||||||||
| (Dollars in thousands) | Volume Effect | Rate Effect | Rate and Volume Effect | Change in Interest Income/ Expense | ||||||||||||
| Interest Income: | ||||||||||||||||
| Loans | $ | 395 | $ | (700 | ) | $ | (10 | ) | $ | (315 | ) | |||||
| Federal funds sold | — | (1 | ) | — | (1 | ) | ||||||||||
| Interest bearing deposits in other banks | 59 | (134 | ) | (38 | ) | (113 | ) | |||||||||
| Taxable investment securities | 830 | (309 | ) | (216 | ) | 305 | ||||||||||
| Total Earning Assets | 1,284 | (1,144 | ) | (264 | ) | (124 | ) | |||||||||
| Interest Expense: | ||||||||||||||||
| Interest-bearing demand deposits | 21 | (25 | ) | (7 | ) | (11 | ) | |||||||||
| Savings and money market deposits | 81 | (239 | ) | (54 | ) | (212 | ) | |||||||||
| Time deposits | (568 | ) | (1,460 | ) | 215 | (1,813 | ) | |||||||||
| Short-term borrowings | (34 | ) | (1 | ) | — | (35 | ) | |||||||||
| Trust preferred securities | — | (121 | ) | — | (121 | ) | ||||||||||
| Total Interest-bearing Liabilities | (500 | ) | (1,846 | ) | 154 | (2192 | ) | |||||||||
| Change in Net Interest Income | $ | 1,784 | $ | 702 | $ | (418 | ) | $ | 2,068 | |||||||
| Year 2020 Compared to 2019 | ||||||||||||||||
| (Dollars in thousands) | Volume Effect | Rate Effect | Rate and Volume Effect | Change in Interest Income/ Expense | ||||||||||||
| Interest Income: | ||||||||||||||||
| Loans | $ | 1,196 | $ | (1,113 | ) | $ | (47 | ) | $ | 37 | ||||||
| Federal funds sold | — | (4 | ) | — | (4 | ) | ||||||||||
| Interest bearing deposits in other banks | 456 | (672 | ) | (381 | ) | (597 | ) | |||||||||
| Taxable investment securities | (280 | ) | (91 | ) | 17 | (355 | ) | |||||||||
| Total Earning Assets | 1,372 | (1,880 | ) | (411 | ) | (919 | ) | |||||||||
| Interest Expense: | ||||||||||||||||
| Interest-bearing demand deposits | 18 | (10 | ) | (3 | ) | 5 | ||||||||||
| Savings and money market deposits | (39 | ) | (605 | ) | 24 | (620 | ) | |||||||||
| Time deposits | (131 | ) | (78 | ) | 3 | (206 | ) | |||||||||
| Short-term borrowings | (12 | ) | 3 | (1 | ) | (10 | ) | |||||||||
| Trust preferred securities | — | (255 | ) | — | (255 | ) | ||||||||||
| Total Interest-bearing Liabilities | (164 | ) | (945 | ) | 23 | (1,086 | ) | |||||||||
| Change in Net Interest Income | $ | 1,536 | $ | (935 | ) | $ | (434 | ) | $ | 167 | ||||||
The reduction in interest income and interest expense during both 2021 and 2020 was driven mainly by lower market rates, which have fallen throughout both years. Overall, our net interest margin decreased 1 basis point to 3.64%in 2021 compared to 3.65% in 2020. While the yield on average assets decreased 37 basis points, to 4.00% from 4.37%, the cost of funds decreased 35 basis points, to 0.37% from 0.72%.
The reduction in market rates was a direct result of actions taken by the FMOC, which, in response to the economic impact of the pandemic, reduced the target federal funds rate twice in March 2020, by 150 bps. As a result, the target federal funds rate stood at 0.00% - 0.25% and the prime interest rate stands at 3.25%. In March 2022, the FMOC increased the target federal funds rate 25 bps, resulting in the prime interest rate increasing to 3.50%. It is the general consensus that this increase is the first of a series of increases that the FOMC will effect in 2022.
23
The decrease in interest income is primarily attributed to reduced yield on loans, not including fees, which was mainly driven by lower market rates, as noted above, plus materially lower rates earned on PPP loans. The yield on PPP loans is 1.00%, excluding the impact of deferred fee income. Although loan fees earned and recognized on PPP loans has been material during 2021 and 2020, it does not completely make up for the reduced yield. The increase in loan fee income is a result of recognition of net deferred fees on PPP loans totaling $2.0 million in 2021, and $994 thousand in 2020. Total loan fees recognized as part of the yield calculation on loans was $2.4 million during 2021 and $1.3 million during 2020. Overall, loan interest income, including fees, was lower in 2021 than 2020 by $315 thousand.
The PPP ended in June 2021, and remaining PPP loan balances totaled only $6.4 million at December 31, 2021. Therefore, the remaining PPP loans and net unearned fees are not expected to have a material impact on future earnings.
Interest income was positively impacted by an additional $305 thousand of interest earned on investment securities, all of which are taxable, due to additional average balances of $33.6 million, as we redeployed excess funds into investment securities, which generally provide higher yields than federal funds sold or interest-bearing deposits in other banks. This improvement in interest income on investments offset the negative effect of reduced interest income from loans. The yield on investment securities decreased to 1.83% in 2021 from 2.47% in 2020, due to lower market rates, as noted above.
Interest expense decreased $2.2 million, which more than offset the decrease of $124 thousand in interest income, driving a $2.1 million improvement in net interest income. The primary driver of the improvement in interest expense, and overall cost of funds, was the reduced cost of time deposits, which decreased to 0.95% in 2021 compared to 1.53% in 2020, along with increased average balances in all other types of deposit accounts, which generally have lower rates.
This change in the mix of our deposits has supported the reduction in our average cost of funds to 0.37% during 2021, compared to 0.72% during 2020. Average balances of time deposits decreased $37.1 million while average balances of interest-bearing demand deposits grew $13.9 million, average balances of savings and money market deposits grew $34.4 million, and average balances of noninterest-bearing deposits grew $44.1 million. Increases in average balances of both interest-bearing and noninterest-bearing deposits is primarily due to stimulus payments and PPP funds, which are generally deposited into customer deposit accounts.
Due to the increased deposit balances, additional borrowings from the FHLB have not been necessary. The Company paid off the last remaining FHLB advance of $5.0 million in June 2021, when it matured.
Our future interest rate structure has been impacted by the commencement of the end of the use of LIBOR, which will completely phase-out in 2023. We use LIBOR in pricing some of our interest earning assets and liabilities, including our trust preferred securities. Certain loan and investment products ceased using LIBOR in 2021, for new contracts and commitments. Most of these contracts have been, or will be, replaced with the secured overnight funding rate (SOFR).
Loans
Our primary source of income is interest earned on loans. Total loan balances increased $18.2 million during 2021, or 3.2%, to $593.7 million at December 31, 2021 as compared to $575.6 million at December 31, 2020. The primary drivers of this increase in total loans were $26.8 million of growth in commercial loans secured by real estate, and $16.5 million of growth in multifamily loans secured by real estate. Commercial loan balances decreased $31.7 million, due mainly to a decrease in PPP loan balances of $28.4 million. PPP loans totaled $6.4 million at December 31, 2021. For more detail on loan balances, refer to Note 6 of the Consolidated Financial Statements and Notes in Item 8 of this Form 10-K.
Nonaccrual loan balances decreased $2.6 million during 2021 to $2.9 million at December 31, 2021. Nonaccrual loans negatively affect interest income as these loans are nonearning assets. When doubt about the collectability of a loan exists, it is the Bank’s policy to stop accruing interest on that loan under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when conditions indicate that payment of principal and interest can no longer be expected, or (c) when any such loan becomes delinquent for 90 days and is not both well secured and in the process of collection. All interest accrued but not collected on loans that are placed on nonaccrual is charged off and reversed against interest income in the current period. In the case of a nonaccrual loan that is well secured and in the process of collection, the interest accrued but not collected is not reversed. Interest received on these loans is accounted for on the cash basis or cost-recovery method until qualifying for return to accrual. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, six consecutive timely payments are made, and prospects for future contractual payments are reasonably assured. For more detail on nonaccrual loans, refer to Note 6 of the Consolidated Financial Statements and Notes in Item 8 of this Form 10-K.
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Impaired loan balances also decreased during 2021, to $2.8 million at December 31, 2021, from $5.1 million at December 31, 2020. Interest income and cash receipts on impaired loans are handled differently depending on whether or not the loan is on nonaccrual status. If the impaired loan is not on nonaccrual status, the interest income on the loan is computed using the effective interest method. For more detail on impaired loan balances, refer to Note 6 of the Consolidated Financial Statements and Notes in Item 8 of this Form 10-K.
The following table presents the dollar composition and percentage of our loan portfolio as of December 31:
| Loan Composition | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| (Dollars in thousands) | $ | % | $ | % | ||||||||||||
| Real estate secured: | ||||||||||||||||
| Commercial | $ | 206,162 | 34.7 | % | $ | 179,381 | 31.2 | % | ||||||||
| Construction and land development | 32,325 | 5.4 | % | 25,031 | 4.3 | % | ||||||||||
| Residential 1-4 family | 224,530 | 37.8 | % | 222,980 | 38.7 | % | ||||||||||
| Multifamily | 33,048 | 5.6 | % | 16,569 | 2.9 | % | ||||||||||
| Farmland | 18,735 | 3.2 | % | 18,368 | 3.2 | % | ||||||||||
| Total real estate loans | 514,800 | 86.7 | % | 462,329 | 80.3 | % | ||||||||||
| Commercial | 54,325 | 9.1 | % | 86,010 | 14.9 | % | ||||||||||
| Agriculture | 4,021 | 0.7 | % | 4,450 | 0.8 | % | ||||||||||
| Consumer installment loans | 18,756 | 3.2 | % | 20,632 | 3.6 | % | ||||||||||
| All other loans | 1,842 | 0.3 | % | 2,145 | 0.4 | % | ||||||||||
| Total loans | 593,744 | 100.0 | % | 575,566 | 100.0 | % | ||||||||||
| Less: Allowance for loan losses | 6,735 | 7,191 | ||||||||||||||
| Total | $ | 587,009 | $ | 568,375 | ||||||||||||
Our loan maturities, and distribution between fixed and variable rate loans as of December 31, 2021 are shown in the following table:
25
| Maturities of Loans | ||||||||||||||||||||
| (Dollars in thousands) | Less than One Year | One to Five Years | Five to Fifteen Years | After Fifteen Years | Total | |||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | $ | 19,831 | $ | 54,437 | $ | 77,974 | $ | 53,920 | $ | 206,162 | ||||||||||
| Construction and land development | 6,041 | 6,177 | 11,942 | 8,165 | 32,325 | |||||||||||||||
| Residential 1-4 family | 6,989 | 20,928 | 84,520 | 112,093 | 224,530 | |||||||||||||||
| Multifamily | 989 | 4,523 | 10,749 | 16,787 | 33,048 | |||||||||||||||
| Farmland | 4,079 | 2,491 | 7,631 | 4,534 | 18,735 | |||||||||||||||
| Total real estate loans | 37,929 | 88,556 | 192,816 | 195,499 | 514,800 | |||||||||||||||
| Commercial | 10,453 | 34,483 | 6,624 | 2,765 | 54,325 | |||||||||||||||
| Agriculture | 1,373 | 2,292 | 56 | 300 | 4,021 | |||||||||||||||
| Consumer installment loans | 2,219 | 13,788 | 2,713 | 36 | 18,756 | |||||||||||||||
| All other loans | 1,444 | 398 | — | — | 1,842 | |||||||||||||||
| Total | $ | 53,418 | $ | 139,517 | $ | 202,209 | $ | 198,600 | $ | 593,744 | ||||||||||
The following table presents the dollar amount of fixed rate and variable rate loans with maturities greater than one year as of December 31, 2021:
| (Dollars in thousands) | Fixed Rate | Variable Rate | ||||||
| Real estate secured: | ||||||||
| Commercial | $ | 94,563 | $ | 91,768 | ||||
| Construction and land development | 14,967 | 11,317 | ||||||
| Residential 1-4 family | 91,450 | 126,091 | ||||||
| Multifamily | 12,127 | 19,932 | ||||||
| Farmland | 3,276 | 11,380 | ||||||
| Total real estate loans | 216,383 | 260,488 | ||||||
| Commercial | 36,088 | 7,784 | ||||||
| Agriculture | 2,340 | 308 | ||||||
| Consumer installment loans | 13,832 | 2,705 | ||||||
| All other loans | 398 | — | ||||||
| Total | $ | 269,041 | $ | 271,285 | ||||
Contractual maturities of loans do not reflect the actual term of our loan portfolio. The average life of mortgage loans is substantially less than the contractual life due to prepayments and enforcement of due on sale clauses. Scheduled principal amortization also reduces the average life of the loan portfolio. The average life of mortgage loans tends to increase when current market mortgage rates are substantially above rates on existing loans while the average life decreases when rates on existing loans are substantially above current market rates.
Some variable rate loans may not reprice, or fully reprice, at their next reset date due to instances where the reset rate may not be above the rate floor, or may be more than the allowable rate increase under the terms of the loan. In these instances, it may take several reset periods before these loans are fully adjusted.
26
Allowance for Loan Losses
The methodology we use to calculate the allowance for loan losses is considered a critical accounting policy. The adequacy of the allowance for loan losses is based upon management’s judgment and analysis. The following factors are included in our evaluation of determining the adequacy of the allowance: risk characteristics of the loan portfolio, current and historical loss experience, concentrations, and internal and external factors such as general economic conditions.
During 2020, in response to the impact of the pandemic, changes to the allowance model included reviewing our internal scoring related to loan modifications and extensions, and external factors, specifically unemployment and other economic factors. During the fourth quarter of 2021, in response to rising price inflation, this factor has been added to the economic factors considered in the model. We continue to adjust the allowance for loan loss model to best reflect the risks in the portfolio and the improvements made in our internal policies and procedures; however, future provisions may be deemed necessary.
The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Loans are charged against the allowance for loan losses when management believes that collectability of all or part of the principal is unlikely. Subsequent to charging off a loan, management makes best efforts to recover any charged-off balances.
The allowance for loan losses decreased to $6.7 million at December 31, 2021 as compared to $7.2 million at December 31, 2020. The allowance for loan losses at the end of 2021 was approximately 1.13% of total loans as compared to 1.25% at the end of 2020. Provisions for loan losses of $372 thousand and $2.3 million were recorded during 2021 and 2020, respectively. Loans charged off, net of recoveries, totaled $828 thousand, or 0.28% of average loans, for the year ended December 31, 2021, compared to $477 thousand, or 0.08% of average loans, in 2020. The low percentage in 2020 is primarily related to the moratorium on foreclosures that existed for most of 2020. The allowance for loan losses is being maintained at a level that management deems appropriate to absorb any potential future losses and known impairments within the loan portfolio whether or not the losses are actually ever realized.
Nonaccrual loans present higher risks of default, and we have experienced a decrease in these loans during 2021. At December 31, 2021, there were 65 nonaccrual loans totaling $2.9 million, or 0.50% of total loans. At December 31, 2020, there were 75 nonaccrual loans totaling $5.5 million, or 0.96% of total loans. The amount of interest income that would have been recognized on these loans had they been accruing interest was $223 thousand and $494 thousand in the years 2021 and 2020, respectively. There were no loans past due 90 days or greater and still accruing interest at either December 31, 2021 or 2020. There are no commitments to lend additional funds to non-performing borrowers.
A majority of our loans are collateralized by real estate located in our market area. It is our policy to sufficiently collateralize loans to help minimize exposure to losses in cases of default. Increasing real estate values in our area have reduced this exposure somewhat. However, while we consider our market area to be somewhat diverse, certain areas are more reliant upon agriculture, coal mining and natural gas. As a result, increased risk of loan impairments is possible due to the volatile nature of the coal mining and natural gas industries. As a result of the economic impact of the COVID-19 pandemic, a number of industries have been identified as posing increased risk. Specifically, residential and commercial rentals, hotels, restaurants and entertainment, and the coal and gas industries have been adversely impacted by the global and domestic economic slowdown. We are monitoring these industries and consider these segments to be the primary higher risks in the loan portfolio.
Commercial and commercial real estate loans are initially risk rated by the originating loan officer. If deterioration in the financial condition of the borrower and/or their capacity to repay the debt occurs, the loan may be downgraded by the loan officer. Guidance for risk rate grading is established by the regulatory authorities who periodically review the Bank’s loan portfolio for compliance. Classifications used by the Bank are Pass, Special Mention, Substandard, Doubtful and Loss.
With regard to the Bank’s consumer and consumer real estate loan portfolio, we use the guidance found in the Uniform Retail Credit Classification and Account Management Policy which affects our estimate of the allowance for loan losses. Under this approach, a consumer or consumer real estate loan must initially have a credit risk grade of Pass or better. Subsequently, if the loan becomes contractually 90 days past due or the borrower files for bankruptcy protection, the loan is downgraded to Substandard and placed in nonaccrual status. If the loan is unsecured upon being deemed Substandard, the entire loan amount is charged-off.
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For non-1-4 family residential loans that are 90 days or more past due or in bankruptcy, the collateral value less estimated liquidation costs is compared to the loan balance to calculate any potential deficiency. If the collateral is sufficient, then no charge-off is necessary. If a deficiency exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged-off against the allowance for loan loss. In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, a current value is obtained and after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate any deficiency. Subsequently, any noted deficiency is then charged-off against the allowance for loan loss when the loan becomes contractually 180 days past due. If the customer has filed bankruptcy, then within 60 days of the bankruptcy notice, any calculated deficiency is charged-off against the allowance for loan loss. Collection efforts continue by means of repossessions or foreclosures, and upon bank ownership, liquidation ensues.
All loans classified as substandard, doubtful or loss are individually reviewed for impairment in accordance with Accounting Standards Codification (ASC) 310-10-35. In evaluating impairment, a current appraisal is generally used to determine if the collateral is sufficient. Appraisals are typically less than a year old and must be independently reviewed to be relied upon. If the appraisal is not current, we perform a useful life review of the appraisal to determine if it is reasonable. If this review determines that the appraisal is not reasonable, then a new appraisal is ordered. Loans considered impaired decreased to $2.8 million with $880 thousand requiring a valuation allowance of $166 thousand at December 31, 2021, as compared to $5.1 million with $2.5 million requiring a valuation allowance of $1.1 million at December 31, 2020. Management is aggressively working to reduce the impaired credits at minimal loss.
In determining the component of our allowance in accordance with the Contingencies topic of the Accounting Standards Codification (ASC 450), we do not directly consider the potential for outdated appraisals since that portion of our allowance is based on the analysis of the performance of loans with similar characteristics, external and internal risk factors. We consider the overall quality of our underwriting process in our internal risk factors, but the need to update appraisals is associated with loans identified as impaired under the Receivables topic of the Accounting Standards Codification (ASC 310). If an appraisal is older than one year, a new external certified appraisal may be obtained and used to determine impairment. If an exposure exists, a specific allowance is directly made in the amount of the potential loss, in addition to estimated liquidation and disposal costs. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
In addition to impaired loans, the remaining loan portfolio is evaluated based on net charge-off history, economic conditions, and internal processes. To calculate the net charge-off history factor, we perform a 12-quarter look-back and use the average net charge offs as a percentage of the loan balances. To calculate the economic conditions factor, we use current economic data which includes national and local regional unemployment information, local housing price changes, gross domestic product growth, and interest rates. Lastly, we evaluate our internal processes of underwriting and consider the inherent risks present in the portfolio due to past and present lending practices. As economic conditions, performance of our loans, and internal processes change, it is possible that future increases or decreases may be needed to the allowance for loan losses.
| Selected Credit Ratios | ||||||||
| December 31, | ||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Allowance for loan losses | $ | 6,735 | $ | 7,191 | ||||
| Total loans | 593,744 | 575,566 | ||||||
| Allowance for loan losses to total loans | 1.13 | % | 1.25 | % | ||||
| Nonaccrual loans | $ | 2,941 | $ | 5,548 | ||||
| Nonaccrual loans to total loans | 0.50 | % | 0.96 | % | ||||
| Ratio of allowance for loan losses to nonaccrual loans | 2.29 | X | 1.30 | X | ||||
| Charge-offs net of recoveries | $ | 828 | $ | 477 | ||||
| Average loans | $ | 586,963 | $ | 578,979 | ||||
| Net charge-offs to average loans | 0.14 | % | 0.08 | % | ||||
The above table includes $1.1 million and $2.5 million in nonaccrual loans as of December 31, 2021 and 2020, respectively, which have been classified as troubled debt restructurings. No troubled debt restructurings were past due 90 days or more and still accruing interest at December 31, 2021 and 2020. There were $2.5 million in loans classified as troubled debt restructurings as of December 31, 2021, as compared to $4.0 million in loans classified as troubled debt restructurings as of December 31, 2020. For more detail on nonaccrual, impaired, past due and restructured loans, refer to Note 6 and Note 8 to the Consolidated Financial Statements and Notes in Item 8 of this Form 10-K.
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The following table shows the average balance, net charge-offs or recoveries and percentage of net charge-offs or recoveries by each major category of loans for the years ended December 31, 2021 and 2020:
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||
| (Dollars in thousands) | Average Balance | Net Charge-offs (Recoveries) | Net Charge-offs (Recoveries) as % of Average Loan Type | Average Balance | Net Charge-offs (Recoveries) | Net Charge-offs (Recoveries) as % of Average Loan Type | ||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||||||
| Commercial | $ | 194,517 | $ | 913 | 0.47 | % | $ | 175,281 | $ | 8 | 0.00 | % | ||||||||||||
| Construction and land development | 28,820 | (6 | ) | -0.02 | % | 27,536 | — | 0.00 | % | |||||||||||||||
| Residential 1-4 family | 220,524 | (37 | ) | -0.02 | % | 235,289 | 127 | 0.05 | % | |||||||||||||||
| Multifamily | 23,840 | — | 0.00 | % | 14,851 | — | 0.00 | % | ||||||||||||||||
| Farmland | 19,144 | (29 | ) | -0.15 | % | 19,749 | 9 | 0.05 | % | |||||||||||||||
| Total real estate loans | 486,845 | 841 | 0.17 | % | 472,706 | 144 | 0.03 | % | ||||||||||||||||
| Commercial | 74,711 | (45 | ) | -0.06 | % | 77,874 | 289 | 0.37 | % | |||||||||||||||
| Agriculture | 4,095 | (1 | ) | -0.02 | % | 4,781 | 14 | 0.29 | % | |||||||||||||||
| Consumer and all other loans | 19,441 | 33 | 0.17 | % | 21,819 | 30 | 0.14 | % | ||||||||||||||||
| Unallocated | 1,871 | — | 0.00 | % | 1,799 | — | 0.00 | % | ||||||||||||||||
| Total loans | $ | 586,963 | $ | 828 | 0.14 | % | $ | 578,979 | $ | 477 | 0.08 | % | ||||||||||||
The following table shows the balance and percentage of our allowance for loan losses allocated to each major category of loans.
Allocation of the Allowance for Loan Losses
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||
| (Dollars in thousands) | Amount | % of ALLL | % of Loans | Amount | % of ALLL | % of Loans | ||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||||||
| Commercial | 2,134 | 31.7 | % | 34.7 | % | 2,281 | 31.8 | % | 31.3 | % | ||||||||||||||
| Construction and land development | 189 | 2.8 | % | 5.4 | % | 233 | 3.2 | % | 4.4 | % | ||||||||||||||
| Residential 1-4 family | 2,237 | 33.2 | % | 37.8 | % | 1,951 | 27.1 | % | 38.9 | % | ||||||||||||||
| Multifamily | 254 | 3.8 | % | 5.6 | % | 151 | 2.1 | % | 2.9 | % | ||||||||||||||
| Farmland | 149 | 2.2 | % | 3.2 | % | 97 | 1.3 | % | 3.2 | % | ||||||||||||||
| Total real estate loans | 4,963 | 73.7 | % | 86.7 | % | 4,713 | 65.5 | % | 80.6 | % | ||||||||||||||
| Commercial | $ | 1,099 | 16.3 | % | 9.1 | % | $ | 2,275 | 31.6 | % | 15.0 | % | ||||||||||||
| Agriculture | 28 | 0.4 | % | 0.7 | % | 40 | 0.6 | % | 0.8 | % | ||||||||||||||
| Consumer and all other loans | 108 | 1.6 | % | 3.5 | % | 163 | 2.3 | % | 3.6 | % | ||||||||||||||
| Unallocated | 537 | 8.0 | % | — | — | — | — | |||||||||||||||||
| Total | $ | 6,735 | 100.0 | % | 100.0 | % | $ | 7,191 | 100 | % | 100.0 | % | ||||||||||||
We have allocated the allowance according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within each of the categories of loans. The allocation of the allowance as shown in the table above should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loan loss trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since the total allowance is a general allowance applicable to the entire portfolio.
The allocation of the allowance for loan losses is based on our judgment of the relative risk associated with each type of loan. We have allocated 31.7% of the allowance to commercial real estate loans, which constituted 34.7% of our loan portfolio at December 31, 2021. This allocation is similar to the 31.8% in 2020 due primarily to reduction in problem credits in this category over the past several years. We have allocated 16.3% of the allowance to commercial loans, which constituted 9.1% of our loan portfolio at December 31, 2021. This allocation percentage increased compared to December 31, 2020 due to the significant reduction in PPP loans, which are included in commercial loans, which have guarantees provided by the SBA, which resulted in their being excluded from the allowance assessment of commercial loans.
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Both residential and commercial real estate loans are secured by real estate whose value tends to be easily ascertainable. These loans are made consistent with appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities.
We have allocated 2.8% of the allowance to real estate construction loans, which constituted 5.4% of our loan portfolio at December 31, 2021. Construction loans are secured by real estate with values that are dependent upon market and economic conditions. Additionally, these credits are generally shorter-term projects, of eighteen months or less. These loans are made consistent with appraisal policies and real estate lending policies which detail maximum loan-to-value ratios and maturities.
We have allocated 33.2% of the allowance to residential real estate loans, which constituted 37.8% of our loan portfolio at December 31, 2021. Our allocation increased as a percentage of the allowance for loan losses due to the $1.6 million increase in residential real estate loans during 2021.
We have allocated 1.6% of the allowance to consumer and all other loans, which constituted 3.5% of our loan portfolio at December 31, 2021. Our allocation decreased as a percentage of the allowance for loan losses due to these credits principally being loans to municipal and other government entities, compared to the 2.3% allocation we had in 2020. At December 31, 2021, we had an unallocated portion of the allowance for loan losses totaling $537 thousand. While our legacy loan loss model calculation did not fully allocate the entire allowance, we believe that the lingering impact of the pandemic, combined with the recent impact of inflation warrant the maintenance of the allowance for loan losses.
We have commenced the process of implementing the Current Expected Credit Loss (CECL) model to replace our legacy loan loss model. We expect to be testing and running concurrent quarterly calculations of both our legacy and CECL models by the second quarter of 2022.
Other Real Estate Owned
Other real estate owned decreased $2.0 million, or 59.2%, to $1.4 million at December 31, 2021 from $3.3 million at December 31, 2020. All properties are available for sale, primarily, by commercial and residential realtors under the direction of our Special Assets division. Our aim is to reduce the level of OREO in order to reduce the level of nonperforming assets at the Bank, while keeping in mind the impact to earnings and capital. In 2021 and 2020, pricing adjustments were made to make certain properties more marketable, which, in some cases, reduced the price below the fair value of the property (which is based on an appraisal less estimated disposition costs). During 2021, we recorded OREO write-downs of $466 thousand as compared to $132 thousand during 2020.
During 2021, we added $566 thousand in OREO properties as a result of settlement of foreclosed loans, offset by sales of $2.6 million with net gains of $76 thousand. During 2020, we added $1.1 million in OREO properties as a result of settlement of foreclosed loans, which was offset by sales of $687 thousand with net gains totaling $60 thousand. As noted previously, a moratorium on foreclosures was initiated in Virginia during the first quarter of 2020 and remained in effect into the third quarter of 2020. Additionally, during 2021, three closed branch office facilities were transferred from bank premises to OREO at a value of $950 thousand. As previously discussed, we continue to take an aggressive approach toward liquidating properties to reduce our level of OREO properties by making pricing adjustments and holding auctions on some of our older properties. We expect to continue these efforts in 2022, which could result in additional losses, while reducing future carrying costs.
Although the properties remain for sale and are actively marketed, we did have lease agreements on certain other real estate owned properties which generated rental income at market rates. Rental income on OREO properties was $24 thousand and $54 thousand in 2021 and 2020, respectively.
Investment Securities
Total investment securities increased $59.0 million, or 121.8%, to $107.4 million at December 31, 2021, Prior to their sale in 2021, from $48.4 million at December 31, 2020. All securities are classified as available-for-sale for liquidity purposes. Sales of securities during 2021 totaled $7.7 million, with $322 thousand in gains realized, while sales of securities in 2020 totaled $1.1 million, with $4 thousand in gains realized. During 2021, maturities, calls and paydowns totaled $16.3 million, and purchases of securities totaled $85.1 million. Investment securities with a carrying value of $12.1 million and $6.8 million at December 31, 2021 and 2020, respectively, were pledged to secure public deposits and for other purposes required by law.
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Our strategy is to invest excess funds in investment securities, which typically yield more interest income than other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond, but which still provide liquidity.
The fair value of our investment portfolio is substantially affected by changes in interest rates, which could result in realized losses if we need to sell the securities and recognize the loss in a rising interest rate environment due to Federal Reserve actions, U.S. fiscal policies or other factors affecting market interest rates. At December 31, 2021, we had a net unrealized loss in our investment portfolio totaling $1.0 million as compared to a $938 thousand gain at December 31, 2020. As interest rates increase the level of unrealized losses could change substantially. However, these changes would have no impact on earnings or regulatory capital, unless the underlying securities were sold at a loss. We have reviewed our investment portfolio and no investment security is deemed to have other than temporary impairment. We monitor our portfolio regularly and use it to maintain liquidity, manage interest rate risk and enhance earnings.
The fair value and weighted average yield of investment securities at December 31, 2021 are shown in the following schedule by contractual maturity and do not reflect principal paydowns for amortizing securities. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yields are calculated by dividing the contractual interest for each time period by the average amortized contractual cost.
| Less than One Year | One to Five Years | Five to ten years | After ten years | Total | ||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Fair Value | Average Yield | Fair Value | Average Yield | Fair Value | Average Yield | Fair Value | Average Yield | Fair Value | Average Yield | ||||||||||||||||||||||||||||||
| U.S Treasuries | $ | — | -% | $ | 6,003 | 0.79 | % | $ | 1,668 | 1.04 | % | $ | — | -% | $ | 7,671 | 0.84 | % | ||||||||||||||||||||||
| U.S. Government Agencies | 502 | 1.82 | % | 441 | 2.26 | % | 1,902 | 2.57 | % | 6,244 | 1.67 | % | 9,089 | 1.79 | % | |||||||||||||||||||||||||
| Taxable municipals | 558 | 3.23 | % | — | -% | 1,900 | 1.74 | % | 20,522 | 2.33 | % | 22,980 | 2.30 | % | ||||||||||||||||||||||||||
| Corporate bonds | — | -% | 1,037 | 4.80 | % | 982 | 2.00 | % | — | -% | 2,019 | 3.41 | % | |||||||||||||||||||||||||||
| Mortgage backed securities | — | -% | 323 | 1.29 | % | 6,295 | 1.22 | % | 58,981 | 1.36 | % | 65,599 | 1.34 | % | ||||||||||||||||||||||||||
| $ | 1,060 | 2.56 | % | $ | 7,804 | 1.41 | % | $ | 12,747 | 1.54 | % | $ | 85,747 | 1.61 | % | $ | 107,358 | 1.59 | % | |||||||||||||||||||||
Bank Owned Life Insurance
At both December 31, 2021 and 2020, we had an aggregate total cash surrender value of $4.7 million on life insurance policies covering former key officers.
Total income for the policies during 2021 and 2020 was $32 thousand and $77 thousand, respectively.
Deposits
Total deposits were $707.5 million at December 31, 2021, an increase of $39.5 million, or 5.9%, from $668.0 million at December 31, 2020. Most of the increase was driven by savings and money market deposits, which grew $34.6 million, or 21.9%, to $192.0 million during 2021. Noninterest-bearing demand deposits grew by $27.5 million, or 12.3%, to $251.3 million. Interest-bearing demand deposits also grew, by $15.6 million, or 31.3%, to $65.2 million. Generally, PPP loan disbursements and federal stimulus payments received by customers are deposited into noninterest-bearing or interest-bearing demand deposit accounts, which primarily explains the increases in those types of accounts. Due to the large influx of non-interest-bearing balances, we allowed attrition of time deposit balances, which decreased by $38.1 million and allowed us to reduce our average cost of funds.
Information detailing average deposit balances and average rates paid on deposits is presented in the Net Interest Margin Analysis table contained in the Net Interest Income and Net Interest Margin section.
Core deposits are considered to include demand deposits and other types of transaction accounts, such as commercial relationships and savings products, all of which saw growth in 2021. Overall, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our customer base and communities.
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Time deposits of $250,000 or more equaled approximately 4.0% of deposits at the end of 2021 and 5.2% of deposits at the end of 2020.
At December 31, 2021 and 2020, uninsured deposits are estimated to be $93.8 million and $79.4 million, respectively. Included in estimated uninsured deposits are $13.6 million and $15.8 million of public funds, for such respective periods, considered secured via pledged securities or letters of credit we have with the FHLB.
The following table shows maturities of all time deposits considered uninsured by the FDIC or otherwise.
| Maturities of Uninsured Time Deposits | ||||
| (Dollars in thousands) | ||||
| December 31, 2021 | ||||
| Three months or less | $ | 2,507 | ||
| Over three months through six months | 3,517 | |||
| Over six months through twelve months | 3,945 | |||
| Over one year | 6,788 | |||
| Total | $ | 16,757 | ||
At December 31, 2021 and 2020, $12.1 million and $6.8 million of securities, respectively, were pledged to collateralize public deposits, including time deposits, held in our Tennessee offices, and as collateral for credit facilities available through FRB. Additionally, we held letters of credit from the FHLB for $12.0 million at both December 31, 2021 and 2020, to secure public deposits, including time deposits, held in our Virginia offices.
We held no brokered deposits at December 31, 2021 and 2020. Internet accounts are limited to customers located in our primary market area and the surrounding geographical area. The average balance of and the average rate paid on deposits is shown in the net interest margin analysis table in the “Net Interest Income and Net Interest Margin” section above. Total Certificate of Deposit Registry Service (CDARS) time deposits were $5.8 million and $9.6 million at December 31, 2021 and 2020, respectively.
Noninterest Income
For the year ended December 31, 2021, noninterest income improved $1.8 million, or 22.5%, to $10.0 million, or 1.25% of average assets, from $8.1 million, or 1.10% of average assets, for the same period in 2020. The improvement was driven by an increase of $507 thousand in service charges and fees, a $557 thousand increase in card processing and interchange income, a $313 thousand increase in insurance and investment fees, plus non-recurring gains on sales of investment securities of $322 thousand.
The improvement in service charges and fees resulted from the fee schedule changes we made in August 2020. The new fee schedule was implemented as part of the overall assessment of products and processes undertaken in 2020. The adjustment of the fee schedule was designed to allow customers to avoid or minimize certain fees by taking advantage of certain services such as combined and online account statements.
The improvement in card processing and interchange income resulted from increased volume and the related increase in interchange fees received.
Efforts to increase noninterest income revenues from financial services drove the improvement in insurance and investment fees, as we believe this segment continues to show potential for continued growth.
Other non-interest income also increased, by $138 thousand, but after considering the non-recurring net gains on sales of fixed assets of $190 thousand in 2021 and the $220 thousand bonus payment received in 2020 from our card service provider, the increase in this component would have been $168 thousand. This increase can be explained primarily by an increase of $128 thousand from commissions and gains on originations and sales of mortgage loans into the secondary market, partially driven by the loan production office we opened in Boone, North Carolina in the fourth quarter of 2020 and the deployment of additional loan originators during 2021.
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Noninterest Expense
Noninterest expenses increased $870 thousand, or 3.2%, to $27.9 million at December 31, 2021, compared to $27.0 million at December 31, 2020. Although higher, noninterest expense as a percent of total average assets improved to 3.49% in 2021 from 3.63% in 2020. The increase in noninterest expense was primarily due to an increase of $1.2 million in occupancy and equipment expense, offset by a $566 thousand reduction in salaries and benefit expense.
The increase in occupancy and equipment expense was driven nearly entirely by $1.1 million in non-recurring losses on three former branch office locations, which were transferred into other real estate owned during the third quarter of 2021. Excluding this loss, occupancy and equipment expense would have increased $182 thousand, due largely to costs associated with the Kingsport office, which was opened in the third quarter of 2020.
The $566 thousand reduction in salaries and benefits expense is due to the restructuring implemented in May 2020, which included a combination of eliminated positions, retirements or resignations representing 12% of the workforce. Excluding the $358 thousand of severance costs incurred in 2020, this reduction would have been $924 thousand.
Other operating expenses were up $240 thousand due to higher loan and other real estate expenses of $246 thousand and $199 thousand, respectively. These increases offset decreases in FDIC insurance and consulting, which decreased $127 thousand and $235 thousand, respectively. FDIC premiums decreased due to improvements in our risk assessment. Consulting decreased due to costs incurred in 2020, which were not repeated in 2021. In addition, 2021 includes a $76 thousand increase in bank franchise taxes due to the increased tax base and added taxes for other states.
Our efficiency ratio, a non-GAAP measure, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, improved to 75.56% in 2021 compared to 81.10% in 2020. The decrease in this ratio is a result of improvements in both net interest income and noninterest income, as discussed above and in the Net Interest Income and Net Interest Margin section earlier in this Item 7. We continue to seek opportunities to operate more efficiently through the use of technology, improving processes, reducing nonperforming assets and increasing productivity.
Income Taxes and Deferred Tax Assets
Income taxes were $1.9 million in 2021, compared to $1.1 million in 2020. The effective tax rates were 21.7%, and 27.6% for 2021 and 2020, respectively. The effective tax rate for the periods differed from the federal statutory rate of 21.0% principally due the impact of the recapture of operating loss carryforwards and applicable credits. The higher effective tax rate in 2020 is the result of an increase in pre-tax earnings in relation to the various tax preference items.
Deferred tax assets represent the future tax benefit of future deductible differences. If it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. The Company has evaluated positive and negative evidence to assess the realizability of its deferred taxes. Based on the evidence, including taxable income projections, the Company believes it is more likely than not that its deferred tax assets will be realizable. Accordingly, the Company did not include a valuation allowance against its deferred tax assets as of December 31, 2021 or 2020.
Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a position will be sustained upon examination. If a tax position meets the more likely than not recognition threshold, it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being recognized. The Company classifies interest and penalties as a component of income tax expense.
As of December 31, 2021, the Company had Federal net operating loss carry forward amounts of approximately $2.2 million. These amounts are not limited pursuant to Internal Revenue Code (IRC) Section 382. The Company is subject to examination in the United States and multiple state jurisdictions. Open tax years for examination are 2018 – 2021.
Capital Resources
Our total stockholders’ equity at the end of 2021 was $63.6 million compared to $58.2 million at the end of 2020. The increase was $5.4 million, or 9.4%. Book value per common share was $2.66 at December 31, 2021 compared to $2.43 at December 31, 2020.
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The Company meets the eligibility criteria to be considered a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February 2015 and does not report consolidated regulatory capital. The Bank continues to be subject to various capital requirements administered by banking agencies.
The Bank is characterized as "well capitalized" under the “prompt corrective action” regulations pursuant to Section 38 of the FDIA. The capital adequacy ratios for the Bank, including the minimum ratios to be considered “well capitalized,” are set forth in Note 21, Capital, to the consolidated financial statements in Item 8 of this Form 10-K.
The Bank is also subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Act. The final rules require the Bank to comply with the following minimum capital ratios: (i) a Common Equity Tier 1 (CET1) ratio of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum CET1 ratio of 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a CET1 ratio above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. As of December 31, 2021, the Bank meets all capital adequacy requirements to which it is subject.
Total assets increased in 2021 and we anticipate asset levels to increase in the future due to an emphasis on growing the loan portfolio and the core deposit base of the Bank. Based upon projections, we believe our earnings will be sufficient to support the Bank’s planned asset growth.
No cash dividends have been paid historically due to our past retained deficit. Earnings have accumulated over the last several years and we attained retained earnings in 2021. Subsequent to December 31, 2021, the Board of Directors declared a $0.05 cash dividend per share payable on March 31, 2022 to stockholders of record on March 15, 2022. This is the first cash dividend paid in the history of the Company. Future payments of cash dividends, if any, will depend on a number of factors including but not limited to maintaining positive retained earnings, compliance with regulatory rules governing the payment of dividends, strategic plans, and sufficient capital at the Bank to allow payment of dividends to the parent company.
Liquidity
We closely monitor our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold and unpledged available-for-sale investments. Collectively, those balances were $159.3 million at December 31, 2021, down from $134.0 million at December 31, 2020. As discussed previously in this Form 10-K, this change is a direct result of redeployment of excess cash into investment securities, which generally return higher yields, while still providing liquidity, as discussed below. A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs.
At December 31, 2021, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $98.3 million, which is net of the $12.1 million of securities pledged as collateral. This will serve as a source of liquidity while yielding a higher return when compared to other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond. Total investment securities increased $59.0 million, or 121.8%, during 2021 from $48.4 million at December 31, 2020.
Our loan to deposit ratio was 83.92% at December 31, 2021 and 86.16% at December 31, 2020.
Available third-party sources of liquidity remain intact at December 31, 2021 which includes the following: our line of credit with the FHLB totaling $199.9 million, the brokered certificates of deposit markets, internet certificates of deposit, and the discount window at the Federal Reserve Bank of Richmond. We also have $30.0 million in unsecured federal funds lines of credit available from three correspondent banks as of December 31, 2021.
We have used our line of credit with FHLB to issue letters of credit totaling $12.0 million to the Treasury Board of Virginia for collateral on public funds. No draws on the letters of credit have been issued. The letters of credit are considered draws on our FHLB line of credit. An additional $187.9 million was available on December 31, 2021 on the $199.9 million line of credit, of which $123.6 million is secured by a blanket lien on our residential real estate loans.
34
While we have access to the brokered deposits market, we held no brokered deposits at December 31, 2021 or 2020. As of December 31, 2021, we had $5.8 million in reciprocal CDARS time deposits, compared to $9.6 million at December 31, 2020.
The Bank has access to additional liquidity through the Federal Reserve Bank of Richmond’s Discount Window for overnight funding needs. We may collateralize this line with investment securities and loans at our discretion; however, we do not anticipate using this funding source except as a last resort.
With the on-balance sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources to meet our requirements and needs for the foreseeable future. However, liquidity can be further affected by a number of factors such as, counterparty willingness or ability to extend credit, regulatory actions and customer preferences, some of which are beyond our control. With the current economic uncertainty resulting from the COVID-19 pandemic, inflation and the war in Ukraine, we continue monitoring of our liquidity position, specifically cash on hand in order to meet customer demands. Additionally, our contingency funding plan is reviewed quarterly with our Asset Liability Committee.
Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
A summary of the contract amount of the Bank’s exposure to off-balance-sheet risk as of December 31, 2021 and 2020 is as follows:
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Financial instruments whose contract amounts represent credit risk: | ||||||||
| Commitments to extend credit | $ | 69,015 | $ | 57,334 | ||||
| Standby letters of credit | 3,684 | 2,031 | ||||||
Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.
Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not actually be drawn upon to the total extent to which the Bank is committed.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.
Interest Sensitivity
At December 31, 2021, we had a negative cumulative gap rate sensitivity ratio of 12.97% for the one-year re-pricing period, compared to 21.46% at December 31, 2020. A negative cumulative gap generally indicates that net interest income would decline in a rising interest rate environment as liabilities re-price more quickly than assets. Conversely, net interest income would likely increase in periods during which interest rates are increasing. The below table is based on contractual maturities and does not take into consideration prepayment speeds of investment securities and loans, nor does it consider decay rates for non-maturity deposits. When considering these prepayment speed and decay rate assumptions, along with our ability to control the repricing of a significant portion of the deposit portfolio, we are in a position to increase interest income in a rising interest rate environment. With the FOMC initiating a series of expected rate increases, we believe our current interest risk profile remains acceptable. Furthermore, we are implementing strategies to moderate any potential adverse impact to our current interest rate risk profile, from what could be a sustained medium- to long-term environment of rising interest rates.
35
| Interest Sensitivity Analysis | ||||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||
| (In thousands of dollars) | ||||||||||||||||||||||||||||
| 1 - 90 Days | 91-365 Days | 1 - 3 Years | 4-5 Years | 6-10 Years | Over 10 years | Total | ||||||||||||||||||||||
| Uses of funds: | ||||||||||||||||||||||||||||
| Loans | $ | 117,732 | $ | 108,871 | $ | 196,232 | $ | 117,809 | $ | 45,156 | $ | 7,944 | $ | 593,744 | ||||||||||||||
| Federal funds sold | 228 | — | — | — | — | — | 228 | |||||||||||||||||||||
| Deposits with banks | 45,516 | — | 250 | — | — | 45,766 | ||||||||||||||||||||||
| Investments | 7,525 | 10,891 | 21,277 | 18,367 | 31,564 | 18,764 | 108,388 | |||||||||||||||||||||
| Bank owned life insurance | 4,685 | — | — | — | — | — | 4,685 | |||||||||||||||||||||
| Total earning assets | $ | 175,686 | $ | 119,762 | $ | 217,759 | $ | 136,176 | $ | 76,720 | $ | 26,708 | $ | 752,811 | ||||||||||||||
| Sources of funds: | ||||||||||||||||||||||||||||
| Int Bearing DDA | 65,212 | — | — | — | — | — | 65,212 | |||||||||||||||||||||
| Savings & MMDA | 194,702 | — | — | — | — | — | 194,702 | |||||||||||||||||||||
| Time Deposits | 34,727 | 81,983 | 51,120 | 28,512 | — | — | 196,342 | |||||||||||||||||||||
| Trust Preferred Securities | 16,496 | — | — | — | — | — | 16,496 | |||||||||||||||||||||
| Federal funds purchased | — | — | ||||||||||||||||||||||||||
| Other Borrowings | — | — | — | — | — | — | — | |||||||||||||||||||||
| Total interest bearing liabilities | $ | 311,137 | $ | 81,983 | $ | 51,120 | $ | 28,512 | $ | — | $ | — | $ | 472,752 | ||||||||||||||
| Discrete Gap | $ | (135,451 | ) | $ | 37,779 | $ | 166,639 | $ | 107,664 | $ | 76,720 | $ | 26,708 | $ | 280,059 | |||||||||||||
| Cumulative Gap | $ | (135,451 | ) | $ | (97,672 | ) | $ | 68,967 | $ | 176,631 | $ | 253,351 | $ | 280,059 | ||||||||||||||
| Cumulative Gap as % of Total Earning Assets | -17.99 | % | -12.97 | % | 9.16 | % | 23.46 | % | 33.65 | % | 37.20 | % | ||||||||||||||||
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not
required.
36
Item 8. Financial Statements and Supplementary Data
FINANCIAL STATEMENTS
CONTENTS
|
Page |
|
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Report of Independent Registered Public Accounting Firm |
38 |
|
|
Consolidated Balance Sheets December 31, 2021 and 2020 |
40 |
Consolidated Statements of Income – Years Ended December 31, 2021 and 2020 |
41 |
|
|
Consolidated Statements of Comprehensive Income – Years Ended December 31, 2021 and 2020 |
42 |
|
|
Consolidated Statements of Stockholders’ Equity – Years Ended December 31, 2021 and 2020 |
43 |
|
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Consolidated Statements of Cash Flows – Years Ended December 31, 2021 and 2020 |
44 |
|
|
| Notes to Consolidated Financial Statements | 45 |
37
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of New Peoples Bankshares, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of New Peoples Bankshares, Inc. and Subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
38
elliottdavis.com
Allowance for Loan Losses
As described in Note 6 and Note 7 to the Company’s financial statements, the Company’s loan portfolio and associated allowance for loan losses (the “Allowance”) totaled approximately $593.7 million and $6.7 million, respectively, at December 31, 2021. As described in Note 1 and Note 7 to the financial statements, the Company’s Allowance is an estimate of probable credit losses as of the balance sheet date and considers both unimpaired and impaired loans. Management’s determination of the allowance for loan losses related to the Company’s loan portfolio segment is generally based on the credit risk ratings and historical loss experience of individual borrowers, supplemented, as necessary, by credit judgment to address observed changes in trends and conditions, and other relevant environmental and economic factors such as concentrations of credit risk (geographic, large borrower, and industry), economic trends and conditions, changes in underwriting standards, experience and depth of lending staff, trends in delinquencies, and the level of net charge-offs (qualitative factor adjustments).
Auditing the Company’s Allowance involved a high degree of subjectivity due to the judgment involved in management’s identification and measurement of qualitative factor adjustments included in the estimate of the Allowance for loan losses.
The primary procedures we performed to address this critical audit matter included the following, among others:
- We evaluated the relevance and the reasonableness of assumptions related to evaluation of the loan portfolio, current economic conditions, and other risk factors used in development of the qualitative factors for collectively evaluated loans.
- We evaluated the reasonableness of assumptions and data used by the Company in developing the qualitative factors by comparing these data points to internally developed and third-party sources, and other audit evidence gathered.
- Analytical procedures were performed to evaluate changes that occurred in the allowance for loan losses for loans collectively evaluated for impairment.
/s/
Firm
ID
We have served as the Company's auditor since 2011.
March 31, 2022
39
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2021 AND 2020
(in thousands except share data)
| ASSETS | 2021 | 2020 | ||||||
| Cash and due from banks | $ | $ | ||||||
| Interest-bearing deposits with banks | ||||||||
| Federal funds sold | ||||||||
| Total Cash and Cash Equivalents | ||||||||
| Investment securities available-for-sale | ||||||||
| Loans held for sale | ||||||||
| Loans receivable | ||||||||
| Allowance for loan losses | ( | ) | ( | ) | ||||
| Net Loans | ||||||||
| Bank premises and equipment, net | ||||||||
| Other real estate owned | ||||||||
| Accrued interest receivable | ||||||||
| Deferred taxes, net | ||||||||
| Right-of-use assets – operating leases | 4,062 | 5,439 | ||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Deposits | ||||||||
| Noninterest bearing | $ | $ | ||||||
| Interest-bearing | ||||||||
| Total Deposits | ||||||||
| Borrowed funds | 16,496 | 21,496 | ||||||
| Lease liabilities – operating leases | 4,062 | 5,439 | ||||||
| Accrued interest payable | ||||||||
| Accrued expenses and other liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingent Liabilities (Notes 19 and 20) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock - $ par value; shares authorized; shares issued and outstanding at December 31, 2021 and 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings (deficit) | ( | ) | ||||||
| Accumulated other comprehensive (loss) income | ( | ) | ||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements.
40
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(in thousands except share and per share data)
| INTEREST AND DIVIDEND INCOME | 2021 | 2020 | ||||||
| Loans including fees | $ | $ | ||||||
| Federal funds sold | ||||||||
| Interest-earning deposits with banks | ||||||||
| Investments | ||||||||
| Dividends on equity securities (restricted) | ||||||||
| Total Interest and Dividend Income | ||||||||
| INTEREST EXPENSE | ||||||||
| Deposits | ||||||||
| Borrowed funds | ||||||||
| Total Interest Expense | ||||||||
| NET INTEREST INCOME | ||||||||
| PROVISION FOR LOAN LOSSES | ||||||||
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | ||||||||
| NONINTEREST INCOME | ||||||||
| Service charges and fees | ||||||||
| Card processing and interchange income | 3,871 | 3,314 | ||||||
| Insurance and investment fees | ||||||||
| Net gain on sales of available-for-sale securities | ||||||||
| Other noninterest income | ||||||||
| Total Noninterest Income | ||||||||
| NONINTEREST EXPENSES | ||||||||
| Salaries and employee benefits | ||||||||
| Occupancy and equipment expenses | ||||||||
| Data processing and telecommunications | ||||||||
| Other operating expenses | ||||||||
| Total Noninterest Expenses | ||||||||
| INCOME BEFORE INCOME TAXES | ||||||||
| INCOME TAX EXPENSE | ||||||||
| NET INCOME | $ | $ | ||||||
| Income Per Share | ||||||||
| Basic and Diluted | $ | 0.29 | $ | 0.12 | ||||
| Average Weighted Shares of Common Stock | ||||||||
| Basic and Diluted | 23,922,086 | 23,922,086 | ||||||
The accompanying notes are an integral part of these financial statements.
41
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(Dollars in thousands)
| 2021 | 2020 | |||||||
| NET INCOME | $ | $ | ||||||
| Other comprehensive income: | ||||||||
| Investment securities activity: | ||||||||
| Unrealized (losses) gains arising during the year | ( | ) | ||||||
| Reclassification adjustment for net gains included in net income | ( | ) | ( | ) | ||||
| Other comprehensive (losses) gains on investment securities | ( | ) | ||||||
| Related tax benefit (expense) | ( | ) | ||||||
| TOTAL OTHER COMPREHENSIVE (LOSS) INCOME | ( | ) | ||||||
| TOTAL COMPREHENSIVE INCOME | $ | $ | ||||||
The
accompanying notes are an integral part of these financial statements.
42
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(in thousands including share data)
Shares of Common Stock |
Common Stock |
Additional Paid-in Capital |
Retained Earnings (Deficit) |
Accumu-lated Other Compre-hensive Income (Loss) |
Total Stockholders’ Equity | |||||||||||||||||||
Balance, December 31, 2019 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | — | |||||||||||||||||||||||
Other comprehensive income, net of tax | — | |||||||||||||||||||||||
Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | — | |||||||||||||||||||||||
Other comprehensive loss, net of tax | — | ( | ) | ( | ) | |||||||||||||||||||
Balance, December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
The
accompanying notes are an integral part of these financial statements.
43
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(Dollars are in thousands)
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Provision for loan losses | ||||||||
| Income on bank owned life insurance | (32 | ) | (77 | ) | ||||
| Gain on sale of securities available-for-sale | (322 | ) | (4 | ) | ||||
| Gain on sale of mortgage loans | ( | ) | ( | ) | ||||
| Loss on sale or disposal of premises and equipment | ||||||||
| Gain on sale of foreclosed real estate and repossessed assets | ( | ) | ( | ) | ||||
| Loans originated for sale | ( | ) | ( | ) | ||||
| Proceeds from sales of loans originated for sale | ||||||||
| Adjustment of carrying value of foreclosed real estate and repossessed assets | ||||||||
| Net amortization/accretion of bond premiums/discounts | ||||||||
| Deferred tax expense | ||||||||
| Net change in: | ||||||||
| Interest receivable | ( | ) | ||||||
| Other assets | ||||||||
| Accrued interest payable | ( | ) | ( | ) | ||||
| Accrued expenses and other liabilities | ( | ) | ||||||
| Net Cash Provided by Operating Activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Net increase in loans | (18,987 | ) | (14,199 | ) | ||||
| Purchase of securities available-for-sale | ( | ) | ( | ) | ||||
| Proceeds from sale of investment securities available-for-sale | ||||||||
| Proceeds from repayments and maturities of securities available-for-sale | ||||||||
| Net sale (purchase) of equity securities (restricted) | 555 | (22 | ) | |||||
| Payments for the purchase of premises and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of premises and equipment | ||||||||
| Proceeds from insurance claims on other real estate owned | ||||||||
| Proceeds from sales of other real estate owned | ||||||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVIES | ||||||||
| Net change in short term borrowings | (5,000 | ) | — | |||||
| Net change in noninterest bearing deposits | ||||||||
| Net change in interest bearing deposits | 11,969 | (6,408 | ) | |||||
| Net Cash Provided by Financing Activities | ||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ) | ||||||
| Cash and Cash Equivalents, Beginning of the Year | ||||||||
| Cash and Cash Equivalents, End of the Year | $ | $ | ||||||
| Supplemental Disclosure of Cash Paid During the Year for: | ||||||||
| Interest | $ | $ | ||||||
| Taxes | $ | $ | ( | ) | ||||
| Supplemental Disclosure of Non-Cash Transactions: | ||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 86 | $ | — | ||||
| Loan made to finance sale of premises and equipment | $ | 185 | $ | — | ||||
| Other real estate acquired in settlement of foreclosed loans | $ | $ | ||||||
| Loans made to finance sale of foreclosed real estate | $ | 400 | $ | 428 | ||||
| Transfer of premises and equipment to other real estate | $ | 950 | $ | — | ||||
| Change in unrealized gains on securities available for sale | $ | (1,969 | ) | $ | 867 | |||
The accompanying notes are an integral part of these financial statements.
44
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 NATURE OF OPERATIONS
Nature of Operations – New Peoples Bankshares, Inc. (New Peoples) is a financial holding company whose principal activity is the ownership and management of a community bank, New Peoples Bank, Inc. (the Bank). New Peoples and the Bank are each organized and incorporated under the laws of the Commonwealth of Virginia. As a state-chartered member bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System. The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwest Virginia, southern West Virginia, northeastern Tennessee and western North Carolina. These services include commercial and consumer loans along with traditional deposit products such as checking and savings accounts.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation - The consolidated financial statements include New Peoples, the Bank, NPB Insurance Services, Inc., and NPB Web Services, Inc. (Hereinafter, collectively referred to as the Company, we, us, or our). All significant intercompany balances and transactions have been eliminated. In accordance with Accounting Standards Codification (ASC) 942, Financial Services – Depository and Lending, NPB Capital Trust I and 2 are not included in the consolidated financial statements.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles of the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy of the allowance for loan losses and the determination of the deferred tax asset and related valuation allowance are based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.
Cash and Cash Equivalents – Cash and cash equivalents as used in the cash flow statements include cash and due from banks, interest-bearing deposits with banks, federal funds sold and investment securities maturing within three months.
Investment Securities – Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity and carried at amortized historical cost. Securities not intended to be held to maturity are classified as available-for-sale and carried at fair value. Securities available-for-sale are intended to be used as part of the Company’s asset and liability management strategy and may be sold in response to changes in interest rates, prepayment risk or other similar factors.
The amortization of premiums and accretion of discounts are recognized in interest income using the effective interest method over the period to maturity for discounts and the earlier of call date or maturity for premiums. Realized gains and losses on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method. Realized gains (losses) on securities available-for-sale are included in noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Unrealized gains and losses on investment securities available for sale are based on the difference between book value and fair value of each security. These gains and losses are credited or charged to other comprehensive income, net of tax, whereas realized gains and losses flow through the statements of income.
Loans held for sale – Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance through earnings. Mortgage loans held for sale are generally sold with servicing released. Gains and losses on sales of mortgages are based on the difference between the selling price and the carrying value of the related loan sold.
Loans – Loans are carried on the balance sheet at unpaid principal balance, net of any unearned interest and the allowance for loan losses. Interest income on loans is computed using the effective interest method, except where serious doubt exists as to the collectability of the loan, in which case accrual of the income is discontinued.
45
It is the Company’s policy to stop accruing interest on a loan, and classify that loan as non-accrual under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when our best judgment indicates that payment in full of principal and interest can no longer be expected, or (c) when any such loan or obligation becomes delinquent for 90 days unless it is both well secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income, except in the case of a nonaccrual loan that is well secured and in the process of collection, in which case, the interest accrued but not collected is not reversed. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual status. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, six consecutive timely payments are made, and prospects for future contractual payments are reasonably assured.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Significant
Group Concentrations of Credit Risk – The Company identifies a concentration as any obligation, direct or indirect, of the
same or affiliated interests which represent 25% or more of the Company’s capital structure, or $
Allowance for Loan Losses – The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The loan portfolio is analyzed periodically and loans are assigned a risk rating. Allowances for impaired loans are generally determined based on collateral values or the present value of expected cash flows. A general allowance is made for all other loans not considered impaired as deemed appropriate by management. In determining the adequacy of the allowance, management considers the following factors: the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, the estimated value of any underlying collateral, prevailing environmental factors and economic conditions, and other inherent risks. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in collateral values and changes in estimates of cash flows on impaired loans. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Loans are charged against the allowance for loan losses when management believes that collectability of all or part of the principal is unlikely. Past due status is determined based on contractual terms.
In regard to our consumer and consumer real estate loan portfolio, the Company uses the guidance found in the Uniform Retail Credit Classification and Account Management Policy which affects our estimate of the allowance for loan losses. Under this approach, a consumer or consumer real estate loan must initially have a credit risk grade of Pass or better. Subsequently, if the loan becomes contractually 90 days past due or the borrower files for bankruptcy protection, the loan is downgraded to Substandard and placed in nonaccrual status. If the loan is unsecured, upon being deemed Substandard, the entire loan amount is charged off. For non-1-4 family residential loans that are 90 days past due or greater, or in bankruptcy, the collateral value less estimated liquidation costs is compared to the loan balance to calculate any potential deficiency. If the collateral is sufficient then no charge-off is necessary. If a deficiency exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged-off against the allowance for loan loss. In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, a current value is obtained and after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate any deficiency. Subsequently, any noted deficiency is then charged-off against the allowance for loan loss when the loan becomes contractually 180 days past due. If the customer has filed bankruptcy, then within 60 days of the bankruptcy notice, any calculated deficiency is charged-off against the allowance for loan loss. Collection efforts continue by means of repossessions or foreclosures, and upon bank ownership, liquidation ensues.
46
Bank Premises and Equipment – Land, buildings and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the following estimated useful lives:
| Schedule of estimated useful lives | ||
| Type | Estimated useful life | |
| Buildings | ||
| Paving and landscaping | ||
| Computer equipment and software | ||
| Vehicles | ||
| Furniture and other equipment |
Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Repairs and maintenance costs are recorded as a component of noninterest expense as incurred.
Other Real Estate Owned – Other real estate owned represents properties acquired through foreclosure or deeds taken in lieu of foreclosure and former branch sites that have been closed and for which there are no intentions to re-open or otherwise use the location. At the time of acquisition, these properties are recorded at fair value less estimated costs to sell. Expenses incurred in connection with operating these properties and subsequent write-downs, if any, are charged to operations. Subsequent to foreclosure, management periodically considers the adequacy of the reserve for losses on the property. Gains and losses on the sales of these properties are credited or charged to income in the year of the sale.
Bank Owned Life Insurance (BOLI) – The Bank purchased life insurance policies on certain, now-former, key officers and employees. BOLI is recorded at the cash surrender value. Tax-exempt income from changes in the net cash surrender value are recorded in noninterest income.
Leases – A right-of-use asset and related lease liability is recognized for operating leases the Bank has entered into for certain office facilities. Most leases include one or more options to renew. The exercise of lease renewal options is typically at the sole discretion of management. If it is determined that it is reasonably certain that the Bank will exercise renewal options, the additional term is included in the calculation of the lease liability. As most of our leases do not provide an implicit rate, we use the fully collateralized Federal Home Loan Bank borrowing rate, commensurate with the lease terms at the lease commencement date in determining the present value of the lease payments.
Income Taxes – Deferred tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. The Company provides a valuation allowance on its net deferred tax assets where it is more likely than not such assets will not be realized. At December 31, 2021 and 2020, the Company had no valuation allowance on its net deferred tax assets.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. See Note 10, Income Taxes, for additional information. The Company records any penalties and interest attributed to uncertain tax positions as a component of income tax expenses.
Financial Instruments – Off-balance-sheet instruments - In the ordinary course of business, the Company has entered into commitments to extend credit. Such financial instruments are recorded in the financial statements when they are funded.
Financial Instruments – Fair Value – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully discussed in Note 22. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risks, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or market conditions could significantly affect these estimates.
47
Comprehensive Income – GAAP require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The change in unrealized gains and losses on available-for-sale securities is the Company’s only component of other comprehensive income.
Revenue from Contracts with Customers - The Company generally satisfies its performance obligations fully on its contracts with customers as services are rendered; and the transaction prices are typically fixed, charged either on a periodic basis or based on activity.
Advertising Cost – Advertising costs are expensed in the period incurred. Those costs, which are included in Advertising, sponsorships and donations in Note 24 totaled $252 thousand and $216 thousand, for the years ended December 31, 2021 and 2020, respectively.
Reclassification – Certain reclassifications have been made to the prior years’ financial statements to place them on a comparable basis with the current year. Net income and stockholders’ equity previously reported were not affected by these reclassifications.
Subsequent Events – The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued. See Note 25 Subsequent Events for additional information.
Basic income per share computations are based on the weighted average number of shares outstanding during each year. Dilutive earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. For the years ended December 31, 2021 and 2020, there were no dilutive potential common shares. Basic and diluted net income per common share calculations follows:
| Schedule of basic and diluted net loss per common share calculations | ||||||||
| (Amounts in thousands, except | For the year ended | |||||||
| share and per share data) | December 31, | |||||||
| 2021 | 2020 | |||||||
| Net income | $ | $ | ||||||
| Weighted average shares outstanding | ||||||||
| Weighted average dilutive shares outstanding | ||||||||
| Basic and diluted income per share | $ | 0.29 | $ | 0.12 | ||||
NOTE 4 DEPOSITS IN AND FEDERAL FUNDS SOLD TO BANKS
The Bank had federal funds sold and interest-bearing cash on deposit with other commercial banks amounting to $46.0 million and $76.3 million at December 31, 2021 and 2020, respectively. Deposit amounts at other commercial banks may, at times, exceed federally insured limits.
Effective March 26, 2020, the Board of Governors of the Federal Reserve System set reserve requirements to zero. Therefore, the Bank is no longer required to maintain minimum reserve balances with the Federal Reserve Bank of Richmond (the Federal Reserve Bank). Prior to March 26, 2020, the minimum required reserve balance was computed by applying prescribed percentages to various types of deposits, either at the Bank or on deposit with the Federal Reserve Bank.
The
Bank has a total of $
48
NOTE 5 INVESTMENT SECURITIES
The amortized cost and estimated fair value of securities (all available-for-sale) as of December 31, 2021 and December 31, 2020 are as follows:
| Schedule of securities amortized cost and estimated fair value | ||||||||||||||||
| Gross | Gross | Approximate | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| (Dollars are in thousands) | Cost | Gains | Losses | Value | ||||||||||||
| December 31, 2021 | ||||||||||||||||
| U.S. Treasuries | $ | $ | $ | |||||||||||||
| U.S. Government Agencies | ||||||||||||||||
| Taxable municipals | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Mortgage backed securities | ||||||||||||||||
| Total Securities available for sale | $ | $ | $ | |||||||||||||
| December 31, 2020 | ||||||||||||||||
| U.S. Government Agencies | $ | $ | $ | |||||||||||||
| Taxable municipals | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Mortgage backed securities | ||||||||||||||||
| Total Securities available for sale | $ | $ | $ | |||||||||||||
The following table details unrealized losses and related fair values in the available-for-sale portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2021 and December 31, 2020.
| Schedule of fair value and gross unrealized losses on investment securities | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
(Dollars are in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||
| U.S. Treasuries | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| U.S. Government Agencies | ||||||||||||||||||||||||
| Taxable municipals | ||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||
| Mtg. backed securities | ||||||||||||||||||||||||
| Total Securities AFS | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||
| U.S. Government Agencies | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Taxable municipals | ||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||
| Mtg. backed securities | ||||||||||||||||||||||||
| Total Securities AFS | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
At December 31, 2021, the available-for-sale portfolio included 113 investments for which the fair market value was less than amortized cost. At December 31, 2020, the available-for-sale portfolio included 42 investments for which the fair market value was less than amortized cost. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial conditions and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based on the Company’s analysis, the Company concluded that no securities had other-than-temporary impairment at December 31, 2021 or December 31, 2020.
Investment
securities with a carrying value of $
During
the year ended December 31, 2021, $7.7 million of securities were sold, realizing $
49
The amortized cost and fair value of investment securities at December 31, 2021, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Also, actual maturities may differ from scheduled maturities on amortizing securities, such as mortgage-backed securities and collateralized mortgage obligations, because the underlying collateral on these types of securities may be repaid prior to the scheduled maturity date.
| Schedule of amortized cost and fair value of investment securities contractual maturity | ||||||
| Weighted | ||||||
| (Dollars are in thousands) | Amortized | Fair | Average | |||
| Securities Available for Sale | Cost | Value | Yield | |||
| Due in one year or less | $ | $ | 2.56% | |||
| Due after one year through five years | 1.41% | |||||
| Due after five years through ten years | 1.54% | |||||
| Due after ten years | 1.61% | |||||
| Total | $ | $ | 1.59% | |||
The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank of Atlanta (FHLB), is required to hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities, which are included in Other Assets on the consolidated balance sheet, are restricted from trading and are recorded at a cost of $2.0 million and $2.6 million at December 31, 2021 and 2020, respectively. The stock has no quoted market value and no ready market exists.
NOTE 6 LOANS
Loans receivable outstanding at December 31, 2021 and 2020, are summarized as follows:
| Summary of loans receivable outstanding | ||||||||
| December 31, | ||||||||
| (Dollars are in thousands) | 2021 | 2020 | ||||||
| Real estate secured: | ||||||||
| Commercial | $ | $ | ||||||
| Construction and land development | ||||||||
| Residential 1-4 family | ||||||||
| Multifamily | ||||||||
| Farmland | ||||||||
| Total real estate loans | ||||||||
| Commercial | ||||||||
| Agriculture | ||||||||
| Consumer installment loans | ||||||||
| All other loans | ||||||||
| Total loans | $ | $ | ||||||
Included in commercial loans at December 31, 2021 and 2020, were $6.4 million and $34.8 million of PPP loans that are guaranteed by the SBA.
Also included in total loans above are deferred loan fees of $1.8 million and $2.3 million, at December 31, 2021 and 2020, respectively, which include deferred PPP loan fees. Deferred loan costs were $2.0 million and $1.8 million, at December 31, 2021 and 2020, respectively. Income from net deferred fees and costs is recognized as income over the lives of the respective loans as a yield adjustment. If loans repay prior to scheduled maturities any unamortized fee or cost is recognized at that time.
As a result of PPP originations during 2021 and 2020, net deferred fees totaling $1.6 million and $1.6 million were received, respectively, and $2.0 million and $994 thousand was recognized through earnings, respectively.
50
Loans receivable on nonaccrual status at December 31, 2021 and 2020 are summarized as follows:
| Summary of loans receivable on nonaccrual status | ||||||||
| (Dollars are in thousands) | 2021 | 2020 | ||||||
| Real estate secured: | ||||||||
| Commercial | $ | $ | ||||||
| Construction and land development | ||||||||
| Residential 1-4 family | ||||||||
| Multi-family | ||||||||
| Farmland | ||||||||
| Total real estate loans | ||||||||
| Commercial | ||||||||
| Consumer installment and other loans | ||||||||
| Total loans receivable on nonaccrual status | $ | $ | ||||||
Total interest income not recognized on nonaccrual loans for 2021 and 2020 was $223 thousand and $494 thousand, respectively.
No accounts received pandemic related forbearance in 2021. During the year ended December 31, 2020, under the provisions of the CARES Act or related guidance issued by banking regulators, modifications, mainly in the form of short-term payment deferrals, were granted on 786 loans totaling $119.6 million. At December 31, 2021, 543 accounts totaling $82.4 million remain, of which 538 accounts totaling $82.3 million are current or less than 90 days past due. All of these accounts are subject to a normal repayment schedule. No accounts at December 31, 2021 were subject to pandemic related forbearance. At December 31, 2020, 673 loans totaling $110.7 million had completed their forbearance period and resumed a normal payment schedule, and 15 loans totaling $836 thousand remained in forbearance. At December 31, 2020, the remaining 98 accounts had been repaid in full or refinanced at market terms and conditions.
Of the accounts that received some form of forbearance during 2020, at December 31, 2021, $15.2 million were to lessors of residential properties, $12.8 to lessors of nonresidential properties and $6.7 million to hotels and restaurants; while at December 31, 2020, $21.4 million were to lessors of residential properties, $16.0 million to lessors of non-residential properties, $12.4 million to hotels and restaurants, and $6.0 million to coal and gas mining operations.
The following table presents information concerning the Company’s investment in loans considered impaired as of December 31, 2021 and December 31, 2020:
| Summary of impaired loans | ||||||||||||||||||||
As of December 31, 2021 (Dollars are in thousands) | Average Recorded Investment | Interest Income Recognized |
Recorded Investment | Unpaid Principal Balance |
Related Allowance | |||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | $ | 245 | $ | — | $ | $ | $ | |||||||||||||
| Construction and land development | 64 | 18 | ||||||||||||||||||
| Residential 1-4 family | 1,720 | 24 | ||||||||||||||||||
| Multifamily | — | — | ||||||||||||||||||
| Farmland | 438 | 14 | ||||||||||||||||||
| Commercial | — | — | ||||||||||||||||||
| Agriculture | — | — | ||||||||||||||||||
| Consumer installment loans | 3 | — | ||||||||||||||||||
| All other loans | — | — | ||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | 871 | 3 | ||||||||||||||||||
| Construction and land development | — | — | ||||||||||||||||||
| Residential 1-4 family | 338 | 6 | ||||||||||||||||||
| Multifamily | — | — | ||||||||||||||||||
| Farmland | 121 | 4 | ||||||||||||||||||
| Commercial | 109 | 1 | ||||||||||||||||||
| Agriculture | — | — | ||||||||||||||||||
| Consumer installment loans | — | — | ||||||||||||||||||
| All other loans | — | — | ||||||||||||||||||
| Total | $ | 3,909 | $ | 70 | $ | $ | $ | |||||||||||||
51
As of December 31, 2020 (Dollars are in thousands) |
Average Recorded Investment |
Interest Income Recognized |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance | |||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | $ | 1,680 | $ | 16 | $ | $ | $ | |||||||||||||
| Construction and land development | 89 | 18 | ||||||||||||||||||
| Residential 1-4 family | 1,788 | 53 | ||||||||||||||||||
| Multifamily | — | — | ||||||||||||||||||
| Farmland | 550 | 59 | ||||||||||||||||||
| Commercial | 59 | — | ||||||||||||||||||
| Agriculture | — | — | ||||||||||||||||||
| Consumer installment loans | 4 | — | ||||||||||||||||||
| All other loans | — | — | ||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | 707 | — | ||||||||||||||||||
| Construction and land development | — | — | ||||||||||||||||||
| Residential 1-4 family | 150 | 3 | ||||||||||||||||||
| Multifamily | — | — | ||||||||||||||||||
| Farmland | 212 | 9 | ||||||||||||||||||
| Commercial | 214 | 12 | ||||||||||||||||||
| Agriculture | — | — | ||||||||||||||||||
| Consumer installment loans | — | — | ||||||||||||||||||
| All other loans | — | — | ||||||||||||||||||
| Total | $ | 5,453 | $ | 170 | $ | $ | $ | |||||||||||||
An age analysis of past due loans receivable is below. At December 31, 2021 and 2020, there were no loans over 90 days past due that were accruing.
| Summary of age analysis of past due loans receivable | ||||||||||||||||||||||||
As of December 31, 2021 (Dollars are in thousands) |
Loans 30-59 Days Past Due |
Loans 60-89 Days Past Due | Loans 90 or More Days Past Due |
Total Past Due Loans |
Current Loans |
Total Loans | ||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||||||
| Commercial | $ | — | $ | — | $ | — | $ | — | $ | 206,162 | $ | |||||||||||||
Construction and land development | 7 | — | 7 | 14 | 32,311 | |||||||||||||||||||
| Residential 1-4 family | 2,473 | 240 | 486 | 3,199 | 221,331 | |||||||||||||||||||
| Multifamily | — | — | 111 | 111 | 32,937 | |||||||||||||||||||
| Farmland | — | — | — | — | 18,735 | |||||||||||||||||||
| Total real estate loans | 2,480 | 240 | 604 | 3,324 | 511,476 | |||||||||||||||||||
| Commercial | 5 | — | — | 5 | 54,320 | |||||||||||||||||||
| Agriculture | — | — | — | — | 4,021 | |||||||||||||||||||
Consumer installment Loans | 56 | 5 | — | 61 | 18,695 | |||||||||||||||||||
| All other loans | — | — | — | — | 1,842 | |||||||||||||||||||
| Total loans | $ | 2,541 | $ | 245 | $ | 604 | $ | 3,390 | $ | 590,354 | $ | 593,744 | ||||||||||||
52
As of December 31, 2020 (Dollars are in thousands) |
Loans 30-59 Days Past Due |
Loans 60-89 Days Past Due | Loans 90 or More Days Past Due |
Total Past Due Loans |
Current Loans |
Total Loans | ||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||||||
| Commercial | $ | 969 | $ | — | $ | — | $ | 969 | $ | 178,412 | $ | |||||||||||||
Construction and land development | 64 | — | — | 64 | 24,967 | |||||||||||||||||||
| Residential 1-4 family | 5,717 | 615 | 690 | 7,022 | 215,958 | |||||||||||||||||||
| Multifamily | — | — | — | — | 16,569 | |||||||||||||||||||
| Farmland | 57 | — | — | 57 | 18,311 | |||||||||||||||||||
| Total real estate loans | 6,807 | 615 | 690 | 8,112 | 454,217 | |||||||||||||||||||
| Commercial | 214 | — | — | 214 | 85,796 | |||||||||||||||||||
| Agriculture | 7 | 1 | — | 8 | 4,442 | |||||||||||||||||||
Consumer installment Loans | 214 | 22 | — | 236 | 20,396 | |||||||||||||||||||
| All other loans | — | — | — | — | 2,145 | |||||||||||||||||||
| Total loans | $ | 7,242 | $ | 638 | $ | 690 | $ | 8,570 | $ | 566,996 | $ | |||||||||||||
The Company categorizes loans receivable into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans receivable as to credit risk. The Company uses the following definitions for risk ratings:
Pass - Loans in this category are considered to have a low likelihood of loss based on analysis of relevant information about the ability of the borrowers to service their debt and other factors.
Special Mention - Loans in this category are currently protected but are potentially weak, including adverse trends in borrower’s operations, credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances. Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s credit position at some future date.
Substandard - A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. There were no loans classified as doubtful at either December 31, 2021 or 2020.
53
Based on the most recent analysis performed, the risk category of loans receivable was as follows:
| Summary of risk category of loans receivable | ||||||||||||||||||||
As of December 31, 2021 (Dollars are in thousands) |
Pass |
Special Mention |
Substandard |
Doubtful |
Total | |||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | |||||||||||||||
| Construction and land development | ||||||||||||||||||||
| Residential 1-4 family | ||||||||||||||||||||
| Multifamily | ||||||||||||||||||||
| Farmland | ||||||||||||||||||||
| Total real estate loans | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Agriculture | ||||||||||||||||||||
| Consumer installment loans | ||||||||||||||||||||
| All other loans | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
As of December 31, 2020 (Dollars are in thousands) |
Pass |
Special Mention |
Substandard |
Doubtful |
Total | |||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | |||||||||||||||
| Construction and land development | ||||||||||||||||||||
| Residential 1-4 family | ||||||||||||||||||||
| Multifamily | ||||||||||||||||||||
| Farmland | ||||||||||||||||||||
| Total real estate loans | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Agriculture | ||||||||||||||||||||
| Consumer installment loans | ||||||||||||||||||||
| All other loans | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
NOTE 7 ALLOWANCE FOR LOAN LOSSES
The following tables present activity in the allowance for loan losses for the years ended December 30, 2021 and 2020. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. Additionally, the allocation of the allowance by recorded portfolio segment and impairment method is presented as of December 30, 2021 and 2020.
54
| Schedule of allocation of portion of allowance | ||||||||||||||||||||
| Real estate secured | ||||||||||||||||||||
| (Dollars are in thousands) | Commercial | Construction and Land Development | Residential 1-4 family | Multifamily | Farmland | Commercial | Agriculture | Consumer and All Other | Unallocated | Total | ||||||||||
| Year ended December 31, 2021 | ||||||||||||||||||||
| Beginning balance | $ | 2,281 | $ | 233 | $ | 1,951 | $ | 151 | $ | 97 | $ | 2,275 | $ | 40 | $ | 163 | $ | - | $ | 7,191 |
| Charge-offs | (915) | - | (48) | - | - | (92) | - | (78) | - | (1,133) | ||||||||||
| Recoveries | 2 | 6 | 85 | - | 29 | 137 | 1 | 45 | - | 305 | ||||||||||
| Provision | 766 | (50) | 249 | 103 | 23 | (1,221) | (13) | (22) | 537 | 372 | ||||||||||
| Ending balance | $ | 2,134 | $ | 189 | $ | 2,237 | $ | 254 | $ | 149 | $ | 1,099 | $ | 28 | $ | 108 | $ | 537 | $ | 6,735 |
| Allowance for loan losses at December 31, 2021 | ||||||||||||||||||||
| Individually evluated for impairment | $ | |
$ | - | $ | |
$ | - | $ | |
$ | |
$ | - | $ | - | $ | - | $ | |
| Collectively evaluated for impairment | 2,040 | 189 | 2,184 | 254 | 132 | 1,097 | 28 | 108 | 537 | 6,569 | ||||||||||
| Total | $ | 2,134 | $ | 189 | $ | 2,237 | $ | 254 | $ | 149 | $ | 1,099 | $ | 28 | $ | 108 | $ | 537 | $ | 6,735 |
| Loans at December 31, 2021 | ||||||||||||||||||||
| Individually evluated for impairment | $ | |
$ | |
$ | |
$ | - | $ | |
$ | |
$ | - | $ | |
$ | - | $ | |
| Collectively evaluated for impairment | |
|
|
|
|
|
|
|
- | | ||||||||||
| Total | $ | |
$ | |
$ | |
$ | |
$ | |
$ | |
$ | |
$ | |
$ | - | $ | |
| Real estate secured | ||||||||||||||||||||
| (Dollars are in thousands) | Commercial | Construction and Land Development | Residential 1-4 family | Multifamily | Farmland | Commercial | Agriculture | Consumer and All Other | Unallocated | Total | ||||||||||
| Year ended December 31, 2020 | ||||||||||||||||||||
| Beginning balance | $ | 1,248 | $ | 158 | $ | 1,736 | $ | 104 | $ | 109 | $ | 1,789 | $ | 27 | $ | 195 | $ | 2 | $ | 5,368 |
| Charge-offs | (65) | - | (165) | - | (42) | (329) | (15) | (85) | - | (701) | ||||||||||
| Recoveries | 57 | - | 38 | - | 33 | 40 | 1 | 55 | - | 224 | ||||||||||
| Provision | 1,041 | 75 | 342 | 47 | (3) | 775 | 27 | (2) | (2) | 2,300 | ||||||||||
| Ending balance | $ | 2,281 | $ | 233 | $ | 1,951 | $ | 151 | $ | 97 | $ | 2,275 | $ | 40 | $ | 163 | $ | - | $ | 7,191 |
| Allowance for loan losses at December 31, 2020 | ||||||||||||||||||||
| Individually evluated for impairment | $ | |
$ | - | $ | |
$ | - | $ | |
$ | |
$ | - | $ | - | $ | - | $ | |
| Collectively evaluated for impairment | 1,707 | 233 | 1,879 | 151 | 95 | 1,871 | 40 | 163 | - | 6,139 | ||||||||||
| Total | $ | 2,281 | $ | 233 | $ | 1,951 | $ | 151 | $ | 97 | $ | 2,275 | $ | 40 | $ | 163 | $ | - | $ | 7,191 |
| Loans at December 31, 2020 | ||||||||||||||||||||
| Individually evluated for impairment | $ | |
$ | |
$ | |
$ | - | $ | |
$ | |
$ | - | $ | |
$ | - | $ | |
| Collectively evaluated for impairment | |
|
|
|
|
|
|
|
- | | ||||||||||
| Total | $ | |
$ | |
$ | |
$ | |
$ | |
$ | |
$ | |
$ | |
$ | - | $ | |
In determining the amount of our allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision. Due to the underlying SBA guarantee provided for PPP loans, these accounts were not included in either the portfolio segment or impairment calculations at December 31, 2021 and 2020. Additionally, due to uncertainties presented by the ongoing pandemic and the resulting economic uncertainty, internal and external qualitative factors were revised accordingly. For 2021, external qualitative factors were adjusted to consider the impact of inflation.
NOTE 8 TROUBLED DEBT RESTRUCTURINGS
At December 31, 2021, loans classified as troubled debt restructurings totaled $2.5 million compared to $4.0 million at December 31, 2020. The following table presents information related to loans modified as troubled debt restructurings during the years ended December 31, 2021 and 2020.
55
| Schedule of loans modified as troubled debt restructurings | ||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||
| (Dollars are in thousands) |
# of Loans | Pre-Mod. Recorded Investment | Post-Mod. Recorded Investment |
# of Loans | Pre-Mod. Recorded Investment | Post-Mod. Recorded Investment | ||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||||||
| Commercial | — | $ | — | $ | — | 3 | $ | 190 | $ | 190 | ||||||||||||||
Construction and land Development | — | — | — | — | — | — | ||||||||||||||||||
| Residential 1-4 family | 1 | 35 | 35 | 27 | 1,236 | 1,236 | ||||||||||||||||||
| Multifamily | — | — | — | — | — | — | ||||||||||||||||||
| Farmland | — | — | — | — | — | — | ||||||||||||||||||
| Total real estate loans | — | — | — | 30 | 1,426 | 1,426 | ||||||||||||||||||
| Commercial | — | — | — | — | — | — | ||||||||||||||||||
| Agriculture | — | — | — | — | — | — | ||||||||||||||||||
| Consumer installment loans | — | — | — | 2 | 7 | 7 | ||||||||||||||||||
| All other loans | — | — | — | — | — | — | ||||||||||||||||||
| Total | 1 | $ | 35 | $ | 35 | 32 | $ | 1,433 | $ | 1,433 | ||||||||||||||
During the year ended December 31, 2021, one loan was modified for which the modification was considered to be a troubled dept restructuring.
At December 31, 2021, two loans totaling $56.0 thousand are considered to be in default. Generally, a TDR is considered to be in default once it becomes 90 days or more past due following a modification.
As discussed in Note 6, during the year ended December 31, 2020 modifications were granted on 786 loans with a gross aggregate balance of $119.6 million, under the provisions of the CARES Act. The characteristics of these modifications are considered short-term and did not result in a reclassification of the loans as troubled debt restructurings, as the accounts met the requirements stated in the CARES Act and had not been subject to prior modification.
During the year ended December 31, 2020, the Company modified the terms of 32 loans for which the modification was considered to be a troubled debt restructuring. The interest rate was not modified on these loans; however, the payment terms or maturity date were changed.
When determining the level of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings in its estimate. The Company evaluates all troubled debt restructurings for possible further impairment. As a result, the allowance may be increased, adjustments may be made in the allocation of the allowance, or charge-offs may be taken to further write down the carrying value of these loans.
NOTE 9 BANK PREMISES AND EQUIPMENT
Depreciation expense for 2021 and 2020 was $2.1 million and $2.2 million, respectively. Bank premises and equipment at December 31, 2021 and 2020 are summarized as follows:
| Schedule of bank premises and equipment | ||||||||
| (Dollars are in thousands) | 2021 | 2020 | ||||||
| Land | $ | $ | ||||||
| Buildings and improvements | ||||||||
| Furniture and equipment | ||||||||
| Construction in progress | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Bank Premises and Equipment | $ | $ | ||||||
56
During the year ended December 31, 2021, the Bank sold four former branch locations, with net book values of approximately $1.1 million, resulting in approximately $173 thousand of net gains on sales.
Also, during 2021, the Bank transferred three other former branch locations, with net book values totaling approximately $2.0 million, to other real estate owned, resulting in an increase to OREO of $950 thousand, and disposal and valuation costs of approximately $1.1 million. Subsequently, in December 2021, these OREO properties were written down to $912 thousand. Equipment with a combined net book value of $188 thousand were written off in 2021.
One new branch office, in Bristol, Virginia, was opened in 2021, resulting in an increase of $2.7 million in premises and equipment. During 2020, the Bank opened a new branch office in Kingsport, Tennessee, and a loan production office in Boone, North Carolina.
As presented in Note 17 Leasing Activities, during 2021, the Bank repurchased the branch office located in Lebanon, Virginia, which had previously been sold and leased back.
NOTE 10 INCOME TAXES
The Company files a consolidated federal income tax return. The following summarizes the provision for income taxes and the related deferred tax components for the years ended December 31, 2021 and 2020.
The source of pre-tax book income is summarized as follows for the years ended December 31, 2021 and 2020:
| Schedule of pre-tax book income | ||||||||
| (Dollars are in thousands) | 2021 | 2020 | ||||||
Pre-tax book income | ||||||||
| Domestic | $ | $ | ||||||
| Total pre-tax book income | $ | $ | ||||||
Income tax expense is summarized as follows for the years ended December 31, 2021 and 2020:
| Schedule of components of income tax expense | ||||||||
| (Dollars are in thousands) | 2021 | 2020 | ||||||
Current income tax expense (benefit) | ||||||||
| Federal | $ | ( | ) | $ | ( | ) | ||
| State | ||||||||
| Total current income tax expense (benefit) | ( | ) | ( | ) | ||||
| Deferred income tax expense | ||||||||
| Federal | ||||||||
| State | ( | ) | ||||||
| Total deferred income tax expense | 2,114 | 1,303 | ||||||
| Income tax expense | $ | $ | ||||||
The following table summarizes the differences between the actual income tax expense and the amounts computed using the federal statutory tax rate of 21% for years ended December 31, 2021 and 2020, respectively:
| Schedule of reconciliation of income tax expense | ||||||||
| (Dollars are in thousands) | 2021 | 2020 | ||||||
| Income tax expense (benefit) at the applicable federal rate | $ | $ | ||||||
| Permanent differences resulting from: | ||||||||
| Nondeductible expenses | ||||||||
| Tax exempt interest income | ( | ) | ( | ) | ||||
| Bank owned life insurance | (7 | ) | (16 | ) | ||||
| Other adjustments | ||||||||
| Income tax expense | $ | $ | ||||||
57
The net deferred tax assets and liabilities resulting from temporary differences as of December 31, 2021 and 2020, are summarized as follows:
| Schedule of net deferred tax assets and liabilities | ||||||||
| (Dollars are in thousands) | 2021 | 2020 | ||||||
| Deferred Tax Assets | ||||||||
| Allowance for loan losses | $ | $ | ||||||
| Deferred compensation | ||||||||
| Nonaccrual loan interest | 532 | 490 | ||||||
| Unrealized loss on securities available for sale | 216 | — | ||||||
| Other real estate owned | 305 | 83 | ||||||
| Amortization of core deposits | 6 | 18 | ||||||
| Amortization of goodwill | ||||||||
| Capitalized interest and repair expense | 23 | 23 | ||||||
| Net operating loss carryforward | ||||||||
| Other | ||||||||
| Total Assets, gross | ||||||||
| Valuation allowance | ||||||||
| Total Assets, net | ||||||||
| Deferred Tax Liabilities | ||||||||
| Accelerated depreciation | 1,105 | 869 | ||||||
| Unrealized gain on securities available for sale | ||||||||
| Prepaid expenses | ||||||||
| Deferred loan costs | 451 | 355 | ||||||
| Total Liabilities, gross | ||||||||
| Net Deferred Tax Asset | $ | $ | ||||||
In accordance with applicable accounting guidance, the Company determined that it was not required to establish a valuation allowance for deferred tax assets as it is more likely than not that the deferred tax asset will be realized through future taxable income, future reversals of existing taxable temporary differences and tax strategies. The Company’s net deferred tax asset is recorded in the consolidated financial statements separately.
At December 31, 2021 and 2020, the Company had no unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to increase significantly over the next twelve months. The company recognizes interest and penalties as a component of income tax expense.
The Company and Bank are subject to U. S. federal income tax, a capital-based franchise tax in the Commonwealth of Virginia; and income and excise taxes in West Virginia, Tennessee and North Carolina, respectively, based on earnings realized from business activities within each state. Years prior to 2018 are no longer subject to examination by taxing authorities.
NOTE 11 TIME DEPOSITS
The aggregate amount of time deposits that meet or exceed the Federal Deposit Insurance Corporation (FDIC) Insurance limit of $250,000 was $28.6 million and $34.8 million at December 31, 2021 and 2020, respectively. We had no brokered time deposits at either December 31, 2021 or 2020. At December 31, 2021, the scheduled maturities of time deposits are as follows (dollars are in thousands):
| Schedule of maturities | ||
| 2022 | $ | 116,638 |
| 2023 | 39,197 | |
| 2024 | 11,925 | |
| 2025 | 18,095 | |
| 2026 | 10,417 | |
| After five years | - | |
| Total | $ | 196,272 |
58
NOTE 12 RELATED PARTY TRANSACTIONS
Officers, directors (and companies controlled by them), principal shareholders, and associates were customers of and had loan transactions with the Bank in the normal course of business. The following table summarizes these transactions, which were made on substantially the same terms as those prevailing for other customers and did not involve any abnormal risk.
| Schedule of related party | ||||||||
| For the year ended December 31, | ||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Beginning balance | $ | $ | ||||||
| New loans and advances on lines | ||||||||
| Payments and other reductions | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
Total related party deposits held at the Bank were $24.8 million and $21.5 million as of December 31, 2021 and 2020, respectively.
NPB Insurance Services, Inc. holds a 39% membership interest in Lonesome Pine Title Agency, LLC, which provides title insurance. Another member of the agency is a related party to the Company.
In August, 2021, the Bank sold a parcel of land, adjacent to the Grundy, Virginia office to a director for $150 thousand, which approximated the fair value of the property. A gain of $17 thousand was recorded from this transaction.
NOTE 13 RETIREMENT PLANS
The Company has established a qualified defined contribution plan that covers all full-time employees. The Company matches employee contributions up to a maximum of 3% of their salary. The Company contributed $246 thousand and $258 thousand to the defined contribution plan for 2021 and 2020, respectively.
The Bank maintains a salary continuation plan for key executives which was established in 2002 and is funded by single premium life insurance policies. Expenses related to the plan were $29 thousand and $17 thousand for the years ended December 31, 2021 and 2020, respectively.
NOTE 14 OTHER REAL ESTATE OWNED
The following table summarizes the activity in other real estate owned for the years ended December 31, 2021 and 2020:
| Schedule of other real estate owned | ||||||||
| 2021 | 2020 | |||||||
| (Dollars are in thousands) | ||||||||
| Balance, beginning of year | $ | 3,334 | $ | 3,393 | ||||
| Additions | 566 | 1,128 | ||||||
| Transfers from premises and equipment | 950 | — | ||||||
| Proceeds from sales | (2,645 | ) | (687 | ) | ||||
| Proceeds from insurance claims | (54 | ) | — | |||||
| Loans made to finance sales | (400 | ) | (428 | ) | ||||
| Adjustment of carrying value | (466 | ) | (132 | ) | ||||
| Gains (losses) from sales | 76 | 60 | ||||||
| Balance, end of year | $ | 1,361 | $ | 3,334 | ||||
59
NOTE 15 BANK OWNED LIFE INSURANCE
At December 31, 2021 and 2020, the Bank had an aggregate total cash surrender value of $4.7 million and $4.7 million, respectively, on life insurance policies covering former key officers.
Total income for the policies during 2021 and 2020 was $32 thousand and $77 thousand, respectively.
NOTE 16 DIVIDEND LIMITATIONS ON SUBSIDIARY BANK
A principal source of funds for the Company is dividends paid by the Bank. The Federal Reserve Act restricts the amount of dividends the Bank may pay. Approval by the Board of Governors of the Federal Reserve System is required if the dividends declared by a state member bank, in any year, exceed the sum of (1) net income of the current year and (2) income net of dividends for the preceding two years.
Virginia law restricts the amount of dividends a Virginia corporation may pay. Generally, a Virginia corporation may not authorize and make distributions if, after giving effect to the distribution, it would be unable to meet its debts as they become due in the usual course of business or if the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if it were dissolved at that time, to satisfy the preferential rights of shareholders whose rights are superior to the rights of those receiving the distribution. In addition, the payment of distributions to shareholders is subject to any prior rights of outstanding preferred stock.
NOTE 17 LEASING ACTIVITIES
During 2021, the Bank repurchased its branch office located in Lebanon, Virginia, for $1.3 million. This branch had previously been sold and leased back in September 2019. As a result of the repurchase, the lease with a remaining term of 12.9 years was cancelled.
At December 31, 2021, the Bank leases four branch offices and sublets a lot adjacent to another branch office. The lease agreements have maturity dates ranging from May 2032 to December 2041. It is assumed that there are currently no circumstances in which the leases would be terminated prior to expiration. The weighted average remaining life of the lease terms at December 31, 2021, was 10.61 years.
The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded to the lease term for each transaction. This methodology is expected to be used for any other subsequent lease agreements. The weighted average discount rate for the leases at December 31, 2021 was 3.24%.
The Company’s operating lease costs for the years ended December 31, 2021 and 2020, as a result of the transactions discussed above, was $528 thousand and $552 thousand, respectively.
The Company’s other operating leases were evaluated and determined to be immaterial to the financial statements. At December 31, 2021, future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands):
| Schedule of future minimum rental commitments under the non-cancellable operating leases | ||
| 2022 | $ | |
| 2023 | ||
| 2024 | ||
| 2025 | ||
| 2026 | ||
| Thereafter | ||
| Total lease payments | 4,959 | |
| Less imputed interest | ||
| Total | $ |
60
NOTE 18 BORROWED FUNDS
The following table presents the breakdown of borrowed funds as of December 31, 2021 and 2020 (dollars in thousands):
| Schedule of breakdown of borrowed funds | |||||||||||||||
FHLB Revolving Advances (a) |
Federal Funds Lines (b) |
FHLB Term Loans Short-Term (c) |
FHLB Term Loans Long-Term (d) |
NPB Capital Trust I (e) |
NPB Capital Trust 2 (e) |
Total | |||||||||
| Balance December 31, 2021 | $ | - | $ | - | $ | - | $ | - | $ | 11,341 | $ | 5,155 | $ | 16,496 | |
| Highest balance at any month-end | |||||||||||||||
| Average weighted balance | - | ||||||||||||||
| Average interest rate: | |||||||||||||||
| Paid during the year | - % | - % | |||||||||||||
| At year-end | -% | -% | -% | - % | |||||||||||
| Balance December 31, 2020 | $ | - | $ | - | $ | 5,000 | $ | - | $ | 11,341 | $ | 5,155 | $ | 21,496 | |
| Highest balance at any month-end | - | ||||||||||||||
| Average weighted balance | - | ||||||||||||||
| Average interest rate: | |||||||||||||||
| Paid during the year | - % | -% | |||||||||||||
| At year-end | -% | -% | - % | ||||||||||||
(a) - The Bank has the ability to borrow up to an additional $111.6 million from the FHLB under a line of credit which is secured by a blanket lien on residential real estate loans. With additional collateral, the Bank’s total credit availability would be $187.9 million. The Bank had no overnight borrowings subject to daily rate changes from the FHLB at December 31, 2021 or 2020.
We have used our line of credit with FHLB to issue letters of credit totaling $12.0 million to the Treasury Board of Virginia for collateral on public funds deposited in the Bank. No draws on the letters of credit have been issued. The letters of credit are considered draws on our FHLB line of credit.
(b) - Federal funds lines consist of $30.0 million and $20.0 million in unsecured federal funds line of credit facilities with correspondent banks as of December 31, 2021 and 2020, respectively exclusive of any outstanding balance.
(c) - At December 31, 2020, short term FHLB advances consisted of one $5.0 million advance with a fixed rate of 1.34% which matured and was paid off on June 30, 2021.
(d) - At December 31, 2021 and 2020, there were no long term FHLB advances.
(e) - TPS I - On July 7, 2004, the Company completed the issuance of $11.3 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust I (TPS I). The rate is determined quarterly and floats based on the 3-month LIBOR plus 260 basis points.
TPS 2 - On September 27, 2006, the Company completed the issuance of $5.2 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust 2 (TPS 2). The rate is determined quarterly and floats based on the 3-month LIBOR plus 177 basis points.
Under the terms of the subordinated debt transactions, the securities have 30-year maturities and are redeemable, in whole or in part, without penalty, at the option of the Company after five years from the issuance date, and on a quarterly basis thereafter.
61
Following are maturities of borrowed funds at December 31, 2021 (dollars in thousands):
| Schedule of maturities of borrowed funds | |||||
| 2022 | $ | - | |||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 16,496 | |||||
| $ | |||||
NOTE 19 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Bank has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheet.
Financial instruments whose contract amount represents credit risk at December 31, 2021 and 2020 were as follows:
| Schedule of financial instruments with credit risk | ||||||||
| 2021 | 2020 | |||||||
| (Dollars in thousands) | ||||||||
| Commitments to extend credit | $ | $ | ||||||
| Standby letters of credit | ||||||||
Commitments to extend credit are agreements to lend to a customer at either a fixed or variable interest rate as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.
NOTE 20 LEGAL CONTINGENCIES
In the course of operations, we may become a party to legal proceedings in the normal course of business. At December 31, 2021, we do not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or any of its subsidiaries to which the property of the Company or any of its subsidiaries is subject, in the opinion of management, may materially impact the financial condition or liquidity of the Company.
The Bank is a defendant in a complaint filed by a former employee in the United States District Court for the Western District of Virginia on January 1, 2021. The complaint alleges wrongful termination based on gender, religion and age. The Bank denies the allegations and intends to vigorously defend against these claims. The complaint does not specify the dollar amount of damage sought. The Bank has responded with a vigorous defense as to all claims and assertions. The amount of any possible loss cannot be estimated at this time.
62
NOTE 21 CAPITAL
Capital Requirements and Ratios
The Company meets eligibility criteria of a small bank holding company in accordance with the Board of Governors of the Federal Reserve System’s Small Bank Holding Company Policy Statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital.
The Bank is subject to various capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets, Tier 1 capital to average assets, and Common Equity Tier 1 capital to risk-weighted assets. As of December 31, 2021, the Bank meets all capital adequacy requirements to which it is subject.
The Bank’s actual capital amounts and ratios are presented in the following table as of December 31, 2021 and 2020, respectively.
| Schedule of capital requirements | ||||||||
| Actual | Minimum Capital Requirement | Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||
| (Dollars are in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||
| December 31, 2021: | ||||||||
| Total Capital to Risk Weighted Assets | $ | $
|
|
$ | ||||
| Tier 1 Capital to Risk Weighted Assets | |
|||||||
| Tier 1 Capital to Average Assets | ||||||||
| Common Equity Tier 1 Capital | ||||||||
| to Risk Weighted Assets | ||||||||
December 31, 2020: | ||||||||
| Total Capital to Risk Weighted Assets | $ | $
|
|
$ | ||||
| Tier 1 Capital to Risk Weighted Assets | |
|||||||
| Tier 1 Capital to Average Assets | ||||||||
| Common Equity Tier 1 Capital | ||||||||
| to Risk Weighted Assets | ||||||||
Accordingly, as of December 31, 2021 and 2020, the Bank was well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since such dates that management believes have changed the Bank’s category.
The Bank is also subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The final rules require the Bank to comply with the following minimum capital ratios: (i) a Common Equity Tier 1 capital to risk-weighted assets ratio of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum Common Equity Tier 1 capital to risk-weighted assets ratio of 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least, 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The Bank’s capital conservation buffer was 8.23% at December 31, 2021. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a Common Equity Tier 1 capital to risk-weighted assets ratio above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. As of both December 31, 2021 and 2020, the Common Equity Tier 1 Capital to Risk-weighted Assets ratio, the Tier 1 Capital to Risk-weighted Assets ratio, the Total Capital to Risk-weighted Assets ratio, and the Tier 1 Capital to Average Assets ratio of the Bank, all exceeded the minimum requirements.
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NOTE 22 FAIR VALUES
The Company established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by this hierarchy are:
Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level 2: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are valued using other financial instruments, the parameters of which can be directly observed.
Level 3: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy are as follows:
Investment Securities Available for Sale - Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices. The Company’s available for sale securities, totaling $107.4 million and $48.4 million at December 31, 2021 and 2020, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service.
Loans - The Company does not record loans at fair value on a recurring basis. Real estate serves as collateral on a substantial majority of the Company’s loans. When a loan is considered impaired, a specific reserve may be established. Loans, which are deemed to be impaired and require a reserve, are primarily valued on a non-recurring basis at the fair value of the underlying real estate collateral. Where there is no observable market price, such fair values are obtained using independent appraisals, which management evaluates to determine whether or not the fair value of the collateral is further impaired below the appraised value and adjusts for estimated costs of disposition. The Company records impaired loans as nonrecurring Level 3 assets. The aggregate amount of impaired loans carried at fair value was $2.8 million and $4.0 million at December 31, 2021 and 2020, respectively.
Other Real Estate Owned –Other real estate owned is adjusted to fair value upon transfer of the loans, or former bank premises, to other real estate owned. These assets are carried at the lower of their carrying value or fair value. Fair value is based upon observable market prices, when available, reduced by estimated disposition costs, which the Company considers to be nonrecurring Level 2 inputs. When observable market prices are not available, management determines the fair value of the foreclosed asset using independent third-party appraisals, evaluated to determine whether or not the property is further impaired below the appraised value, and adjusts for estimated costs of disposition. The Company records foreclosed assets as nonrecurring Level 3. The aggregate carrying amounts of foreclosed assets were $1.4 million and $3.3 million at December 31, 2021 and 2020, respectively.
Assets and liabilities measured at fair value are as follows as of December 31, 2021 (for purpose of this table the impaired loans are shown net of the related allowance):
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| Schedule of summary of assets and liabilities measured at fair value | ||||||
(Dollars are in thousands) |
Quoted market price in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) | |||
(On a recurring basis) Available for sale investments |
||||||
| U.S. Treasuries | $ | $ | $ | |||
| U.S. Government Agencies | ||||||
| Taxable municipals | ||||||
| Corporate bonds | ||||||
| Mortgage backed securities | ||||||
(On a non-recurring basis) Other real estate owned |
- | - | 1,361 | |||
| Impaired loans: | ||||||
| Real estate secured: | ||||||
| Commercial | - | - | 414 | |||
| Construction and land development | - | - | 24 | |||
| Residential 1-4 family | - | - | 1,848 | |||
| Multifamily | - | - | - | |||
| Farmland | - | - | 517 | |||
| Commercial | - | - | 28 | |||
| Agriculture | - | - | - | |||
| Consumer installment loans | - | - | 2 | |||
| All other loans | - | - | - | |||
| Total | $ | - | $ | 107,358 | $ | 4,194 |
Assets and liabilities measured at fair value are as follows as of December 31, 2020 (for purpose of this table the impaired loans are shown net of the related allowance):
(Dollars are in thousands) |
Quoted market price in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) | |||
(On a recurring basis) Available for sale investments |
||||||
| U.S. Government Agencies | $ | $ | $ | |||
| Taxable municipals | ||||||
| Corporate bonds | ||||||
| Mortgage backed securities | ||||||
(On a non-recurring basis) Other real estate owned |
- | - | 3,334 | |||
| Impaired loans: | ||||||
| Real estate secured: | ||||||
| Commercial | - | - | 1,377 | |||
| Construction and land development | - | - | 99 | |||
| Residential 1-4 family | - | - | 1,927 | |||
| Multifamily | - | - | - | |||
| Farmland | - | - | 597 | |||
| Commercial | - | - | 25 | |||
| Agriculture | - | - | - | |||
| Consumer installment loans | - | - | 5 | |||
| All other loans | - | - | - | |||
| Total | $ | - | $ | 48,406 | $ | 7,364 |
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For Level 3 assets measured at fair value on a recurring or non-recurring basis as of December 31, 2021 and 2020, the significant unobservable inputs used in the fair value measurements were as follows:
| Schedule of significant unobservable inputs In level 3 assets | ||||||||||
(Dollars in thousands) |
Fair Value at December 31, 2021 |
Fair Value at December 31, 2020 |
Valuation Technique |
Significant Unobservable Inputs |
General Range of Significant Unobservable Input Values | |||||
| Impaired Loans | $ | 2,667 | $ | 4,030 | Appraised Value/Discounted Cash Flows/Market Value of Note | Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell | 0 – 18% | |||
| Other Real Estate Owned | $ | 1,361 | $ | 3,334 | Appraised Value/Comparable Sales/Other Estimates from Independent Sources | Discounts to reflect current market conditions and estimated costs to sell | 0 – 18% |
Fair Value of Financial Instruments
The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a recurring basis are as follows:
| Schedule of estimated fair value of financial instruments | ||||||||||
| Fair Value Measurements | ||||||||||
(Dollars are in thousands) |
Carrying Amount |
Fair Value |
Quoted market price in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) | |||||
| December 31, 2021 | ||||||||||
| Financial Instruments – Assets | ||||||||||
| Net Loans | $ | $ | $ | $ | $ | |||||
| Financial Instruments – Liabilities | ||||||||||
| Time Deposits | ||||||||||
| Borrowed Funds | ||||||||||
| December 31, 2020 | ||||||||||
| Financial Instruments – Assets | ||||||||||
| Net Loans | $ | $ | $ | $ | $ | |||||
| Financial Instruments – Liabilities | ||||||||||
| Time Deposits | ||||||||||
| Borrowed Funds | ||||||||||
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates.
Estimated fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Company’s fair value estimates, methods and assumptions are set forth below for the Company’s other financial instruments.
The carrying value of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities and accrued interest approximates fair value and is excluded from the table above.
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The methods utilized to measure the fair value of financial instruments represent an approximation of exit price; however, an actual exit price may differ.
NOTE 23 REVENUE FROM CONTRACTS WITH CUSTOMERS
All of our revenue from contracts with customers as defined in ASC 606 is recognized within Noninterest Income. The following table presents Noninterest Income by revenue stream for the years ended December 31, 2021 and 2020.
| Schedule of revenue from contracts with customers | ||||||||
| (Dollars are in thousands) | 2021 | 2020 | ||||||
| Service charges and fees | $ | $ | ||||||
| Card processing and interchange income | 3,871 | 3,314 | ||||||
| Insurance and investment fees | ||||||||
| Gains on sales of available-for-sale securities (1) | ||||||||
| Other noninterest income | ||||||||
| Total Noninterest Income | $ | $ | ||||||
| (1) |
Certain revenues are earned from contracts with customers. These revenues are recognized when the promised services are rendered to the customer and reflects the entitled consideration received in exchange for those services.
Service charges and fees – revenue is recognized on deposit services based on published fees for the services provided. These fees may be collected on a transaction basis, at the time the service is rendered or periodically based on the period over which the service is provided. Transaction based fees include services such as stop payment requests, paper statement rendering and ITM usage fees. Periodic fees include such charges as monthly account maintenance fees. Overdraft fees are realized at the time the overdraft occurs.
Card processing and interchange fees – Card related interchange revenue is primarily comprised of debit and credit card income. Debit and credit card income is earned when customers’ debit or credit cards are processed through a card payment network. Card related interchange income is recognized at the time the customer transactions settle.
Insurance and investment fees - Insurance and investment fee income consists of commissions received on annuity and investment product sales through a third-party service provider. Performance is generally satisfied at the time an annuity policy is issued, or at the execution of an investment transaction.
NOTE 24 NONINTEREST EXPENSES
Other operating expenses, included as part of noninterest expenses, consisted of the following for the years ended December 31, 2021 and 2020:
| Schedule of noninterest expenses | ||||||||
| (Dollars are in thousands) | 2021 | 2020 | ||||||
| Advertising, sponsorships and donations | $ | $ | ||||||
| ATM network expense | 1,473 | 1,476 | ||||||
| Legal and professional fees | ||||||||
| Consulting fees | ||||||||
| Loan related expenses | ||||||||
| Printing and supplies | ||||||||
| FDIC insurance premiums | ||||||||
| Other real estate owned expenses, net | 506 | 307 | ||||||
| Other operating expenses | 2,556 | 2,507 | ||||||
| Total | $ | $ | ||||||
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NOTE 25 SUBSEQUENT EVENTS
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were available to be issued and has identified the following as a non-recognized subsequent event.
On February 28, 2022, the board of directors declared a dividend of $0.05 per share payable on March 31, 2022 to shareholders of record as of March 15, 2022.
At this time, we cannot state how the continuing economic uncertainty related to the pandemic and current geopolitical conditions will affect the financial position, operations or liquidity of the Company.
NOTE 26 RECENT ACCOUNTING DEVELOPMENTS
The following is a summary of recent authoritative announcements:
In June 2016, per ASU No. 2016-13, ‘Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,’ the Financial Accounting Standards Board (the FASB) issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. Subsequently, per ASU No. 2019-10, implementation for the Company is delayed until reporting periods beginning after December 15, 2022. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.
In May 2019, the FASB issued targeted transition relief for entities which irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the amendments to the transition guidance for ASU 2016-13 will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Subsequently, per ASU No. 2019-10, implementation for the Company is delayed until reporting periods beginning after December 15, 2021. The Company is currently in the process of evaluating the impact of adoption of this guidance on its financial statements.
In November 2019, the FASB released ASU 2019-10, ‘Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),’ in which the FASB shared a new philosophy to extend and simplify how effective dates for certain major Updates would be staggered between larger public companies (bucket one) and all other entities (bucket two). A major Update would first be effective for bucket-one entities. For bucket-two entities, including the Company, it is anticipated that the FASB will consider requiring an effective date staggered at least two years after bucket one for major Updates. Generally, it is expected that early application would continue to be allowed for all entities. The Company is considered a bucket-two entity due to its eligibility to be a smaller reporting company, per the Securities and Exchange Commission (the SEC). This Update applies to ASU 2016-13, as discussed above, ASU 2017-12, which does not apply to the Company, and ASU 2016-02, which the Company has already early-adopted.
In December 2019, the FASB released ASU 2019-12, ‘Income Taxes (Topic 740),’ which simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, improve consistent application, and simplify GAAP for other areas of Topic 740. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company does not expect these amendments to have a material effect on its financial statements.
In January 2020, the FASB released ASU 2020-01, ‘Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815),’ which clarify certain interactions between the guidance to account for certain equity securities under Topic 321, 323 and 815, and improve current GAAP by reducing diversity in practice and increasing comparability of accounting. The amendments in this Update are effective for the Company for fiscal years beginning after December 31, 2021, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
68
In March 2020, the FASB released ASU 2020-03, ‘Codification Improvements to Financial Instruments,’ as part of its ongoing project for improving the Codification or correcting its unintended application. This Update is being issued to increase stakeholder awareness of these amendments. These amendments affect Fair Value Option Disclosures, Applicability of Portfolio Exception in Topic 820 to Nonfinancial Items, Disclosures for Depository and Lending Institutions, Cross-Reference to Line-of-Credit or Revolving-Debt Arrangements Guidance in Subtopic 470-50, Cross-Reference to Net Asset Value Practical Expedient in Subtopic 820-10, Interaction of Topic 842 and Topic 326, and Interaction of Topic 326 and Subtopic 860-20. The amendments in this update are effective immediately. The implementation of these amendments did not have a material effect on its financial statements.
In March 2020, the FASB released ASU 2020-04, ‘Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting,’ which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. The amendments in this Update are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference the London Interbank Offering Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The amendments in the Update are effective for the Company as of March 12, 2020 through December 31, 2022. The Company is working through implementation of this guidance, but does not expect this amendment to have a material impact on its financial statements.
In August 2020, the FASB released ASU 2020-06, ‘Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,’ which reduces the number of accounting models for convertible debt instruments and convertible preferred stock. The Board concluded that eliminating certain accounting models simplifies the accounting for convertible instruments, reduces complexity for preparers and practitioners, and improves the decision usefulness and relevance of the information provided to financial statement users. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The implementation of these amendments did not have a material effect on its financial statements.
In January 2021, the FASB released ASU 2021-01, ‘Reference Rate Reform (Topic 848),’ which clarifies that certain optional expedients and exceptions in topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition related to reference rate reform. The amendments in this Update are effective immediately for all entities. An entity may elect to apply the amendments in the Update on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. The Company does not expect this amendment to have a material effect on its financial statements.
In July 2021, the FASB released ASU 2021-05, ‘Lessors – Certain Leases with Variable Lease Payments (Topic 842),’ which amends the lease classification requirements for lessors to align them with practice under Topic 840. The amendments in this Update amend Topic 842 and are effective for the Company for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 13, 2022. The Company may elect either (1) to retrospectively apply the amendments to leases that commenced or were modified on or after the adoption of Update 2016-02 or (2) prospectively to leases that commence or are modified on or after the date that the Company first applies the amendments. The Company does not expect this amendment to have a material effect on its financial statements.
In August 2021, the FASB released ASU 2021-06, ‘Presentation of Financial Statements (Topic 205), Financial Services – Depository and Lending (Topic 942), and Financial Services – Investment Companies (Topic 946),’ which amends certain SEC paragraphs pursuant to SEC final rule releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. These amendments become effective for fiscal years ending on or after December 15, 2021. The Company does not expect these amendments to have a material effect on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
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NOTE 27 PARENT CORPORATION ONLY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 2021 AND 2020
(Dollars in Thousands)
| Schedule of parent corporation only condensed balance sheets | ||||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Due from banks | $ | $ | ||||||
| Investment in subsidiaries | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Accrued interest payable | $ | $ | ||||||
| Accrued expenses and other liabilities | ||||||||
| Trust preferred securities | 16,496 | 16,496 | ||||||
| Total Liabilities | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
Common stock - $2.00 par value, 50,000,000 shares authorized; 23,922,086 shares issued and outstanding at both December 31, 2021 and 2020 | ||||||||
| Additional paid capital | ||||||||
| Retained earnings (deficit) | ( | ) | ||||||
| Accumulated other comprehensive (loss) income | ( | ) | ||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(Dollars in thousands)
| Schedule of parent corporation only condensed statements of income | ||||||||
| 2021 | 2020 | |||||||
| Income | ||||||||
| Miscellaneous income | $ | 13 | $ | 16 | ||||
| Dividends from subsidiaries | ||||||||
| Undistributed income of subsidiaries | 7,026 | 2,842 | ||||||
| Total income | ||||||||
| Expenses | ||||||||
| Trust preferred securities interest expense | ||||||||
| Professional fees | ||||||||
| Other operating expenses | ||||||||
| Total Expenses | ||||||||
| Income before Income Taxes | ||||||||
| Income Tax Benefit | ( | ) | ( | ) | ||||
| Net Income | $ | $ | ||||||
70
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(Dollars in thousands)
| Schedule of parent corporation only condensed statements of cash flows | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Equity in undistributed earnings of subsidiaries | ( | ) | ( | ) | ||||
| Net (increase) decrease in other assets | ( | ) | ||||||
| Net decrease in other liabilities | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Net (decrease) increase in Cash and Cash Equivalents | ( | ) | ||||||
| Cash and Cash Equivalents, Beginning of year | ||||||||
| Cash and Cash Equivalents, End of Year | $ | $ | ||||||
| Supplemental Disclosure of Cash Paid During the Year for: | ||||||||
| Interest | $ | $ | ||||||
| Taxes | $ | $ | ( | ) | ||||
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NOTE 28 SELECTED QUARTERLY INFORMATION (UNAUDITED)
| Schedule of selected quarterly information | ||||||||||||||||
| 2021 QUARTERS | ||||||||||||||||
| (Dollars in thousands except per share data) | Fourth | Third | Second | First | ||||||||||||
| Income statement | ||||||||||||||||
| Net interest income | $ | $ | ||||||||||||||
| Provision for loan losses | ||||||||||||||||
| Noninterest income | ||||||||||||||||
| Noninterest expense | ||||||||||||||||
| Net income | ||||||||||||||||
| Earnings per share, basic and diluted * | 0.08 | 0.08 | 0.07 | 0.07 | ||||||||||||
| Period end balance sheet | ||||||||||||||||
| Total loans receivable | $ | $ | ||||||||||||||
| Total assets | ||||||||||||||||
| Total deposits | ||||||||||||||||
| Total stockholders’ equity | 63,631 | 62,518 | 60,964 | 59,347 | ||||||||||||
| 2020 QUARTERS | ||||||||||||||||
| (Dollars in thousands except per share data) | Fourth | Third | Second | First | ||||||||||||
| Income statement | ||||||||||||||||
| Net interest income | $ | $ | $ | |||||||||||||
| Noninterest income | ||||||||||||||||
| Provision for loan losses | ||||||||||||||||
| Noninterest expense | ||||||||||||||||
| Net income (loss) | ||||||||||||||||
| Earnings (loss) per share, basic and diluted | 0.06 | 0.06 | 0.00 | 0.00 | ||||||||||||
| Period end balance sheet | ||||||||||||||||
| Total loans receivable | $ | $ | $ | |||||||||||||
| Total assets | ||||||||||||||||
| Total deposits | ||||||||||||||||
| Total stockholders’ equity | 58,177 | 56,919 | 55,473 | 55,251 | ||||||||||||
| * |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting of New Peoples Bankshares, Inc. New Peoples’ internal control system was designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting practices.
All internal control systems, no matter how well designed, have inherent limitations. Because of these inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation, and may not prevent or detect misstatements. 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.
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Management assessed the effectiveness of New Peoples’ internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control - Integrated Framework” issued in 2013. Based on this assessment, management concluded that the internal control over financial reporting was effective as of December 31, 2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that is designed to ensure that material information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of December 31, 2021.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information contained under the captions “Election of Directors,” “Incumbent Directors,” “Executive Officers Who Are Not Directors,” “Corporate Governance” and “Delinquent Section 16(a) Reports” in the 2022 Proxy Statement that is required to be disclosed in this Item 10 is incorporated herein by reference.
Item 11. Executive Compensation
The information contained under the captions “Director Compensation” and “Executive Compensation and Related Party Transactions” in the 2022 Proxy Statement that is required to be disclosed in this Item 11 is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information contained under the captions “Security Ownership of Management” and “Security Ownership of Certain Beneficial Owners” in the 2022 Proxy Statement that is required to be disclosed in this Item 12 is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information contained under the caption “Executive Compensation and Related Party Transactions” and “Corporate Governance” in the 2022 Proxy Statement that is required to be disclosed in this Item 13 is incorporated herein by reference.
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Item 14. Principal Accountant Fees and Services
The information contained under the caption “Audit Information” in the 2022 Proxy Statement that is required to be disclosed in this Item 14 is incorporated herein by reference.
| Item 15. | Exhibit and Financial Statement Schedules |
(a)(1) The response to this portion of Item 15 is included in Item 8 above.
(a)(2) The response to this portion of Item 15 is included in Item 8 above.
(a)(3) The following exhibits are filed as part of this Form 10-K:
____________________________________
* Denotes management contract.
(b) See Item 15(a)(3) above.
(c) See Items 15(a)(1) and (2) above.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NEW PEOPLES BANKSHARES, INC.
By: /s/ C. TODD ASBURY
C. Todd Asbury
Director, President and Chief Executive Officer
Date: March 31, 2022
By: /s/ CHRISTOPHER G. SPEAKS
Christopher G. Speaks
Executive Vice President, Chief Financial Officer and Treasurer
Date: March 31, 2022
By: /s/ JOHN J. BOCZAR
John J. Boczar
Chief Accounting Officer and Secretary
Date: March 31, 2022
75
POWER OF ATTORNEY
Each of the undersigned hereby appoints C. Todd Asbury and Christopher G. Speaks, and each of them, as attorneys and agents for the undersigned, with full power of substitution, in his name and on his behalf as a director of New Peoples Bankshares, Inc. (the “Registrant”), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Registrant to comply with the Securities Exchange Act of 1934, and any rules, regulations, policies or requirements of the Securities and Exchange Commission (the “Commission”) in respect thereof, in connection with the preparation and filing with the Commission of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “Report”), and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
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Date |
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/s/ C. TODD ASBURY |
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Director, President and |
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March 31, 2022 |
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C. Todd Asbury |
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Chief Executive Officer |
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(Principal Executive Officer) |
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/s/ CHRISTOPHER G. SPEAKS |
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Executive Vice President and |
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March 31, 022 |
Christopher G. Speaks |
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Chief Financial Officer |
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/s/ JOHN J. BOCZAR |
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Chief Accounting Officer |
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March 31, 2022 |
John J. Boczar |
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(Principal Accounting Officer) |
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/s/ TIM BALL |
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Director |
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March 31, 2022 |
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Tim Ball |
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/s/ GINA D. BOGGESS |
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Director |
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March 31, 2022 |
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Gina D. Boggess |
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/s/ J. ROBERT BUCHANAN |
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Director |
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March 31, 2022 |
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J. Robert Buchanan |
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/s/ JOE CARTER |
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Director |
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March 31, 2022 |
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Joe Carter |
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/s/ JOHN D. COX |
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Director |
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March 31, 2022 |
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John D. Cox |
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/s/ CHARLES H. GENT |
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Director |
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March 31, 2022 |
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Charles H. Gent |
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/s/ EUGENE HEARL |
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Director |
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March 31, 2022 |
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Eugene Hearl |
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/s/ HAROLD LYNN KEENE |
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Chairman, Director |
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March 31, 2022 |
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Harold Lynn Keene |
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| /s/ MICHAEL G. MCGLOTHLIN |
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Director |
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March 31, 2022 |
Michael G. McGlothlin |
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/s/ B. SCOTT WHITE |
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Vice Chairman, Director |
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March 31, 022 |
B. Scott White |
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76
Exhibit 4.2
DESCRIPTION OF SECURITIES
As of December 31, 2021, the common stock, par value $2.00 per share, was the only class of securities of New Peoples Bankshares, Inc. (the “Company”) registered under Section 12 of the Securities Exchange Act of 1934, as amended.
The following section describes the general terms and provisions of the shares of the Company’s common stock. You should read the Company’s articles of incorporation, as amended, and bylaws, as amended, for additional information about the common stock. The articles of incorporation and bylaws are included as exhibits to the Company’s Annual Report on Form 10-K, to which this exhibit also is attached.
General
As of December 31, 2021, the Company’s authorized capital stock consisted of 50,000,000 shares of common stock, par value $2.00 per share, 23,922,086 of which were outstanding.
Voting Rights
Each holder of common shares is entitled to one vote per share held on any matter submitted to a vote of shareholders. There are no cumulative voting rights in the election of directors.
Dividends
The Company’s shareholders are entitled to receive dividends or distributions that its board of directors may declare out of funds legally available for those payments. The payment of dividends or distributions by the Company is subject to the restrictions of Virginia law applicable to the declaration of distributions by a corporation. A Virginia corporation generally may not authorize and make distributions if, after giving effect to the distribution, it would be unable to meet its debts as they become due in the usual course of business or if the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if it were dissolved at that time, to satisfy the preferential rights of shareholders whose rights are superior to the rights of those receiving the distribution. In addition, the payment of distributions to shareholders is subject to any prior rights of outstanding preferred stock.
The Company is a corporation separate and distinct from New Peoples Bank, Inc., its bank subsidiary (the “Bank”). As a financial holding company, the Company’s ability to pay dividends is affected by the ability of the Bank to pay dividends to the holding company. The ability of the Bank, as well as the Company, to pay dividends is influenced by bank regulatory requirements and capital guidelines.
No Preemptive or Conversion Rights
Holders of the Company’s common shares do not have preemptive rights to purchase additional shares of any class of the Company’s stock, and have no conversion or redemption rights.
Calls and Assessments
All of the issued and outstanding common shares are fully paid and non-assessable.
Liquidation Rights
In the event of the Company’s liquidation, dissolution or winding up, the holders of common shares (and the holders of any class or series of stock entitled to participate with the common shares in the distribution of assets) shall be entitled to receive, in cash or in kind, the Company’s assets available for distribution remaining after payment or provision for payment of the Company’s debts and liabilities.
Certain Provisions of the Company’ s Articles of Incorporation and Bylaws and Virginia Law
General
The Company’s articles of incorporation and bylaws contain provisions that could make more difficult an acquisition of the Company by means of a tender offer, a proxy contest or otherwise. In addition, Virginia has two antitakeover statutes, the Affiliated Transactions Statute and the Control Share Acquisitions Statute, that could make it more difficult for another party to acquire the Company without the approval of the Company’s board of directors. These provisions are expected to discourage specific types of coercive takeover practices and inadequate takeover bids as well as to encourage persons seeking to acquire control to first negotiate with the Company. Although these provisions may have the effect of delaying, deferring or preventing a change in control, the Company believes that the benefits of increased protection through the potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure the Company outweigh the disadvantages of discouraging these proposals because, among other things, negotiation of such proposals could result in an improvement of their terms.
Shareholder Approval of Certain Transactions
The Company’s articles of incorporation provide that an amendment of the Company’s articles of incorporation, a plan of merger or share exchange, a transaction involving the sale of all or substantially all of the Company’s assets other than in the regular course of business, and a plan of dissolution must be approved by the vote of a majority of all the votes entitled to be cast on such transactions by each voting group entitled to vote on the transaction at a meeting at which a quorum of the voting group is present, provided that the transaction has been approved and recommended by at least two-thirds of the directors in office at the time of such approval and recommendation. If the transaction is not so approved and recommended by two-thirds of the directors in office, then the transaction must be approved by the vote of eighty percent (80%) or more of all the votes entitled to be cast on such transactions by each voting group entitled to vote on the transaction.
Classified Board of Directors
The Company’s articles of incorporation provide that the board of directors shall be divided into three classes as nearly equal in number as possible. The members of each class are elected for a term of three years and until their successors are elected and qualified. As a result, approximately one third of the members of the board of directors are elected each year, and two annual meetings are required for the Company’s shareholders to change a majority of the members constituting the board of directors.
Removal of Directors
The Company’s bylaws currently provide that any director may be removed from office at a meeting called expressly for that purpose by the vote of stockholders holding a majority of the shares entitled to vote at an election of directors.
Advance Notification Requirements
The Company’s bylaws prescribe the procedure that a shareholder must follow to nominate directors or to bring other business before shareholders’ meetings outside of the proxy statement process. For a shareholder to nominate a candidate for director or to bring other business before at an annual meeting of shareholders, written notice of nomination must be received by the Company’s Corporate Secretary not less than 30 days prior to the first anniversary date of the initial notice given to shareholders of record on the record date for the previous annual meeting by or at the direction of the board of directors; provided, however, that such notice shall not be required to be given more than 90 days prior to the annual meeting of shareholders. Notice of nomination of a director must describe various matters regarding the nominee and the shareholder giving the notice. Notice of other business to be brought before the meeting must include a description of the proposed business, the reasons therefore, and other specified matters regarding the shareholder giving the notice.
Exhibit 21
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Name of Subsidiary |
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Incorporation |
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New Peoples Bank, Inc. |
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State of Virginia |
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NPB Web Services, Inc. |
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State of Virginia |
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NPB Capital Trust I |
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State of Delaware |
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NPB Capital Trust 2 |
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State of Delaware |
Exhibit 31.1
CERTIFICATION
I, C. Todd Asbury, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2021 of New Peoples Bankshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 31, 2022
/s/ C. TODD ASBURY
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| C. Todd Asbury | |
| Director, President & Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Christopher G. Speaks, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2021 of New Peoples Bankshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 31, 2022
/s/ CHRISTOPHER G. SPEAKS
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Christopher G. Speaks Executive Vice President & Chief Financial Officer
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Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER AND CHIEF ACCOUNTING OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
The undersigned, as the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, respectively, of New Peoples Bankshares, Inc., certify that, to the best of their knowledge and belief, the Annual Report on Form 10-K for the year ended December 31, 2021, which accompanies this certification, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of New Peoples Bankshares, Inc. at the dates and for the periods indicated. The foregoing certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) and shall not be relied upon for any other purpose. The undersigned expressly disclaim any obligation to update the foregoing certification except as required by law.
| Date: March 31, 2022 | /s/ C. TODD ASBURY | |||
| C. Todd Asbury | ||||
| Director, President & Chief Executive Officer | ||||
| Date: March 31, 2022 | /s/ CHRISTOPHER G. SPEAKS | |||
| Christopher G. Speaks | ||||
| Executive Vice President & Chief Financial Officer | ||||