New Peoples Bankshares Inc 10-Q for FY2021 Q3
New Peoples Bankshares Inc (NWPP)
About this 10-Q
New Peoples Bankshares Inc filed this 10-Q on November 15, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1M
- up 16.5% from $859K a year earlier
- Net income
- $1.85M
- up 29.6% from net income of $1.42M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly
period ended
or
|
|
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 |
|
incorporation or organization) |
|
Identification No.) |
|
|
|
|
|
|
|
|
|
(Address of principal executive offices) |
|
(Zip Code) |
(
(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 |
|
|
None |
|
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.
|
|
|
☑ |
|
No |
☐ |
|
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).
|
|
|
☑ |
|
No |
☐ |
|
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 ☐ |
|
|
|
|
Smaller reporting company |
|
|
|
|
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).
|
|
Yes |
☐ |
|
|
☑ |
|
The number of shares outstanding of the registrant’s common stock was as of November 15, 2021.
NEW PEOPLES BANKSHARES, INC.
INDEX
|
|
Page |
PART I |
FINANCIAL INFORMATION |
|
Item 1. |
Financial Statements |
|
|
|
|
|
Consolidated Statements of Income – Three months ended June 30, 2021 and 2020 (Unaudited) |
3 |
|
|
|
|
Consolidated Statements of Income – Six months ended June 30, 2021 and 2020 (Unaudited) |
4 |
|
|
|
|
Consolidated Statements of Comprehensive Income – Three and six months ended June 30, 2021 and 2020 (Unaudited) |
5 |
|
|
|
|
Consolidated Balance Sheets – June 30, 2021 (Unaudited) and December 31, 2020 |
6 |
|
|
|
|
Consolidated Statements of Changes in Stockholders’ Equity – Three and six months ended June 30, 2021 and 2020 (Unaudited) |
7 |
|
|
|
|
Consolidated Statements of Cash Flows – Six months ended June 30, 2021 and 2020 (Unaudited) |
8 |
|
|
|
|
Notes to Consolidated Financial Statements |
9 |
|
|
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
28 |
|
|
|
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk |
38 |
|
|
|
Item 4. |
Controls and Procedures |
38 |
|
|
|
PART II |
OTHER INFORMATION |
|
|
|
|
Item 1. |
Legal Proceedings |
38 |
|
|
|
Item 1A. |
Risk Factors |
39 |
|
|
|
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
39 |
|
|
|
Item 3. |
Defaults upon Senior Securities |
39 |
|
|
|
Item 4. |
Mine Safety Disclosures |
39 |
|
|
|
Item 5. |
Other Information |
39 |
|
|
|
Item 6. |
Exhibits |
39 |
|
|
|
SIGNATURES |
40 |
|
Part I Financial Information
Item 1 Financial Statements
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
| INTEREST AND DIVIDEND INCOME | 2021 | 2020 | ||||||
| Loans including fees | $ | $ | ||||||
| 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 | — | 450 | ||||||
| NET INTEREST INCOME AFTER | ||||||||
| PROVISION FOR LOAN LOSSES | ||||||||
| NONINTEREST INCOME | ||||||||
| Service charges and fees | ||||||||
| Card processing and interchange | ||||||||
| 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 expense | ||||||||
| 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 | $ | $ | ||||||
| Average Weighted Shares of Common Stock | ||||||||
| Basic and diluted | ||||||||
The accompanying notes are an integral part of these financial statements.
3
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
| 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 | 372 | 2,000 | ||||||
| NET INTEREST INCOME AFTER | ||||||||
| PROVISION FOR LOAN LOSSES | ||||||||
| NONINTEREST INCOME | ||||||||
| Service charges and fees | ||||||||
| Card processing and interchange | ||||||||
| 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 expense | ||||||||
| 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 | $ | $ | ||||||
| Average Weighted Shares of Common Stock | ||||||||
| Basic and diluted | ||||||||
The accompanying notes are an integral part of these financial statements.
4
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(IN THOUSANDS)
(UNAUDITED)
| For
the three months ended September 30, | For
the nine months ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income: | ||||||||||||||||
| Investment securities activity | ||||||||||||||||
| Unrealized (losses) gains arising during the period | ( | ) | ( | ) | ||||||||||||
| Reclassification adjustment for net gains included | ||||||||||||||||
| in net income | ( | ) | ( | ) | ( | ) | ||||||||||
| Other comprehensive (loss) gain 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.
5
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)
(UNAUDITED)
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| 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 | ||||||||
| Other assets | ||||||||
| Total Assets | $ | |||||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Noninterest bearing | $ | |||||||
| Interest-bearing | ||||||||
| Total Deposits | ||||||||
| Borrowed funds | ||||||||
| Lease liabilities – operating leases | ||||||||
| Accrued interest payable | ||||||||
| Accrued expenses and other liabilities | ||||||||
| Total Liabilities | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock - $ par value; shares authorized;
shares issued and outstanding at September 30, 2021 and December 31, 2020 | ||||||||
| 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.
6
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(IN THOUSANDS INCLUDING SHARE DATA)
(UNAUDITED)
| Shares of Common Stock | Common Stock | Additional Paid-in- Capital | Retained (Deficit) Earnings | Accumulated
Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Other comprehensive income, net of tax | — | |||||||||||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Other comprehensive income, net of tax | — | |||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Other comprehensive income, net of tax | — | |||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Other comprehensive income, net of tax | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Other comprehensive income, net of tax | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Other comprehensive income, net of tax | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
The accompanying notes are an integral part of these financial statements.
7
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(IN THOUSANDS)
(UNAUDITED)
| 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 | ( | ) | ( | ) | ||||
| Net gain on sale of securities available-for-sale | ( | ) | ( | ) | ||||
| Gain on sale of mortgage loans | ( | ) | ( | ) | ||||
| (Gain) Loss on sale of premises and equipment | ( | ) | ||||||
| Loss on sale of repossessed assets | ||||||||
| Gain on sale of other real estate owned | ( | ) | ( | ) | ||||
| Loans originated for sale | ( | ) | ( | ) | ||||
| Proceeds from sales of loans originated for sale | ||||||||
| Adjustment to carrying value of premises transferred to other real estate owned | ||||||||
| Adjustment of carrying value of other real estate owned | ||||||||
| Adjustment of carrying value of repossessed assets | ||||||||
| Amortization/accretion of bond premiums/discounts | ||||||||
| Deferred tax expense | ||||||||
| Net change in: | ||||||||
| Accrued interest receivable | ( | ) | ||||||
| Other assets | ( | ) | ( | ) | ||||
| Accrued interest payable | ( | ) | ( | ) | ||||
| Accrued expenses and other liabilities | ||||||||
| Net Cash Provided by Operating Activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Net decrease (increase) in loans | ( | ) | ||||||
| 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 redemption (purchase) of equity securities (restricted) | ( | ) | ||||||
| Payments for the purchase of premises and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of premises and equipment | ||||||||
| Proceeds from sales of repossessed assets | ||||||||
| 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 ACTIVITIES | ||||||||
| Net change in short term borrowings | ( | ) | ||||||
| Net change in noninterest bearing deposits | ||||||||
| Net change in interest bearing deposits | ( | ) | ||||||
| Net Cash Provided by Financing Activities | ||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ) | ||||||
| Cash and Cash Equivalents, Beginning of the Period | ||||||||
| Cash and Cash Equivalents, End of the Period | $ | $ | ||||||
| Supplemental Disclosure of Cash Paid During the Period for: | ||||||||
| Interest | $ | $ | ||||||
| Taxes | $ | $ | ||||||
| Supplemental Disclosure of Non-cash Transactions: | ||||||||
| Other real estate acquired in settlement of foreclosed loans | $ | $ | ||||||
| Loans made to finance sale of other real estate owned | $ | $ | ||||||
| Transfer of premises and equipment to other real estate | $ | $ | ||||||
| Change in unrealized gains on securities available for sale | $ | ( | ) | $ | ||||
The accompanying notes are an integral part of these financial statements.
8
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 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 Federal Reserve). The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwest Virginia, southern West Virginia, western North Carolina and northeastern Tennessee. 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
These consolidated financial statements conform to U. S. generally accepted accounting principles (GAAP) and to general industry practices. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position at September 30, 2021 and December 31, 2020, and the results of operations for the three and nine month periods ended September 30, 2021 and 2020. The Notes included herein should be read in conjunction with the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.
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.
The preparation of financial statements in conformity with 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.
Basic income per share computations are based on the weighted average number of shares outstanding during each period. Dilutive earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate to outstanding common stock warrants and are determined by the Treasury Method. For the three-month and nine-month periods ended September 30, 2021 and 2020, there were no potential common shares. Basic and diluted net income per common share calculations follows:
| Schedule Basic and diluted net income per common share | ||||||||||||||||
| (Dollars
in Thousands, Except Share and Per Share Data) | For
the three months ended September 30, | For
the nine months ended September 30, | ||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Weighted average shares outstanding | ||||||||||||||||
| Weighted average dilutive shares outstanding | ||||||||||||||||
| Basic and diluted income per share | $ | $ | $ | $ | ||||||||||||
9
NOTE 4 CAPITAL
Capital Requirements and Ratios
The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February 2015 and, therefore, is not 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 September 30, 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 September 30, 2021 and December 31, 2020, respectively.
| Schedule Bank’s actual capital amounts and ratios | ||||||||||||||||||||||||
| Actual | Minimum Capital Requirement | Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
| (Dollars are in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
| September 30, 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 September 30, 2021, and December 31, 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 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. All ratios shown in the table above exceed the minimum requirements. The Bank’s capital conservation buffer as of September 30, 2021, was 8.37%.
10
NOTE 5 INVESTMENT SECURITIES
The amortized cost and estimated fair value of available-for-sale (AFS) securities as of September 30, 2021 and December 31, 2020 is as follows:
| Schedule of estimated fair value of available-for-sale (AFS) securities | ||||||||||||||||
| Gross | Gross | Approximate | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| (Dollars are in thousands) | Cost | Gains | Losses | Value | ||||||||||||
| September 30, 2021 | ||||||||||||||||
| U.S. Treasuries | $ | $ | $ | $ | ||||||||||||
| U.S. Government Agencies | ||||||||||||||||
| Taxable municipals | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Mortgage backed securities | ||||||||||||||||
| Total Securities AFS | $ | $ | $ | $ | ||||||||||||
| December 31, 2020 | ||||||||||||||||
| U.S. Government Agencies | $ | $ | $ | $ | ||||||||||||
| Taxable municipals | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Mortgage backed securities | ||||||||||||||||
| Total Securities AFS | $ | $ | $ | $ | ||||||||||||
The following table details unrealized losses and related fair values in the AFS portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2021 and December 31, 2020.
| Schedule of unrealized loss position | ||||||||||||||||||||||||
| 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 | ||||||||||||||||||
| September 30, 2021 | ||||||||||||||||||||||||
| U.S. Treasuries | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| U.S. Government Agencies | ||||||||||||||||||||||||
| Taxable municipals | ||||||||||||||||||||||||
| Mortgage backed securities | ||||||||||||||||||||||||
| Total Securities AFS | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||
| U.S. Government Agencies | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Taxable municipals | ||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||
| Mortgage backed securities | ||||||||||||||||||||||||
| Total Securities AFS | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
At September 30, 2021, there were 78 securities in a loss position, of which 26 have been in a loss position for twelve months or more. Management believes that all unrealized losses have resulted from temporary changes in the interest rates and current market conditions and are not a result of credit deterioration. Management does not intend to sell, and it is not likely that the Bank will be required to sell any of the securities referenced in the table above before recovery of their amortized cost.
Investment securities
with a carrying value of $
11
The following table summarizes sales of AFS debt securities for the nine months-ended September 30,
| Schedule summarizes sales of AFS debt securities | ||||||||
| (Dollars are in thousands) | 2021 | 2020 | ||||||
| Proceeds | $ | $ | ||||||
| Gains | ||||||||
| Losses | ( | ) | ||||||
| Tax provision (benefit) | ( | ) | ||||||
The amortized cost and fair value of investment securities at September 30, 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.
| Schedule amortized cost and fair value of investment securities | ||||||||||||
| Weighted | ||||||||||||
| (Dollars are in thousands) | Amortized | Fair | Average | |||||||||
| Securities Available-for-Sale | Cost | Value | Yield | |||||||||
| Due in one year or less | $ | $ | % | |||||||||
| Due after one year through five years | % | |||||||||||
| Due after five years through ten years | % | |||||||||||
| Due after ten years | % | |||||||||||
| Total | $ | $ | % | |||||||||
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 $
NOTE 6 LOANS
There were $109 thousand of loans held for sale at September 30, 2021 and $389 thousand at December 31, 2020, which represents mortgage loans originated for sale. These originations and sales are executed on a best efforts basis.
Loans receivable outstanding as of September 30, 2021 and December 31, 2020 are summarized as follows:
| Schedule of Loans receivable on nonaccrual status | ||||||||
| (Dollars are in thousands) | September
30, 2021 | December 31, 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 September 30, 2021 and December 31, 2020 were $9.6 million and $34.8 million of Paycheck Protection Program (PPP) loans, respectively, that are guaranteed by the Small Business Administration (SBA). Fees paid by SBA for round 1 PPP loans ranged from 1% to 5% of the amount borrowed, with 5% paid on loans up to $350 thousand, 3% on loans between $350 thousand and $2 million, and 1% on loans over $2 million. For round 2 PPP loans the fee structure was modified to the lesser of 50%, or $2.5 thousand for loans up to $50 thousand, 5% on loans ranging from $50 thousand to $350 thousand; 3% on loans between $350 thousand and $2 million and 1% on loans over $2 million. Included in total loans above are net deferred fees of $390 thousand and $496 thousand, including unearned PPP loans fees, at September 30, 2021 and December 31, 2020, respectively. Income from net deferred fees 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.
12
Loans receivable on nonaccrual status as of September 30, 2021 and December 31, 2020 are summarized as follows:
| Schedule Of Summary Loans receivable on nonaccrual status | ||||||||
| (Dollars are in thousands) | September
30, 2021 | December 31, 2020 | ||||||
| Real estate secured: | ||||||||
| Commercial | $ | $ | ||||||
| Construction and land development | ||||||||
| Residential 1-4 family | ||||||||
| Multifamily | ||||||||
| Farmland | ||||||||
| Total real estate loans | ||||||||
| Commercial | ||||||||
| Consumer installment loans and other loans | ||||||||
| Total loans receivable on nonaccrual status | $ | $ | ||||||
Total interest income not recognized on nonaccrual loans for the nine months ended September 30, 2021 and September 30, 2020 was $445 thousand and $418 thousand, respectively.
The following tables present information concerning the Company’s investment in loans considered impaired as of September 30, 2021 and December 31, 2020:
| Summary of impaired loans | ||||||||||||
As of September 30, 2021 (Dollars are in thousands) | Recorded
Investment | Unpaid Principal Balance | Related
Allowance | |||||||||
| With no related allowance recorded: | ||||||||||||
| Real estate secured: | ||||||||||||
| Commercial | $ | $ | $ | |||||||||
| Construction and land development | ||||||||||||
| Residential 1-4 family | ||||||||||||
| Multifamily | ||||||||||||
| Farmland | ||||||||||||
| Commercial | ||||||||||||
| Agriculture | ||||||||||||
| Consumer installment loans | ||||||||||||
| All other loans | ||||||||||||
| With an allowance recorded: | ||||||||||||
| Real estate secured: | ||||||||||||
| Commercial | ||||||||||||
| Construction and land development | ||||||||||||
| Residential 1-4 family | ||||||||||||
| Multifamily | ||||||||||||
| Farmland | ||||||||||||
| Commercial | ||||||||||||
| Agriculture | ||||||||||||
| Consumer installment loans | ||||||||||||
| All other loans | ||||||||||||
| Total | $ | $ | $ | |||||||||
13
As of December 31, 2020 (Dollars are in thousands) | Recorded
Investment | Unpaid Principal Balance | Related
Allowance | |||||||||
| With no related allowance recorded: | ||||||||||||
| Real estate secured: | ||||||||||||
| Commercial | $ | $ | $ | |||||||||
| Construction and land development | ||||||||||||
| Residential 1-4 family | ||||||||||||
| Multifamily | ||||||||||||
| Farmland | ||||||||||||
| Commercial | ||||||||||||
| Agriculture | ||||||||||||
| Consumer installment loans | ||||||||||||
| All other loans | ||||||||||||
| With an allowance recorded: | ||||||||||||
| Real estate secured: | ||||||||||||
| Commercial | ||||||||||||
| Construction and land development | ||||||||||||
| Residential 1-4 family | ||||||||||||
| Multifamily | ||||||||||||
| Farmland | ||||||||||||
| Commercial | ||||||||||||
| Agriculture | ||||||||||||
| Consumer installment loans | ||||||||||||
| All other loans | ||||||||||||
| Total | $ | $ | $ | |||||||||
The following tables present information concerning the Company’s average impaired loans and interest recognized on those impaired loans, for the periods indicated:
| Nine Months Ended | ||||||||||||||||
| September 30, 2021 | September 30, 2020 | |||||||||||||||
(Dollars are in thousands) | Average
Recorded Investment | Interest
Income Recognized | Average
Recorded Investment | Interest
Income Recognized | ||||||||||||
| Real estate secured: | ||||||||||||||||
| Commercial | $ | $ | $ | $ | ||||||||||||
| Construction and land development | ||||||||||||||||
| Residential 1-4 family | ||||||||||||||||
| Multifamily | ||||||||||||||||
| Farmland | ||||||||||||||||
| Commercial | ||||||||||||||||
| Agriculture | ||||||||||||||||
| Consumer installment loans | ||||||||||||||||
| All other loans | ||||||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Real estate secured: | ||||||||||||||||
| Commercial | ||||||||||||||||
| Construction and land development | ||||||||||||||||
| Residential 1-4 family | ||||||||||||||||
| Multifamily | ||||||||||||||||
| Farmland | ||||||||||||||||
| Commercial | ||||||||||||||||
| Agriculture | ||||||||||||||||
| Consumer installment loans | ||||||||||||||||
| All other loans | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
14
| Three Months Ended | ||||||||||||||||
| September 30, 2021 | September 30, 2020 | |||||||||||||||
(Dollars are in thousands) | Average
Recorded Investment | Interest
Income Recognized | Average
Recorded Investment | Interest
Income Recognized | ||||||||||||
| Real estate secured: | ||||||||||||||||
| Commercial | $ | $ | $ | $ | ||||||||||||
| Construction and land development | ||||||||||||||||
| Residential 1-4 family | ||||||||||||||||
| Multifamily | ||||||||||||||||
| Farmland | ||||||||||||||||
| Commercial | ||||||||||||||||
| Agriculture | ||||||||||||||||
| Consumer installment loans | ||||||||||||||||
| All other loans | ||||||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Real estate secured: | ||||||||||||||||
| Commercial | ||||||||||||||||
| Construction and land development | ||||||||||||||||
| Residential 1-4 family | ||||||||||||||||
| Multifamily | ||||||||||||||||
| Farmland | ||||||||||||||||
| Commercial | ||||||||||||||||
| Agriculture | ||||||||||||||||
| Consumer installment loans | ||||||||||||||||
| All other loans | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
An age analysis of past due loans receivable as of September 30, 2021 and December 31, 2020 is below. At September 30, 2021 and December 31, 2020, no loans over 90 days past due were accruing.
| Summary age analysis of past due loans receivable | ||||||||||||||||||||||||
As of September 30, 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 | $ | $ | ||||||||||||||||||||||
| Construction and land development | ||||||||||||||||||||||||
| Residential 1-4 family | ||||||||||||||||||||||||
| Multifamily | ||||||||||||||||||||||||
| Farmland | ||||||||||||||||||||||||
| Total real estate loans | ||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Agriculture | ||||||||||||||||||||||||
| Consumer installment loans | ||||||||||||||||||||||||
| All other loans | ||||||||||||||||||||||||
| Total loans | $ | $ | ||||||||||||||||||||||
15
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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Construction and land development | ||||||||||||||||||||||||
| Residential 1-4 family | ||||||||||||||||||||||||
| Multifamily | ||||||||||||||||||||||||
| Farmland | ||||||||||||||||||||||||
| Total real estate loans | ||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Agriculture | ||||||||||||||||||||||||
| Consumer installment loans | ||||||||||||||||||||||||
| All other loans | ||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
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 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 relevant information analyzed 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 as 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.
Based on the most recent analysis performed, the risk categories of loans receivable as of September 30, 2021 and December 31, 2020 were as follows:
| Schedule of summary of category of loans receivable | ||||||||||||||||||||
As of September 30, 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 | $ | $ | $ | $ | $ | |||||||||||||||
16
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
In determining the amount of our allowance for loan losses, 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 September 30, 2021 and December 31, 2020. Additionally, due to uncertainties presented by the ongoing pandemic and the resulting economic uncertainty, internal and external qualitative factors were revised accordingly. This revision included reviewing our internal scoring related to loan modifications and extensions, and external factors, specifically, unemployment and other economic factors.
The following table presents activity in the allowance for loan losses for the nine- and three-month periods ending September 30, 2021, and 2020, respectively. Additionally, the allocation of the allowance by recorded portfolio segment and impairment method is presented as of September 30, 2021, and December 31, 2020, respectively.
17
| Summary of activity in the allowance for loan losses | ||||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||
| Nine months ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Three months ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Allowance for loan losses at September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
| Individually evluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Loans at September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
| Individually evluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
18
| 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 | ||||||||||||||||||||||||||||||
| Allowance for loan losses at December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Individually evluat ed for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Loans at December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||
| Nine months ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||||||
| Provision | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Three months ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
NOTE 8 TROUBLED DEBT RESTRUCTURINGS
There were $2.8 million in loans that were classified as troubled debt restructurings (TDRs) at September 30, 2021 and $4.0 million at December 31, 2020. All loans considered to be TDRs are individually evaluated for impairment as part of the allowance for loan losses calculation.
19
The following table presents information related to loans modified as TDRs during the nine and three months ended September 30, 2021 and 2020.
| Schedule of loans modified as TDRs | ||||||||||||||||||||||||
| For the nine months ended September 30, 2021 | For the nine months ended September 30, 2020 | |||||||||||||||||||||||
Troubled Debt Restructurings (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 | $ | $ | $ | $ | ||||||||||||||||||||
| Construction and land Development | ||||||||||||||||||||||||
| Residential 1-4 family | ||||||||||||||||||||||||
| Multifamily | ||||||||||||||||||||||||
| Farmland | ||||||||||||||||||||||||
| Total real estate loans | ||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Agriculture | ||||||||||||||||||||||||
| Consumer installment loans | ||||||||||||||||||||||||
| All other loans | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||
| For the three months ended September 30, 2021 | For the three months ended September 30, 2020 | |||||||||||||||||||||||
Troubled Debt Restructurings (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 | $ | $ | $ | $ | ||||||||||||||||||||
| Construction and land Development | ||||||||||||||||||||||||
| Residential 1-4 family | ||||||||||||||||||||||||
| Multifamily | ||||||||||||||||||||||||
| Farmland | ||||||||||||||||||||||||
| Total real estate loans | ||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Agriculture | — | — | — | |||||||||||||||||||||
| Consumer installment loans | ||||||||||||||||||||||||
| All other loans | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||
During the three months and nine months ended September 30, 2021, no loans were modified for which the modification was considered to be a troubled dept restructuring.
During the three
months ended September 30, 2020, one modified loan with a balance of $
During the three
months ended September 30, 2021, one loan with a balance of $
20
During the three
months ended September 30, 2020, no loans previously modified as troubled debt restructurings defaulted. During the nine months ended
September 30, 2020, one loan previously modified as a troubled debt restructuring, with a balance of $
In determining the allowance for loan losses, management considers TDRs and subsequent defaults in these restructurings in its estimate. The Company evaluates all TDRs 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 the loan.
NOTE 9 OTHER REAL ESTATE OWNED
The following table summarizes the activity in other real estate owned for the nine months ended September 30, 2021 and the year ended December 31, 2020:
| Schedule Of other real estate owned | ||||||||
| (Dollars are in thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Balance, beginning of period | $ | $ | ||||||
| Additions | ||||||||
| Transfers from premises and equipment | ||||||||
| Proceeds from sales | ( | ) | ( | ) | ||||
| Proceeds from insurance claims | ( | ) | ||||||
| Loans made to finance sales | ( | ) | ||||||
| Adjustment of carrying value | ( | ) | ( | ) | ||||
| Gains from sales, net | ||||||||
| Balance, end of period | $ | $ | ||||||
During the three
months ended September 30, 2021, three former branch office sites were transferred to Other Real Estate Owned at a value of $
NOTE 10 FAIR VALUES
The financial reporting standard, “Fair Value Measurements and Disclosures” provides a framework for measuring fair value under generally accepted accounting principles and requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans and other real estate acquired through foreclosure).
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair Value Measurements and Disclosures also establish fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.
Level 1: Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an exchange market, as well as U. S. Treasury, other U. S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.
21
Level 3: Significant unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.
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 if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, or by dealers or brokers in active over-the counter markets. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
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 values 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.
Foreclosed Assets – Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Foreclosed assets are carried at the lower of the 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 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.
Assets and liabilities measured at fair value are as follows as of September 30, 2021 (for purpose of this table the impaired loans are shown net of the related allowance):
| Schedule Assets and liabilities measured at fair value | ||||||||||||
September 30, 2021 (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 | ||||||||||||
| Impaired loans | ||||||||||||
| Total | $ | $ | $ | |||||||||
22
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):
December 31, 2020 (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 | ||||||||||||
| Impaired loans | ||||||||||||
| Total | $ | $ | $ | |||||||||
For Level 3 assets measured at fair value on a recurring or non-recurring basis as of September 30, 2021 and December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:
| Schedule of significant unobservable inputs Level 3 assets | ||||||||||||||||||||
|
(Dollars in thousands) |
|
Fair Value September 30, 2021 |
|
|
Fair Value at December 31, 2020 |
|
|
Valuation Technique |
|
|
Significant Unobservable Inputs |
|
|
General Range of Significant Unobservable Input Values |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Real Estate Owned |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
Discounts to reflect current market conditions and estimated costs to sell |
|
|
|
|
|
Fair Value of Financial Instruments
Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to
estimate the value, is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument.
The following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.
23
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 as of September 30, 2021 and December 31, 2020 are as follows:
| Schedule fair value 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) | |||||||||||||||
| September 30, 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, 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 values of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities and accrued interest approximates fair value and are excluded from the table above.
In accordance with our adoption of Accounting Standards Update (ASU) 2016-01 in 2018, the methods utilized to measure the fair value of financial instruments at September 30, 2021 and December 31, 2020, represent an approximation of exit price; however, an actual exit price may differ.
NOTE 11 LEASING ACTIVITIES
As
of September 30, 2021, the Bank leases five branch office sites resulting from sale leaseback transactions entered into in 2017 and 2019.
The lease agreements have maturity dates ranging from May 2032 to September 2034. While it is assumed that there are currently no circumstances
in which the leases would be terminated prior to expiration, on October 1, 2021, the company repurchased the branch office that was sold
under a sale leaseback transaction in 2019. The weighted average remaining life of the lease terms at September 30, 2021 was
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 September 30, 2021 was
For the nine months
ended September 30, 2021 and 2020, operating lease expenses were $
24
The Company’s other operating leases were evaluated and determined to be immaterial to the financial statements. At September 30, 2021, future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands):
| Schedule Of non-cancellable operating lease | |||||
| 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less imputed interest | |||||
| Total | $ |
After considering the repurchase of the branch office October 1, 2021, minimum future rental commitments will consist of total lease payments of $4.956 million less imputed interest of $899 thousand, for a total of $4.057 million.
NOTE 12 REVENUE FROM CONTRACTS WITH CUSTOMERS
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 three and nine months ended September 30, 2021 and 2020.
| Schedule of Redeemable Noncontrolling Interest | ||||||||||||||||
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Service charges and fees | $ | $ | $ | $ | ||||||||||||
| Card Processing and interchange income | ||||||||||||||||
| Gain on sale of securities available-for-sale (1) | ||||||||||||||||
| Insurance and investment fees | ||||||||||||||||
| Other noninterest income | ||||||||||||||||
| Total Noninterest Income | $ | $ | $ | $ | ||||||||||||
| (1) |
NOTE 13 NONINTEREST EXPENSES
Other operating expenses, included as part of noninterest expenses, consisted of the following for the periods presented:
| Schedule of noninterest expenses | ||||||||||||||||
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| (Dollars are in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Advertising | $ | $ | $ | $ | ||||||||||||
| ATM network expense | ||||||||||||||||
| Legal and professional fees | ||||||||||||||||
| Consulting fees | ||||||||||||||||
| Loan related expenses | ||||||||||||||||
| Printing and supplies | ||||||||||||||||
| FDIC insurance premiums | ||||||||||||||||
| Other real estate owned expenses, net | ||||||||||||||||
| Other operating expenses | ||||||||||||||||
| Total other operating expenses | $ | $ | $ | $ | ||||||||||||
25
NOTE 14 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. No subsequent events have occurred since September 30, 2021, except for the repurchase of a branch office site that had been previously sold under a sale leaseback transaction in 2019.
NOTE 15 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.
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 Company does not expect these amendments to have a material effect on its financial statements.
26
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 Company does not expect these amendments to 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.
27
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Caution About Forward Looking Statements
We make forward looking statements in this quarterly report on Form 10-Q 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. 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;
- 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.
28
Critical Accounting Policies
For discussion of our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2020 (the 2020 10-K). Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting policies relate to our provision for loan losses and the calculation of our deferred tax asset and 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 further deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional provisions could be required.
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. In the past, the Company provided a valuation allowance on its net deferred tax assets where it was deemed more likely than not such assets would not be realized. At September 30, 2021 and December 31, 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 “Deferred Tax Asset and Income Taxes” below.
COVID-19 Pandemic
Since the first quarter of 2020, COVID-19 has adversely affected, and will continue to adversely affect, economic activity globally, nationally and locally. Market interest rates declined significantly and remain at historically low levels. In early 2020, the Federal Open Market Committee (FOMC) reduced the target federal funds rate twice by a total of 150 basis points (bps). As a result of these actions the target federal funds rate now stands at 0.00% - 0.25% and the prime interest rate stands at 3.25%. While the FOMC has recently signaled its intention to ease interest rate accommodations, it is expected that it will be mid-2022 before overt action is taken to raise interest rates.
State and local governments have eased many of their executive orders relating to mask-wearing, social distancing, and attendance limitations. However, with the rise in instances of the Delta variant of COVID-19, some of these executive orders have been reinstated. During the third quarter of 2021, supply chain constraints became more prevalent, adversely affecting many businesses. Price inflation is also being seen in many types of consumer products, including groceries and fuel. Although there are signs of economic improvement; specifically, improved employment statistics, it appears the improvement may be uneven, and the expectation of any sustained recovery is impossible to predict. Previously, economic conditions such as these have led certain industries and individual businesses to reduce operations and staffing, and in some cases to close, either temporarily or permanently.
As the uncertainty created by the pandemic persists, we continue to meet the needs of our customers. Since the first quarter of 2020, we have maintained a committee dedicated to managing our response to the pandemic. This has included marshalling supplies and personal protective equipment, coordinating employee and customer communications, evaluating staffing and maintaining compliance with various mandates and regulations. All of our branch offices have been fully open since April 2021. We continue to maintain diligence, including the practices of daily self-assessments and temperature monitoring for all employees prior to entering their worksite. Even so, we have had exposure instances that cause us to temporarily close offices, or reduce service to drive-thru only, and quarantine employees. Several departments have reinstituted remote work protocols with employees alternating weeks working on and off site. Additionally, we encourage our employees to be vaccinated.
Last year, as part of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), the Small Business Administration (SBA) was authorized to guarantee Paycheck Protection Program (PPP) loans used by borrowers for payroll and other permitted purposes. The SBA provided a 100% guarantee and paid originators a processing fee ranging from 1% to 5%, based on the loan amount. We funded a total of $44.5 million of these loans (Round 1) for our customers through August 2020, when the funding period closed, and received $1.6 million in net fees from the SBA, which is being recognized as income over the terms of these loans.
29
In December 2020, the Consolidated Appropriations Act, 2021 was enacted providing additional economic relief related to the COVID-19 pandemic. This legislation included a second round (Round 2) of PPP loans. We participated in this program and funded 568 Round 2 loans totaling $25.3 million through June 30, 2021. The total remaining balances of PPP loans, including both Round 1 and Round 2, at September 30, 2021 was $9.6 million. Of the combined $69.8 million loans funded in both Round 1 and Round 2, 1,144 loans have received full or partial forgiveness payments from the SBA totaling $60.2 million, of which 1,004 loans totaling $50.4 million received forgiveness during the first nine months of 2021.
With the end of the second round of the PPP loan program, our efforts are now focused on assisting borrowers in applying for and obtaining forgiveness through the SBA of the $9.6 million of PPP loans remaining at September 30, 2021.
In response to the economic impact brought on by the COVID-19 pandemic, banking and financial regulators provided guidance to financial institutions regarding borrower requests for forbearance. In general, short-term deferrals or other minor modifications extended to borrowers who were current in their loan obligations at December 31, 2019, were not considered troubled debt restructurings (TDRs) or impairments. These accommodations have been provided in the form of payment deferrals or conversion to interest only for a period of time, generally three to six months. As of September 30, 2021, of the 648 loans, totaling $103.4 million, which received some form of forbearance in accordance with the applicable legislative and regulatory guidelines, none remain in forbearance.
In summary, the lingering, adverse economic impact of the COVID-19 pandemic has been extensive and wide ranging, resulting in a steep decline in interest rates, reduced participation in the labor force and supply chain backlogs resulting in a decline in economic output, and we cannot reasonably estimate the term or intensity of any prolonged adverse impact on our financial position, operations or liquidity.
London Interbank Offering Rate
The use of the London Interbank Offering Rate (LIBOR) as a benchmark interest rate will be ending later in 2021, and this may impact our future interest rate structure. We use LIBOR in pricing some of our interest earning assets and liabilities, including our trust preferred securities. At this time, it appears that LIBOR will be replaced by the Secured Overnight Financing Rate (SOFR), which is a transparent measure of the cost of borrowing cash overnight collateralized by Treasury securities, as SOFR is now being listed on quotation systems and is being incorporated into instruments and transactions previously tied to LIBOR.
The United Kingdom’s Financial Conduct Authority (FCA), who is the regulator of LIBOR, announced on March 5, 2021, that they will no longer require any panel bank to continue to submit LIBOR after December 31, 2021. As it pertains to U.S. dollar LIBOR, the FCA will consider the case to require continued publication, on a synthetic basis, of 1-month, 3-month and 6-month LIBOR settings through June 30, 2023. After such date, the LIBOR settings will no longer be representative and this index will not be restored.
It should be noted, however, that United States bank regulators, in a joint statement, have urged banks to stop using LIBOR altogether on new transactions by the end of 2021 to avoid the creation of safety and soundness risk. The Federal Reserve Bank of New York has created a working group called the Alternative Reference Rate Committee (ARRC) to assist U.S. institutions in transitioning away from LIBOR as a benchmark interest rate. The ARRC has recommended the use of the SOFR as a replacement index for LIBOR. Because there is not yet a consensus as to what rate or rates may become acceptable alternatives to LIBOR, we cannot predict the effect of any such alternatives on the value of our LIBOR-based variable-rate loans, as well as LIBOR-based securities, trust preferred securities, or other securities or financial arrangements. Regardless of whether SOFR or some other benchmark rate replaces LIBOR, we do not anticipate that the change will have a material impact on our ability to negotiate and price earning assets and liabilities. However, the transition to an alternative reference rate for new contracts, or the implementation of a substitute index or indices for the calculation of interest rates under the Company’s existing loan agreements with borrowers or other financial arrangements, could change the Company’s market risk profile, interest margin, interest spread and pricing models. This may cause the Company to incur significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept a substitute index or indices, and may result in disputes or litigation with customers or other counterparties over the appropriateness or comparability to LIBOR of any substitute index or indices.
Overview and Highlights
For the nine months ended September 30, 2021, we earned net income of $5.1 million, which equates to $0.21 per share, and is $3.6 million higher than the $1.5 million net income we earned during the same period in 2020. Most components of the income statement improved. Net interest income grew $1.8 million, provision for loan losses decreased $1.6 million, and non-interest income increased $1.6 million. Non-interest expense increased $415 thousand as we absorbed losses on disposals of three former branch offices. Consequently, income tax expense increased $969 thousand due to the increase in net income before income taxes. Although interest rates are generally lower, net interest income increased due to the reduction in interest expense with interest income improving slightly due to the accelerated accretion of fee income from PPP loan forgiveness offsetting the impact of lower interest rates.
30
The balance sheet grew to $800.8 million as of September 30, 2021, from $756.3 million as of December 31, 2020, with deposit growth providing funds for investment growth. Our Boone, North Carolina, loan production office, which opened in the fourth quarter of 2020, is positively affecting originations of commercial and commercial real estate loans, as well as residential mortgage loan originations brokered through or sold into the secondary market. Deposit growth is primarily due to stimulus payments and PPP funds received by our customers, which has helped to drive down our cost of funds, as these deposit accounts are generally non-interest bearing. As a result of the improved earnings, we returned to a positive retained earnings position at September 30, 2021, after several years of being a deficit balance.
As a follow-on to the operational assessment initiated in 2019 and implemented in 2021, we have identified several areas to assess our current position and develop means of improvements. The areas we are assessing include reducing the level of nonperforming assets, improving our secondary mortgage origination operations, improving marketing and development to better align with bank-wide and individual market goals; reviewing compensation structure to better align with bank-wide goals, and improving operations and efficiencies in the loan origination and operations functions. As part of the initiative to reduce nonearning assets, three former branch office sites were sold during the third quarter, resulting in net gains of $190 thousand, and three more were transferred to OREO, after writedowns of $1.1 million. Since September 30, 2021, an additional former branch office site was auctioned successfully, and one of the sites transferred to OREO is under a sales agreement, with both transactions expected to close during the fourth quarter. As part of our efforts to enhance our mortgage operations, we have implemented a new compensation plan for mortgage originators and realigned the department to improve both origination efforts and backroom support.
Comparison of the nine months ended September 30, 2021 to September 30, 2020
Overall, during the nine months ended September 30, 2021, compared to the same period in 2020, net income has improved 240% to $5.1 million, or $0.21 per share, from $1.5 million, or $0.06 per share. Interest income was up and interest expense was down, resulting in an improvement of $1.8 million in net interest income. Other primary drivers of the improvement were provision for loan losses, which was down $1.6 million, and non-interest income, which was up $1.6 million.
Year-to-date highlights include:
| · | Net interest income improved to $20.5 million for the first nine months of 2021, an improvement of $1.8 million, or 9.6%, compared to the same period in 2020; |
| · | Net interest margin was 3.68% for the first nine months of 2021, an increase of 3 basis points compared to 3.65% for the first nine months of 2020; |
| · | Investment securities totaling $77.2 million were purchased during the first nine months of 2021, accounting for the $56.8 million growth of that portfolio; |
| · | Investment securities totaling $7.7 million were sold during the third quarter of 2021, resulting in gains of $322 thousand; |
| · | Provision for loans losses was $372 thousand for the first nine months of 2021, a reduction of $1.6 million, or 81.4%, compared to the first nine months of 2020; |
| · | Noninterest income was $7.5 million, an increase of $1.6 million, or 26.5%, compared to the first nine months of 2020; |
| · | Total noninterest expense was $21.1 million, an increase of $415 thousand, or 2.0%, compared to the first nine months of 2020; and |
| · | Occupancy and equipment expense was $4.6 million, an increase of $1.2 million, or 34.8%, compared to the nine months of 2020. |
| · | Retained earnings returned to a positive balance in the third quarter of 2021, after several years of being a deficit balance. |
During the first nine months of 2021 compared to the first nine months of 2020, the increase of $1.8 million in net interest income was due primarily to a reduction in interest expense on deposits of $1.6 million. This reduction in interest expense on deposits was driven mainly by a reduction in the average cost of retail time deposits, which declined 60 basis points, to 1.00% from 1.60%, plus a decrease in average balances of $34.7 million. Interest income on earning assets was essentially unchanged, as an increase of $1.3 million in loan fees offset a decrease of $1.3 million in interest income on loans. The increase in loan fee income is a result of recognition of deferred fees on PPP loans forgiven. As the PPP portfolio stands at $9.6 million at September 30, 2021, we expect the fee revenue earned from these loans to have largely run its course by year-end. Although average loan balances grew $9.6 million, average yields decreased to 4.40% from 4.78%, which caused the decrease in interest income. The yield on PPP loans is 1.00% (excluding the impact of deferred fee income), which also negatively affects our loan yields.
31
While interest income on deposits with other banks decreased $122 thousand, it was more than offset by increased interest income on investment securities of $137 thousand. The primary driver of the reduced interest income on deposits with other banks was the reduction in average yields to 0.11% from 0.44%. The improvement in interest income on investment securities was mainly a result of $24.0 million of increased average balances, although yields declined to 1.94% from 2.51%.
The reduction in both interest income, excluding fees, and interest expense was driven mainly by lower market rates, which have fallen throughout 2020 and 2021. Our total average yield on earning assets was 4.06% during the first nine months of 2021, compared to 4.40% during the same period in 2020. The reduction in our average cost of funds to 0.39% during the first nine months of 2021, compared to 0.77% during the same period in 2020, more than offset the reduced yield on average assets. In summary, the net interest margin for the first nine months of 2021 was 3.68%, a reduction of 3 basis points compared to 3.65% for the first nine months of 2020.
The provision for loan losses for the first nine months of 2021 was down $1.6 million compared to the same period in 2020, to $372 thousand from $2.0 million, due to a combination of factors, including the limited risk associated with PPP loans, improving economic trends, such as improving employment statistics, combined with the liquidity provided to customers through stimulus payments and the aforementioned funding and forgiveness of PPP loans. For more information on the factors affecting the allowance for loan losses, including provision expense, refer to Note 7, Allowance for loan Losses, in Item 1 of this Form 10-Q. Depending on the length of the economic downturn, and the nature and speed of any future recovery, it is possible that additional provisions may be needed beyond those necessary to support organic growth of the loan portfolio.
Total non-interest income for the first nine months of 2021 compared to the same period in 2020 grew by $1.6 million to $7.5 million. This improvement was driven by increases in service charges and fees, card processing and interchange income, insurance and investment fees, and gains on sales of investment securities, of $436 thousand, $438 thousand, $276 thousand, and $318 thousand respectively. The improvement in service charges and fees resulted from the fee schedule changes we made in August 2020. 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. Gains of $322 thousand were realized from sales of securities during the first nine months of 2021 versus $4 thousand during the same period in 2020. Other non-interest income also increased, to $840 thousand from $744 thousand, driven by the $190 thousand gains on sales of former branch offices and $111 thousand from commissions on and gains on originations and sales of mortgage loans, even when the $220 thousand bonus payment from a service provider in 2020 is considered.
For the nine months ended September 30, 2021, compared to the same period in 2020, total non-interest expense increased $415 thousand, to $21.1 million, primarily because of a $1.2 million increase in occupancy and equipment expense, which was partially offset by an $883 thousand decrease in salaries and employee benefits. The increase in occupancy and equipment expense was driven nearly entirely by $1.1 million in asset disposal costs, a result of the three former branch office locations transferred to OREO, as previously discussed. We expect some modest expense reductions associated with the sales and disposals of former branch office locations. The reduction in salaries and benefits expense is due to the restructuring implemented during the second quarter of 2020. Data processing and telecommunications expense is down $46 thousand due to changes in the related agreements with some of those service providers. Other operating expenses were up $164 thousand due to higher loan and other real estate expenses of $173 thousand and $184 thousand, respectively, increased internal and external audit and accounting expenses of $87 thousand, other professional fees of $32 thousand, and advertising and promotions of $37 thousand. These increases offset decreases in FDIC insurance, consulting, data processing, and travel, which decreased $79 thousand, $237 thousand, $67 thousand, and $55 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. Travel reflects the impact of the pandemic. In addition, 2021 includes a $61 thousand increase in bank franchise taxes due to the increased tax base and added taxes for other states.
The efficiency ratio, a non-GAAP measure, improved to 76.4% for the first nine months of 2021 from 84.2% for the first nine months of 2020, due to improvements discussed above. We re-engaged the firm that assisted in the operational assessment in 2019 and 2020 to review our efforts to date and work toward enhancing our revenue and cost control structure.
32
Comparison of the Three Months ended September 30, 2021 to September 30, 2020
Overall, during the quarter ended September 30, 2021, compared to the same quarter in 2020, net income improved 29.6% to $1.8 million, or $0.08 per share, from $1.4 million, or $0.06 per share. Contributing to this improvement was higher interest income, lower interest expense, lower provision for loan loss expense and higher non-interest income. Although non-interest expense was higher, it was more than offset by improvements in every other major category of the income statement.
Quarter-to-date highlights include:
| · | Net interest income was $7.4 million for the third quarter of 2021, an improvement of $1.0 million, or 15.7%, compared to the third quarter of 2020; |
| · | Net interest margin was 3.93% for the third quarter of 2021, an increase of 27 basis points compared to 3.66% in the third quarter of 2020; |
| · | Provision for loan losses was zero for the third quarter of 2021 compared to $450 thousand for the third quarter of 2020; |
| · | Noninterest income was $3.0 million, an increase of $854 thousand, or 40.4%, during the third quarter of 2021 compared to the third quarter of 2020; and |
| · | Noninterest expense was $8.1 million, an increase of $1.8 million, or 28.4%, for the third quarter of 2021 compared to the third quarter of 2020. |
During the third quarter of 2021, compared to the third quarter of 2020, net interest income increased $1.0 million, the result of a $478 thousand increase in interest income on earning assets, and a $526 thousand decrease in interest expense on interest-bearing liabilities. The primary driver was an improvement of $695 thousand in loan fees, which was mainly due to recognition of deferred fees on PPP loans forgiven, which more than offset a decrease in interest income on loans of $364 thousand. The impact of the increased loan fee income will not continue, as only 14% of the original portfolio remains outstanding at September 30, 2021. The reduced interest income on loans was a result of both lower average balances and reduced average yields, to 4.40% from 4.61%. Also driving the improvement in interest income was an increase of $134 thousand in interest income on investment securities. Although the average yield on investment securities declined to 1.72% from 2.39%, average balances increased by $49.3 million, as we redeployed lower yielding deposits in other banks into investment securities providing a higher return. Overall, our yield on earning assets declined to 4.26% from 4.31%.
On the interest expense side of net interest income, the primary driver of the $526 thousand reduction in interest expense was a $472 thousand decrease in interest expense on retail time deposits. The decrease in interest expense on retail time deposits was primarily due to a reduction in average cost to 0.90% from 1.52%, combined with a reduction in average balances of $40.1 million. Also contributing to the reduced interest expense was an increase in average balances of non-interest-bearing deposits of $48.6 million, a result of liquidity provided to customers through stimulus payments and the funding of PPP loans. Overall, our average cost of funds has declined to 0.34% from 0.66%.
In summary, our net interest margin for the third quarter of 2021 was 3.93% compared to 3.66% for the third quarter of 2020. The reduction in yields and costs has been driven by decreases in general market rates, as previously discussed.
The provision for loan losses was zero in the third quarter of 2021 compared to $450 thousand for the same quarter in 2020, due to a combination of factors, including the limited risk associated with PPP loans, improving economic trends, including improving employment statistics, combined with the liquidity provided to customers through stimulus payments and the aforementioned funding and forgiveness of PPP loans. For more information on the factors affecting the allowance for loan losses, including provision expense, refer to Note 7, Allowance for loan Losses, in Item 1 of this Form 10-Q. Depending on the length of the economic downturn and the nature and speed of any future recovery, it is possible that additional provisions may be needed beyond those necessary to support organic growth of the loan portfolio.
Total non-interest income increased $854 thousand in the third quarter of 2021 compared to the third quarter of 2020, primarily due to $322 thousand of net gains on sales of investment securities, an increase of $284 thousand in other non-interest income, an increase of $142 thousand in service charges and fees, and an increase of $90 thousand in card processing and interchange income. During the third quarter of 2021, we sold $7.7 million of securities and realized gains of $322 thousand. The increase in other non-interest income is primarily a result of $190 thousand of net gains on sales of three former branch office locations. As part of the project to improve earnings, fee schedule changes were implemented in August of 2020, and this contributed to the increase in service charges and fees. Card processing revenue increased due to increased volume and the related incremental increase in interchange income received. In addition, efforts to increase noninterest income revenues from financial services drove the improvement in insurance and investment fees. Commissions and gains on originations and sales of mortgage loans also increased.
33
Total non-interest expense increased $1.8 million for the third quarter of 2021 compared to the third quarter of 2020, primarily due to an increase of $1.1 million in occupancy and equipment expense, which was driven nearly entirely by $1.1 million in disposal costs of three former branch office locations, which were transferred to OREO. Otherwise, we expect some modest expense reductions associated with the sales and disposals of former branch office locations. Salaries and benefits expense increased $258 thousand, due to an increase of $183 thousand for general wage increases and additional employees hired to staff our loan production office in Boone, NC, which opened in the fourth quarter of 2020; and our new branch office in Bristol, VA which opened in October 2021; an increase of $31 thousand in bonus accruals related to a new incentive plan, an increase of $29 thousand in commissions for mortgage personnel, and an increase of $27 thousand in group insurance due to changes made in the employer contribution formula. These were partially offset by contra expense of $106 thousand related to mortgage originations. Other operating expenses increased $439 thousand, primarily due to increases in other real estate expense, which increased $242 thousand, and loan related expenses, which increased $110 thousand. Other real estate owned expenses increased due to write-downs of $395 thousand. Loan related expenses increased due to costs associated with processing PPP loan forgiveness.
The efficiency ratio, a non-GAAP measure, improved to 76.4% for the third quarter of 2021 compared to 84.2% for the third quarter of 2020. This ratio has been positively affected by earnings improvement projects. As discussed above, we are continuing our operational assessments and have implemented several to date, which we anticipate will help improve the efficiency ratio by increasing earnings or controlling costs.
Balance Sheet
During the nine months ended September 30, 2021, the balance sheet grew to $800.8 million. Highlights include:
| · | Total assets grew by $44.5 million, or 5.9%, during the first nine months of 2021, to $800.8 million; |
| · | Interest bearing deposits in other banks decreased by $6.5 million, to $69.6 million; |
| · | Loans decreased by $1.5 million, or 0.26%, to $574.1 million; |
| · | Securities available for sale increased $56.8 million, or 117.4%, to $105.2 million; |
| · | Total deposits increased $45.5 million, or 6.8%, to $713.5 million; |
| · | Book value per share increased to $2.61 at September 30, 2021 as compared to $2.43 at December 31, 2020. |
The growth in total assets was primarily driven by the growth in deposits, which funded investment purchases. During the first nine months of 2021, investment purchases totaling $77.2 million and sales of $7.7 million were made. Also, during this period, 568 loans totaling $25.3 million were funded in Round 2 of the PPP program. Cumulatively through September 30, 2021, $60.2 million of all PPP loans originated in both rounds have received full or partial SBA forgiveness, of which $50.4 received forgiveness during the first nine months of 2021. Excluding the net impact of $25.3 million PPP loan originations and $50.4 million of repayments, loan growth totaled $23.7 million during the first nine months of 2021. This loan growth has resulted in an increase in commercial real estate and multi-family loans, which have been positively impacted by our new Boone, NC, loan production office, which opened during the fourth quarter of 2020. These increases were offset primarily by decreases in commercial loans, which declined $28.8 million, a result of PPP loan forgiveness. At September 30, 2021, approximately $21.4 million in new loan originations were in the pipeline. Through November 8, 2021, approximately $16.0 million, of these loans have closed. There were $109 thousand of loans held for sale at September 30, 2021.
Efforts to reduce non-earning assets have resulted in the sale of three former branch office sites during the quarter, with two other sites sold or pending sale since September 30, 2021, with closings expected during the fourth quarter. pending closing.
The increase in total deposits was primarily driven by an increase of $35.9 million, or 16.4%, in noninterest-bearing demand deposits, a result of the federal stimulus payments received by customers and PPP loan funds, which are typically deposited into a customer’s checking account. Also, interest-bearing demand deposits increased $13.0 million, or 25.7%. Savings and money market accounts grew $34.2 million, or 22.7%. This growth was partially reduced by a decrease of $27.8 million in retail time deposits. Although we have lowered deposit rates, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our customer base and communities.
Total borrowings were reduced by $5 million as we repaid a maturing FHLB advance in June 2021. Trust preferred securities of $16.5 million at September 30, 2021 were unchanged compared to December 31, 2020.
Since December 31, 2020, total capital grew $4.7 million, as year-to-date earnings added $5.1 million, while investment securities caused other comprehensive losses of $752 thousand. During the quarter, our retained deficit has been mitigated and we now report retained earnings. Consequently, book value per share has increased to $2.61 at September 30, 2021 compared to $2.43 at December 31, 2020. The bank remains well capitalized per regulatory guidance.
34
Asset Quality
Nonperforming assets include nonaccrual loans, other real estate owned (OREO) and loans past due more than 90 days which are still accruing interest. Our policy is to place loans on nonaccrual status once they reach 90 days past due. The makeup of the nonaccrual loans is primarily those secured by residential mortgages and commercial real estate. OREO is primarily made up of commercial and single-family residential properties, plus four former branch office locations. At September 30, 2021, the former branch offices comprised $1.4 million of the OREO balance.
Nonperforming assets decreased $3.4 million, or 38.7%, during the first nine months of 2021, driven by a decrease in non-accruing loans of $2.4 million and a decrease in other real estate owned of $1.0 million. No accruing loans are more than 90 days past due. As a result, the ratio of nonperforming assets to total assets decreased to 0.68% at September 30, 2021 compared to 1.17% at December 31, 2020.
Nonperforming assets consisted of the following as of September 30, 2021, and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| Nonaccrual loans | $ | 3,126 | $ | 5,548 | ||||
| Loans past due more than 90 days, still accruing | — | — | ||||||
| Nonperforming loans | 3,126 | 5,548 | ||||||
| Other real estate owned | 2,318 | 3,334 | ||||||
| Nonperforming assets | $ | 5,444 | $ | 8,882 | ||||
| Nonperforming loans/Total loans at period end | 0.54 | % | 0.96 | % | ||||
| Nonperforming assets/Total assets at period end | 0.68 | % | 1.17 | % | ||||
All OREO properties are available for sale by commercial and residential realtors under the direction of our Special Assets division. During the first nine months of 2021, $566 thousand of OREO was acquired as a result of settlement of foreclosed loans and three former branch office locations worth $950 thousand were transferred into OREO. Sales of OREO for the first nine months of 2021 totaled $2.1 million, resulting in a net gain of $73 thousand. As part of our continuing effort to reduce OREO, we made valuation adjustments of $423 thousand during the first nine months of 2021, based on updated property valuations. As we continue these efforts, additional losses could occur, while reducing future carrying costs. Due to sales of foreclosed properties we no longer have any foreclosures generating rental income. Rental income was $24 thousand for the first nine months of 2021 compared to $47 thousand for the first nine months of 2020.
We continue extensive efforts to work through problem credits and liquidate foreclosed properties and other parcels of other real estate owned, to reduce the level of nonperforming assets. These efforts include price adjustments and property auctions to expedite sales. Since September 30, 2021, one of the former branch sites which was transferred to OREO is under a purchase agreement. We are mindful of the impact on earnings and capital as we work to achieve this goal. However, we may recognize future losses on sales of OREO and reductions in the allowance for loan losses as we expedite the resolution of these assets.
Loans rated substandard or below totaled $3.1 million at September 30, 2021, a decrease of $2.3 million from $5.4 million at December 31, 2020. Total past due loans decreased to $2.7 million at September 30, 2021 from $8.6 million at December 31, 2020.
Our allowance for loan losses at September 30, 2021 was $6.7 million, or 1.16% of total loans (1.18% when excluding PPP loans) as compared to $7.2 million, or 1.25% (1.33% when excluding PPP loans) of total loans at December 31, 2020. Impaired loans totaled $3.1 million with an estimated related specific allowance of $193 thousand for potential losses at September 30, 2021 as compared to $5.1 million of impaired loans with an estimated related allowance of $1.1 million at the end of 2020. A provision of $372 thousand was recorded for the first nine months of 2021 compared to $2.0 million during the first nine months of 2020.
In the first nine months of 2021, net charge-offs totaled $906 thousand, or 0.31% of average loans, annualized, as compared to $381 thousand, or 0.07%, of average loans for the same period in 2020. Included in the net charge-offs are two loans to the same borrower, previously modified as TDRs, totaling $1.1 million that defaulted during the second quarter of 2021, resulting in charge-offs totaling $835 thousand. The allowance for loan losses is 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. Through our quarterly assessment, 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. During the first nine months of 2021, we adjusted our external qualitative factors to reflect the improving economic trends, including positive employment and home sales statistics, combined with the liquidity provided to customers through stimulus payments and forgiveness of PPP loans. Those changes along with the assessment of the inherent and specific risks associated with the loan portfolio resulted in a provision to the allowance of $372 thousand for the first nine months 2021. The following table summarizes components of the allowance for loan losses and the related loans as of September 30, 2021 and December 31, 2020:
35
| (Dollars in thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Specific allowance | $ | 193 | $ | 1,052 | ||||
| General allowance | 6,464 | 6,139 | ||||||
| Total allowance | $ | 6,657 | $ | 7,191 | ||||
| Impaired loans | $ | 3,133 | $ | 5,082 | ||||
| Other loans | 570,920 | 570,484 | ||||||
| Total loans | $ | 574,053 | $ | 575,566 | ||||
| Total allowance/Total loans | 1.16 | % | 1.25 | % | ||||
| General allowance/Other loans | 1.13 | % | 1.08 | % | ||||
Deferred Tax Asset and Income Taxes
Due to timing differences between book and tax treatment of several income and expense items, a net deferred tax asset of $2.0 million and $3.1 million existed at September 30, 2021 and December 31, 2020, respectively. Our income tax expense was computed at the corporate income tax rate of 21% of taxable income. We have no significant nontaxable income or nondeductible expenses.
Capital Resources
Total stockholders’ equity at September 30, 2021, was $62.5 million compared to $58.2 million at December 31, 2020, an increase of $4.3 million. The increase was due to net income of $5.1 million, which drove retained earnings into positive territory. Due to modest rate increases during September 2021, unrealized losses of $752 thousand, net of tax were recorded for the available-for-sale investment portfolio.
The Company meets the eligibility criteria to be classified as a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February 2015 and is therefore not obligated to report consolidated regulatory capital. The Bank continues to be subject to various capital requirements administered by banking agencies.
The Bank’s capital ratios along with the minimum regulatory thresholds to be considered well-capitalized are presented in the following table:
| Well-Capitalized Regulatory Threshold | September 30, 2021 | December 31, 2020 | ||||||||||
| Tier 1 leverage | 5.00 | % | 9.53 | % | 9.49 | % | ||||||
| Common equity Tier 1 | 6.50 | % | 15.11 | % | 15.16 | % | ||||||
| Tier 1 risk-based capital | 8.00 | % | 15.11 | % | 15.16 | % | ||||||
| Total risk-based capital | 10.00 | % | 16.37 | % | 16.41 | % | ||||||
At September 30 2021, the Bank remains well capitalized under the regulatory framework for prompt corrective action. The ratios mentioned above for the Bank comply with the Federal Reserve rules to align with the Basel III Capital requirements.
Book value was $2.61 per common share at September 30, 2021, and $2.43 per common share at December 31, 2020. Other key performance indicators are as follows:
36
| Three months ended September 30, | Nine months ended September 30, | ||||
| 2021 | 2020 | 2021 | 2020 | ||
| Return on average assets1 | 0.91% | 0.02% | 0.85% | 0.02% | |
| Return on average equity1 | 11.75% | 0.21% | 11.30% | 0.27% | |
| Average equity to average assets | 7.76% | 7.32% | 7.56% | 7.50% | |
1 - Annualized
Based on current economic conditions, we believe it is prudent to continue to maintain the Bank’s capital ratios at levels commensurate with the Bank’s risk profile. With recent capital stress testing and projected growth, we believe our capital levels and liquidity will be sufficient to support planned asset growth and any continued downturn in economic conditions. Those expectations could be impacted if actual deterioration in economic conditions is more severe than the assumptions included in the stress testing. Accordingly, management is working on various strategies for more efficient use of liquidity and to improve capital and stock performance, including continuation of the operational assessments discussed earlier.
Cash dividends have not been paid by the Company historically due to a retained deficit. Due to increased earnings, the retained deficit has been eliminated this quarter and we now have retained earnings of $114 thousand. With the return to a retained earnings position, we may be able to consider payment of a cash dividend in the future. The payment of cash dividends will depend on a number of factors including our ability to maintain capital ratios at or above current levels with consideration of strategic plans and an acceptable risk profile.
Liquidity
Throughout the pandemic, we elevated our monitoring of liquidity, including consideration of leveraging or selling illiquid assets, and deem liquidity adequate to meet potential needs. Liquid assets include cash, due from banks, federal funds sold, and unpledged available for sale investments. Collectively, those balances were $186.6 million at September 30, 2021, an increase from $134.0 million at December 31, 2020. Sufficient short-term assets are maintained at levels management deems adequate to meet potential liquidity needs.
At September 30, 2021, all of our investment securities were classified as available-for-sale. These investments provide a source of liquidity in the amount of $100.0 million, net of the $5.2 million of securities pledged as collateral. Investment securities available for sale serve as a source of liquidity while yielding a higher return versus other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond.
Our loan to deposit ratio was 80.5% at September 30, 2021 and 86.2% at December 31, 2020. We anticipate this ratio to remain at or below 90% for the foreseeable future.
Available third-party sources of liquidity to the Bank at September 30, 2021 include the following: a line of credit with the FHLB, access to brokered certificates of deposit markets and the discount window at the Federal Reserve Bank of Richmond. We also have the ability to cumulatively borrow $20.0 million in unsecured federal funds credit facilities extended by three correspondent banks.
The Bank’s total line of credit with the FHLB is $199.1 million, with unused availability at September 30, 2021, of $107.4 million. This line secures letters of credit totaling $12.0 million. No advances were outstanding at September 30, 2021. Any borrowings, plus the letters of credit, are secured by a blanket lien on our residential real estate loans which amounted to $119.4 million at September 30, 2021. While we do not foresee a need to borrow funds up to the available capacity, should borrowings exceed the available pledged collateral, additional collateral would need to be provided to FHLB.
The Bank also has access to the brokered deposits market and the Certificate of Deposit Registry Service (CDARS). At September 30, 2021, we held no brokered deposits and $7.0 million in CDARS reciprocal time deposits.
Additional liquidity is available through the Federal Reserve Bank 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, etc., some of which are beyond our control.
37
The bank holding company has approximately $180 thousand in cash on deposit at the Bank at September 30, 2021. Additionally, $430 thousand in dividend payments from the Bank have been received in the first nine months of 2020. These funds are used to pay operating expenses and trust preferred interest payments. The Company makes quarterly interest payments on the trust preferred securities.
Off Balance Sheet Items and Contractual Obligations
There have been no material changes during the nine months ended September 30, 2021, to the off-balance sheet items and the contractual obligations disclosed in our 2020 Form 10-K.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not Applicable.
| Item 4. | Controls and Procedures |
We have carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer (our CEO) and our Executive Vice President and Chief Financial Officer (our CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were operating effectively in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the three months ended September 30, 2021 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Part II Other Information
| Item 1. | Legal Proceedings |
In the course of operations, we may become a party to legal proceedings in the normal course of business. At September 30, 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 or to which the property of the Company or any of its subsidiaries is subject, in the opinion of management, will materially impact the financial condition or liquidity of the Company.
The Bank was named as a defendant in an action filed in the United States District Court for the Western District of Virginia on December 22, 2020. The plaintiff alleged that the Bank breached a contractual arrangement in the assessment of overdraft fees for the re-presentment of items previously returned due to lack of sufficient funds and sought class action status in its pursuit of this complaint. During the third quarter of 2021, this claim was resolved without material impact to the financial position or liquidity of the bank.
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. While this claim has proceeded to the discovery stage, due to the present status of this case, any possible loss cannot be estimated at this time.
38
| Item 1A. | Risk Factors |
Not Applicable.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Mine Safety Disclosures |
Not Applicable.
| Item 5. | Other Information |
None
| Item 6. | Exhibits |
The following exhibits are filed as part of this report or are incorporated by reference:
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
NEW PEOPLES BANKSHARES, INC. |
|
|
(Registrant) |
|
|
|
|
By: |
/s/ C. TODD ASBURY |
|
|
C. Todd Asbury |
|
|
President and Chief Executive Officer |
|
|
|
|
Date: |
November 15, 2021 |
|
|
|
|
By: |
/s/ CHRISTOPHER G. SPEAKS |
|
|
Christopher G. Speaks |
|
|
Executive Vice President, Chief Financial Officer and Treasurer |
|
|
|
|
Date: |
November 15, 2021 |
40