Attached files

file filename
EX-32 - CERTIFICATION OF - NEW PEOPLES BANKSHARES INCf2snwpp10q111920ex32.htm
EX-31.2 - CERTIFICATIONS - NEW PEOPLES BANKSHARES INCf2snwpp10q111920ex31_2.htm
EX-31.1 - CERTIFICATIONS - NEW PEOPLES BANKSHARES INCf2snwpp10q111920ex31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

 

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: 000-33411

 

NEW PEOPLES BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

     

Virginia

(State or other jurisdiction of

incorporation or organization)

 

 

31-1804543

(I.R.S. Employer

Identification No.)

 

67 Commerce Drive, Honaker, Virginia

(Address of principal executive offices)

 

24260

(Zip Code)

 
         

(276) 873-7000

 
(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.

Yes [X]   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).

Yes [X]   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  [  ]
Non-accelerated filer  [X]   Smaller reporting company  [X]
    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. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

         
Yes [  ]   No [X]

 

The number of shares outstanding of the registrant’s common stock was 23,922,086 as of November 20, 2020.

 
 

 

NEW PEOPLES BANKSHARES, INC.

 

INDEX

 

 

PART I   FINANCIAL INFORMATION Page
Item 1.   Financial Statements  
Consolidated Statements of Income – Three months  
ended September 30, 2020 and 2019 (Unaudited) 3
       
  Consolidated Statements of Income – Nine months 4
  ended September 30, 2020 and 2019 (Unaudited)  
       
Consolidated Statements of Comprehensive Income – Three and nine months  
ended September 30, 2020 and 2019 (Unaudited) 5
   
Consolidated Balance Sheets – September 30, 2020 (Unaudited) and December 31, 2019 6
       
Consolidated Statements of Changes in Stockholders’ Equity –  
Three and nine months ended September 30, 2020 and 2019 (Unaudited) 7
       
Consolidated Statements of Cash Flows – Nine months  
ended September 30, 2020 and 2019 (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 37
       
Item 4.      Controls and Procedures 38
       
PART II   OTHER INFORMATION 39
       
Item 1.       Legal Proceedings 39
       
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 1Financial Statements

 

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

       
INTEREST AND DIVIDEND INCOME  2020  2019
Loans including fees  $7,271   $7,290 
Federal funds sold   —      1 
Interest-earning deposits with banks   16    170 
Investments   245    334 
Dividends on equity securities (restricted)   34    38 
Total Interest and Dividend Income   7,566    7,833 
           
INTEREST EXPENSE          
Deposits   1,024    1,275 
Borrowed funds   128    211 
Total Interest Expense   1,152    1,486 
           
NET INTEREST INCOME   6,414    6,347 
           
PROVISION FOR LOAN LOSSES   450    1,020 
           
NET INTEREST INCOME AFTER          
PROVISION FOR LOAN LOSSES   5,964    5,327 
           
NONINTEREST INCOME          
Service charges and fees   859    924 
Card processing and interchange   892    800 
Insurance and investment fees   206    158 
Other noninterest income   159    973 
Total Noninterest Income   2,116    2,855 
           
NONINTEREST EXPENSES          
Salaries and employee benefits   2,981    3,544 
Occupancy and equipment expense   1,132    1,128 
Data processing and telecommunications   604    615 
Other operating expenses   1,565    1,792 
Total Noninterest Expenses   6,282    7,079 
           
INCOME BEFORE INCOME TAXES   1,798    1,103 
           
INCOME TAX EXPENSE   374    227 
           
NET INCOME  $1,424   $876 
           
Income Per Share          
Basic and diluted  $0.06   $0.04 
           
Average Weighted Shares of Common Stock          
Basic and diluted   23,922,086    23,922,086 

 

The accompanying notes are an integral part of these financial statements.

 

3

 

 

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

       
INTEREST AND DIVIDEND INCOME  2020  2019
Loans including fees  $21,483   $21,361 
Federal funds sold   1    5 
Interest-earning deposits with banks   191    643 
Investments   814    1,066 
Dividends on equity securities (restricted)   108    118 
Total Interest and Dividend Income   22,597    23,193 
           
INTEREST EXPENSE          
Deposits   3,417    3,795 
Borrowed funds   484    675 
Total Interest Expense   3,901    4,470 
           
NET INTEREST INCOME   18,696    18,723 
           
PROVISION FOR LOAN LOSSES   2,000    1,290 
           
NET INTEREST INCOME AFTER          
PROVISION FOR LOAN LOSSES   16,696    17,433 
           
NONINTEREST INCOME          
Service charges and fees   2,238    2,597 
Card processing and interchange   2,480    2,276 
Insurance and investment fees   447    481 
Net gain on sales of available-for-sale securities   4    —   
Other noninterest income   744    1,247 
Total Noninterest Income   5,913    6,601 
           
NONINTEREST EXPENSES          
Salaries and employee benefits   10,300    11,020 
Occupancy and equipment expense   3,395    3,407 
Data processing and telecommunications   1,881    1,913 
Other operating expenses   5,149    5,650 
Total Noninterest Expenses   20,725    21,990 
           
INCOME BEFORE INCOME TAXES   1,884    2,044 
           
INCOME TAX EXPENSE   385    417 
           
NET INCOME  $1,499   $1,627 
           
Income Per Share          
Basic and diluted  $0.06   $0.07 
           
Average Weighted Shares of Common Stock          
Basic and diluted   23,922,086    23,922,086 

  

The accompanying notes are an integral part of these financial statements.

 

4

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(IN THOUSANDS)

(UNAUDITED)

 

 

             
             
   For the three months ended
September 30,
  For the nine months ended
September 30,
   2020  2019  2020  2019
             
NET INCOME  $1,424   $876   $1,499   $1,627 
                     
Other comprehensive income:                    
  Investment securities activity                    
    Unrealized gains arising during the period   28    191    1,039    1,682 
    Reclassification adjustment for net gains included                    
        in net income   —      —      (4)   —   
    Other comprehensive gain on investment securities   28    191    1,035    1,682 
    Related tax expense   (6)   (40)   (217)   (353)
TOTAL OTHER COMPREHENSIVE INCOME   22    151    818    1,329 
TOTAL COMPREHENSIVE INCOME  $1,446   $1,027   $2,317   $2,956 

 

 

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,
   2020  2019
ASSETS          
           
Cash and due from banks   16,002   $13,998 
Interest-bearing deposits with banks   61,636    35,897 
Federal funds sold   270    252 
Total Cash and Cash Equivalents   77,908    50,147 
           
Investment securities available-for-sale   44,109    50,649 
 Loans held for sale   337    2 
           
Loans receivable   585,122    562,544 
Allowance for loan losses   (6,987)   (5,368)
Net loans   578,135    557,176 
           
Bank premises and equipment, net   22,580    22,242 
Other real estate owned   3,237    3,393 
Accrued interest receivable   2,781    2,115 
Deferred taxes, net   3,974    4,576 
Right-of-use assets – operating leases   5,537    5,835 
Other assets   10,527    10,238 
           
        Total Assets   749,125   $706,373 
           
LIABILITIES          
           
Deposits:          
Noninterest bearing   215,371   $170,782 
Interest-bearing   446,301    450,695 
        Total Deposits   661,672    621,477 
           
Borrowed funds   21,496    21,496 
Lease liabilities – operating leases   5,537    5,835 
Accrued interest payable   491    694 
Accrued expenses and other liabilities   3,010    2,269 
           
Total Liabilities   692,206    651,771 
           
STOCKHOLDERS’ EQUITY          
           
Common stock - $2.00 par value; 50,000,000 shares authorized;          
23,922,086 shares issued and outstanding at September
30, 2020 and December 31, 2019
   47,844    47,844 
Additional paid-in-capital   14,570    14,570 
Retained deficit   (6,370)   (7,869)
Accumulated other comprehensive income   875    57 
           
Total Stockholders’ Equity   56,919    54,602 
           
Total Liabilities and Stockholders’ Equity   749,125   $706,373 

 

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, 2020 AND 2019

(IN THOUSANDS INCLUDING SHARE DATA)

(UNAUDITED)

 

 

   Shares of Common Stock  Common Stock  Additional Paid-in- Capital  Retained  Deficit  Accumulated Other
Comprehensive Income (Loss)
  Total Stockholders’ Equity
                   
Balance, December 31, 2018   23,922   $47,844   $14,570   $(9,928)  $(1,236)  $51,250 
                               
Net income   —      —      —      406    —      406 
Other comprehensive income,
net of tax
   —      —      —      —      370    370 
Balance, March 31, 2019   23,922   $47,844   $14,570   $(9,522)  $(866)  $52,026 
                               
Net income   —      —      —      345    —      345 
Other comprehensive income,
net of tax
   —      —      —      —      808    808 
Balance, June 30, 2019   23,922   $47,844   $14,570   $(9,177)  $(58)  $53,179 
                               
Net income   —      —      —      876    —      876 
Other comprehensive income,
net of tax
   —      —      —      —      151    151 
Balance, September 30, 2019   23,922   $47,844   $14,570   $(8,301)  $93   $54,206 
                               
                               
                               
Balance, December 31, 2019   23,922   $47,844   $14,570   $(7,869)  $57   $54,602 
                               
Net income   —      —      —      46    —      46 
Other comprehensive income, net of tax   —      —      —      —      603    603 
Balance, March 31, 2020   23,922   $47,844   $14,570   $(7,823)  $660   $55,251 
                               
Net income   —      —      —      29    —      29 
Other comprehensive income, net of tax   —      —      —      —      193    193 
Balance, June 30, 2020   23,922   $47,844   $14,570   $(7,794)  $853   $55,473 
                               
Net income   —      —      —      1,424    —      1,424 
Other comprehensive income, net of tax   —      —      —      —      22    22 
Balance, September 30, 2020   23,922   $47,844   $14,570   $(6,370)  $875   $56,919 
                               

  

 

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, 2020 AND 2019

(IN THOUSANDS)

(UNAUDITED)

 

       
   2020  2019
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $1,499   $1,627 
Adjustments to reconcile net income to net cash provided by
operating activities:
          
Depreciation   1,634    1,757 
Provision for loan losses   2,000    1,290 
Income on bank owned life insurance   (61)   (54)
Net gain on sale of securities available-for-sale   (4)   —   
Gain on sale of mortgage loans   (144)   (78)
Loss (gain) on sale or disposal of premises and equipment   19    (807)
Loss on sale of repossessed assets   2    —   
(Gain) loss on sale of other real estate owned   (52)   55 
Loans originated for sale   (10,307)   (4,216)
Proceeds from sales of loans originated for sale   10,116    8,082 
Adjustment of carrying value of other real estate owned   132    214 
Adjustment of carrying value of repossessed assets   33    —   
Amortization/accretion of bond premiums/discounts   318    410 
Deferred tax expense   385    418 
Net change in:          
Accrued interest receivable   (666)   (243)
Other assets   (314)   (278)
Accrued interest payable   (203)   100 
Accrued expenses and other liabilities   741    769 
Net Cash Provided by Operating Activities   5,128    9,046 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Net increase in loans   (23,445)   (16,006)
Purchase of securities available-for-sale   (2,045)   (790)
Proceeds from sale of investment securities available-for-sale   1,025    —   
Proceeds from repayments and maturities of securities available-for-sale   8,281    7,991 
Net purchase of equity securities (restricted)   (22)   (14)
Payments for the purchase of premises and equipment   (1,992)   (1,429)
Proceeds from sale of premises and equipment   1    559 
Proceeds from sales of repossessed assets   73     
Proceeds from insurance claims on other real estate owned   —      19 
Proceeds from sales of other real estate owned   562    1,155 
Net Cash Used in Investing Activities   (17,562)   (8,515)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net change in short term borrowings   —      (5,630)
Net change in noninterest bearing deposits   44,589    11,673 
Net change in interest bearing deposits   (4,394)   13,938 
Net Cash Provided by Financing Activities   40,195    19,981 
           
Net increase in cash and cash equivalents   27,761    20,512 
Cash and Cash Equivalents, Beginning of the Period   50,147    28,173 
Cash and Cash Equivalents, End of the Period  $77,908   $48,685 
           
Supplemental Disclosure of Cash Paid During the Period for:          
Interest  $4,104   $4,370 
Taxes  $—     $—   
Supplemental Disclosure of Non-cash Transactions:          
      Transfer of loans to Loans Held for Sale  $—      4,359 
      Right-of-use asset established in exchange for new operating lease liability  $—     $1,232 
      Loan to finance sale of premises  $—     $752 
Other real estate acquired in settlement of foreclosed loans  $914   $492 
Loans made to finance sale of other real estate owned  $428   $647 
Change in unrealized gains on securities available for sale  $1,035   $1,682 

 

 

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, 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, 2020 and December 31, 2019, and the results of operations for the three month and nine month periods ended September 30, 2020 and 2019. 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, 2019. 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.

 

Certain reclassifications have been made to prior period financial statements to allow them to be presented on a comparable basis with the current period. Previously reported net income and stockholders’ equity were not affected by these reclassifications.

 

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.

 

NOTE 3 INCOME PER SHARE

 

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. For the three-month and nine-month periods ended September 30, 2020 and 2019, there were no potential common shares. Basic and diluted net income per common share calculations follows:

 

(Dollars in Thousands, Except
Share and Per Share Data)
  For the three months
ended September 30,
  For the nine months
ended September 30,
   2020  2019  2020  2019
Net income  $1,424   $876   $1,499   $1,627 
Weighted average shares outstanding   23,922,086    23,922,086    23,922,086    23,922,086 
Weighted average dilutive shares outstanding   23,922,086    23,922,086    23,922,086    23,922,086 
                     
Basic and diluted income per share  $0.06   $0.04   $0.06   $0.07 

 

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, 2020, 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, 2020 and December 31, 2019, respectively.

                   
   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, 2020:
Total Capital to Risk Weighted Assets   74,191    15.73%  $37,725    8.0%  $47,156    10.0%
Tier 1 Capital to Risk Weighted Assets   68,283    14.48%   28,294    6.0%   37,725    8.0%
Tier 1 Capital to Average Assets   68,283    9.11%   29,979    4.0%   37,473    5.0%
Common Equity Tier 1 Capital                              
to Risk Weighted Assets   68,283    14.48%   21,220    4.5%   30,652    6.5%
                               
 December 31, 2019:                              
Total Capital to Risk Weighted Assets   72,109    14.83%  $38,910    8.0%  $48,637    10.0%
Tier 1 Capital to Risk Weighted Assets   66,741    13.72%   29,182    6.0%   38,910    8.0%
Tier 1 Capital to Average Assets   66,741    9.43%   28,313    4.0%   35,391    5.0%
Common Equity Tier 1 Capital                              
to Risk Weighted Assets   66,741    13.72%   21,887    4.5%   31,614    6.5%

 

Accordingly, as of September 30, 2020 and December 31, 2019, 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 7.0%), (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 4.0%, calculated as the ratio of Tier 1 capital to average assets. The phase-in of the capital conservation buffer requirement began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. The 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, 2020 was 7.73%.

10

 

 

NOTE 5 INVESTMENT SECURITIES

 

The amortized cost and estimated fair value of available-for-sale (AFS) securities as of September 30, 2020 and December 31, 2019 is as follows:

 

    Gross  Gross  Approximate
  Amortized  Unrealized  Unrealized  Fair
(Dollars are in thousands)  Cost  Gains  Losses  Value
September 30, 2020            
U.S. Government Agencies  $14,468   $375   $(62)  $14,781 
Taxable municipals   4,363    204    —      4,567 
Corporate bonds   5,396    189    (27)   5,558 
Mortgage backed securities   18,775    436    (8)   19,203 
Total Securities AFS  $43,002   $1,204   $(97)  $44,109 
December 31, 2019                    
U.S. Government Agencies  $15,703   $57   $(127)  $15,633 
Taxable municipals   4,389    54    (1)   4,442 
Corporate bonds   5,408    115    —      5,523 
Mortgage backed securities   25,077    111    (137)   25,051 
Total Securities AFS  $50,577   $337   $(265)  $50,649 

 

 

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, 2020 and December 31, 2019.

 

                   
   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, 2020                  
U.S. Government Agencies  $1,503   $(2)  $4,162   $(60)  $5,665   $(62)
Taxable municipals   —      —      —      —      —      —   
Corporate bonds   1,223    (27)   —      —      1,223    (27)
Mortgage backed securities   1,647    (5)   261    (3)   1,908    (8)
Total Securities AFS  $4,373   $(34)  $4,423   $(63)  $8,796   $(97)
                               
December 31, 2019                              
U.S. Government Agencies  $6,788   $(46)  $4,516   $(81)  $11,304   $(127)
Taxable municipals   1,049    (1)   —      —      1,049    (1)
Mortgage backed securities   1,586    (4)   12,002    (133)   13,588    (137)
Total Securities AFS  $9,423   $(51)  $16,518   $(214)  $25,941   $(265)
                               

 

At September 30, 2020, there were 39 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 not as 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 $7.0 million and $6.9 million at September 30, 2020 and December 31, 2019, respectively, were pledged as collateral to secure public deposits and for other purposes required by law.

11

 

The following table summarizes sales of AFS debt securities for the nine months ended September 30,

 

(Dollars are in thousands)  2020  2019
 Proceeds  $1,025   $—   
 Gains   7    —   
 Losses   (3)   —   
 Tax benefit   (1)   —   

 

The amortized cost and fair value of investment securities at September 30, 2020, 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.

        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   5,080    5,263    2.53%
Due after five years through ten years   10,817    11,027    3.29%
Due after ten years   27,105    27,819    2.27%
Total  $43,002   $44,109    2.35%

 

 

The Bank, as a member of the Federal Reserve Bank of Richmond (the Reserve Bank) and the Federal Home Loan Bank (the FHLB) of Atlanta, 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 are restricted from trading and are recorded at a cost of $2.58 million and $2.56 million at September 30, 2020 and December 31, 2019, respectively.

 

 

NOTE 6 LOANS

 

There were $337 thousand of loans held for sale at September 30, 2020 and $2 thousand at December 31, 2019, 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, 2020 and December 31, 2019 are summarized as follows:

 

(Dollars are in thousands)  September 30,
2020
  December 31, 2019
Real estate secured:          
Commercial  $174,898   $170,436 
Construction and land development   26,054    31,130 
Residential 1-4 family   226,267    242,922 
Multifamily   14,979    13,638 
Farmland   19,111    20,790 
Total real estate loans   461,309    478,916 
Commercial   96,107    53,994 
Agriculture   4,572    4,797 
Consumer installment loans   21,313    23,127 
All other loans   1,821    1,710 
Total loans  $585,122   $562,544 

 

Included in commercial loans are 665 loans originated under the Paycheck Protection Program totaling $43,546,000 at September 30, 2020 and none at December 31, 2019.

12

Loans receivable on nonaccrual status as of September 30, 2020 and December 31, 209 are summarized as follows:

       
(Dollars are in thousands)  September 30,
2020
  December 31, 2019
Real estate secured:          
Commercial  $1,761   $1,601 
Construction and land development   59    45 
Residential 1-4 family   3,172    2,544 
Farmland   205    531 
Total real estate loans   5,197    4,721 
Commercial   118    390 
Consumer installment loans and other loans   28    45 
Total loans receivable on nonaccrual status  $5,343   $5,156 

 

 

Total interest income not recognized on nonaccrual loans for the nine months ended September 30, 2020 and September 30, 2019 was $418 thousand and $544 thousand, respectively.

 

The following tables present information concerning the Company’s investment in loans considered impaired as of September 30, 2020 and December 31, 2019:

 

 

 

As of September 30, 2020

(Dollars are in thousands)

  Recorded
Investment
  Unpaid Principal Balance  Related
Allowance
With no related allowance recorded:               
Real estate secured:               
Commercial  $984   $1,011   $—   
Construction and land development   104    381    —   
Residential 1-4 family   2,254    2,407    —   
Multifamily   —      —      —   
Farmland   408    577    —   
Commercial   —      —      —   
Agriculture   —      —      —   
Consumer installment loans   6    6    —   
All other loans   —      —      —   
With an allowance recorded:               
Real estate secured:               
Commercial   605    672    285 
Construction and land development   —      —      —   
Residential 1-4 family   229    249    49 
Multifamily   —      —      —   
Farmland   210    222    4 
Commercial   33    41    8 
Agriculture   —      —      —   
Consumer installment loans   —      —      —   
All other loans   —      —      —   
Total  $4,833   $5,566   $346 

 

13

 

 

 

 

As of December 31, 2019

(Dollars are in thousands)

  Recorded
Investment
  Unpaid Principal Balance  Related
Allowance
With no related allowance recorded:               
Real estate secured:               
Commercial  $2,416   $2,478   $—   
Construction and land development   70    346    —   
Residential 1-4 family   1,263    1,460    —   
Multifamily   —      —      —   
Farmland   778    970    —   
Commercial   128    178    —   
Agriculture   —      1    —   
Consumer installment loans   —      —      —   
All other loans   —      —      —   
With an allowance recorded:               
Real estate secured:               
Commercial   363    379    70 
Construction and land development   —      —      —   
Residential 1-4 family   55    60    44 
Multifamily   —      —      —   
Farmland   216    228    9 
Commercial   286    886    200 
Agriculture   —      —      —   
Consumer installment loans   —      —      —   
All other loans   —      —      —   
Total  $5,575   $6,986   $323 

 

 

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, 2020  September 30, 2019

 

 

 

(Dollars are in thousands)

  Average
Recorded
Investment
  Interest
Income
Recognized
  Average
Recorded
Investment
  Interest
Income
Recognized
Real estate secured:                    
Commercial  $2,004   $1   $1,918   $76 
Construction and land development   87    12    96    3 
Residential 1-4 family   1,819    49    2,114    47 
Multifamily   —      —      37    1 
Farmland   590    51    1,235    29 
Commercial   74    1    691    11 
Agriculture   —      —      —      —   
Consumer installment loans   3    —      3    —   
All other loans   —      —      —      —   
With an allowance recorded:                    
Real estate secured:                    
Commercial   493    —      496    1 
Construction and land development   —      —      —      —   
Residential 1-4 family   104    3    364    —   
Multifamily   —      —      —      —   
Farmland   213    7    223    6 
Commercial   160    1    563    —   
Agriculture   —      —      —      —   
Consumer installment loans   —      —      3    —   
All other loans   —      —      —      —   
Total  $5,547   $125   $7,743   $174 

 

14

 

   Three Months Ended
   September 30, 2020  September 30, 2019

 

 

 

(Dollars are in thousands)

  Average
Recorded
Investment
  Interest
Income
Recognized
  Average
Recorded
Investment
  Interest
Income
Recognized
Real estate secured:                    
Commercial  $1,673   $—     $1,978   $34 
Construction and land development   107    8    84    3 
Residential 1-4 family   2,334    36    1,365    8 
Multifamily   —      —      —      —   
Farmland   419    41    788    16 
Commercial   33    —      45    —   
Agriculture   —      —      —      —   
Consumer installment loans   7    —      6    —   
All other loans   —      —      —      —   
With an allowance recorded:                    
Real estate secured:                    
Commercial   553    —      372    —   
Construction and land development   —      —      —      —   
Residential 1-4 family   154    3    340    —   
Multifamily   —      —      —      —   
Farmland   211    5    111    —   
Commercial   34    1    1,036    1 
Agriculture   —      —      —      —   
Consumer installment loans   —      —      —      —   
All other loans   —      —      —      —   
Total  $5,525   $94   $6,125   $62 

 

 

An age analysis of past due loans receivable as of September 30, 2020 and December 31, 2019 is below. At September 30, 2020 and December 31, 2019, no loans over 90 days past due were accruing.

 

                   
                   

 

 

 

 

As of September 30, 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   681   $—      61    742    174,156   $174,898 
Construction and land development   25    —      —      25    26,029    26,054 
Residential 1-4 family   3,516    422    930    4,868    221,399    226,267 
Multifamily   —      —      —      —      14,979    14,979 
Farmland   75    —      103    178    18,933    19,111 
Total real estate loans   4,297    422    1,094    5,813    455,496    461,309 
Commercial   153    —      10    163    95,944    96,107 
Agriculture   211    —      11    222    4,350    4,572 
Consumer installment loans   142    18    3    163    21,150    21,313 
All other loans   —      —      —      —      1,821    1,821 
Total loans   4,803   $440    1,118    6,361    578,761   $585,122 

 

15

 

 

 

 

 

 

As of December 31, 2019

(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  $502   $125   $262   $889   $169,547   $170,436 
Construction and land development   50    18    18    86    31,044    31,130 
Residential 1-4 family   3,700    1,096    710    5,506    237,416    242,922 
Multifamily   262    —      —      262    13,376    13,638 
Farmland   111    47    152    310    20,480    20,790 
Total real estate loans   4,625    1,286    1,142    7,053    471,863    478,916 
Commercial   406    —      323    729    53,265    53,994 
Agriculture   244    —      21    265    4,532    4,797 
Consumer installment loans   98    24    23    145    22,982    23,127 
All other loans   —      —      —      —      1,710    1,710 
Total loans  $5,373   $1,310   $1,509   $8,192   $554,352   $562,544 

 

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.

 

16

 

Based on the most recent analysis performed, the risk categories of loans receivable as of September 30, 2020 and December 31, 2019 were as follows:

 

                

As of September 30, 2020

(Dollars are in thousands)

  Pass  Special
Mention
  Substandard  Doubtful  Total
Real estate secured:                         
   Commercial  $168,111   $5,026   $1,761   $—     $174,898 
   Construction and land development   25,752    243    59    —      26,054 
   Residential 1-4 family   221,385    1,742    3,140    —      226,267 
   Multifamily   14,744    235    —      —      14,979 
   Farmland   17,626    1,280    205    —      19,111 
Total real estate loans   447,618    8,526    5,165    —      461,309 
Commercial   93,331    2,708    68    —      96,107 
Agriculture   4,561    —      11    —      4,572 
Consumer installment loans   21,289    7    17    —      21,313 
All other loans   1,821    —      —      —      1,821 
Total  $568,620   $11,241   $5,261   $—     $585,122 
                          

 

As of December 31, 2019

(Dollars are in thousands)

   

 

 

Pass

    

 

Special

Mention

    

 

 

Substandard

    Doubtful    

 

 

Total

 
Real estate secured:                         
   Commercial  $165,570   $3,265   $1,601   $—     $170,436 
   Construction and land development   30,747    360    23    —      31,130 
   Residential 1-4 family   239,210    1,207    2,505    —      242,922 
   Multifamily   13,638    —      —      —      13,638 
   Farmland   18,779    1,480    531    —      20,790 
Total real estate loans   467,944    6,312    4,660    —      478,916 
Commercial   51,086    2,504    118    286    53,994 
Agriculture   4,753    4    40    —      4,797 
Consumer installment loans   23,087    12    28    —      23,127 
All other loans   1,710    —      —      —      1,710 
Total  $548,580   $8,832   $4,846   $286   $562,544 

 

Included in Commercial loans under the “Pass” classification are loans extended under the Paycheck Protection Program totaling $43.5 million at September 30, 2020 and $0 at December 31, 2019.

 

NOTE 7 ALLOWANCE FOR LOAN LOSSES

 

In determining the amount of our allowance for loan losses, we evaluate the risk characteristics and credit quality of our loan portfolio, and assess current economic conditions, diversification of the portfolio, collateral adequacy, past loss experience and the level of nonperforming loans. 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.

 

As a result of the COVID-19 pandemic, and the resulting economic impact, the company provided forbearance, largely in the form of payment deferrals, on $117.4 million in loans to borrowers during the first nine months of 2020. Factors have been incorporated into the allowance determination to consider the effects of credit deterioration due to the economic impact resulting from the pandemic, such as increased unemployment and decreased gross domestic production.

 

The following table presents activity in the allowance for loan losses for the nine- and three-month periods ending September 30, 2020 and 2019, respectively. Additionally, the allocation of the allowance by recorded portfolio segment and impairment method is presented as of September 30, 2020 and December 31, 2019, respectively.

 

17

     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   $           1,248  $                 158  $           1,736  $              104  $              109  $           1,789  $                27  $              195  $                  2  $           5,368
 Charge-offs                 (65)                    -                   (66)                  -                   (42)              (326)                (15)                (59)                  -                 (573)
 Recoveries                  56                    -                    31                  -                    33                 34                   1                 37                  -                  192
 Provision                874                    32               361                 44                 20               627                 31                 13                  (2)            2,000
 Ending balance   $           2,113  $                 190  $           2,062  $              148  $              120  $           2,124  $                44  $              186  $                 -     $           6,987
                                         
                                         
 Three months ended September 30, 2020                                         
 Beginning balance   $           2,054  $                 169  $           2,039  $              145  $              121  $           1,817  $                49  $              181  $                 -     $           6,575
 Charge-offs                 (43)                    -                   (66)                  -                     -                     -                     -                   (15)                  -                 (124)
 Recoveries                  54                    -                    14                  -                     -                      3                  -                    15                  -                    86
 Provision                  48                    21                 75                   3                  (1)               304                  (5)                   5                  -                  450
 Ending balance   $           2,113  $                 190  $           2,062  $              148  $              120  $           2,124  $                44  $              186  $                 -     $           6,987
                                         
                                         
 Allowance for loan losses at September 30, 2020                                         
 Individually evaluated for impairment   $              285  $                   -     $                49  $                 -     $                  4  $                  8  $                 -     $                 -     $                 -     $              346
 Collectively evaluated for impairment             1,828                  190            2,013               148               116            2,116                 44               186                  -               6,641
   $           2,113  $                 190  $           2,062  $              148  $              120  $           2,124  $                44  $              186  $                 -     $           6,987
                                         
                                         
 Loans at September 30, 2020                                         
 Individually evaluated for impairment   $           1,589  $                 104  $           2,483  $                 -     $              618  $                33  $                 -     $                  6  $                 -     $           4,833
 Collectively evaluated for impairment         173,309             25,950        223,784          14,979          18,493          96,074            4,572          23,128                  -           580,289
   $       174,898  $            26,054  $       226,267  $         14,979  $         19,111  $         96,107  $           4,572  $         23,134  $                 -     $       585,122
                                         
                                         
 Allowance for loan losses at December 31, 2019                                         
 Individually evaluated for impairment   $                70  $                   -     $                44  $                 -     $                  9  $              200  $                 -     $                 -     $                 -     $              323
 Collectively evaluated for impairment             1,178                  158            1,692               104               100            1,589                 27               195                   2            5,045
   $           1,248  $                 158  $           1,736  $              104  $              109  $           1,789  $                27  $              195  $                  2  $           5,368
                                         
                                         
 Loans at December 31, 2019                                         
 Individually evaluated for impairment   $           2,779  $                   70  $           1,318  $                 -     $              994  $              414  $                 -     $                 -     $                 -     $           5,575
 Collectively evaluated for impairment         167,657             31,060        241,604          13,638          19,796          53,580            4,797          24,837                  -           556,969
   $       170,436  $            31,130  $       242,922  $         13,638  $         20,790  $         53,994  $           4,797  $         24,837  $                 -     $       562,544

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 
 Nine months ended September 30, 2019                                         
 Beginning balance   $           1,386  $                 202  $           2,437  $                89  $              287  $              448  $                37  $              175  $              275  $           5,336
 Charge-offs                   -                       -                 (171)                  -                   (33)           (1,563)                  (9)                (73)                  -              (1,849)
 Recoveries                  16                    34               168                 30                   8                 59                   1                 57                  -                  373
 Provision               (143)                  (70)              (566)                (17)              (135)            2,480                  (5)                 18              (272)            1,290
 Ending balance   $           1,259  $                 166  $           1,868  $              102  $              127  $           1,424  $                24  $              177  $                  3  $           5,150
                                         
                                         
 Three months ended September 30, 2019                                         
 Beginning balance   $           1,225  $                 146  $           1,967  $                87  $              118  $           1,383  $                35  $              162  $                65  $           5,188
 Charge-offs                   -                       -                   (42)                  -                     -              (1,026)                  (9)                (30)                  -              (1,107)
 Recoveries                  14                    -                    11                  -                     -                    14                  -                    10                  -                    49
 Provision                  20                    20                (68)                 15                   9            1,053                  (2)                 35                (62)            1,020
 Ending balance   $           1,259  $                 166  $           1,868  $              102  $              127  $           1,424  $                24  $              177  $                  3  $           5,150

 

During the second quarter of 2019, $4.4 million of non-performing or under-performing real estate loans were sold resulting in $57 thousand of charge-offs and $113 thousand of recoveries.

 

Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

19

 

NOTE 8 TROUBLED DEBT RESTRUCTURINGS

 

There were $4.5 million in loans that were classified as troubled debt restructurings at September 30, 2020 and $4.3 million at December 31, 2019. All loans considered to be troubled debt restructurings are individually evaluated for impairment as part of the allowance for loan losses calculation.

 

The following table presents information related to loans modified as troubled debt restructurings during the nine and three months ended September 30, 2020 and 2019.

 

                   
   For the nine months ended
September 30, 2020
  For the nine months ended
September 30, 2019

 

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   3   $190   $190    —     $—     $—   
Construction and land
Development
   —      —      —      —      —      —   
   Residential 1-4 family   27    1,236    1,236    —      —      —   
   Multifamily   —      —      —      —      —      —   
   Farmland   —      —      —      1    281    281 
      Total real estate loans   30    1,426    1,426    1    281    281 
Commercial                  —      —      —   
Agriculture   —      —      —      —      —      —   
Consumer installment loans   2    7    7    —      —      —   
All other loans   —      —      —      —      —      —   
Total   32   $1,433   $1,433    1   $281   $281 
                               

 

   For the three months ended
September 30, 2020
  For the three months ended
September 30, 2019

 

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   1    32    32    —      —      —   
   Multifamily   —      —      —      —      —      —   
   Farmland   —      —      —      —      —      —   
      Total real estate loans   1    32    32    —      —      —   
Commercial                  —      —      —   
Agriculture   —      —      —      —      —      —   
Consumer installment loans   —      —      —      —      —      —   
All other loans   —      —      —      —      —      —   
Total   1   $32   $32    —     $—     $—   
                               

 

During the three months ended September 30, 2020, one loan with a balance of $32 thousand, modified due to bankruptcy, was considered to be a troubled debt restructuring. During the first nine months of 2020, 32 modified loans totaling $1.4 million were considered to be troubled debt restructurings.

 

20

During the three months ended September 30, 2019, no modified loans were considered to be troubled debt restructurings. During the first nine months of 2019, one loan was modified for which the modification was considered to be a troubled debt restructure. This loan is secured by farmland and the modification is related to a court-ordered payment plan.

 

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 $31 thousand, defaulted. One loan previously modified as a troubled debt restructuring, with a balance of $663 thousand, which defaulted during the first three months of 2020, has been paid off.

 

No loans modified as troubled debt restructurings defaulted during the three or nine months ended September 30, 2019. Generally, a troubled debt restructuring is considered to be in default once it becomes 90 days or more past due following a modification.

 

In determining the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings in its estimate. The Company evaluates all troubled debt restructurings for possible further impairment. As a result, the allowance may be increased, adjustments may be made in the allocation of the allowance, or charge-offs may be taken to further write down the carrying value of 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, 2020 and the year ended December 31, 2019:

(Dollars are in thousands)  September 30,
2020
  December 31, 2019
Balance, beginning of period  $3,393   $5,937 
Additions   914    811 
Transfers from premises and equipment   —      683 
Proceeds from sales   (562)   (1,322)
Proceeds from insurance claims   —      (19)
Loans made to finance sales   (428)   (2,360)
Adjustment of carrying value   (132)   (214)
Gains (losses) from sales   52    (123)
Balance, end of period  $3,237   $3,393 


 

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 were as follows as of September 30, 2020 (for purpose of this table the impaired loans are shown net of the related allowance):

 

          

 

 

September 30, 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  $—     $14,781   $—   
    Taxable municipals   —      4,567    —   
    Corporate bonds   —      5,558    —   
    Mortgage backed securities   —      19,203    —   
                
(On a non-recurring basis)
Other real estate owned
   —      —      3,237 
Impaired loans   —      —      4,487 
Total  $—     $44,109   $7,724 

 

 

22

 

Assets and liabilities measured at fair value are as follows as of December 31, 2019 (for purpose of this table the impaired loans are shown net of the related allowance):

 

          

 

 

December 31, 2019

(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  $—     $15,633   $—   
    Taxable municipals   —      4,442    —   
    Corporate bonds   —      5,523    —   
    Mortgage backed securities   —      25,051    —   
                
(On a non-recurring basis)
Other real estate owned
   —      —      3,393 
Impaired loans             5,252 
Total  $—     $50,649   $8,645 

 

 

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of September 30, 2020 and December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:

 

                     
                     

 

 

 

(Dollars in thousands)

 

 

Fair Value at September 30, 2020

 

 

Fair Value at

December 31,

2019

 

 

 

Valuation Technique

 

 

 

Significant Unobservable Inputs

  General Range of Significant Unobservable Input Values
                     
Impaired Loans $ 4,487 $ 5,252   Appraised Value/Discounted Cash Flows/Market Value of Note   Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell   0 – 18%
                     
Other Real Estate Owned $ 3,237 $ 3,393   Appraised Value/Comparable Sales/Other Estimates from Independent Sources   Discounts to reflect current market conditions and estimated costs to sell   0 – 18%

 

Fair Value of Financial Instruments

 

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, 2020 and December 31, 2019 are as follows:

 

                
                
         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, 2020                         
Financial Instruments – Assets                         
   Net Loans  $578,135   $575,103   $—     $570,270   $4,487 
                          
Financial Instruments – Liabilities                         
   Time Deposits   249,733    252,846    —      252,846    —   
   FHLB Advances   5,000    4,971    —      4,971    —   
                          
December 31, 2019                         
Financial Instruments – Assets                         
   Net Loans  $557,176   $550,495   $—     $545,243   $5,252 
                          
Financial Instruments – Liabilities                         
   Time Deposits   257,406    259,325    —      259,325    —   
   FHLB Advances   5,000    5,054    —      5,054    —   

 

 

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, trust preferred securities 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, 2020 and December 31, 2019, represent an approximation of exit price; however, an actual exit price may differ.

 

NOTE 11 LEASING ACTIVITIES

 

The Company adopted ASU 2016-02 (Topic 842) effective May 31, 2017, as the Bank entered into sale leaseback transactions for four branch office sites.

 

In September 2019, the Bank entered into a sale leaseback transaction, with a non-affiliated third party, for its branch office located in Lebanon, Virginia for a total purchase price of $1.34 million. Net proceeds, after sales expenses of $42 thousand totaled $1.30 million and a gain of $803 thousand was recorded. The Bank provided financing to the purchaser, in the amount of $752 thousand, for a term of 5 years. In connection with this sale, the Bank entered into a lease agreement with the purchaser with an initial term of 15 years, with five 5-year renewal options.

 

As of September 30, 2020, the Bank leases five branch offices and a loan production office. The lease agreements have maturity dates ranging from November 2020 to September 2034. It is assumed that there are currently no circumstances in which the leases would be terminated prior to expiration. The weighted average remaining life of the lease terms at September 30, 2020 was 12.13 years.

24

 

The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate that 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, 2020 was 3.16%.

 

For the nine months ended September 30, 2020 and 2019, operating lease expenses were $429 thousand and $361 thousand, respectively.

The Company’s other operating leases were evaluated and determined to be immaterial to the financial statements. At September 30, 2020, future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands):

 2020   $132 
 2021    511 
 2022    530 
 2023    544 
 2024    546 
 Thereafter    4,528 
 Total lease payments    6,791 
 Less imputed interest    1,254 
 Total   $5,537 

 

NOTE 12 REVENUE FROM CONTRACTS WITH CUSTOMERS

 

All our revenue from contracts with customers as defined in ASC 606 is recognized within Non-interest income. The following table presents Non-interest income by revenue stream for the three and nine months ended September 30, 2020 and 2019.

 

  For the three months ended  For the nine months ended
  September 30,  September 30,
(Dollars in thousands)  2020  2019  2020  2019
Service charges and fees  $859   $924   $2,238   $2,597 
Card Processing and interchange income   892    800    2,480    2,276 
Gain on sale of securities available-for-sale (1)   —      —      4    —   
Insurance and investment fees   206    158    447    481 
Other noninterest income   159    973    744    1,247 
Total Noninterest Income  $2,116   $2,855   $5,913   $6,601 

 

(1)Not within the scope of ASU 2014-09

 

25

 

NOTE 13 NONINTEREST EXPENSES

 

Other operating expenses, included as part of noninterest expenses, consisted of the following for the periods presented:

 

   For the three months ended September 30,  For the nine months ended September 30,
(Dollars are in thousands)  2020  2019  2020  2019
             
Advertising  $42   $82   $166   $233 
ATM network expense   357    488    1,113    1,389 
Legal and professional fees   112    244    602    727 
Consulting fees   82    77    443    296 
Loan related expenses   88    194    275    484 
Printing and supplies   38    39    105    116 
FDIC insurance premiums   103    (3)   297    210 
Other real estate owned expenses, net   59    99    255    525 
Other operating expenses   684    572    1,893    1,670 
Total other operating expenses  $1,565   $1,792   $5,149   $5,650 

 

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, 2020.

 

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.

26

 

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 particular 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.

 

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 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 currently in the process of evaluating the impact of adoption of this guidance 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 October, 2020, the FASB released ASU 2020-08, ‘Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs,’ which amends ASU 2017-08 and clarifies that an entity should reevaluate whether a callable debt security that has multiple call dates is within the scope of paragraph 310-20-35-33 for each reporting period. These amendments are part of the FASB’s ongoing project for improving the Codification or correcting its unintended application. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is not permitted. The Company does not expect this amendment 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 report that are subject to risks and uncertainties. These forward looking statements include statements regarding 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 enacted legislation to stabilize the United States financial system;
  • 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 in our future 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, 2019 (the 2019 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.

 

Our deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. If all or a portion of the net deferred tax asset is determined to be unlikely to be realized in the foreseeable future, a valuation allowance is established to reduce the net deferred tax asset to the amount that is more likely than not to be realized. 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.

 

Recent Events

 

In response to challenges related to COVID-19, we supplemented our existing procedures for the adoption of temporary workplace safety standards outlined by the Virginia Department of Labor and Industry. Since the first quarter of 2020, we have maintained a committee dedicated to managing our response to the pandemic. This has included martialing supplies and personal protection equipment, coordinating employee and customer communications, evaluating staffing and maintaining compliance with various mandates and regulations. We have restricted access to our lobbies since the first quarter of 2020. Based on our continuing assessment of the intensity of the pandemic, in our market areas, we continue to limit lobby access and expect this limitation to continue for the foreseeable future. Meanwhile, our offices continue to provide customer services principally via drive-thru facilities and Interactive Teller Machines (ITMs).

 

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 has 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 $43.5 million of these loans for our customers through August 2020, when the funding period closed, and received $1.6 million in fees from the SBA, which is being recognized as income over the terms of these loans. It is anticipated the SBA will forgive the majority of these loans. Thus far, a small number of borrowers have applied for and received forgiveness. We anticipate that the pace of requests will increase in the upcoming months.

 

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, are not be considered troubled debt restructurings (TDRs) or impairments. Through September 30, 2020, we have provided forbearance on approximately 795 loans totaling $117.4 million. These accommodations have been provided in the form of payment deferrals or conversion to interest only for a period of time. The majority of the loans obtaining forbearance are within our general market area, with $73.3 million, $16.7 million and $26.9 million in Virginia, Tennessee and West Virginia, respectively. At September 30, 2020, these loans cover a number of industries, such as residential property rental of $21.5 million, commercial and other real estate rental of $16.0 million, hotels and motels of $11.1 million; amusement and entertainment of $4.3 million and residential construction of $3.7 million. Consumer loans represent $40.5 million, with $39.5 million secured by real estate. Most of these loans have reached the end of their forbearance period and the vast majority of these borrowers are resuming their payments. At September 30, 2020, the portfolio of accounts having received forbearance included 45 loans totaling $2.8 million that were 30 days or more past due. Of these accounts, six loans totaling $280 thousand were past due 90 days or more and nonaccrual. $2.5 million of these loans were existing or newly classified as TDRs. While we believe that the majority of these borrowers will be able to repay their obligations, we cannot reasonably estimate the risk of loss should the adverse economic impact of the pandemic continue for an extended period of time.

 

As discussed in our 2019 Form 10-K, the adverse economic impact of the COVID-19 pandemic has been extensive and wide ranging, resulting in a steep decline in interest rates, an increase in unemployment and a resulting decline in economic output. At this time, we cannot reasonably estimate the term or intensity of any possible adverse impact on our financial position, operations or liquidity. Given the recent resurgence in COVID-19 cases and hospitalizations as the weather has cooled, economic recovery may be slow and uneven. However, we are encouraged by the recent news that a vaccination and therapeutic treatments may soon be available.

29

 

Overview and Highlights

 

For the nine months ended September 30, 2020, the Company reported net income of $1.5 million, or $0.06 per share. This compares to net income of $1.6 million, or $0.07 per share, for the similar period ended September 30, 2019, which is a decrease of $128,000, or 7.9%. However, when excluding pre-tax non-recurring expenses related to the earnings improvement project and restructuring costs in 2020, which were $342,000 and $553,000, respectively, plus the gain on sale of the Lebanon branch of $810,000 in 2019, net income would have been approximately $2.2 million, or $0.09 per share, for the nine months ended September 30, 2020 and $987,000, or $0.04 per share, for the same period in 2019, a 123% improvement.

 

The restructuring announced in May 2020, has driven $720 thousand of reductions in salaries and benefits expense so far this year through September 30, 2020 compared to the same nine months last year, even after including the costs of the restructuring. A combination of eliminated positions, retirements or resignations represents approximately 12% of the workforce. The estimated annual pre-tax savings resulting from this restructuring is $1.6 million. Affected employees are receiving transitional support, including severance payments, assistance to aid in maintaining health insurance, and support in applying for unemployment benefits.

 

Contracts renegotiated in 2019, related to the ATM and card transaction processing, and data and telephone circuits, have resulted in an increase of $196 thousand in interchange fee income, a decrease in card processing expenses of $276 thousand, and a reduction of $128 thousand in phone and data circuit expense, respectively, for the first nine months of 2020 compared to the same period in 2019.

 

As part of the project to improve earnings, fee schedule changes were implemented in August 2020 and this contributed to approximately $163 thousand of increases in service charges and other fee income during the third quarter of 2020. In addition, efforts to increase noninterest income revenues from financial services and secondary market mortgage origination fee income are underway. During the first nine months of 2020, we incurred fees and related out-of-pocket expenses of approximately $342 thousand related to assistance from a consulting firm in implementing recommended changes. We view these costs to be nonrecurring. Once the recommendations are fully implemented, benefits in the form of revenue enhancements and cost savings are anticipated to exceed $3.0 million annually.

 

Total assets grew $42.8 million, or 6.1%, to $749.1 million in the nine months ended September 30, 2020, driven by increased interest-bearing deposits in other banks, a result of cash from deposit growth, plus an increase in loan balances driven by Paycheck Protection Program (PPP) loans. Deposit growth is a result of PPP loans, which were principally funded by deposits to customer checking accounts, and federal stimulus payments to customers. The drawback of these additional deposit funds is that overdraft fee income has been reduced.

 

As we prepare for potential asset quality challenges, the allowance for loan losses has increased to $7.0 million at September 30, 2020, an increase of $1.6 million since December 31, 2019. This affects the provision for loan loss expense, which was $2.0 million for the first nine months of 2020 compared to $1.3 million for the first nine months of 2019.

 

As a result of a moratorium on foreclosures and a gain on the sale of a foreclosed property in February, we have experienced a reduction of $270 thousand in expenses related to other real estate owned during the first nine months of 2020 compared to the same period in 2019.

 

With the unease caused by the pandemic, we are more closely monitoring our liquidity and our customer activity related to large cash withdrawals and draws against lines of credit. We have observed a reduction in funds since the end of June as customers use PPP and stimulus funds. However, we believe our available liquidity levels to be adequate for the foreseeable future.

 

Although loan balances have increased by $22.6 million and interest bearing deposits held at other banks has increased by $25.7 million, the interest rate reductions made by the Federal Reserve’s Open Market Committee in March 2020 has caused a reduction in our interest income of $610,000 for the first nine months of 2020 compared to the same period in 2019. However, as we have reduced interest rates paid on our deposit balances, interest expense is down $569,000 for the same period comparison, nearly mitigating the decline in interest income.

 

On September 14, 2020, we opened a branch office in Kingsport, TN, located in a building that we purchased in February 2020. On October 30, 2020, we closed a nearby office and transferred accounts to the newly opened branch. We have also relocated our loan production office to this location and have provided notice that we will end the lease on the current loan production office when it expires during the fourth quarter of this year. The impact of COVID-19 has caused us to delay renovations to the building in Bristol, VA purchased in 2019, for which we received regulatory approval to operate as a full service branch in October 2019. The regulatory approval was extended to April 2021. Although we are delaying the opening of this site, we believe this expansion, along with the newly opened Kingsport, TN location, fits in with our stated objective of expanding our presence in the Tri-Cities market area.  The Bristol location is within the business district and will allow us to provide retail consumer, commercial banking and financial services within Bristol and the surrounding area.

 

30

Highlights as of and for the nine and three-month periods ended September 30, 2020 include the following.

 

Year-to-date September 30, 2020

 

 

·The net interest margin was 3.65%, a reduction of 19 basis points compared to 3.84% for the first nine months of 2019;

 

·Net interest income was essentially unchanged at $18.7 million when compared to the first nine months of 2019,;

 

·Provision for loans losses was $2.0 million, an increase of $710 thousand compared to the first nine months of 2019;

 

·Noninterest income was $5.9 million, a decrease of $674 thousand compared to the first nine months of 2019, primarily due to the non-recurring gain of $810 thousand in the prior year on the sale and leaseback of the Lebanon office, offset by a $204 thousand increase in card processing and interchange income, which resulted from renegotiated contracts discussed above;

 

·Salaries and employee benefits expense was $10.3 million, a reduction of $720 thousand compared to the same period of 2019, which was due mainly to the restructuring discussed above;

 

·ATM network expense was $1.1 million, a reduction of $276 thousand compared to the same period in 2019, resulting from a renewed and renegotiated contract;

 

·Loan related expenses were $275 thousand, a reduction of $209 thousand, or 43.2%, compared to the same period in 2019;

 

·Expenses associated with other real estate owned were $255 thousand, a reduction of $270 thousand, or 51.5%, as compared to the nine-month period ended September 30, 2019; and

 

·Total noninterest expenses were $20.7 million, a reduction of $1.3 million, or 5.8%, as compared to the same period in 2019, due to reasons described in the prior four bulleted items.

 

For the quarter ended September 30, 2020

 

 

·Net interest margin was 3.66% for the quarter, a decrease of 24 basis points compared to 3.90% for the quarter ended September 30, 2019, due to market rate reductions;

 

·Net interest income improved to $6.4 million for the quarter, an improvement of $67 thousand compared to the same quarter in 2019;

 

·Provision for loans losses was $450 for the quarter, a reduction of $570 thousand compared to the same quarter in 2019;

 

·Noninterest income was $2.1 million for the quarter, a decrease of $739 thousand, or 25.9%, compared to the same quarter in 2019, mainly due to the $810 thousand non-recurring gain on the sale of the Lebanon branch in 2019 discussed above;

 

·Salaries and employee benefits expense decreased to $3.0 million for the quarter, a reduction of $563 thousand, or 15.9%, compared to the same quarter in 2019; and

 

·Expenses associated with other real estate owned were $59 thousand for the quarter, a reduction of $40 thousand, or 40.4%, compared to the same quarter in 2019.

 

Balance Sheet 

 

·Year to date, total loans increased $22.6 million, or 4.0%, to $585.1 million;
·Securities available for sale decreased $6.5 million, or 12.2%, to $46.7 million at September 30, 2020 compared to December 31, 2019
·Time deposits decreased $10.9 million, 18.8%, to $249.7 million at September 30, 2020 compared to December 31, 2019
·Total deposits increased $40.2 million, or 6.5%, to $661.7 million at September 30, 2020 compared to December 31, 2019;
·Borrowings remained unchanged year-to-date;
·Total capital at September 30, 2020 was $56.9 million;
·Book value per share was $2.38 as of September 30, 2020; and
·The Bank remains ‘well capitalized’ as defined by regulatory guidance.

 

31

Asset Quality

·Nonperforming assets, which include nonaccrual loans and other real estate owned, totaled $8.6 million at September 30,2020, a decline of $31,000, or 0.4% during the first nine months of 2020;
·Nonperforming assets as a percentage of total assets was 1.15% as of September 30, 2020;
·Loans past due 30 days or more, or on nonaccrual totaled, $10.1 million, or 1.7% of total loans outstanding;
·Annualized net charge offs as a percentage of average loans for the quarter were 0.03%, down from 0.76% for the third quarter of 2019; and
·The allowance for loan losses as a percentage of total loans was 1.19% as of September 30, 2020 compared to 0.95% as of December 31, 2019. Excluding PPP loans, the allowance as a percentage of total loans was 1.25% as of September 30, 2020.

 

Comparison of the nine months ended September 30, 2020 to September 30, 2019

 

The Company’s primary source of income is net interest income, which was $18.7 million for the first nine months of 2020, essentially unchanged when compared to the first nine months of 2019. While we had increases in both loans and balances in interest-bearing deposits in other banks, the growth was not sufficient to offset the impact of decreases in interest rates, resulting in a decrease in interest income of $596 thousand. However, total interest expense decreased by $569 thousand, nearly entirely mitigating the decrease in interest income, due primarily to the year-over-year decrease in average balances of interest-bearing deposits, specifically money market and time deposits, combined with the decrease in rates paid on money market deposits.

 

Overall, the net interest margin decreased 19 basis points (bps) to 3.65%. This reduction in interest rates was a direct result of actions taken by the Federal Reserve’s Federal Open Market Committee, in response to the economic impact of the pandemic, which reduced the target federal funds rate twice in March 2020, by 150 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%. Additionally, the yield on PPP loans is 1.00% (excluding the impact of deferred fee income), which reduces the overall average yield on loans. Fee revenue from the SBA on PPP loans only partially mitigates the low rate on these loans. Our yield on loans was 4.97% for the first nine months of 2020 compared to 5.15% for the same period in 2019. We have responded by lowering rates paid on deposit accounts, as evidenced by our 0.77% cost of funds for the first nine months of 2020 compared to 0.92% for the same period in 2019.

 

As we prepare for potential asset quality challenges, the provision for loan losses increased $710 thousand, or 55.0%, to $2.0 million for the first nine months of 2020 compared to $1.3 million for the first nine months of 2019. The economic impact of COVID-19 caused us to reassess the internal and external qualitative factors used in our loan loss model, resulting in the increased provision to the allowance for loan losses. Specifically, we adjusted internal factors to recognize risk associated with providing forbearance to existing borrowers. External factors were adjusted to reflect the economic impact on domestic production and increased unemployment. We continually measure the anticipated economic impact of the pandemic, but depending on the length of the economic downturn and the nature and speed of any future recovery, additional provisions may be needed beyond those necessary to support organic growth of the loan portfolio.

 

Noninterest income for the first nine months of 2020 was $5.9 million, a decrease of $688 thousand, or 10.4%, when compared to the same period in 2019. This decrease was driven primarily by the $810 thousand non-recurring gain on the sale of the Lebanon office recorded in 2019. However, card processing revenue increased $204 thousand for the comparative periods due to the renegotiated contract with our provider. Service charges and fees decreased $359 thousand due to reduction in overdraft protection revenue, a result of the impact of stimulus and PPP funds received by our customers.

 

Noninterest expense decreased $1.3 million, or 5.7%, to $20.7 million for the first nine months of 2020 compared to the first nine months of 2019, primarily due to a reduction of $720 thousand in salaries and benefits expenses, a result of restructuring and reduced staffing discussed above. These reduced salaries and benefits costs helped offset the impact of the related nonrecurring costs due to the severance payments and expenses of the consulting firm. This firm is also reviewing our processes and procedures. Once enhancements resulting from the review are fully implemented, it is estimated that the pre-tax annual benefits will exceed $3.0 million.

 

Other operating expenses of $5.1 million are down $501 thousand for the first nine months of 2020 compared to the first nine months of 2019, due largely to reductions in expenses related to other real estate owned, loan related expenses, and ATM processing, which decreased $270 thousand, $209 thousand, and $276 thousand, respectively. OREO costs benefited from a gain recognized on the sale of a foreclosed property in February, while loan collection costs reflect the impact of loan forbearance combined with the moratorium on foreclosures. The reduction in ATM processing relates to benefits obtained from renewed and renegotiated contracts that took effect during the second quarter of 2019. This new agreement with our card services provider is anticipated to provide a combination of annualized revenue and savings of approximately $400 thousand over a five-year period. As noted in the discussion of noninterest income, above, card processing fees increased $204 thousand for the comparative periods.

32

 

The efficiency ratio, a non-GAAP measure, improved to 84.2% for the first nine months of 2020 from 86.8% for the first nine months of 2019, due to improvements made thus far as discussed above.

 

Comparison of the Three Months ended September 30, 2020 to September 30, 2019

 

Net interest income was up $67 thousand to $6.4 million during the third quarter of 2020 compared to the third quarter of 2019. Although interest income was down $267 thousand due to reductions in market rates and yields on earning assets, interest expense was down $334 thousand due to reductions in our cost of funds, more than mitigating the reduction in interest income. As discussed above, the effect of rate reductions by the Federal Reserve’s Federal Open Market Committee, in response to the economic impact of the pandemic, has overshadowed increased loan balances and interest-bearing deposits in other banks. While we had increases in loans and increases in deposits in other banks, that growth was not sufficient to offset the impact of decreases in interest rates. Overall, the net interest margin decreased 25 basis points (bps) to 3.65% during the third quarter of 2020, from 3.90% for the third quarter of 2019, driven by a 51 bps reduction in yield on earning assets, partially mitigated by a 26 bps reduction in cost of funds. The net estimated annualized effect of a 25 bps reduction in net interest margin is $1.7 million against pre-tax income. We expect this lower interest rate environment to continue affecting net interest income for the foreseeable future.

 

The provision for loan losses decreased $570 thousand, or 55.9%, to $450 thousand for the third quarter of 2020 compared to $1.0 million for the third quarter of 2019.

 

Noninterest income for the third quarter of 2020 was $2.1 million, down $739 thousand, or 25.9%, when compared to the third quarter of 2019. This decrease was driven primarily by the $810 thousand non-recurring gain on the sale of the Lebanon branch in the third quarter of 2019. Income from service charges was down $88 thousand, as overdraft protection revenue was impacted by federal stimulus payments and PPP funds received into our customers’ deposit accounts. However, as part of the earnings enhancement project, we reviewed our fee schedule for deposit products and revised and restructured the schedule, which became effective August 1, 2020, so we anticipate an increase in service fees and other charges going forward. Card processing and interchange fees increased $92 thousand due to benefits of the renegotiated contract with our card provider. Revenue from insurance and investments fees increased $48 thousand, or 30.4%, as customers see out investment alternatives in response to the current low interest rate environment.

 

Noninterest expense for the third quarter of 2020 was down $797 thousand, or 11.3%, to $6.3 million compared to the third quarter of 2019. Salaries and benefits expenses decreased $563 thousand due to reduced staff from the restructuring discussed earlier. Other operating expenses were down $227 thousand, or 12.7%, to $1.6 million for the same comparable periods, largely due to ATM network expense, legal and professional fees, and loan related expenses, which decreased $131 thousand, $132 thousand, and $106 thousand, respectively. Loan related expense reductions are due to the moratorium on foreclosures. ATM expense reductions are related to renegotiated contracts previously discussed.

 

The efficiency ratio, a non-GAAP measure, improved to 73.6% for the third quarter of 2020 compared to 76.9% for the third quarter of 2019.

 

Balance Sheet

 

Total assets increased $42.8 million, or 6.1%, to $749.1 million at September 30, 2020 from $706.4 million at December 31, 2019, driven by increased interest-bearing deposits in other banks, a result of cash from deposit growth, plus an increase in loan balances driven by Paycheck Protection Program (PPP) loans. Deposit growth of $40.2 million is net of approximately $27 million in withdrawals during the first and second quarters from one depositor of funds that had been deposited temporarily.

 

Total investments decreased $6.5 million, or 12.9%, to $44.1 million at September 30, 2020 from $50.6 million at December 31, 2019, but mitigated by unrealized gains of $1.0 million. During the nine months ended September 30, 2020, sales of investments totaled $1.0 million, resulting in net realized gains of $4 thousand, and calls and principal paydowns totaled $8.3 million.

 

There were $337 thousand in loans held for sale at September 30, 2020, compared to $2 thousand at December 31, 2019.

33

 

Loans receivable increased $22.6 million, or 4.0%, to $585.1 million at September 30, 2020 as compared to $562.5 million at December 31, 2019, driven mainly by 665 PPP loans totaling $43.5 million. The PPP loans were originated, principally, in our general market area, with $29.5 million, $3.3 million and $10.0 million originated in Virginia, Tennessee and West Virginia, respectively. These loans were extended to borrowers in a number of businesses such as physician and hospital services, $6.6 million, professional services $3.4 million, coal mining $2.8 million, residential construction and repair $2.5 million; natural gas drilling $1.7 million, trucking and freight $1.5 million, restaurants $1.4 million and hotels $1.4 million. While other loan demand has softened, we continue to seek opportunities to provide credit at reasonable terms. At September 30, 2020, approximately $13.4 million in new loans were in the pipeline. Through November 13, 2020, approximately $4.0 million of these loans have closed. It is anticipated that loan demand for commercial real estate, capital assets and purchase money mortgage loans will continue to be dampened, as borrowers remain impacted by the pandemic-related economic downturn.

 

Total deposits increased $40.2 million, or 6.5%, to $661.7 million at September 30, 2020 from $621.5 million at December 31, 2019 due to funding of PPP loans and federal stimulus payments to customers. During those nine months, noninterest-bearing demand deposits increased $44.6 million, or 26.1%, driven primarily by $30.2 million in federal stimulus payments received by customers in April 2020 through the CARES Act, plus PPP loan funds, which were typically deposited into a customer’s checking account. Also during those nine months, interest-bearing deposits decreased $4.4 million, or 1.0%, driven primarily by a decrease in money market accounts of $23.5 million, partially mitigated by an increase of $12.8 million in interest-bearing demand deposits and an increase in savings accounts of $17.6 million. The $27 million in withdrawals by a large customer discussed previously came from a money market account. 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.

 

Trust preferred securities of $16.5 million at September 30, 2020 were unchanged compared to December 31, 2019.

 

Borrowed funds from the FHLB were $5.0 million at both September 30, 2020 and December 31, 2019. The following table presents the FHLB advances:

 

(Dollars in thousands)   Maturity Date   Rate  

September 30,

2020

  December 31, 2019
                 
Fixed Rate Hybrid   6/30/2021   1.34%   5,000   5,000

 

Total equity at September 30, 2020 was $56.9 million, an increase of $2.3 million, or 4.2%, compared to $54.6 million at December 31, 2019. Net income of $1.5 million and other comprehensive income of $818 thousand drove this increase.

 

Asset Quality

 

Nonperforming assets increased $31 thousand, or 0.4%, during the first nine months of 2020, driven by an increase in nonaccrual loan balances of $187 thousand that was mitigated by a decrease in OREO of $156 thousand. As a result, the ratio of nonperforming assets to total assets decreased to 1.15% at September 30, 2020 compared to 1.21% at December 31, 2019.

 

Nonperforming assets include nonaccrual loans, 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. We continue extensive and aggressive measures to work through problem credits and liquidate foreclosed properties in an effort to reduce nonperforming assets. We are mindful of the impact on earnings and capital as we work to achieve this goal. However, we may recognize some losses and reductions in the allowance for loan loss as we expedite the resolution of these problem assets.

 

 

34

Nonperforming assets consisted of the following as of September 30, 2020 and December 31, 2019:

 

   September 30,
2020
  December 31, 2019
Nonaccrual loans  $5,343   $5,156 
Loans past due more than 90 days, still accruing   —      —   
Nonperforming loans   5,343    5,156 
Other real estate owned   3,237    3,393 
Nonperforming assets  $8,580   $8,549 
           
Nonperforming loans/Total loans at period end   0.91%   1.52%
Nonperforming assets/Total assets at period end   1.15%   1.21%

 

 

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 2020, $914 thousand of OREO was acquired as a result of settlement of foreclosed loans. Foreclosed real estate sales for the first nine months of 2020 totaled $562 thousand, resulting in a net gain of $52 thousand. In an effort to reduce our level of foreclosed properties, we maintain the aggressive approach toward liquidating properties, exhibited over the past, by making pricing adjustments to expedite sales. This includes valuation adjustments of $132 thousand recorded thus far in 2020. As we continue these efforts, additional losses could occur, while reducing future carrying costs. We do have lease agreements on certain OREO properties that are generating rental income at market rates. Rental income on OREO properties was $47 thousand for the first nine months of 2020 compared to $49 thousand for the first nine months of 2019.

 

Loans rated substandard or below totaled $5.3 million at September 30, 2020 compared to $5.1 million at December 31, 2019. Total past due loans decreased to $6.4 million at September 30, 2020 from $8.2 million at December 31, 2019.

 

Our allowance for loan losses at September 30, 2020 was $7.0 million or 1.19% of total loans (1.29% when excluding the $43.5 million of PPP loans) as compared to $5.4 million or 0.95% of total loans at December 31, 2019. Impaired loans totaled $4.8 million with an estimated related specific allowance of $346 thousand for potential losses at September 30, 2020 as compared to $5.6 million of impaired loans with an estimated related allowance of $323 thousand at the end of 2019. A provision of $2.0 million was recognized for the first nine months of 2020 compared to $1.3 million during the first nine months of 2019. In the first nine months of 2020, net charge-offs totaled $381 thousand, or 0.07% of average loans, annualized, as compared to $1.5 million, or 0.27%, of average loans for the same period of 2019. The allowance for loan losses is being maintained at a level that management deems appropriate to absorb any potential future losses and known impairments within the loan portfolio, whether or not the losses are actually ever realized. 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. Our internal and external qualitative factors have been adjusted to reflect known and anticipated changes to the overall risk to the loan portfolio resulting from the COVID-19 pandemic. Those changes along with the assessment of the inherent and specific risks associated with the loan portfolio resulted in additional provisions to the allowance during 2020. The following table summarizes components of the allowance for loan losses and the related loans as of September 30, 2020 and December 31, 2019:

 

(Dollars in thousands)  September 30,
2020
  December 31, 2019
Specific allowance  $348   $323 
General allowance   6,641    5,045 
Total allowance  $6,987   $5,368 
           
Impaired loans  $4,833   $5,575 
Other loans   580,289    556,969 
Total loans  $585,122   $562,544 
           
Total allowance/Total loans   1.19%   0.95%
General allowance/Other loans   1.14%   0.91%

 

35

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 $4.0 million and $4.6 million existed at September 30, 2020 and December 31, 2019, 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, 2020 was $56.9 million compared to $54.6 million at December 31, 2019, an increase of $2.3 million. The increase includes net unrealized gains of $818 thousand related to the available-for-sale investment portfolio, net of tax, plus net income of $1.5 million for the nine-month period.

 

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, 2020  December 31, 2019
Tier 1 leverage   5.00%   8.93%   9.43%
Common equity Tier 1   6.50%   14.19%   13.72%
Tier 1 risk-based capital   8.00%   14.19%   13.72%
Total risk-based capital   10.00%   15.44%   14.83%

 

 

At September 30 2020, 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.

 

Tangible book value, which is total stockholders’ equity net of accumulated other comprehensive income, was $2.34 per common share at September 30, 2020 and $2.28 per share at December 31, 2019. Other key performance indicators are as follows:

  Three months ended September 30,   Nine months ended September 30,
  2020 2019   2020 2019
Return on average assets1 0.75% 0.50%   0.27% 0.31%
Return on average equity1 10.12% 6.49%   3.61% 4.15%
Average equity to average assets 7.41% 7.63%   7.47% 7.40%

 

1 - Annualized

 

Under current economic conditions, we believe it is prudent to continue to increase capital to support planned asset growth while being able to absorb potential losses that may occur if asset quality deteriorates, and based upon projections, we believe our current capital levels will be sufficient.

 

No cash dividends have been paid historically and we do not anticipate paying a cash dividend in the foreseeable future as the Company continues to have a retained deficit. Earnings will continue to be retained to build capital and position the Company to pay a dividend to its shareholders as soon as practicable.

 

 

Liquidity

 

Given the pandemic, we have elevated our monitoring of liquidity, including consideration of leveraging or selling illiquid assets, and deem liquidity to remain 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 $115.0 million at September 30, 2020, an increase from $93.9 million at December 31, 2019. A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs for the upcoming 12 months.

36

 

At September 30, 2020, all of our investment securities were classified as available-for-sale. These investments provide a source of liquidity in the amount of $37.1 million, which is net of the $7.0 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.

 

Our loan to deposit ratio was 88.4% at September 30, 2020 and 90.5% at December 31, 2019. We anticipate this ratio to remain at or below 90% for the foreseeable future, excluding the impact of PPP loan originations.

 

Available third-party sources of liquidity at September 30, 2020 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. We also have the ability to cumulatively borrow $20.0 million in unsecured federal funds through credit facilities extended by various correspondent banks.

 

The Bank’s total line of credit with the FHLB is $188.4 million, with unused availability at September 30, 2020 of $166.4 million. One advance was outstanding at September 30, 2020 for $5.0 million and the line also secures letters of credit totaling $17.0 million. The advance and letters of credit are secured by a blanket lien on our residential real estate loans that amounted to $138.9 million at September 30, 2020.

 

The Bank also has access to the brokered deposits market and the Certificate of Deposit Registry Service (“CDARS”). At September 30, 2020, we held no brokered deposits and $9.5 million in CDARS reciprocal time deposits.

 

The Bank is also a member of an internet certificate of deposit network whereby we may purchase funds from other financial institutions at auction. We may invest funds through this network as well. Currently, we only intend to use this source of liquidity in a liquidity crisis event.

 

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. Aside from the conventional discount window facility, the Federal Reserve Bank is also offering funding for specifically for financial institutions providing PPP loans. As we continue to assess our overall liquidity, we may consider taking advantage of this program or some similar credit facilities being offered by other correspondent banks related to matching PPP loans.

 

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.

 

The bank holding company has approximately $44 thousand in cash on deposit at the Bank at September 30, 2020. Additionally, $585 thousand in dividend payments from the Bank have been received in the first nine months of 2020. These funds will be used to pay operating expenses and make 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, 2020 to the off-balance sheet items and the contractual obligations disclosed in our 2019 Form 10-K.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

Not Applicable.

 

37

 

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, 2020 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

38

 

Part II Other Information

Item 1.Legal Proceedings

 

In the course of operations, we may become a party to legal proceedings.

 

There are no pending or threatened legal proceedings to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.

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:

 

  No. Description
3.1 Amended Articles of Incorporation of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarterly period ended June 30, 2008 filed on August 11, 2008).
3.2 Bylaws of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 3.1 to Form 8-K filed on April 15, 2004).
4.1 Specimen Common Stock Certificate of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 4.1 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012).
31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
32 Certification by Chief Executive Officer and Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.
101 The following materials for the Company’s 10-Q Report for the quarterly period ended March 31, 2020, formatted in XBRL:  (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements, tagged as blocks of text.

 

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 20, 2020

 

     
  By: /s/ JOHN J. BOCZAR          
    John J. Boczar.
    Executive Vice President and Chief Financial officer
     
  Date:   November 20, 2020

 

40