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AMERICAN NATIONAL BANKSHARES INC. - Quarter Report: 2021 September (Form 10-Q)

americannb20210930_10q.htm
 
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2021

 

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: 0-12820

 

AMERICAN NATIONAL BANKSHARES INC.

(Exact name of registrant as specified in its charter)

   

Virginia

 

54-1284688

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

628 Main Street, Danville, Virginia

 

24541

(Address of principal executive offices)

 

(Zip Code)

(434) 792-5111

(Registrant's telephone number, including area code)

 

(Not applicable)

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

   

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

AMNB

Nasdaq Global Select Market

 

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

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

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  ☐ 

Smaller reporting company ☐

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.              ☐

 

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

 

Yes

No

 

At October 29, 2021, the Company had 10,778,728 shares of Common Stock outstanding, $1 par value.

 

 

 

AMERICAN NATIONAL BANKSHARES INC.

 

       

Index

 

 

Page

 

 

 

 

Part I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020

3

 

 

 

 

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020 (unaudited)

4

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020 (unaudited)

5

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders' Equity for the three and nine months ended September 30, 2021 and 2020 (unaudited)

6

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (unaudited)

8

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

9

 

 

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

33

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

52

 

 

 

 

 

Item 4.

Controls and Procedures

53

 

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

54

 

 

 

 

 

Item 1A.

Risk Factors

54

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

55

 

 

 

 

 

Item 4.

Mine Safety Disclosures

55

       

 

Item 5.

Other Information

55

 

 

 

 

 

Item 6.

Exhibits

56

 

 

 

 

SIGNATURES

57

 

 

 

 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

American National Bankshares Inc.

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

 

  

(Unaudited) September 30, 2021

  

(Audited) December 31, 2020

 

Assets

        

Cash and due from banks

 $38,349  $30,767 

Interest-bearing deposits in other banks

  480,052   343,603 

Securities available for sale, at fair value

  643,949   466,091 

Restricted stock, at cost

  8,046   8,715 

Loans held for sale

  9,518   15,591 

Loans, net of deferred fees and costs

  1,940,332   2,015,056 

Less allowance for loan losses

  (20,630)  (21,403)

Net loans

  1,919,702   1,993,653 

Premises and equipment, net

  37,021   39,723 

Other real estate owned, net of valuation allowance

  213   958 

Goodwill

  85,048   85,048 

Core deposit intangibles, net

  4,978   6,091 

Bank owned life insurance

  28,950   28,482 

Other assets

  33,237   31,288 

Total assets

 $3,289,063  $3,050,010 
         

Liabilities

        

Noninterest-bearing deposits

 $980,985  $830,094 

Interest-bearing deposits

  1,881,096   1,781,236 

Total deposits

  2,862,081   2,611,330 

Customer repurchase agreements

  26,595   42,551 

Long-term borrowings

  28,207   35,630 

Other liabilities

  21,793   22,605 

Total liabilities

  2,938,676   2,712,116 
         

Shareholders' equity

        

Preferred stock, $5 par value, 2,000,000 shares authorized, none outstanding

      

Common stock, $1 par value, 20,000,000 shares authorized, 10,778,562 shares outstanding at September 30, 2021 and 10,982,367 shares outstanding at December 31, 2020

  10,715   10,926 

Capital in excess of par value

  148,069   154,850 

Retained earnings

  193,107   169,681 

Accumulated other comprehensive (loss) income, net

  (1,504)  2,437 

Total shareholders' equity

  350,387   337,894 

Total liabilities and shareholders' equity

 $3,289,063  $3,050,010 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

American National Bankshares Inc.

Consolidated Statements of Income

(Dollars in thousands, except per share data) (Unaudited)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 

Interest and Dividend Income:

                               

Interest and fees on loans

  $ 21,974     $ 22,346     $ 65,334     $ 65,046  

Interest and dividends on securities:

                               

Taxable

    1,896       1,545       5,297       5,228  

Tax-exempt

    94       107       293       330  

Dividends

    112       122       349       382  

Other interest income

    201       59       375       356  

Total interest and dividend income

    24,277       24,179       71,648       71,342  

Interest Expense:

                               

Interest on deposits

    781       2,118       2,990       7,908  

Interest on short-term borrowings

    3       42       19       237  

Interest on long-term borrowings

    400       524       1,352       1,523  

Total interest expense

    1,184       2,684       4,361       9,668  

Net Interest Income

    23,093       21,495       67,287       61,674  

(Recovery of) Provision for loan losses

    482       2,619       (870 )     8,331  

Net Interest Income After (Recovery of) Provision for Loan Losses

    22,611       18,876       68,157       53,343  

Noninterest Income:

                               

Trust fees

    1,311       1,054       3,757       3,019  

Service charges on deposit accounts

    664       618       1,916       1,880  

Other fees and commissions

    1,147       996       3,644       2,888  

Mortgage banking income

    989       1,030       3,449       2,472  

Securities gains, net

                      814  

Brokerage fees

    265       170       733       553  

Income from Small Business Investment Companies

    491       98       1,510       34  

Income from insurance investments

    132       108       1,062       271  

Losses on premises and equipment, net

    (107 )     (15 )     (588 )     (97 )

Other

    231       233       704       788  

Total noninterest income

    5,123       4,292       16,187       12,622  

Noninterest Expense:

                               

Salaries and employee benefits

    8,185       7,989       23,881       21,540  

Occupancy and equipment

    1,513       1,423       4,548       4,116  

FDIC assessment

    194       162       644       433  

Bank franchise tax

    440       426       1,321       1,277  

Core deposit intangible amortization

    361       402       1,113       1,246  

Data processing

    748       705       2,224       2,253  

Software

    344       353       1,011       1,112  

Other real estate owned, net

    21       28       148       34  

Other

    3,037       2,652       8,655       7,895  

Total noninterest expense

    14,843       14,140       43,545       39,906  

Income Before Income Taxes

    12,891       9,028       40,799       26,059  

Income Taxes

    2,713       1,801       8,566       4,808  

Net Income

  $ 10,178     $ 7,227     $ 32,233     $ 21,251  

Net Income Per Common Share:

                               

Basic

  $ 0.94     $ 0.66     $ 2.96     $ 1.93  

Diluted

  $ 0.94     $ 0.66     $ 2.95     $ 1.93  

Weighted Average Common Shares Outstanding:

                               

Basic

    10,833,875       10,966,645       10,907,721       10,983,729  

Diluted

    10,836,293       10,969,901       10,911,372       10,988,090  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

American National Bankshares Inc.

Consolidated Statements of Comprehensive Income

(Dollars in thousands) (Unaudited)

 

   

Three Months Ended September 30,

 
   

2021

   

2020

 

Net income

  $ 10,178     $ 7,227  
                 

Other comprehensive loss:

               
                 

Unrealized losses on securities available for sale

    (2,191 )     (245 )

Tax effect

    474       53  
                 

Unrealized gains on cash flow hedges

    230       243  

Tax effect

    (49 )     (53 )
                 

Other comprehensive loss

    (1,536 )     (2 )
                 

Comprehensive income

  $ 8,642     $ 7,225  

 

   

Nine Months Ended September 30,

 
   

2021

   

2020

 

Net income

  $ 32,233     $ 21,251  
                 

Other comprehensive income (loss):

               
                 

Unrealized gains (losses) on securities available for sale

    (6,657 )     7,603  

Tax effect

    1,450       (1,641 )
                 

Reclassification adjustment for gains on sales or calls of securities available for sale

          (814 )

Tax effect

          176  
                 

Unrealized gains (losses) on cash flow hedges

    1,603       (2,715 )

Tax effect

    (337 )     586  
                 

Other comprehensive income (loss)

    (3,941 )     3,195  
                 

Comprehensive income

  $ 28,292     $ 24,446  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

American National Bankshares Inc.

Consolidated Statements of Changes in Shareholders' Equity

Three Months Ended September 30, 2021 and 2020

(Dollars in thousands, except per share data) (Unaudited)

  Common Stock  

Capital in Excess of Par Value

  Retained Earnings  

Accumulated Other Comprehensive Income (Loss)

  

Total Shareholders' Equity

 

Balance, June 30, 2020

 $10,911  $154,222  $159,586  $2,714  $327,433 
                     

Net income

        7,227      7,227 
                     

Other comprehensive loss

           (2)  (2)
                     

Vesting of restricted stock (466 shares)

               
                     

Equity based compensation (5,436 shares)

  8   273         281 
                     

Cash dividends paid, $0.27 per share

        (2,958)     (2,958)
                     

Balance, September 30, 2020

 $10,919  $154,495  $163,855  $2,712  $331,981 
                     

Balance, June 30, 2021

 $10,811  $150,947  $185,843  $32  $347,633 
                     

Net income

        10,178      10,178 
                     

Other comprehensive loss

           (1,536)  (1,536)
                     

Stock repurchased (100,764 shares)

  (101)  (3,212)        (3,313)
                     

Vesting of restricted stock (517 shares)

  1   1         2 
                     

Equity based compensation (4,615 shares)

  4   333         337 
                     

Cash dividends paid, $0.27 per share

        (2,914)     (2,914)
                     

Balance, September 30, 2021

 $10,715  $148,069  $193,107  $(1,504) $350,387 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

American National Bankshares Inc.

Consolidated Statements of Changes in Shareholders' Equity

Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands, except per share data) (Unaudited)

  

Common Stock

  

Capital in Excess of Par Value

  

Retained Earnings

  

Accumulated Other Comprehensive Income (Loss)

  

Total Shareholders' Equity

 

Balance, December 31, 2019

 $11,019  $158,244  $151,478  $(483) $320,258 
                     

Net income

        21,251      21,251 
                     

Other comprehensive income

           3,195   3,195 
                     

Stock repurchased (140,526 shares)

  (141)  (4,840)        (4,981)
                     

Stock options exercised (1,793 shares)

  2   28         30 
                     

Vesting of restricted stock (18,007 shares)

  18   (18)         
                     

Equity based compensation (36,949 shares)

  21   1,081         1,102 
                     

Cash dividends paid, $0.81 per share

        (8,874)     (8,874)
                     

Balance, September 30, 2020

 $10,919  $154,495  $163,855  $2,712  $331,981 
                     

Balance, December 31, 2020

 $10,926  $154,850  $169,681  $2,437  $337,894 
                     

Net income

        32,233      32,233 
                     

Other comprehensive (loss)

           (3,941)  (3,941)
                     

Stock repurchased (247,999 shares)

  (248)  (7,895)        (8,143)
                     

Stock options exercised (5,180 shares)

  5   81         86 
                     

Vesting of restricted stock (15,832 shares)

  16   (16)         
                     

Equity based compensation (41,079 shares)

  16   1,049         1,065 
                     

Cash dividends paid, $0.81 per share

        (8,807)     (8,807)
                     

Balance, September 30, 2021

 $10,715  $148,069  $193,107  $(1,504) $350,387 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

American National Bankshares Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands) (Unaudited)

 

    Nine Months Ended September 30,  
   

2021

   

2020

 

Cash Flows from Operating Activities:

               

Net income

  $ 32,233     $ 21,251  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Provision for (recovery of) loan losses

    (870 )     8,331  

Depreciation

    1,694       1,598  

Net accretion of acquisition accounting adjustments

    (3,148 )     (2,620 )

Core deposit intangible amortization

    1,113       1,246  

Net amortization of securities

    1,275       842  

Net gain on sale or call of securities available for sale

          (814 )

Gain on sale of loans held for sale

    (3,449 )     (2,472 )

Proceeds from sales of loans held for sale

    123,193       113,781  

Originations of loans held for sale

    (113,671 )     (116,071 )

Net loss (gain) on other real estate owned

    111       (12 )

Net loss on sale or disposal of premises and equipment

    588       97  

Equity based compensation expense

    1,065       1,102  

Earnings on bank owned life insurance

    (468 )     (461 )

Deferred income tax benefit

    (63 )     (164 )

Net change in other assets

    (836 )     (2,806 )

Net change in other liabilities

    793       (1,603 )

Net cash provided by operating activities

    39,560       21,225  
                 

Cash Flows from Investing Activities:

               

Proceeds from sales of securities available for sale

          5,811  

Proceeds from maturities, calls and paydowns of securities available for sale

    137,511       177,469  

Purchases of securities available for sale

    (323,302 )     (155,817 )

Net change in restricted stock

    669       (77 )

Net decrease (increase) in loans

    77,984       (253,650 )

Proceeds from sale of premises and equipment

    1,316       1  

Purchases of premises and equipment

    (833 )     (2,347 )

Proceeds from sales of other real estate owned

    634       162  

Net cash used in investing activities

    (106,021 )     (228,448 )
                 

Cash Flows from Financing Activities:

               

Net change in noninterest-bearing deposits

    150,891       241,778  

Net change in interest-bearing deposits

    99,921       168,528  

Net change in customer repurchase agreements

    (15,956 )     1,431  

Net change in subordinated debt

    (7,500 )      

Common stock dividends paid

    (8,807 )     (8,874 )

Repurchase of common stock

    (8,143 )     (4,981 )

Proceeds from exercise of stock options

    86       30  

Net cash provided by financing activities

    210,492       397,912  

Net Increase in Cash and Cash Equivalents

    144,031       190,689  

Cash and Cash Equivalents at Beginning of Period

    374,370       79,582  

Cash and Cash Equivalents at End of Period

  $ 518,401     $ 270,271  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

AMERICAN NATIONAL BANKSHARES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1 – Accounting Policies

 

The consolidated financial statements include the accounts of American National Bankshares Inc. (NASDAQ: AMNB) (the "Company") and its wholly-owned subsidiary, American National Bank and Trust Company (the "Bank"). The Company is a multi-state bank holding company headquartered in Danville, Virginia. The Bank is a community bank organization serving Virginia and North Carolina with 26 banking offices. In addition to traditional retail, commercial and mortgage offerings, the Bank also provides trust and investment services through its Trust and Investment Services Division.

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, goodwill and intangible assets, other-than-temporary impairment of securities, accounting for merger and acquisition activity, accounting for acquired loans with specific credit-related deterioration, and the valuation of deferred tax assets and liabilities.

 

COVID-19 spread rapidly across the world in the first quarter of 2020 and was declared a pandemic by the World Health Organization. On March 13, 2020, the United States President declared a national emergency in the face of a growing public health and economic crisis due to the COVID-19 global pandemic. The government and private sector responses to contain its spread began to significantly affect the Company's operations beginning in March 2020 and will likely continue to adversely affect its operations through 2021, although such effects may vary significantly. The duration and extent of the effects over longer terms cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic will most likely affect future earnings, cash flows and overall financial condition of the Company. These uncertainties include the nature and duration of the financial effects felt by its customers impacting their ability to perform in accordance with their underlying loan agreements, the Company's ability to generate demand for non-loan related products and services, as well as potential declines in real estate values resulting from the market disruption which may impair the recorded values of collateral-dependent loans and other real estate owned. Further, these factors, in addition to those pervasive to the industry and overall U.S. economy, may necessitate an overall valuation of the Company's franchise in such a way an impairment charge to the carrying value of goodwill would be required. Accordingly, significant estimates used in the preparation of the Company's financial statements including those associated with the evaluation of the allowance for loan losses as well as other valuation-based estimates may be subject to significant adjustments in future periods. We have seen significant improvement in the severity of the pandemic, however, as it continues to affect economies around the world and in the United States, it could impact estimates in future periods.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results that may occur for any other period. These statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020. Certain prior period balances have been reclassified to conform to the current period presentation.

 

Recently Adopted Accounting Developments

 

In December 2020, the Consolidated Appropriations Act of 2021 ("CAA") was passed. Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, including the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") and treatment of certain loan modifications related to the COVID-19 pandemic.

 

The Company utilized a Disaster Assistance Program for borrowers in accordance with Section 4013 of the CARES Act throughout the pandemic. The Company assisted borrowers with modifications to outstanding loan balances of $347.0 million in the aggregate since the beginning of the pandemic in March 2020. At September 30, 2021, all modifications had expired compared to outstanding loan balances of $2.3 million at June 30, 2021.

 

The Company processed a total of $364.2 million in PPP loans with $66.9 million forgiven in the third quarter of 2021 compared to $80.0 million in the second quarter of 2021. The loans are 100% guaranteed by the SBA and therefore do not have a related allowance.  The SBA paid the Bank a processing fee based on the size of the loan which is amortized to income over the life of the loan or until the loan is forgiven. Total outstanding net PPP loans were $37.2 million and $211.3 million at September 30, 2021 and December 31, 2020, respectively.

 

9

 

Recent Accounting Pronouncements and Other Authoritative Accounting Guidance

 

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU's 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission ("SEC") and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. At the one-time evaluation date, the Company qualified as a smaller reporting company and elected to defer the adoption of the standard. The Company is refining the data in the model that will be used upon future adoption of the standard and expects to run concurrent models in the fourth quarter of 2021 and each quarter of 2022 until adoption. The implementation of this ASU will likely result in an adjustment to the Company's reserves when implemented.

 

Effective  November 25, 2019, the SEC adopted Staff Accounting Bulletin ("SAB") 119. SAB 119 updated portions of SEC interpretative guidance to align with ASC 326, Financial Instruments - Credit Losses. It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

 

In  March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments in this ASU provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope." This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.

 

 

Note 2 – Securities

 

The amortized cost and fair value of investments in securities available for sale at September 30, 2021 were as follows (dollars in thousands):

 

  

September 30, 2021

 
  Amortized Cost  Unrealized Gains  Unrealized Losses  Fair Value 

Securities available for sale:

                

U.S. Treasury

 $110,154  $92  $205  $110,041 

Federal agencies and GSEs

  89,680   1,298   482   90,496 

Mortgage-backed and CMOs

  358,910   3,933   2,436   360,407 

State and municipal

  62,813   1,336   282   63,867 

Corporate

  18,950   248   60   19,138 

Total securities available for sale

 $640,507  $6,907  $3,465  $643,949 

 

10

 

The amortized cost and fair value of investments in securities available for sale at December 31, 2020 were as follows (dollars in thousands):

 

  

December 31, 2020

 
  Amortized Cost  Unrealized Gains  Unrealized Losses  Fair Value 

Securities available for sale:

                

U.S. Treasury

 $34,997  $1  $  $34,998 

Federal agencies and GSEs

  104,092   1,976   45   106,023 

Mortgage-backed and CMOs

  246,770   6,117   105   252,782 

State and municipal

  57,122   1,979   2   59,099 

Corporate

  13,011   188   10   13,189 

Total securities available for sale

 $455,992  $10,261  $162  $466,091 

 

Restricted Stock

 

Due to restrictions placed upon the Bank's common stock investment in the Federal Reserve Bank of Richmond ("FRB") and Federal Home Loan Bank of Atlanta ("FHLB"), these securities have been classified as restricted equity securities and carried at cost. The restricted securities are not subject to the investment security classification requirements and are included as a separate line item on the Company's consolidated balance sheets. The FRB requires the Bank to maintain stock with a par value equal to 3.00% of its outstanding capital and an additional 3.00% is on call. The FHLB requires the Bank to maintain stock in an amount equal to 3.75% of outstanding borrowings and a specific percentage of the Bank's total assets. The cost of restricted stock at September 30, 2021 and  December 31, 2020 was as follows (dollars in thousands):

 

  September 30, 2021  December 31, 2020 

FRB stock

 $6,490  $6,458 

FHLB stock

  1,556   2,257 

Total restricted stock

 $8,046  $8,715 

 

Temporarily Impaired Securities

 

The following table shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2021. The reference point for determining when securities are in an unrealized loss position is month end. Therefore, it is possible that a security's market value exceeded its amortized cost on other days during the past twelve-month period.

 

Available for sale securities that have been in a continuous unrealized loss position, at September 30, 2021, were as follows (dollars in thousands):

 

  

Total

  

Less than 12 Months

  

12 Months or More

 
  

Fair Value

  

Unrealized Loss

  

Fair Value

  

Unrealized Loss

  

Fair Value

  

Unrealized Loss

 

U.S. Treasury

 $75,384  $205  $75,384  $205  $  $ 

Federal agencies and GSEs

  54,053   482   48,140   302   5,913   180 

Mortgage-backed and CMOs

  208,634   2,436   202,455   2,302   6,179   134 

State and municipal

  17,869   282   15,440   166   2,429   116 

Corporate

  7,690   60   7,690   60       

Total

 $363,630  $3,465  $349,109  $3,035  $14,521  $430 

 

11

 

The table below shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, at December 31, 2020 (dollars in thousands):

 

  

Total

  

Less than 12 Months

  

12 Months or More

 
  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss 

Federal agencies and GSEs

 $21,237  $45  $19,974  $26  $1,263  $19 

Mortgage-backed and CMOs

  46,640   105   46,640   105       

State and municipal

  3,456   2   3,456   2       

Corporate

  5,990   10   5,990   10       

Total

 $77,323  $162  $76,060  $143  $1,263  $19 

 

U.S. Treasury securities: The unrealized losses on the Company's investment in eight U.S. Treasury securities were caused by normal market fluctuations. None of these securities were in an unrealized loss position for 12 months or more. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2021.

 

Federal agencies and GSEs: The unrealized losses on the Company's investment in 23 government sponsored entities ("GSE") securities were caused by normal market fluctuations. Eleven of these securities were in an unrealized loss position for 12 months or more. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2021.

 

Mortgage-backed securities: The unrealized losses on the Company's investment in 16 GSE mortgage-backed securities were caused by normal market fluctuations. One of these securities was in an unrealized loss position for 12 months or more. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2021.

 

Collateralized Mortgage Obligations: The unrealized losses associated with 23 GSE collateralized mortgage obligations ("CMOs") were due to normal market fluctuations. One of these securities was in an unrealized loss position for 12 months or more. The contractual cash flows of these investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2021.

 

State and municipal securities: The unrealized losses on 26 state and municipal securities were caused by normal market fluctuations. One of these securities was in an unrealized loss position for 12 months or more. These securities are of high credit quality (rated AA- or higher), and principal and interest payments have been made timely. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2021.

 

Corporate securities: The unrealized losses on three corporate securities were caused by normal market fluctuations and not credit deterioration. These securities are not rated, but the Company conducted thorough internal credit reviews prior to purchase earlier this year, which determined the investment risk to be acceptable due to the issuers' experienced management teams, strong asset quality, and ample levels of capital and liquidity. The Company conducts ongoing quarterly reviews of these companies as well. The contractual terms of these investment do not permit the issuer to settle the security at a price less than the amortized cost basis of the investment. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at  September 30, 2021.

 

Restricted stock: When evaluating restricted stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider restricted stock to be other-than-temporarily impaired at September 30, 2021, and no impairment has been recognized.

 

12

 

Other-Than-Temporarily-Impaired Securities

 

As of September 30, 2021 and December 31, 2020, there were no securities classified as other-than-temporarily impaired.

 

Realized Gains and Losses

 

The following table presents the gross realized gains and losses on, and the proceeds from the sale of, securities available for sale during the three and nine months ended September 30, 2021 and 2020 (dollars in thousands):

 

  

Three Months Ended September 30, 2021

  

Nine Months Ended September 30, 2021

 

Realized gains:

        

Gross realized gains

 $  $ 

Gross realized losses

      

Net realized gains

 $  $ 

Proceeds from sales of securities

 $  $ 

 

  

Three Months Ended September 30, 2020

  

Nine Months Ended September 30, 2020

 

Realized gains:

        

Gross realized gains

 $  $814 

Gross realized losses

      

Net realized gains

 $  $814 

Proceeds from sales of securities

 $  $5,811 

 

 

Note 3 – Loans

 

Loans, net of deferred fees and costs and excluding loans held for sale, at September 30, 2021 and  December 31, 2020, were comprised of the following (dollars in thousands):

 

  September 30, 2021  December 31, 2020 

Commercial

 $320,278  $491,256 

Commercial real estate:

        

Construction and land development

  120,193   140,071 

Commercial real estate - owner occupied

  404,029   373,680 

Commercial real estate - non-owner occupied

  713,339   627,569 

Residential real estate:

        

Residential

  280,351   269,137 

Home equity

  95,317   104,881 

Consumer

  6,825   8,462 

Total loans, net of deferred fees and costs

 $1,940,332  $2,015,056 

 

Acquired Loans 

 

The outstanding principal balance and the carrying amount of these loans, including loans accounted for under ASC 310-30, included in the consolidated balance sheets at September 30, 2021 and  December 31, 2020 are as follows (dollars in thousands):

 

  September 30, 2021  December 31, 2020 

Outstanding principal balance

 $182,125  $251,730 

Carrying amount

  174,184   241,008 

 

13

 

The outstanding principal balance and related carrying amount of purchased credit impaired loans, for which the Company applies ASC 310-30 to account for interest earned, as of the indicated dates are as follows (dollars in thousands):

 

  September 30, 2021  December 31, 2020 

Outstanding principal balance

 $29,073  $37,417 

Carrying amount

  23,072   30,201 

 

The following table presents changes in the accretable yield on acquired impaired loans, for which the Company applies ASC 310-30, for the nine months ended September 30, 2021 and the year ended December 31, 2020 (dollars in thousands):

 

  September 30, 2021  December 31, 2020 

Balance at January 1

 $6,513  $7,893 

Accretion

  (2,948)  (3,553)

Reclassification from nonaccretable difference

  1,432   2,233 

Other changes, net (1)

  (433)  (60)
  $4,564  $6,513 

  __________________________

  (1) This line item represents changes in the cash flows expected to be collected due to the impact of non-credit changes such as prepayment assumptions, changes in interest rates on variable rate acquired impaired loans, and discounted payoffs that occurred in the period.

 

Past Due Loans

 

The following table shows an analysis by portfolio segment of the Company's past due loans at September 30, 2021 (dollars in thousands):

 

  30- 59 Days Past Due  60-89 Days Past Due  90 Days + Past Due and Still Accruing  Non Accrual Loans  Total Past Due  

Current

  Total Loans 

Commercial

 $51  $  $  $32  $83  $320,195  $320,278 

Commercial real estate:

                            

Construction and land development

           1   1   120,192   120,193 

Commercial real estate - owner occupied

           23   23   404,006   404,029 

Commercial real estate - non-owner occupied

           926   926   712,413   713,339 

Residential:

                            

Residential

  409         827   1,236   279,115   280,351 

Home equity

  81   55      81   217   95,100   95,317 

Consumer

  1   13      13   27   6,798   6,825 

Total

 $542  $68  $  $1,903  $2,513  $1,937,819  $1,940,332 

 

The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 2020 (dollars in thousands):

 

  30- 59 Days Past Due  60-89 Days Past Due  90 Days + Past Due and Still Accruing  Non Accrual Loans  Total Past Due  

Current

  Total Loans 

Commercial

 $153  $9  $  $100  $262  $490,994  $491,256 

Commercial real estate:

                            

Construction and land development

  168         5   173   139,898   140,071 

Commercial real estate - owner occupied

  62      209   304   575   373,105   373,680 

Commercial real estate - non-owner occupied

           1,158   1,158   626,411   627,569 

Residential:

                            

Residential

  711   211   53   792   1,767   267,370   269,137 

Home equity

           69   69   104,812   104,881 

Consumer

  49   14      6   69   8,393   8,462 

Total

 $1,143  $234  $262  $2,434  $4,073  $2,010,983  $2,015,056 

 

14

 

Impaired Loans

 

The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at September 30, 2021 (dollars in thousands):

 

  

Recorded Investment

  Unpaid Principal Balance  Related Allowance  Average Recorded Investment  Interest Income Recognized 

With no related allowance recorded:

                    

Commercial

 $  $  $  $5  $ 

Commercial real estate:

                    

Construction and land development

               

Commercial real estate - owner occupied

  14   11      87   1 

Commercial real estate - non-owner occupied

  1,027   1,026      1,087   22 

Residential:

                    

Residential

  1,139   1,146      1,265   31 

Home equity

  5   5      5    

Consumer

               
  $2,185  $2,188  $  $2,449  $54 

With a related allowance recorded:

                    

Commercial

 $16  $9  $9  $28  $1 

Commercial real estate:

                    

Construction and land development

               

Commercial real estate - owner occupied

               

Commercial real estate - non-owner occupied

           31    

Residential

                    

Residential

  16   16   1   76   2 

Home equity

               

Consumer

               
  $32  $25  $10  $135  $3 

Total:

                    

Commercial

 $16  $9  $9  $33  $1 

Commercial real estate:

                    

Construction and land development

               

Commercial real estate - owner occupied

  14   11      87   1 

Commercial real estate - non-owner occupied

  1,027   1,026      1,118   22 

Residential:

                    

Residential

  1,155   1,162   1   1,341   33 

Home equity

  5   5      5    

Consumer

               
  $2,217  $2,213  $10  $2,584  $57 

 

In the table above, recorded investment may exceed unpaid principal balance due to acquired loans with a premium and loans with unearned costs that exceed unearned fees.

 

15

 

The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at December 31, 2020 (dollars in thousands):

 

  

Recorded Investment

  Unpaid Principal Balance  Related Allowance  Average Recorded Investment  Interest Income Recognized 

With no related allowance recorded:

                    

Commercial

 $18  $18  $  $23  $6 

Commercial real estate:

                    

Construction and land development

               

Commercial real estate - owner occupied

  286   283      357   27 

Commercial real estate - non-owner occupied

  1,148   1,147      766   75 

Residential:

                    

Residential

  1,096   1,103      912   62 

Home equity

  6   6      31   3 

Consumer

               
  $2,554  $2,557  $  $2,089  $173 

With a related allowance recorded:

                    

Commercial

 $39  $33  $29  $382  $15 

Commercial real estate:

                    

Construction and land development

               

Commercial real estate - owner occupied

               

Commercial real estate - non-owner occupied (1)

  122   122      180   15 

Residential:

                    

Residential

  137   137   1   256   9 

Home equity

               

Consumer

               
  $298  $292  $30  $818  $39 

Total:

                    

Commercial

 $57  $51  $29  $405  $21 

Commercial real estate:

                    

Construction and land development

               

Commercial real estate - owner occupied

  286   283      357   27 

Commercial real estate - non-owner occupied

  1,270   1,269      946   90 

Residential:

                    

Residential

  1,233   1,240   1   1,168   71 

Home equity

  6   6      31   3 

Consumer

               
  $2,852  $2,849  $30  $2,907  $212 

  __________________________

  (1) Allowance is reported as zero in the table due to presentation in thousands and rounding.

 

In the table above, recorded investment may exceed unpaid principal balance due to acquired loans with a premium and loans with unearned costs that exceed unearned fees.

 

16

 

During the three and nine months ended September 30, 2021 there were no loans modified as troubled debt restructurings ("TDRs"). During the nine months ended September 30, 2020, there were five loans modified as TDRs.  One was a commercial loan, two were commercial real estate - non-owner occupied loans, one was a residential real estate loan, and one was a home equity loan, all included in the impaired loan balances. The commercial loan was a payment deferral with a pre- and post-modification outstanding investment of $106,000. The two commercial real estate - non-owner occupied loans were payment deferrals with an aggregate pre- and post-modification outstanding recorded investment of $1,311,000. The residential real estate loan was a payment deferral with a pre- and post-modification outstanding recorded investment of $82,000. The home equity loan was an extension of maturity with a pre- and post-modification outstanding recorded investment of $6,000. 

 

During the nine months ended September 30, 2021, the Company had one commercial real estate - non-owner occupied loan with a recorded investment of $259,000 at restructure and one commercial loan with a recorded investment of $106,000 at restructure that subsequently defaulted within 12 months of modification. During the nine months ended September 30, 2020, the Company had one commercial real estate loan with a recorded investment of $1,052,000 that subsequently defaulted within 12 months of modification. The Company defines defaults as one or more payments that occur more than 90 days past the due date, charge-off or foreclosure subsequent to modification.  There were no defaults during the three months ended September 30, 2021 and the three and nine months ended September 30, 2020.

 

The Company utilized a Disaster Assistance Program for borrowers in accordance with Section 4013 of the CARES Act throughout the pandemic. The Company assisted borrowers with modifications to outstanding loan balances of $347.0 million in the aggregate since the beginning of the pandemic in March 2020. At September 30, 2021, all modifications had expired compared to outstanding loan balances of $2.3 million at June 30, 2021.

 

The Company processed a total of $364.2 million in PPP loans under the CARES Act.  Of the total processed, $66.9 million was forgiven in the three months and $254.3 million in the nine months ended September 30, 2021. Total outstanding net PPP loans were $37.2 million and $211.3 million at  September 30, 2021 and December 31, 2020, respectively.

 

The loan portfolio consists primarily of commercial and residential real estate loans, commercial loans to small and medium-sized businesses, construction and land development loans, and home equity loans. At September 30, 2021, the commercial real estate portfolio included concentrations of $83,540,000, $44,127,000 and $199,571,000 in hotel, restaurants, and retail loans, respectively. These concentrations total 4.3%, 2.3%, and 10.3% of total loans, respectively, excluding loans in process.

 

Residential Real Estate in Process of Foreclosure

 

The Company had $5,000 in residential loans in process of foreclosure at September 30, 2021 and $387,000 in process of foreclosure at  December 31, 2020, respectively. The Company had no residential other real estate owned ("OREO") at September 30, 2021 and had $285,000 in residential OREO at December 31, 2020.

 

Risk Grades

 

The following tables show the Company's loan portfolio broken down by internal risk grading as of September 30, 2021 (dollars in thousands):

 

Commercial and Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

 

  

Commercial

  

Construction and Land Development

  

Commercial Real Estate - Owner Occupied

  

Commercial Real Estate - Non-owner Occupied

  

Residential

  

Home Equity

 

Pass

 $311,207  $115,975  $383,787  $697,632  $275,172  $94,941 

Special Mention

  8,466   2,933   11,840   8,880   2,375    

Substandard

  605   1,285   8,402   6,827   2,804   376 

Doubtful

                  

Total

 $320,278  $120,193  $404,029  $713,339  $280,351  $95,317 

 

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

 

  

Consumer

 

Performing

 $6,824 

Nonperforming

  1 

Total

 $6,825 

 

17

 

The following tables show the Company's loan portfolio broken down by internal risk grading as of December 31, 2020 (dollars in thousands):

 

Commercial and Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

 

  

Commercial

  

Construction and Land Development

  

Commercial Real Estate -Owner Occupied

  

Commercial Real Estate - Non-owner Occupied

  

Residential

  

Home Equity

 

Pass

 $479,416  $131,770  $350,376  $612,688  $262,677  $104,608 

Special Mention

  10,956   2,505   14,621   9,196   3,665    

Substandard

  865   5,796   8,474   5,563   2,795   273 

Doubtful

  19      209   122       

Total

 $491,256  $140,071  $373,680  $627,569  $269,137  $104,881 

 

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

 

  

Consumer

 

Performing

 $8,456 

Nonperforming

  6 

Total

 $8,462 

 

Loans classified in the Pass category typically are fundamentally sound, and risk factors are reasonable and acceptable.

 

Loans classified in the Special Mention category typically have been criticized internally, by loan review or the loan officer, or by external regulators under the current credit policy regarding risk grades.

 

Loans classified in the Substandard category typically have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are typically characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected.

 

Loans classified in the Doubtful category typically have all the weaknesses inherent in loans classified as substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur that may salvage the debt.

 

Consumer loans are classified as performing or nonperforming. A loan is nonperforming when payments of interest and principal are past due 90 days or more.

 

 

Note 4 – Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

 

Changes in the allowance for loan losses and the reserve for unfunded lending commitments (included in other liabilities) at and for the indicated dates and periods are presented below (dollars in thousands):

 

    Nine Months Ended September 30, 2021     Year Ended December 31, 2020     Nine Months Ended September 30, 2020  

Allowance for Loan Losses

                       

Balance, beginning of period

  $ 21,403     $ 13,152     $ 13,152  

Provision for (recovery of) loan losses

    (870 )     8,916       8,331  

Charge-offs

    (70 )     (1,006 )     (675 )

Recoveries

    167       341       280  

Balance, end of period

  $ 20,630     $ 21,403     $ 21,088  
                         

Reserve for Unfunded Lending Commitments

                       

Balance, beginning of period

  $ 304     $ 329     $ 329  

Provision for (recovery of) unfunded commitments

    23       (25 )     10  

Balance, end of period

  $ 327     $ 304     $ 339  

 

The reserve for unfunded loan commitments is included in other liabilities.

 

18

 

The following table presents changes in the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment at and for the nine months ended September 30, 2021 (dollars in thousands):

 

   

Commercial (1)

   

Construction and Land Development

   

Commercial Real Estate - Owner Occupied

   

Commercial Real Estate - Non-owner Occupied

   

Residential Real Estate

   

Consumer

   

Total

 

Allowance for Loan Losses

                                                       

Balance at December 31, 2020

  $ 3,373     $ 1,927     $ 4,340     $ 7,626     $ 4,067     $ 70     $ 21,403  

Provision for (recovery of) loan losses

    (440 )     (551 )     166       259       (281 )     (23 )     (870 )

Charge-offs

                (3 )           (17 )     (50 )     (70 )

Recoveries

    27             6       6       71       57       167  

Balance at September 30, 2021

  $ 2,960     $ 1,376     $ 4,509     $ 7,891     $ 3,840     $ 54     $ 20,630  
                                                         

Balance at September 30, 2021:

                                                       
                                                         

Allowance for Loan Losses

                                                       

Individually evaluated for impairment

  $ 9     $     $     $     $ 1     $     $ 10  

Collectively evaluated for impairment

    2,930       1,376       4,311       7,465       3,760       54       19,896  

Purchased credit impaired loans

    21             198       426       79             724  

Total

  $ 2,960     $ 1,376     $ 4,509     $ 7,891     $ 3,840     $ 54     $ 20,630  
                                                         

Loans

                                                       

Individually evaluated for impairment

  $ 16     $     $ 14     $ 1,027     $ 1,160     $     $ 2,217  

Collectively evaluated for impairment

    319,837       119,967       394,875       704,158       369,394       6,812       1,915,043  

Purchased credit impaired loans

    425       226       9,140       8,154       5,114       13       23,072  

Total

  $ 320,278     $ 120,193     $ 404,029     $ 713,339     $ 375,668     $ 6,825     $ 1,940,332  

__________________________

(1) Includes PPP loans, which are guaranteed by the SBA and have no related allowance.

 

The following table presents changes in the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment at and for the year ended December 31, 2020 (dollars in thousands):

 

   

Commercial (1)

   

Construction and Land Development

   

Commercial Real Estate - Owner Occupied

   

Commercial Real Estate - Non-owner Occupied

   

Residential Real Estate

   

Consumer

   

Total

 

Allowance for Loan Losses

                                                       

Balance at December 31, 2019

  $ 2,657     $ 1,161     $ 2,474     $ 3,781     $ 3,023     $ 56     $ 13,152  

Provision for loan losses

    1,156       764       1,871       3,960       1,076       89       8,916  

Charge-offs

    (505 )           (17 )     (165 )     (117 )     (202 )     (1,006 )

Recoveries

    65       2       12       50       85       127       341  

Balance at December 31, 2020

  $ 3,373     $ 1,927     $ 4,340     $ 7,626     $ 4,067     $ 70     $ 21,403  
                                                         

Balance at December 31, 2020:

                                                       
                                                         

Allowance for Loan Losses

                                                       

Individually evaluated for impairment

  $ 29     $     $     $     $ 1     $     $ 30  

Collectively evaluated for impairment

    3,318       1,927       4,138       7,185       3,896       70       20,534  

Purchased credit impaired loans

    26             202       441       170             839  

Total

  $ 3,373     $ 1,927     $ 4,340     $ 7,626     $ 4,067     $ 70     $ 21,403  
                                                         

Loans

                                                       

Individually evaluated for impairment

  $ 57     $     $ 286     $ 1,270     $ 1,239     $     $ 2,852  

Collectively evaluated for impairment

    490,736       139,833       360,579       616,498       365,967       8,390       1,982,003  

Purchased credit impaired loans

    463       238       12,815       9,801       6,812       72       30,201  

Total

  $ 491,256     $ 140,071     $ 373,680     $ 627,569     $ 374,018     $ 8,462     $ 2,015,056  

__________________________

(1) Includes PPP loans, which are guaranteed by the SBA and have no related allowance.

 

19

 

The allowance for loan losses is allocated to loan segments based upon historical loss factors, risk grades on individual loans, and qualitative factors. Qualitative factors include levels and trends in delinquencies, nonaccrual loans, and charge-offs and recoveries; trends in volume and terms of loans; effects of changes in risk selection, underwriting standards, and lending policies; experience of lending staff; national, regional, and local economic trends and conditions; portfolio concentrations; regulatory and legal factors; competition; quality of loan review system; and value of underlying collateral.

 

There was a provision expense of $482,000 in the third quarter of 2021 compared to a recovery of provision expense of $1.4 million in the second quarter of 2021 and an expense of $2.6 million for the third quarter of the previous year. The expense in the third quarter of 2021 was the net result of the required provision resulting from significant loan growth netted against a negative provision from the adjustment of qualitative factors around continued improvement in economic conditions.  Ongoing low charge-off and delinquency rates and overall strong asset quality metrics also contributed to the adjustments to the factors reducing the provision expense in the third quarter and also resulted in a negative provision in the second quarter of 2021. The expense in the third quarter of 2020 was the result of adjustments to the qualitative factors for the declining and uncertain economic landscape in the wake of the COVID-19 pandemic. Sharp declines in employment, GDP, housing starts and business activity in general indicated a higher risk of probable future losses in the Bank's portfolio at the time.

 

 

Note 5 – Goodwill and Other Intangible Assets

 

The Company's goodwill was recognized in connection with past business combinations and is reported at the community banking segment.  The Company reviews the carrying value of the goodwill at least annually or more frequently if certain impairment indicators exist.  In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If, after assessing the totality of events and circumstances, we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Company elects to bypass the qualitative assessment or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists. In the last evaluation of goodwill, which was the annual evaluation at June 30, 2021, the Company concluded that no impairment existed. No indicators of impairment were identified during the nine months ended September 30, 2021 or 2020.

 

Core deposit intangibles resulting from the acquisition of MidCarolina Financial Corporation ("MidCarolina") in July 2011 were $6,556,000 and were amortized on an accelerated basis over 108 months ending June 2020. Core deposit intangibles resulting from the acquisitions of MainStreet BankShares, Inc. in January 2015 and HomeTown Bankshares Corporation ("HomeTown") in April 2019 were $10,039,000 in the aggregate and are being amortized on an accelerated basis over 120 months.

 

The changes in the carrying amount of goodwill and intangibles for the nine months ended September 30, 2021, are as follows (dollars in thousands):

 

  

Goodwill

  

Intangibles

 

Balance at December 31, 2020

 $85,048  $6,091 

Amortization

     (1,113)

Balance at September 30, 2021

 $85,048  $4,978 

 

 

Note 6 – Leases

 

The Company's leases are recorded under ASC 842, Leases. Lease liabilities represent the Company's obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company's incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company's right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. The aggregate right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Company's consolidated balance sheets.

 

The Company's long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term, and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably certain of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

 

The following tables present information about the Company's leases, as of and for the periods indicated (dollars in thousands):

 

   

September 30, 2021

   

December 31, 2020

 

Lease liabilities

  $ 4,119     $ 4,940  

Right-of-use assets

  $ 4,040     $ 4,878  

Weighted average remaining lease term (years)

    7.12       7.33  

Weighted average discount rate

    3.15 %     3.03 %

 

20

 
   

Three Months Ended September 30, 2021

   

Three Months Ended September 30, 2020

 

Lease cost

               

Operating lease cost

  $ 267     $ 243  

Short-term lease cost

          1  

Total lease cost

  $ 267     $ 244  
                 

Cash paid for amounts included in the measurement of lease liabilities

  $ 265     $ 237  

 

   

Nine Months Ended September 30, 2021

   

Nine Months Ended September 30, 2020

 

Lease cost

               

Operating lease cost

  $ 804     $ 742  

Short-term lease cost

          2  

Total lease cost

  $ 804     $ 744  
                 

Cash paid for amounts included in the measurement of lease liabilities

  $ 781     $ 722  

 

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):

 

Lease payments due

  As of September 30, 2021  

Three months ending December 31, 2021

  $ 266  

Twelve months ending December 31, 2022

    1,037  

Twelve months ending December 31, 2023

    938  

Twelve months ending December 31, 2024

    509  

Twelve months ending December 31, 2025

    471  

Twelve months ending December 31, 2026

    260  

Thereafter

    1,167  

Total undiscounted cash flows

    4,648  

Discount

    (529 )

Lease liabilities

  $ 4,119  

 

 

Note 7 – Short-term Borrowings

 

Short-term borrowings may consist of customer repurchase agreements, overnight borrowings from the FHLB, and federal funds purchased. The Company has federal funds lines of credit established with correspondent banks in the amount of $60,000,000 and has access to the FRB's discount window. Customer repurchase agreements are collateralized by securities of the U.S. Government or GSEs. They mature daily. The interest rates may be changed at the discretion of the Company. The securities underlying these agreements remain under the Company's control. FHLB overnight borrowings contain floating interest rates that may change daily at the discretion of the FHLB. Federal funds purchased are unsecured overnight borrowings from other financial institutions. Short-term borrowings consisted of the following at September 30, 2021 and December 31, 2020 (dollars in thousands):

 

    September 30, 2021     December 31, 2020  

Customer repurchase agreements

  $ 26,595     $ 42,551  

 

 

Note 8 – Long-term Borrowings 

 

Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, second mortgage loans, home equity lines of credit, and commercial real estate loans. In addition, the Company pledges as collateral its capital stock in the FHLB and deposits with the FHLB. The Company has a line of credit with the FHLB equal to 30% of the Company's assets, subject to the amount of collateral pledged. As of  September 30, 2021, $959,095,000 in eligible collateral was pledged under the blanket floating lien agreement which covers both short-term and long-term borrowings.

 

21

 

There were no long-term borrowings with FHLB as of September 30, 2021 or December 31, 2020.

 

In the regular course of conducting its business, the Company takes deposits from political subdivisions of the states of Virginia and North Carolina. At September 30, 2021, the Bank's public deposits totaled $309,407,000. The Company is required to provide collateral to secure the deposits that exceed the insurance coverage provided by the Federal Deposit Insurance Corporation. This collateral can be provided in the form of certain types of government or agency bonds or letters of credit from the FHLB. At September 30, 2021, the Company had $275,000,000 in letters of credit with the FHLB outstanding, as well as $84,412,000 in agency, state, and municipal securities, pledged to provide collateral for such deposits.

 

Subordinated Debt

 

On April 1, 2019, in connection with the HomeTown merger, the Company assumed had $7,500,000 in aggregate principal amount of fixed-to-floating rate subordinated notes issued to various institutional accredited investors. A fair value adjustment of $30,000 was recorded on the subordinated debt as a result of the acquisition of HomeTown on April 1, 2019, and was amortized into interest expense through December 30, 2020. The notes had a maturity date of December 30, 2025 and had an annual fixed interest rate of 6.75% until December 30, 2020. Thereafter, the notes had a floating interest rate based on LIBOR. Interest was paid semi-annually, in arrears, on June 30 and December 30 of each year during the fixed interest rate period. Interest was paid quarterly, in arrears, on March 30, June 30, September 30 and December 30 throughout the floating interest rate period or earlier redemption date. This debt was paid in full and the notes were redeemed on June 30, 2021.

 

Junior Subordinated Debt

 

On April 7, 2006, AMNB Statutory Trust I, a Delaware statutory trust and a wholly owned unconsolidated subsidiary of the Company, issued $20,000,000 of preferred securities (the "Trust Preferred Securities") in a private placement pursuant to an applicable exemption from registration. The Trust Preferred Securities mature on June 30, 2036, but may be redeemed at the Company's option beginning on September 30, 2011. Distributions are cumulative and will accrue from the date of original issuance but may be deferred by the Company from time to time for up to 20 consecutive quarterly periods. The Company has guaranteed the payment of all required distributions on the Trust Preferred Securities. The proceeds of the Trust Preferred Securities received by the trust, along with proceeds of $619,000 received by the trust from the issuance of common securities by the trust to the Company, were used to purchase $20,619,000 of the Company's junior subordinated debt securities (the "Junior Subordinated Debt"), issued pursuant to junior subordinated debentures entered into between the Company and Wilmington Trust Company, as trustee. The proceeds of the Junior Subordinated Debt were used to fund the cash portion of the merger consideration to the former shareholders of Community First Financial Corporation in connection with the Company's acquisition of that company in 2006, and for general corporate purposes.

 

On July 1, 2011, in connection with the MidCarolina merger, the Company assumed $8,764,000 in junior subordinated debt to MidCarolina Trust I and MidCarolina Trust II, two separate Delaware statutory trusts (the "MidCarolina Trusts"), to fully and unconditionally guarantee the preferred securities issued by the MidCarolina Trusts. These long-term obligations, which currently qualify as Tier 1 capital, constitute a full and unconditional guarantee by the Company of the MidCarolina Trusts' obligations. The MidCarolina Trusts were not consolidated in the Company's financial statements.

 

In accordance with ASC 810-10-15-14, Consolidation – Overall – Scope and Scope Exceptions, the Company did not eliminate through consolidation the Company's $619,000 equity investment in AMNB Statutory Trust I or the $264,000 equity investment in the MidCarolina Trusts. Instead, the Company reflected these equity investments in other assets in the consolidated balance sheets.

 

A description of the junior subordinated debt securities outstanding payable to the trusts is shown below as of  September 30, 2021 and December 31, 2020 (dollars in thousands):

 

       

Principal Amount

 

Issuing Entity

Date Issued

 

Interest Rate

 

Maturity Date

 September 30, 2021  December 31, 2020 

AMNB Statutory Trust I

4/7/2006

 

LIBOR plus 1.35%

 

6/30/2036

 $20,619  $20,619 
              

MidCarolina Trust I

10/29/2002

 

LIBOR plus 3.45%

 

11/7/2032

  4,531   4,489 
              

MidCarolina Trust II

12/3/2003

 

LIBOR plus 2.95%

 

10/7/2033

  3,057   3,022 
              
       $28,207  $28,130 

 

The principal amounts reflected above for the MidCarolina Trusts are net of fair value adjustments of $624,000 and $552,000 at September 30, 2021 and $666,000 and $587,000 at  December 31, 2020, respectively. The original fair value adjustments of $1,197,000 and $1,021,000 were recorded as a result of the acquisition of MidCarolina on July 1, 2011, and are being amortized into interest expense over the remaining lives of the respective borrowings.

 

 

Note 9 - Derivative Financial Instruments and Hedging Activities

 

The Company uses derivative financial instruments ("derivatives") primarily to manage risks to the Company associated with changing interest rates. The Company's derivatives are hedging instruments in a qualifying hedge accounting relationship (cash flow or fair value hedge).

 

The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Company's trust preferred capital notes. The Company uses interest rate swap agreements as part of its hedging strategy by exchanging variable-rate interest payments on a notional amount equal to the principal amount of the borrowings for fixed-rate interest payments, with such interest rates set based on benchmarked interest rates.

 

All interest rate swaps were entered into with counterparties that met the Company's credit standards, and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in these derivative contracts is not significant.

 

Terms and conditions of the interest rate swaps vary, and amounts receivable or payable are recognized as accrued under the terms of the agreements. The Company assesses the effectiveness of each hedging relationship on a periodic basis. In accordance with ASC 815, Derivatives and Hedging, the effective portions of the derivatives' unrealized gains or losses are recorded as a component of other comprehensive income. Based on the Company's assessment, its cash flow hedges are highly effective, but to the extent that any ineffectiveness exists in the hedge relationships, the amounts would be recorded in interest income and interest expense in the Company's consolidated statements of income.

 

The following tables present information on the Company's derivative financial instruments as of September 30, 2021 and December 31, 2020 (dollars in thousands):

 

   

September 30, 2021

 
    Notional Amount    

Positions

   

Assets

   

Liabilities

    Cash Collateral Pledged  

Cash flow hedges:

                                       

Interest rate swaps:

                                       

Variable-rate to fixed-rate swaps with counterparty

  $ 28,500       3     $     $ 3,265     $ 4,050  

 

   

December 31, 2020

 
    Notional Amount    

Positions

   

Assets

   

Liabilities

    Cash Collateral Pledged  

Cash flow hedges:

                                       

Interest rate swaps:

                                       

Variable-rate to fixed-rate swaps with counterparty

  $ 28,500       3     $     $ 4,868     $ 5,750  

 

 

Note 10 – Stock Based Compensation

 

The Company's 2018 Equity Compensation Plan (the "2018 Plan") was adopted by the Board of Directors of the Company on February 20, 2018 and approved by shareholders on May 15, 2018 at the Company's 2018 Annual Meeting of Shareholders. The 2018 Plan provides for the granting of restricted stock awards, incentive and non-statutory options, and other equity-based awards to employees and directors at the discretion of the Compensation Committee of the Board of Directors. The 2018 Plan authorizes the issuance of up to 675,000 shares of common stock.

 

Stock Options

 

Accounting guidance requires that compensation cost relating to share-based payment transactions be recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued.

 

A summary of stock option transactions for the nine months ended September 30, 2021 is as follows:

 

    Option Shares     Weighted Average Exercise Price     Weighted Average Remaining Contractual Term (years)     Aggregate Intrinsic Value ($000)  

Outstanding at December 31, 2020

    10,541     $ 16.63                  

Granted

                           

Exercised

    (5,180 )     16.63                  

Forfeited

    (332 )     16.63                  

Expired

                           

Outstanding and exercisable at September 30, 2021

    5,029     $ 16.63       3.22     $ 83  

 

23

 

The fair value of options is estimated at the date of grant using the Black-Scholes option pricing model and expensed over the options' vesting period. No stock options have been granted since 2009. Replacement stock option awards representing 40,753 shares of the Company's common stock were issued in conjunction with the HomeTown acquisition in 2019. As of September 30, 2021, there were no nonvested stock option grants and no unrecognized compensation expense. The outstanding options have a remaining final maturity date of December 2024.

 

Restricted Stock

 

The Company from time to time grants shares of restricted stock to key employees and non-employee directors. These awards help align the interests of these employees and directors with the interests of the shareholders of the Company by providing economic value directly related to increases in the value of the Company's common stock. The value of the stock awarded is established as the fair value of the Company's common stock at the time of the grant. The Company recognizes expense, equal to the total value of such awards, ratably over the vesting period of the stock grants. The majority of the restricted stock granted cliff vests at the end of a 36-month period beginning on the date of the grant. The remainder vests one-third each year beginning on the date of the grant. Nonvested restricted stock activity for the nine months ended September 30, 2021 is summarized in the following table.

 

   

Shares

    Weighted Average Grant Date Value Per Share  

Nonvested at December 31, 2020

    58,539     $ 34.81  

Granted

    24,709       28.26  

Vested

    (16,661 )     38.63  

Forfeited

    (2,065 )     30.72  

Nonvested at September 30, 2021

    64,522     $ 31.45  

 

As of September 30, 2021 and December 31, 2020, there was $910,000 and $797,000 respectively, in unrecognized compensation cost related to nonvested restricted stock granted under the 2018 Plan. The weighted average period over which this cost is expected to be recognized is 1.46 years. The share based compensation expense for nonvested restricted stock was $534,000 and $504,000 during the first nine months of 2021 and 2020, respectively.

 

The Company offers its outside directors alternatives with respect to director compensation. For 2021, the regular quarterly board retainer will be received in the form of shares of immediately vested, but restricted stock with a market value of $10,000. Monthly meeting fees can be received as $800 per meeting in cash or $1,000 in immediately vested, but restricted stock. Board policy requires the directors to maintain ownership of a minimum aggregate market value of $250,000 with respect to shares received for service on the Board. Only outside directors receive board fees. The Company issued 16,370 and 21,697 shares and recognized share based compensation expense of $531,000 and $598,000 during the first nine months of 2021 and 2020, respectively.

 

 

Note 11 – Earnings Per Common Share

 

The following shows the weighted average number of shares used in computing earnings per common share and the effect on the weighted average number of shares of potentially dilutive common stock. Potentially dilutive common stock had no effect on income available to common shareholders. Nonvested restricted shares are included in the computation of basic earnings per share as the holder is entitled to full shareholder benefits during the vesting period including voting rights and sharing in nonforfeitable dividends. The following table presents basic and diluted earnings per share for the three and nine month periods ended September 30, 2021 and 2020:

 

  

Three Months Ended September 30,

 
  

2021

  

2020

 
  

Shares

  Per Share Amount  

Shares

  Per Share Amount 

Basic earnings per share

  10,833,875  $0.94   10,966,645  $0.66 

Effect of dilutive securities - stock options

  2,418      3,256    

Diluted earnings per share

  10,836,293  $0.94   10,969,901  $0.66 

 

  

Nine Months Ended September 30,

 
  

2021

  

2020

 
  

Shares

  

Per Share Amount

  

Shares

  

Per Share Amount

 

Basic earnings per share

  10,907,721  $2.96   10,983,729  $1.93 

Effect of dilutive securities - stock options

  3,651   (0.01)  4,361    

Diluted earnings per share

  10,911,372  $2.95   10,988,090  $1.93 

 

Outstanding stock options on common stock whose effects are anti-dilutive are not included in computing diluted earnings per share. There were no anti-dilutive stock options for the three or nine months ended September 30, 2021 and 2020.

 

24

 

Note 12 – Fair Value Measurements

 

Determination of Fair Value

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the fair value measurements and disclosures topic of ASC 820, Fair Value Measurement, fair value is the price that would be received to sell 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 at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

 

Fair Value Hierarchy

 

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 

Level 1

Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2 – 

Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3

Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

 

 The following describes the valuation techniques used by the Company to measure certain financial assets and financial liabilities recorded at fair value on a recurring basis in the financial statements:

 

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). If no observable market data is available, valuations are based upon third party model based techniques (Level 3). There were no securities recorded with a Level 3 valuation at September 30, 2021 or December 31, 2020.

 

Loans held for sale: Loans held for sale are carried at fair value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data, which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are recorded in current period earnings as a component of mortgage banking income on the Company's consolidated statements of income.

 

Derivative asset (liability) - cash flow hedges: Cash flow hedges are recorded at fair value on a recurring basis. Cash flow hedges are valued by a third party using significant assumptions that are observable in the market and can be corroborated by market data. All of the Company's cash flow hedges are classified as Level 2.

 

25

 

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at the dates indicated (dollars in thousands):

 

   

Fair Value Measurements at September 30, 2021 Using

 
   

Balance at September 30,

    Quoted Prices in Active Markets for Identical Assets     Significant Other Observable Inputs    

Significant Unobservable Inputs

 

Description

 

2021

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Securities available for sale:

                               

U.S. Treasury

  $ 110,041     $     $ 110,041     $  

Federal agencies and GSEs

    90,496             90,496        

Mortgage-backed and CMOs

    360,408             360,408        

State and municipal

    63,866             63,866        

Corporate

    19,138             19,138        

Total securities available for sale

  $ 643,949     $     $ 643,949     $  

Loans held for sale

  $ 9,518     $     $ 9,518     $  

Liabilities:

                               

Derivative - cash flow hedges

  $ 3,265     $     $ 3,265     $  

 

   

Fair Value Measurements at December 31, 2020 Using

 
   

Balance at December 31,

    Quoted Prices in Active Markets for Identical Assets     Significant Other Observable Inputs    

Significant Unobservable Inputs

 

Description

 

2020

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Securities available for sale:

                               

U.S. Treasury

  $ 34,998     $     $ 34,998     $  

Federal agencies and GSEs

    106,023             106,023        

Mortgage-backed and CMOs

    252,782             252,782        

State and municipal

    59,099             59,099        

Corporate

    13,189             13,189        

Total securities available for sale

  $ 466,091     $     $ 466,091     $  

Loans held for sale

  $ 15,591     $     $ 15,591     $  

Liabilities:

                               

Derivative - cash flow hedges

  $ 4,868     $     $ 4,868     $  

 

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

 

26

 

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

 

Impaired loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected when due. The measurement of the loss associated with impaired loans can be based on either the observable market price of the loan, the present value of projected cash flows, or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company's collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal, of one year or less, conducted by an independent, licensed appraiser using observable market data (Level 2). The present value of projected cash flows method results in a Level 3 categorization because the calculation relies on the Company's judgment to determine projected cash flows, which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a TDR. However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business's financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.

 

Other real estate owned: Measurement for fair values for OREO are the same as impaired loans. Any fair value adjustments are recorded in the period incurred as a valuation allowance against OREO with the associated expense included in OREO expense, net on the consolidated statements of income.

 

The following table summarizes the Company's assets that were measured at fair value on a nonrecurring basis at the dates indicated (dollars in thousands):

 

   

Fair Value Measurements at September 30, 2021 Using

 
   

Balance at September 30,

    Quoted Prices in Active Markets for Identical Assets     Significant Other Observable Inputs    

Significant Unobservable Inputs

 

Description

 

2021

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Impaired loans, net of valuation allowance

  $ 22     $     $     $ 22  

Other real estate owned, net

    213      

            213  

 

   

Fair Value Measurements at December 31, 2020 Using

 
   

Balance at December 31,

    Quoted Prices in Active Markets for Identical Assets     Significant Other Observable Inputs    

Significant Unobservable Inputs

 

Description

 

2020

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Impaired loans, net of valuation allowance

  $ 268     $     $     $ 268  

Other real estate owned, net

    958                   958  

 

Quantitative Information about Level 3 Fair Value Measurements as of September 30, 2021 and December 31, 2020:

 

Assets

 

Valuation Technique

 

Unobservable Input

 

Range; Weighted Average (1)

             

Impaired loans

 

Discounted appraised value

 

Selling cost

  8.00%
   

Discounted cash flow analysis

 

Market rate for borrower (discount rate)

  4.13% - 7.20%; 5.21%
             

Other real estate owned, net

 

Discounted appraised value

 

Selling cost

  8.00%

  __________________________

  (1) Unobservable inputs were weighted by the relative fair value of the impaired loans.

 

ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

 

27

 

The carrying values and the exit pricing concept fair values of the Company's financial instruments at September 30, 2021 are as follows (dollars in thousands):

 

   

Fair Value Measurements at September 30, 2021 Using

 
    Carrying    

Quoted Prices in Active Markets for Identical Assets

   

Significant Other Observable Inputs

   

Significant Unobservable Inputs

    Fair Value  
    Value     Level 1     Level 2     Level 3     Balance  

Financial Assets:

                                       

Cash and cash equivalents

  $ 518,401     $ 518,401     $     $     $ 518,401  

Securities available for sale

    643,949             643,949             643,949  

Restricted stock

    8,046             8,046             8,046  

Loans held for sale

    9,518             9,518             9,518  

Loans, net of allowance

    1,919,702                   1,904,320       1,904,320  

Bank owned life insurance

    28,950             28,950             28,950  

Accrued interest receivable

    5,829             5,829             5,829  
                                         

Financial Liabilities:

                                       

Deposits

  $ 2,862,081     $     $ 2,864,242     $     $ 2,864,242  

Repurchase agreements

    26,595             26,595             26,595  

Junior subordinated debt

    28,207                   26,037       26,037  

Accrued interest payable

    424             424             424  

Derivative - cash flow hedges

    3,265             3,265             3,265  

 

The carrying values and the exit pricing concept fair values of the Company's financial instruments at December 31, 2020 are as follows (dollars in thousands):

 

   

Fair Value Measurements at December 31, 2020 Using

 
    Carrying    

Quoted Prices in Active Markets for Identical Assets

   

Significant Other Observable Inputs

   

Significant Unobservable Inputs

    Fair Value  
    Value     Level 1     Level 2     Level 3     Balance  

Financial Assets:

                                       

Cash and cash equivalents

  $ 374,370     $ 374,370     $     $     $ 374,370  

Securities available for sale

    466,091             466,091             466,091  

Restricted stock

    8,715             8,715             8,715  

Loans held for sale

    15,591             15,591             15,591  

Loans, net of allowance

    1,993,653                   1,992,326       1,992,326  

Bank owned life insurance

    28,482             28,482             28,482  

Accrued interest receivable

    7,193             7,193             7,193  
                                         

Financial Liabilities:

                                       

Deposits

  $ 2,611,330     $     $ 2,615,157     $     $ 2,615,157  

Repurchase agreements

    42,551             42,551             42,551  

Subordinated debt

    7,500             7,522             7,522  

Junior subordinated debt

    28,130                   21,696       21,696  

Accrued interest payable

    778             778             778  

Derivative - cash flow hedges

    4,868             4,868             4,868  

 

28

 

Note 13 – Segment and Related Information

 

The Company has two reportable segments, community banking and trust and investment services.

 

Community banking involves making loans to and generating deposits from individuals and businesses. Investment income from securities is also allocated to the community banking segment. Loan fee income, service charges from deposit accounts, and non-deposit fees such as automated teller machine fees and insurance commissions generate additional income for the community banking segment.

 

Trust and investment services include estate planning, trust account administration, investment management, and retail brokerage. Investment management services include purchasing equity, fixed income, and mutual fund investments for customer accounts. The trust and investment services segment receives fees for investment and administrative services.

 

Segment information as of and for the three and nine months ended September 30, 2021 and 2020 is shown in the following tables (dollars in thousands):

 

   

As of and For the Three Months Ended September 30, 2021

 
   

Community Banking

   

Trust and Investment Services

   

Total

 

Interest income

  $ 24,277     $     $ 24,277  

Interest expense

    1,184             1,184  

Noninterest income

    3,547       1,576       5,123  

Noninterest expense

    14,164       679       14,843  

Income before income taxes

    12,080       811       12,891  

Net income

    9,537       641       10,178  

Depreciation and amortization

    929       3       932  

Total assets

    3,288,849       214       3,289,063  

Goodwill

    85,048             85,048  

Capital expenditures

    454             454  

 

   

As of and For the Three Months Ended September 30, 2020

 
   

Community Banking

   

Trust and Investment Services

   

Total

 

Interest income

  $ 24,179     $     $ 24,179  

Interest expense

    2,684             2,684  

Noninterest income

    2,716       1,576       4,292  

Noninterest expense

    13,598       542       14,140  

Income before income taxes

    8,445       583       9,028  

Net income

    6,764       463       7,227  

Depreciation and amortization

    938       3       941  

Total assets

    2,864,361       178       2,864,539  

Goodwill

    85,048             85,048  

Capital expenditures

    463             463  

 

29

 
   

As of and For the Nine Months Ended September 30, 2021

 
   

Community Banking

   

Trust and Investment Services

   

Total

 

Interest income

  $ 71,648     $     $ 71,648  

Interest expense

    4,361             4,361  

Noninterest income

    11,697       4,490       16,187  

Noninterest expense

    41,529       2,016       43,545  

Income before income taxes

    38,326       2,473       40,799  

Net income

    30,278       1,955       32,233  

Depreciation and amortization

    2,798       9       2,807  

Total assets

    3,288,849       214       3,289,063  

Goodwill

    85,048             85,048  

Capital expenditures

    833             833  

 

   

As of and For the Nine Months Ended September 30, 2020

 
   

Community Banking

   

Trust and Investment Services

   

Total

 

Interest income

  $ 71,342     $     $ 71,342  

Interest expense

    9,668             9,668  

Noninterest income

    9,050       3,572       12,622  

Noninterest expense

    38,751       1,155       39,906  

Income before income taxes

    24,866       1,193       26,059  

Net income

    20,273       978       21,251  

Depreciation and amortization

    2,838       6       2,844  

Total assets

    2,864,361       178       2,864,539  

Goodwill

    85,048             85,048  

Capital expenditures

    2,343       4       2,347  

 

 

Note 14 – Supplemental Cash Flow Information

 

Supplemental cash flow information as of and for the nine months ended September 30, 2021 and 2020 is shown in the following table (dollars in thousands):

 

   

2021

   

2020

 

Supplemental Schedule of Cash and Cash Equivalents:

               

Cash and due from banks

  $ 38,349     $ 35,633  

Interest-bearing deposits in other banks

    480,052       234,638  

Cash and Cash Equivalents

  $ 518,401     $ 270,271  
                 

Supplemental Disclosure of Cash Flow Information:

               

Cash paid for:

               

Interest on deposits and borrowed funds

  $ 4,715     $ 9,860  

Income taxes

    2,312       5,885  

Noncash investing and financing activities:

               

Transfer of loans to other real estate owned

          95  

Transfer of loans to repossessions

          411  

Net unrealized gains (losses) on securities available for sale

    (6,657 )     6,789  

Net unrealized gains (losses) on cash flow hedges

    1,602       (2,715 )

 

30

 

Note 15 – Accumulated Other Comprehensive Income (Loss)

 

Changes in each component of accumulated other comprehensive income (loss) ("AOCI") for the three and nine months ended September 30, 2021 and 2020 were as follows (dollars in thousands):

 

For the Three Months Ended

 Net Unrealized Gains (Losses) on Securities  Unrealized Gains (Losses) on Cash Flow Hedges  Adjustments Related to Pension Benefits  Accumulated Other Comprehensive Income (Loss) 
                 

Balance at June 30, 2020

 $8,418  $(4,403) $(1,301) $2,714 
                 

Net unrealized losses on securities available for sale, net of tax, $(53)

  (192)        (192)
                 

Net unrealized gains on cash flow hedges, net of tax, $53

     190      190 
                 

Balance at September 30, 2020

 $8,226  $(4,213) $(1,301) $2,712 
                 

Balance at June 30, 2021

 $4,430  $(2,761) $(1,637) $32 
                 

Net unrealized losses on securities available for sale, net of tax, $(474)

  (1,717)        (1,717)
                 

Net unrealized gains on cash flow hedges, net of tax, $49

     181      181 
                 

Balance at September 30, 2021

 $2,713  $(2,580) $(1,637) $(1,504)

 

For the Nine Months Ended

 

Net Unrealized Gains (Losses) on Securities

  

Unrealized Gains (Losses) on Cash Flow Hedges

  

Adjustments Related to Pension Benefits

  

Accumulated Other Comprehensive Income (Loss)

 
                 

Balance at December 31, 2019

 $2,902  $(2,084) $(1,301) $(483)
                 

Net unrealized gains on securities available for sale, net of tax, $1,641

  5,962         5,962 
                 

Reclassification adjustment for realized gains on securities, net of tax, $(176)

  (638)        (638)
                 

Net unrealized losses on cash flow hedges, net of tax, $(586)

     (2,129)     (2,129)
                 

Balance at September 30, 2020

 $8,226  $(4,213) $(1,301) $2,712 
                 

Balance at December 31, 2020

 $7,920  $(3,846) $(1,637) $2,437 
                 

Net unrealized losses on securities available for sale, net of tax, $(1,450)

  (5,207)        (5,207)
                 

Net unrealized gains on cash flow hedges, net of tax, $337

     1,266      1,266 
                 

Balance at September 30, 2021

 $2,713  $(2,580) $(1,637) $(1,504)

 

31

 

Reclassifications Out of Accumulated Other Comprehensive Income (Loss)

 For the Three and Nine Months Ended September 30, 2021 and 2020

(dollars in thousands)

 

For the Three Months Ended September 30, 2021

  Amount Reclassified from AOCI    

Affected Line Item in the Statement of Where Net Income is Presented

Details about AOCI Components

           

Available for sale securities:

           

Realized gains on sales and calls of securities

  $    

Securities gains, net

         

Income taxes

Total reclassifications

  $    

Net of tax

 

For the Three Months Ended September 30, 2020

  Amount Reclassified from AOCI    

Affected Line Item in the Statement of Where Net Income is Presented

Details about AOCI Components

           

Available for sale securities:

           

Realized gains on sales and calls of securities

  $    

Securities gains, net

         

Income taxes

Total reclassifications

  $    

Net of tax

 

For the Nine Months Ended September 30, 2021

 

Amount Reclassified from AOCI

   

Affected Line Item in the Statement of Where Net Income is Presented

Details about AOCI Components

           

Available for sale securities:

           

Realized gains on sales and calls of securities

  $    

Securities gains, net

         

Income taxes

Total reclassifications

  $    

Net of tax

 

For the Nine Months Ended September 30, 2020

 

Amount Reclassified from AOCI

   

Affected Line Item in the Statement of Where Net Income is Presented

Details about AOCI Components

           

Available for sale securities:

           

Realized gains on sales and calls of securities

  $ 814    

Securities gains, net

      (176 )  

Income taxes

Total reclassifications

  $ 638    

Net of tax

 

32

 
 

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The purpose of this discussion is to focus on important factors affecting the financial condition and results of operations of the Company. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements.

 

Forward-Looking Statements

 

This report contains forward-looking statements with respect to the financial condition, results of operations and business of American National Bankshares Inc. (the "Company") and its wholly owned subsidiary, American National Bank and Trust Company (the "Bank"). These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on information available to management at the time these statements and disclosures were prepared. Forward-looking statements are subject to numerous assumptions, estimates, risks, and uncertainties that could cause actual conditions, events, or results to differ materially from those stated or implied by such forward-looking statements.

 

A variety of factors, some of which are discussed in more detail in Item 1A – Risk Factors of the Company's Annual Report on Form 10-K for the year ended December 31, 2020, may affect the operations, performance, business strategy, and results of the Company. Those factors include, but are not limited to, the following:

 

 

the impact of the ongoing COVID-19 pandemic and the associated efforts to limit the spread of the virus;

 

financial market volatility, including the level of interest rates, could affect the values of financial instruments and the amount of net interest income earned;

  the adequacy of the level of the Company's allowance for loan losses, the amount of loan loss provisions required in future periods, and the failure of assumptions underlying the allowance for loan losses;
 

general economic or business conditions, either nationally or in the market areas in which the Company does business, may be less favorable than expected, resulting in deteriorating credit quality, reduced demand for credit, or a weakened ability to generate deposits;

 

competition among financial institutions may increase, and competitors may have greater financial resources and develop products and technology that enable those competitors to compete more successfully than the Company;

 

businesses that the Company is engaged in may be adversely affected by legislative or regulatory changes, including changes in accounting standards and tax laws;

 

the ability to recruit and retain key personnel;

 

cybersecurity threats or attacks, the implementation of new technologies, and the ability to develop and maintain reliable and secure electronic systems; and

 

risks associated with mergers and acquisitions and other expansion activities.

 

COVID-19 Impact and Response

 

In March 2020, the outbreak of COVID-19 was recognized as a global pandemic. The spread of the virus created a global health crisis that resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally. Governmental responses included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by many parties, resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that led to a loss of revenues and a rapid increase in unemployment, disrupted supply chains, market downturns and volatility, changes in consumer behavior, related emergency response legislation and an expectation that the Board of Governors of the Federal Reserve System ("Federal Reserve") will maintain a low interest rate environment for the foreseeable future. In 2020, the Company implemented a business continuity plan and protocols to continue to maintain a high level of care for its employees, customers and communities.  The Company transitioned to a majority of its non-branch employees working remotely and assisting customers by appointment only in branches or directing them to drive-thrus or ATMs.  In April 2021, the majority of remaining remote workers returned to the office, and the Company fully opened branch lobbies to customers with prudent safety protocols. The Company remains focused on supporting and protecting its employees, customers, and communities while creating shareholder value.

 

The Bank assisted borrowers through its Disaster Assistance Program ("DAP") adopted in March 2020 in response to the federal banking agencies issuance of the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus." This issuance was in response to the COVID-19 pandemic affecting societies and economies around the world. This guidance encouraged financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance explained that, in consultation with the Financial Accounting Standards Board ("FASB") staff, the federal banking agencies have concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not troubled debt restructurings ("TDRs"). At September 30, 2021, all modifications had expired compared to outstanding modified loan balances of $30.0 million at December 31, 2020.

 

 

The Company continued to participate in the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act into the third quarter of 2021. The loans are 100% guaranteed by the SBA and therefore do not have a related allowance. The SBA paid the Bank a processing fee based on the size of the loan which is amortized to income over the life of the loan or until the loan is forgiven or otherwise repaid. During the third quarter of 2021, the SBA forgave $66.9 million of loans compared to $80.0 million in the second quarter of 2021. Total outstanding net PPP loans were $37.2 million and $211.3 million at September 30, 2021 and December 31, 2020, respectively.  

 

Reclassification

 

In certain circumstances, reclassifications have been made to prior period information to conform to the 2021 presentation. There were no material reclassifications.

 

CRITICAL ACCOUNTING POLICIES

 

The accounting and reporting policies followed by the Company conform with U.S. generally accepted accounting principles ("GAAP") and they conform to general practices within the banking industry. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them, as needed. Management has discussed the Company's critical accounting policies and estimates with the Audit Committee of the Board of Directors. The Company's critical accounting policies, which are summarized below, relate to (1) the allowance for loan losses, (2) mergers and acquisitions, (3) acquired loans with specific credit-related deterioration, (4) goodwill and intangible assets, (5) deferred tax assets and liabilities, and (6) other-than-temporary impairment of securities. A summary of the Company's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K for the year ended December 31, 2020.

 

The financial information contained within the Company's financial statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset, or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method.

 

Allowance for Loan Losses

 

The purpose of the allowance for loan losses ("ALLL") is to provide for probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance.

 

The goal of the Company is to maintain an appropriate, systematic, and consistently applied process to determine the amounts of the ALLL and the provision for loan loss expense.

 

The Company uses certain practices to manage its credit risk. These practices include (1) appropriate lending limits for loan officers, (2) a loan approval process, (3) careful underwriting of loan requests, including analysis of borrowers, cash flows, collateral, and market risks, (4) regular monitoring of the portfolio, including diversification by type and geography, (5) review of loans by the Loan Review department, which operates independently of loan production, (6) regular meetings of the Credit Committee to discuss portfolio and policy changes and make decisions on large or unusual loan requests, and (7) regular meetings of the Asset Quality Committee which reviews the status of individual loans.

 

Risk grades are assigned as part of the loan origination process. From time to time, risk grades may be modified as warranted by the facts and circumstances surrounding the credit.

 

Calculation and analysis of the ALLL is prepared quarterly by the Finance Department with review and input from Credit Administration. The Company's Credit Committee, Risk and Compliance Committee, Audit Committee, and the Board of Directors review the allowance for adequacy.

 

The Company's ALLL has two basic components: the formula allowance and the specific allowance. Each of these components is determined based upon estimates and judgments.

 

The formula allowance uses historical loss experience as an indicator of future losses, along with various qualitative factors, including levels and trends in delinquencies, nonaccrual loans, and charge-offs and recoveries; trends in volume and terms of loans; effects of changes in risk selection, underwriting standards, and lending policies; experience of lending staff; national, regional, and local economic trends and conditions; portfolio concentrations; regulatory and legal factors; competition; quality of loan review system; and value of underlying collateral. In the formula allowance for commercial and commercial real estate loans, the historical loss rate is combined with the qualitative factors, resulting in an adjusted loss factor for each risk-grade category of loans. The period-end balances for each loan risk-grade category are multiplied by the adjusted loss factor. Allowance calculations for residential real estate and consumer loans are calculated based on historical losses for each product category without regard to risk grade. This loss rate is combined with qualitative factors resulting in an adjusted loss factor for each product category.

 

 

The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified impaired loans. These include:

 

 

The present value of expected future cash flows discounted at the loan's effective interest rate. The effective interest rate on a loan is the rate of return implicit in the loan (that is, the contractual interest rate adjusted for any net deferred loan fees or costs and any premium or discount existing at the origination or acquisition of the loan);

 

The loan's observable market price; or

  The fair value of the collateral, net of estimated costs to dispose, if the loan is collateral dependent.

 

The use of these computed values is inherently subjective and actual losses could be greater or less than the estimates.

 

No single statistic, formula, or measurement determines the adequacy of the allowance. Management makes subjective and complex judgments about matters that are inherently uncertain, and different amounts would be reported under different conditions or using different assumptions. For analytical purposes, management allocates a portion of the allowance to specific loan categories and specific loans. However, the entire allowance is used to absorb credit losses inherent in the loan portfolio, including identified and unidentified losses.

 

The relationships and ratios used in calculating the allowance, including the qualitative factors, may change from period to period as facts and circumstances evolve. Furthermore, management cannot provide assurance that in any particular period the Bank will not have sizable credit losses in relation to the amount reserved. Management may find it necessary to significantly adjust the allowance, considering current factors at the time.

 

Mergers and Acquisitions

 

Business combinations are accounted for under the FASB Accounting Standards Codification ("ASC") 805, Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company will rely on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques. Under the acquisition method of accounting, the Company will identify the acquirer and the closing date and apply applicable recognition principles and conditions.

 

Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples of costs to the Company include systems conversions, integration planning, consultants, and advertising costs. The Company will account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities will be recognized in accordance with other applicable GAAP. These acquisition-related costs have been and will be included within the consolidated statements of income classified within the noninterest expense caption.

 

Acquired Loans with Specific Credit-Related Deterioration

 

Acquired loans with specific credit deterioration are accounted for by the Company in accordance with ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality. Certain acquired loans, those for which specific credit-related deterioration, since origination, is identified, are recorded at fair value reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on a reasonable expectation about the timing and amount of cash flows to be collected. In accounting for purchased credit impaired loans, such loans are not classified as nonaccrual when they become 90 days past due. They are considered to be accruing because their interest income relates to the accretable yield and not to contractual interest payments.

 

Goodwill and Intangible Assets

 

The Company's goodwill was recognized in connection with past business combinations and is reported at the community banking segment.  The Company reviews the carrying value of the goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Company elects to bypass the qualitative assessment or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists. In the last evaluation of goodwill, which was the annual evaluation at June 30, 2021, the Company concluded that no impairment existed. No indicators of impairment were identified during the nine months ended September 30, 2021 or 2020.

 

 

Deferred Tax Assets and Liabilities

 

The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized. "More likely than not" is defined as greater than a 50% chance. Management considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed.

 

Other-than-temporary Impairment of Securities

 

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (1) the Company intends to sell the security or (2) it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-likely-than-not that it will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income.

 

Non-GAAP Presentations

 

Non-GAAP presentations are provided because the Company believes these may be valuable to investors. These include (1) the analysis of net interest income presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets and (2) the calculation of the efficiency ratio.

 

Internet Access to Corporate Documents

 

The Company provides access to its Securities and Exchange Commission ("SEC") filings through a link on the Investor Relations page of the Company's website at www.amnb.com. Reports available include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are filed electronically with the SEC. The information on the Company's website is not incorporated into this report or any other filing the Company makes with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

 

 

 

RESULTS OF OPERATIONS

 

Executive Overview

 

Third quarter 2021 financial highlights include the following:

 

  Net loans held for investment, excluding PPP loans, grew $92.9 million, or 5.1%, during the third quarter compared to $15.4 million, or 0.9%, in the second quarter of this year and $83.0 million, or 4.6%, in the third quarter of the prior year.

 

 

Average deposits grew 3.4% during the quarter and 13.7% over the same quarter of 2020; the cost of interest-bearing deposits decreased to 0.17% in the third quarter, compared to 0.21% in the previous quarter and 0.52% in the same quarter of the prior year.

 

 

Fully taxable equivalent net interest margin was 3.09% for the quarter, up from 3.00% in the previous quarter and down from 3.26% in the same quarter of the prior year.*   

 

  Noninterest revenues decreased $19 thousand, or 0.4%, when compared to the previous quarter, and increased $831 thousand, or 19.4%, compared to the same quarter in the prior year.

 

  Noninterest expense increased $206 thousand, or 1.4%, when compared to the previous quarter, and increased $703 thousand, or 5.0%, when compared to the same quarter in the prior year.

 

 

The Company recorded a provision for loan losses in the third quarter of 2021 of $482 thousand compared to a negative provision in the second quarter of $1.4 million and a provision expense of $2.6 million in the third quarter in the prior year. Annualized net charge-offs (recoveries) as a percentage of average loans outstanding were (0.01%) for the third and second quarters of 2021 and 0.01% for the third quarter of 2020.

 

  Nonperforming assets as a percentage of total assets were 0.06% at September 30, 2021, down from 0.07% at June 30, 2021 and 0.16% at September 30, 2020.

 

*Refer to the Non-GAAP Financial Measures within this section for further information on this non-GAAP financial measurement.

 

Net Interest Income

 

Net interest income is the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest-bearing liabilities, primarily deposits and other funding sources. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest-bearing liabilities can materially impact net interest income. The following discussion of net interest income is presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets, such as certain state and municipal securities. A tax rate of 21% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent basis. Net interest income divided by average earning assets is referred to as the net interest margin. The net interest spread represents the difference between the weighted rate earned on average earning assets and the weighted rate paid on average interest-bearing liabilities.

 

 

Three months ended September 30, 2021 and 2020

 

Net interest income on a taxable equivalent basis was $23.1 million, an increase of $1.6 million, or 7.4%, for the third quarter of 2021 compared to $21.5 million for the same quarter of 2020. The increase in net interest income from the same quarter in the prior year was attributable to an increase in earning assets and fee recognition associated with PPP loans, additional accretion income and reduced deposit costs from a significantly lower rate environment. Average loan balances for the 2021 quarter were down $179,074,000, or 8.5%, over the 2020 quarter, primarily due to PPP forgiveness. PPP loans had a net balance of $37,200,000 at September 30, 2021, earn 1% interest, and generate fee income that is being accreted over the life of the loans or at forgiveness. The interest income from the total PPP portfolio generated $169,000 in revenues for the third quarter of 2021.  Total net PPP fees recognized in net interest income during the third quarter of 2021 were $2,436,000, enhanced by the accelerated amortization of fees and costs on the forgiveness of $66,900,000 in PPP loans. Loan yields for the quarter were 31 basis points higher than the 2020 quarter.

 

For the third quarter of 2021, the Company's yield on interest-earning assets was 3.25%, compared to 3.66% for the third quarter of 2020. The cost of interest-bearing liabilities was 0.25% for the 2021 period compared to 0.63% for the 2020 period. The interest rate spread was 3.00% for the 2021 period compared to 3.03% for the 2020 period. The net interest margin, on a fully taxable equivalent basis, was 3.09% for the 2021 period compared to 3.26%, for the 2020 period, a decrease of 17 basis points. The decrease in net interest margin was driven by declining interest rates partially offset by PPP fee income earned.

 

 

The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the three months ended September 30, 2021 and 2020. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans is only recognized when the loan returns to accrual status or at full payment of principal.

 

Net Interest Income Analysis (dollars in thousands)

 

   

Three Months Ended September 30,

 
   

2021

   

2020

   

2021

   

2020

   

2021

   

2020

 
   

Average Balance

   

Income/Expense

   

Yield/Rate

 

Loans:

                                               

Commercial

  $ 325,692     $ 544,712     $ 5,185     $ 4,495       6.32 %     3.28 %

Real estate

    1,590,858       1,549,078       16,702       17,755       4.20       4.58  

Consumer

    6,731       8,565       125       144       7.37       6.69  

Total loans

    1,923,281       2,102,355       22,012       22,394       4.57       4.26  
                                                 

Securities:

                                               

U.S. Treasury

    53,347       10,541       139       3       1.04       0.11  

Federal agencies and GSEs

    90,876       61,405       265       287       1.17       1.87  

Mortgage-backed and CMOs

    335,940       194,585       1,091       942       1.30       1.94  

State and municipal

    62,883       46,432       320       294       2.04       2.53  

Other securities

    26,462       20,815       311       275       4.70       5.28  

Total securities

    569,508       333,778       2,126       1,801       1.49       2.16  
                                                 

Deposits in other banks

    496,872       212,857       201       59       0.16       0.11  
                                                 

Total interest-earning assets

    2,989,661       2,648,990       24,339       24,254       3.25       3.66  
                                                 

Non-earning assets

    209,853       221,223                                  
                                                 

Total assets

  $ 3,199,514     $ 2,870,213                                  
                                                 

Deposits:

                                               

Demand

  $ 481,032     $ 410,228       38       56       0.03       0.05  

Money market

    713,846       580,200       166       475       0.09       0.33  

Savings

    247,536       206,493       6       24       0.01       0.05  

Time

    375,181       423,039       571       1,563       0.60       1.47  

Total deposits

    1,817,595       1,619,960       781       2,118       0.17       0.52  
                                                 

Customer repurchase agreements

    29,681       45,689       3       42       0.04       0.37  

Long-term borrowings

    28,192       35,597       400       524       5.68       5.89  

Total interest-bearing liabilities

    1,875,468       1,701,246       1,184       2,684       0.25       0.63  
                                                 

Noninterest-bearing demand deposits

    950,673       814,685                                  

Other liabilities

    21,727       24,244                                  

Shareholders' equity

    351,646       330,038                                  

Total liabilities and shareholders' equity

  $ 3,199,514     $ 2,870,213                                  
                                                 

Interest rate spread

                                    3.00 %     3.03 %

Net interest margin

                                    3.09 %     3.26 %
                                                 

Net interest income (taxable equivalent basis)

              23,155       21,570                  

Less: Taxable equivalent adjustment

                    62       75                  

Net interest income

                  $ 23,093     $ 21,495                  

 

 

Changes in Net Interest Income (Rate/Volume Analysis)

(in thousands)

 

   

Three Months Ended September 30,

 
   

2021 vs. 2020

 
           

Change

 
   

Increase

   

Attributable to

 
   

(Decrease)

   

Rate

   

Volume

 

Interest income

                       

Loans:

                       

Commercial

  $ 690     $ 3,005     $ (2,315 )

Real estate

    (1,053 )     (1,522 )     469  

Consumer

    (19 )     14       (33 )

Total loans

    (382 )     1,497       (1,879 )

Securities:

                       

U.S. Treasury

    136       91       45  

Federal agencies and GSEs

    (22 )     (131 )     109  

Mortgage-backed and CMOs

    149       (380 )     529  

State and municipal

    26       (65 )     91  

Other securities

    36       (33 )     69  

Total securities

    325       (518 )     843  

Deposits in other banks

    142       36       106  

Total interest income

    85       1,015       (930 )
                         

Interest expense

                       

Deposits:

                       

Demand

    (18 )     (26 )     8  

Money market

    (309 )     (399 )     90  

Savings

    (18 )     (22 )     4  

Time

    (992 )     (832 )     (160 )

Total deposits

    (1,337 )     (1,279 )     (58 )

Customer repurchase agreements

    (39 )     (28 )     (11 )

Long-term borrowings

    (124 )     (18 )     (106 )

Total interest expense

    (1,500 )     (1,325 )     (175 )

Net interest income (taxable equivalent basis)

  $ 1,585     $ 2,340     $ (755 )

 

Nine months ended September 30, 2021 and 2020

 

Net interest income on a taxable equivalent basis was $67.5 million for the nine months ended September 30, 2021, an increase of $5,575,000, or 9.0%, compared to $61.9 million in the same period of 2020. The increase in net interest income from the same period in the prior year was attributable to an increase in earning assets and fee recognition associated with PPP, accretion income and reduced deposit costs from a significantly lower rate environment. Average loan balances for the 2021 period were down $27,446,000, or 1.4%, over the 2020 period, primarily due to PPP forgiveness. These loans had a net balance of $37,200,000 at September 30, 2021, earn 1% interest, and generate fee income that is being accreted over the life of the loans or until forgiveness where the fee income is fully accreted into income. The interest income from the total PPP portfolio generated $1,054,000 in revenues for the nine months of 2021. Total net PPP fees recognized in net interest income during the period of 2021 were $7,073,000, enhanced by the accelerated amortization of fees and costs on the forgiveness of $252,000,000 in PPP loans. Loan yields for the 2021 period were 7 basis points higher than the 2020 period.

 

For the nine months ended September 30, 2021, the Company's yield on interest-earning assets was 3.30%, compared to 3.84% for the prior year period. The cost of interest-bearing liabilities was 0.32% for the 2021 period compared to 0.79% for the 2020 period. The interest rate spread was 2.98% for the 2021 period compared to 3.05% for the 2020 period. The net interest margin, on a fully taxable equivalent basis, was 3.10% in the 2021 period compared to 3.32% in the 2020 period, a decrease of 22 basis points. The decrease in net interest margin was driven by declining interest rates partially offset by PPP fee income earned.

 

 

The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the nine months ended September 30, 2021 and 2020. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans is only recognized when the loan returns to accrual status or at full payment of principal.

 

Net Interest Income Analysis (dollars in thousands)

 

   

Nine Months Ended September 30,

 
   

2021

   

2020

   

2021

   

2020

   

2021

   

2020

 
   

Average Balance

   

Income/Expense

   

Yield/Rate

 

Loans:

                                               

Commercial

  $ 393,571     $ 464,094     $ 15,433     $ 12,414       5.24 %     3.57 %

Real estate

    1,568,055       1,522,803       49,642       52,319       4.22       4.58  

Consumer

    7,139       9,314       364       451       6.82       6.47  

Total loans

    1,968,765       1,996,211       65,439       65,184       4.43       4.36  
                                                 

Securities:

                                               

U.S. Treasury

    36,969       7,292       265       47       0.96       0.86  

Federal agencies and GSEs

    99,595       70,604       867       1,147       1.16       2.17  

Mortgage-backed and CMOs

    292,207       198,528       3,025       3,144       1.38       2.11  

State and municipal

    61,210       43,345       958       871       2.09       2.68  

Other securities

    24,175       19,932       900       812       4.96       5.43  

Total securities

    514,156       339,701       6,015       6,021       1.56       2.36  
                                                 

Deposits in other banks

    422,111       147,996       375       356       0.12       0.32  
                                                 

Total interest-earning assets

    2,905,032       2,483,908       71,829       71,561       3.30       3.84  
                                                 

Non-earning assets

    210,651       222,451                                  
                                                 

Total assets

  $ 3,115,683     $ 2,706,359                                  
                                                 

Deposits:

                                               

Demand

  $ 466,999     $ 371,155       116       294       0.03       0.11  

Money market

    700,027       550,063       657       2,254       0.13       0.55  

Savings

    238,349       192,632       19       101       0.01       0.07  

Time

    367,979       446,354       2,198       5,259       0.80       1.57  

Total deposits

    1,773,354       1,560,204       2,990       7,908       0.23       0.68  
                                                 

Customer repurchase agreements

    36,954       43,649       19       237       0.07       0.73  

Other short-term borrowings

          1                         0.50  

Long-term borrowings

    33,111       35,575       1,352       1,523       5.44       5.71  

Total interest-bearing liabilities

    1,843,419       1,639,429       4,361       9,668       0.32       0.79  
                                                 

Noninterest-bearing demand deposits

    903,296       717,007                                  

Other liabilities

    22,238       22,692                                  

Shareholders' equity

    346,730       327,231                                  

Total liabilities and shareholders' equity

  $ 3,115,683     $ 2,706,359                                  
                                                 

Interest rate spread

                                    2.98 %     3.05 %

Net interest margin

                                    3.10 %     3.32 %
                                                 

Net interest income (taxable equivalent basis)

                    67,468       61,893                  

Less: Taxable equivalent adjustment

                    181       219                  

Net interest income

                  $ 67,287     $ 61,674                  

 

 

Changes in Net Interest Income (Rate/Volume Analysis)

(in thousands)

 

   

Nine Months Ended September 30,

 
   

2021 vs. 2020

 
           

Change

 
   

Increase

   

Attributable to

 
   

(Decrease)

   

Rate

   

Volume

 

Interest income

                       

Loans:

                       

Commercial

  $ 3,019     $ 5,122     $ (2,103 )

Real estate

    (2,677 )     (4,198 )     1,521  

Consumer

    (87 )     23       (110 )

Total loans

    255       947       (692 )

Securities:

                       

U.S. Treasury

    218       6       212  

Federal agencies and GSEs

    (280 )     (648 )     368  

Mortgage-backed and CMOs

    (119 )     (1,306 )     1,187  

State and municipal

    87       (220 )     307  

Other securities

    88       (74 )     162  

Total securities

    (6 )     (2,242 )     2,236  

Deposits in other banks

    19       (330 )     349  

Total interest income

    268       (1,625 )     1,893  
                         

Interest expense

                       

Deposits:

                       

Demand

    (178 )     (240 )     62  

Money market

    (1,597 )     (2,088 )     491  

Savings

    (82 )     (102 )     20  

Time

    (3,061 )     (2,257 )     (804 )

Total deposits

    (4,918 )     (4,687 )     (231 )

Customer repurchase agreements

    (218 )     (186 )     (32 )

Long-term borrowings

    (171 )     (68 )     (103 )

Total interest expense

    (5,307 )     (4,941 )     (366 )

Net interest income (taxable equivalent basis)

  $ 5,575     $ 3,316     $ 2,259  

 

 

Noninterest Income

 

Three months ended September 30, 2021 and 2020

 

For the quarter ended September 30, 2021, noninterest income increased $831,000, or 19.4%, compared to the comparable 2020 quarter. Details of individual accounts are shown in the table below.

 

   

Three Months Ended September 30,

 
   

(Dollars in thousands)

 
   

2021

   

2020

   

$ Change

   

% Change

 

Noninterest income:

                               

Trust fees

  $ 1,311     $ 1,054     $ 257       24.4 %

Service charges on deposit accounts

    664       618       46       7.4  

Other fees and commissions

    1,147       996       151       15.2  

Mortgage banking income

    989       1,030       (41 )     (4.0 )

Brokerage fees

    265       170       95       55.9  

Income from Small Business Investment Companies

    491       98       393       (401.0 )

Income from insurance investments

    132       108       24       22.2  

Losses on premises and equipment, net

    (107 )     (15 )     (92 )     (613.3 )

Other

    231       233       (2 )     (0.9 )

Total noninterest income

  $ 5,123     $ 4,292     $ 831       19.4  

 

Trust fees increased $257,000 for the three months ended September 30, 2021 compared to the same quarter in 2020 as a result of growth in clients and growth in market value. Other fees and commissions increased $151,000 in the 2021 quarter compared to the 2020 quarter due to increased usage of debit cards. Income from Small Business Investment Companies increased $393,000, primarily the result of additional income distributions during the three months ended September 30, 2021 compared to the same quarter in 2020. During the third quarter of 2021, the Company recognized a loss on premises and equipment, net of $105,000 from the sale of buildings acquired in the HomeTown Bankshares Corporation acquisition compared to no losses in the 2020 quarter related to these transactions. 

 

Nine months ended September 30, 2021 and 2020

 

For the nine months ended September 30, 2021, noninterest income increased $3,565,000, or 28.2%, compared to the comparable 2020 period. Details of individual accounts are shown in the table below.

 

   

Nine Months Ended September 30,

 
   

(Dollars in thousands)

 
   

2021

   

2020

   

$ Change

   

% Change

 

Noninterest income:

                               

Trust fees

  $ 3,757     $ 3,019     $ 738       24.4 %

Service charges on deposit accounts

    1,916       1,880       36       1.9  

Other fees and commissions

    3,644       2,888       756       26.2  

Mortgage banking income

    3,449       2,472       977       39.5  

Securities gains, net

          814       (814 )     (100.0 )

Brokerage fees

    733       553       180       32.5  

Income from Small Business Investment Companies

    1,510       34       1,476       (4,341.2 )

Income from insurance investments

    1,062       271       791       291.9  

Losses on premises and equipment, net

    (588 )     (97 )     (491 )     506.2  

Other

    704       788       (84 )     (10.7 )

Total noninterest income

  $ 16,187     $ 12,622     $ 3,565       28.2  

 

Trust fees increased $738,000 for the nine months ended September 30, 2021 compared to the same period in 2020 as a result of growth in clients and growth in market value.  Other fees and commissions increased $756,000 in the 2021 period compared to the 2020 period due to increased usage of debit cards. Mortgage banking income increased $977,000 in the 2021 period compared to the 2020 period, primarily due to increased volume of applications for purchases and refinancing. There were no net securities gains in the 2021 period compared to $814,000 in the same period in 2020. Income from Small Business Investment Companies and income from insurance investments increased $1,476,000 and $791,000, respectively, during the nine months ended September 30, 2021 compared to the same period in 2020. The increase in income from insurance investments was primarily the result of an additional bonus distribution received in 2021. Losses on premises and equipment, net increased $491,000 from the 2020 period, primarily from the loss of $543,000 recognized in the 2021 period on the sale of buildings acquired in the HomeTown Bankshares Corporation acquisition.

 

 

Noninterest Expense

 

Three months ended September 30, 2021 and 2020

 

For the three months ended September 30, 2021, noninterest expense increased $703,000, or 5.0%, compared to the same quarter of 2020. Details of individual accounts are shown in the table below.

 

   

Three Months Ended September 30,

 
   

(Dollars in thousands)

 
   

2021

   

2020

   

$ Change

   

% Change

 

Noninterest Expense

                               

Salaries and employee benefits

  $ 8,185     $ 7,989     $ 196       2.5 %

Occupancy and equipment

    1,513       1,423       90       6.3  

FDIC assessment

    194       162       32       19.8  

Bank franchise tax

    440       426       14       3.3  

Core deposit intangible amortization

    361       402       (41 )     (10.2 )

Data processing

    748       705       43       6.1  

Software

    344       353       (9 )     (2.5 )

Other real estate owned, net

    21       28       (7 )     (25.0 )

Other

    3,037       2,652       385       14.5  

Total noninterest expense

  $ 14,843     $ 14,140     $ 703       5.0  

 

Salaries and employee benefits increased $196,000 in the 2021 quarter as compared to the 2020 quarter primarily the result of additional salary expenses related to mortgage production. The increase in occupancy and equipment expense in the third quarter of 2021 compared to the third quarter of 2020 reflects additional expenses related to the opening of the Triangle (North Carolina) banking office and enhancements in technology.  Other expenses increased $385,000 compared to the same quarter of 2020 as a result of increased loan related expenses and normal expense seasonality.   

 

Nine months ended September 30, 2021 and 2020

 

For the nine months ended September 30, 2021, noninterest expense increased $3,639,000, or 9.1%, compared to the same period of 2020. Details of individual accounts are shown in the table below.

 

   

Nine Months Ended September 30,

 
   

(Dollars in thousands)

 
   

2021

   

2020

   

$ Change

   

% Change

 

Noninterest Expense

                               

Salaries and employee benefits

  $ 23,881     $ 21,540     $ 2,341       10.9 %

Occupancy and equipment

    4,548       4,116       432       10.5  

FDIC assessment

    644       433       211       48.7  

Bank franchise tax

    1,321       1,277       44       3.4  

Core deposit intangible amortization

    1,113       1,246       (133 )     (10.7 )

Data processing

    2,224       2,253       (29 )     (1.3 )

Software

    1,011       1,112       (101 )     (9.1 )

Other real estate owned, net

    148       34       114       335.3  

Other

    8,655       7,895       760       9.6  

Total noninterest expense

  $ 43,545     $ 39,906     $ 3,639       9.1  

 

Salaries and employee benefits increased $2,341,000 in the 2021 period as compared to the 2020 period. Salaries and employee benefits expenses increased in the 2021 period due to incentive accrual adjustments and the reduced deferral of salary costs from the PPP program than was recorded in the 2020 period. The nine months ended September 30, 2021 also included increased mortgage commissions due to increased loan production.  The increase in occupancy and equipment expense in the period of 2021 compared to the period of 2020 reflects expenses related to the opening of the Triangle banking office and enhancements in technology. Other real estate owned ("OREO"), net expense was $148,000 in the nine months ended September 30, 2021 compared $34,000 in the same period in 2020; the result of a loss on the sale of OREO of $111,000 during the 2021 period. Other expenses increased $760,000 compared to the same quarter of 2020 primarily from increased loan related expenses, investment related expenses, investments in technology and normal expense seasonality.

 

 

 

Non-GAAP Financial Measures

 

The efficiency ratio is calculated by dividing noninterest expense excluding (1) gains or losses on the sale of OREO, (2) core deposit intangible amortization and (3) merger related expense by net interest income including tax equivalent income on nontaxable loans and securities and noninterest income and excluding (a) gains or losses on securities and (b) gains or losses on sale or disposal of premises and equipment. The efficiency ratio for the 2021 quarter was 51.03% compared to 53.00% for the 2020 quarter. The efficiency ratio is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. Such information is not prepared in accordance with GAAP and should not be construed as such. Management believes, however, such financial information is meaningful to the reader in understanding operating performance but cautions that such information not be viewed as a substitute for GAAP information. The Company, in referring to its net income, is referring to income under GAAP. The components of the efficiency ratio calculation are summarized in the following table (dollars in thousands):

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 

Efficiency Ratio

                               

Noninterest expense

  $ 14,843     $ 14,140     $ 43,545     $ 39,906  

Add/subtract: gain/loss on sale of OREO, net of write-downs

          (23 )     (111 )     35  

Subtract: core deposit intangible amortization

    (361 )     (402 )     (1,113 )     (1,246 )
    $ 14,482     $ 13,715     $ 42,321     $ 38,695  
                                 

Net interest income

  $ 23,093     $ 21,495     $ 67,287     $ 61,674  

Tax equivalent adjustment

    62       75       181       144  

Noninterest income

    5,123       4,292       16,187       12,622  

Subtract: gain on securities

                      (814 )

Add: loss on fixed assets

    107       15       588       97  
    $ 28,385     $ 25,877     $ 84,243     $ 73,723  
                                 

Efficiency ratio

    51.02 %     53.00 %     50.24 %     52.49 %

 

Net interest margin is calculated by dividing tax equivalent net interest income by total average earning assets. Because a portion of interest income earned by the Company is nontaxable, the tax equivalent net interest income is considered in the calculation of this ratio. Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit for both the 2021 and 2020 periods is 21%. The reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below (dollars in thousands):

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 

Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income

                               

Non-GAAP measures:

                               

Interest income - loans

  $ 22,012     $ 22,394     $ 65,439     $ 65,184  

Interest income - investments and other

    2,327       1,860       6,390       6,377  

Interest expense - deposits

    (781 )     (2,118 )     (2,990 )     (7,908 )

Interest expense - customer repurchase agreements

    (3 )     (42 )     (19 )     (237 )

Interest expense - long-term borrowings

    (400 )     (524 )     (1,352 )     (1,523 )

Total net interest income

  $ 23,155     $ 21,570     $ 67,468     $ 61,893  

Less non-GAAP measures:

                               

Tax benefit realized on non-taxable interest income - loans

  $ (38 )   $ (48 )   $ (105 )   $ (138 )

Tax benefit realized on non-taxable interest income - municipal securities

    (24 )     (27 )     (76 )     (81 )

GAAP measures net interest income

  $ 23,093     $ 21,495     $ 67,287     $ 61,674  

 

Income Taxes

 

The effective tax rate for the third quarter of 2021 was 21.05% compared to 21.00% for the third quarter of 2020The effective rates for the nine months ended September 30, 2021 and 2020, respectively, were 20.99% and 18.45%. The effective tax rate is ordinarily lower than the statutory rate of 21% due to the benefit of tax-exempt interest, tax-exempt changes in the cash surrender value of bank owned life insurance and excess tax benefits recognized on the exercise of stock options and vesting of restricted stock.  However, it can be more than the statutory rate due to the presence of state taxes.  

 

 

Fair Value Impact to Net Interest Margin

 

The Company's fully taxable equivalent net interest margin includes the impact of acquisition accounting fair value adjustments. The net accretion impact for the three and nine months ended September 30, 2021 and 2020, as well as the remaining estimated net accretion impact are reflected in the following table (dollars in thousands):

 

   

Loan

   

Deposit

   

Borrowings

         
   

Accretion

   

Accretion

   

Amortization

   

Total

 

For the three months ended September 30, 2021

  $ 1,332     $ 18     $ (25 )   $ 1,325  

For the three months ended September 30, 2020

    1,649       33       (21 )     1,661  
                                 

For the nine months ended September 30, 2021

    3,163       61       (76 )     3,148  

For the nine months ended September 30, 2020

    2,530       153       (63 )     2,620  
                                 

For the remaining three months of 2021 (estimated)

    405       17       (27 )     395  

For the years ending (estimated):

                               

2022

    1,330       50       (102 )     1,278  

2023

    782       30       (102 )     710  

2024

    547       5       (102 )     450  

2025

    424       2       (102 )     324  

2026

    295       1       (102 )     194  

Thereafter (estimated)

    1,004       2       (640 )     366  

 

Impact of Inflation and Changing Prices

 

The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. The most significant effect of inflation is on noninterest expense, which tends to rise during periods of inflation. Changes in interest rates have a greater impact on a financial institution's profitability than do the effects of higher costs for goods and services. Through its balance sheet management practices, the Company has the ability to react to those changes and measure and monitor its interest rate and liquidity risk. Price inflation has been consistently modest over the past several years.

 

 

 

CHANGES IN FINANCIAL POSITION

 

BALANCE SHEET ANALYSIS

 

Securities

 

The securities portfolio generates income, plays a major role in the management of interest rate sensitivity, provides a source of liquidity, and is used to meet collateral requirements. The securities portfolio consists primarily of high credit quality investments, mostly federal agency, mortgage-backed, and state and municipal securities.

 

The available for sale securities portfolio was $643,949,000 at September 30, 2021, compared to $466,091,000 at December 31, 2020, an increase of $177,858,000, or 38.2%. At September 30, 2021, the available for sale portfolio had an amortized cost of $640,507,000, resulting in a net unrealized gain of $3,442,000. At December 31, 2020, the available for sale portfolio had an amortized cost of $455,992,000, resulting in a net unrealized gain of $10,099,000.

 

During the nine months ended September 30, 2021, the Company did not sell any securities. This compares to the nine months ended September 30, 2020, when the Company sold $5,000,000 in par value bonds and realized a net gain of $814,000.

 

The Company is cognizant of the continuing historically low and steady rate environment and has elected to execute an asset liability strategy of purchasing high quality taxable securities with relatively low optionality and moderate and overall balanced duration.

 

Loans

 

The loan portfolio consists primarily of commercial and residential real estate loans, commercial loans to small and medium-sized businesses, construction and land development loans, and home equity loans. At September 30, 2021, the commercial real estate portfolio included concentrations of $83,540,000, $44,127,000 and $199,571,000 in hotel, restaurants, and retail loans, respectively. These concentrations total 16.9% of total loans, excluding loans in process. 

 

Total loans were $1,940,332,000 at September 30, 2021, compared to $2,015,056,000 at December 31, 2020, a decrease of $74,724,000, or 3.7%. At September 30, 2021, net PPP loans, which are in the commercial loan category, totaled $37,200,000, compared to $211,275,000 at December 31, 2020

 

Average loans were $1,923,281,000 for the third quarter of 2021, compared to $2,105,355,000 for the third quarter of 2020, a decrease of $179,074,000, or 8.5%, primarily related to PPP forgiveness.

 

Loans held for sale totaled $9,518,000 at September 30, 2021 and $15,591,000 at December 31, 2020. Secondary loan production volume was $113,671,000 for the nine month period ended September 30, 2021 and $116,071,000 for the same period of 2020. These loans were approximately 35% purchase and 65% refinancing for the quarter ended September 30, 2021, and for the year ended December 31, 2020.

 

Management of the loan portfolio is organized around portfolio segments. Each segment is comprised of various loan types that are reflective of operational and regulatory reporting requirements. The following table presents the Company's loan portfolio by segment as of September 30, 2021 and December 31, 2020 (dollars in thousands):

 

    September 30, 2021     December 31, 2020  

Commercial

  $ 320,278     $ 491,256  

Commercial real estate:

               

Construction and land development

    120,193       140,071  

Commercial real estate - owner occupied

    404,029       373,680  

Commercial real estate - non-owner occupied

    713,339       627,569  

Residential real estate:

               

Residential

    280,351       269,137  

Home equity

    95,317       104,881  

Consumer

    6,825       8,462  

Total loans, net of deferred fees and costs

  $ 1,940,332     $ 2,015,056  

 

Provision for Loan Losses

 

The Company had a provision for loan losses of $482,000 for the third quarter of 2021, as compared to a negative provision of $1,352,000 for the second quarter of 2021, and $2,619,000 for the third quarter of 2020. The third quarter of 2021 provision expense was required due to the significant loan growth during the quarter but offset by reductions in the qualitative factors related to both national and local economic conditions, particularly declining levels of unemployment rates and jobless claims.  Ongoing low charge-off and delinquency rates and overall strong asset quality metrics also contributed to the negative provision related to these qualitative factors.  Net recoveries for the three months ended September 30, 2021 were $51,000 compared to $38,000 for the same 2020 period.   

 

 

Allowance for Loan Losses

 

The purpose of the ALLL is to provide for probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance.

 

At September 30, 2021, the ALLL was $20,630,000, compared to $21,403,000 at December 31, 2020. The ALLL as a percentage of total loans at such dates was 1.06%.  The ALLL as a percentage of loans without PPP loans at September 30, 2021 was 1.08% compared to 1.19% at December 31, 2020.  PPP loans are 100% guaranteed by the SBA so there is no allowance associated with the loans in the program.  

 

The Company recognized provision expense of $482,000 in the third quarter of 2021 and a recovery of provision expense in the second quarter of 2021 of $1.4 million, accounting for the change from December 31, 2021 in the ALLL.  The expense in the third quarter was the net result of the required provision resulting from significant loan growth during the quarter netted against a negative provision from the adjustment of qualitative factors around continued improvement in economic conditions. The improvement in the qualitative factors discussed justified the negative provision recognized in the second quarter where loan growth was minimal. Ongoing low charge-off and delinquency rates and overall strong asset quality metrics also contributed to the qualitative factor adjustments.

 

As part of the Company's methodology to evaluate the adequacy of its ALLL, the Company computed its ASC 450 loan balance by reducing total loans by acquired loans and loans that were evaluated for impairment individually. The FASB ASC 450 loan loss reserve balance is the total ALLL reduced by allowances associated with these other pools of loans.

 

The general allowance, ASC 450 (FAS 5) reserves to FASB ASC 450 loans, was 1.13% at September 30, 2021, compared to 1.16% at December 31, 2020. On a dollar basis, the reserve was $19,896,000 at September 30, 2021, compared to $20,534,000 at December 31, 2020. This segment of the allowance represents by far the largest portion of the loan portfolio and the largest aggregate risk.  

 

The specific allowance, ASC 310-40 (FAS 114) reserves to FASB ASC 310-40 loans, was 0.44% at September 30, 2021, compared to 1.06% at December 31, 2020. On a dollar basis, the reserve was $9,800 at September 30, 2021, compared to $30,000 at December 31, 2020. There is ongoing turnover in the composition of the impaired loan population, which decreased by a net $635,000 over December 31, 2020.

 

The specific allowance does not include reserves related to acquired loans with deteriorated credit quality. This reserve was $724,000 at September 30, 2021 compared to $839,000 at December 31, 2020. This is the only portion of the reserve related to purchased credit impaired loans. Cash flow expectations for these loans are reviewed on a quarterly basis and unfavorable changes in those estimates relative to the initial estimates can result in the need for additional loan loss provision. The following table presents the Company's loan loss and recovery experience for the periods indicated (dollars in thousands):

 

    Nine Months Ended September 30, 2021    

Year Ended December 31, 2020

 

Balance at beginning of period

  $ 21,403     $ 13,152  
                 

Charge-offs:

               

Construction and land development

           

Commercial real estate - owner occupied

    3       17  

Commercial real estate - non-owner occupied

          165  

Residential real estate

    17       90  

Home equity

          27  

Total real estate

    20       299  

Commercial and industrial

          505  

Consumer

    50       202  

Total charge-offs

    70       1,006  
                 

Recoveries:

               

Construction and land development

          2  

Commercial real estate - owner occupied

    6       12  

Commercial real estate - non-owner occupied

    6       50  

Residential real estate

    41       63  

Home equity

    30       22  

Total real estate

    83       149  

Commercial and industrial

    27       65  

Consumer

    57       127  

Total recoveries

    167       341  
                 

Net charge-offs (recoveries)

    (97 )     665  

(Recovery of) Provision for loan losses

    (870 )     8,916  

Balance at end of period

  $ 20,630     $ 21,403  

 

 

Asset Quality Indicators

 

The following table provides qualitative indicators relevant to the Company's loan portfolio for the nine month period and year indicated below.

 

Asset Quality Ratios

 
    September 30, 2021     December 31, 2020  

Allowance to loans (1)

    1.06 %     1.06 %

ASC 450 (FAS 5) ALLL to ASC 450 loans (2)

    1.13       1.16  

Net charge-offs (recoveries) to allowance (3)

    (0.63 )     3.11  

Net charge-offs to average loans (3)

    (0.01 )     0.03  

Nonperforming assets to total assets

    0.06       0.12  

Nonperforming loans to loans

    0.10       0.13  

Provision to net charge-offs (recoveries) (3)

    (896.91 )     1,340.75  

Provision (recovery) to average loans (3)

    (0.06 )     0.44  

Allowance to nonperforming loans

    1,084.08       793.88  

__________________________

(1) - Excluding PPP loans, 1.08% at September 30, 2021 and 1.19% at December 31, 2020

(2) - Excluding PPP loans, 1.15% at September 30, 2021 and 1.32% at December 31, 2020

(3) - Annualized

 

Nonperforming Assets (Loans and Other Real Estate Owned)

 

Nonperforming loans include loans on which interest is no longer accrued and accruing loans that are contractually past due 90 days or more. Nonperforming loans include loans originated and loans acquired exclusive of purchased credit impaired loans.

 

Nonperforming loans to total loans were 0.10% at September 30, 2021 and 0.13% at December 31, 2020.

 

Nonperforming assets include nonperforming loans, OREO and repossessions. Nonperforming assets represented 0.06% and 0.13% of total assets at September 30, 2021 and December 31, 2020, respectively. 

 

In most cases, it is the policy of the Company that any loan that becomes 90 days past due will automatically be placed on nonaccrual loan status, accrued interest reversed out of income, and further interest accrual ceased. Any payments received on such loans will be credited to principal. In some cases a loan in process of renewal may become 90 days past due. In these instances the loan may still be accruing because of a delayed renewal process in which the customer has not been billed. In accounting for acquired impaired loans, such loans are not classified as nonaccrual when they become 90 days past due. They are considered to be accruing because their interest income relates to the accretable yield and not to contractual interest payments.

 

Loans will only be restored to full accrual status after six consecutive months of payments that were each less than 30 days delinquent. The Company strictly adheres with this policy before restoring a loan to normal accrual status.

 

The following table presents the Company's nonperforming assets as of September 30, 2021 and December 31, 2020 (dollars in thousands):

 

Nonperforming Assets

    September 30, 2021     December 31, 2020  

Nonaccrual loans:

               

Real estate

  $ 1,858     $ 2,328  

Commercial

    32       100  

Consumer

    13       6  

Total nonaccrual loans

    1,903       2,434  
                 

Loans past due 90 days and accruing interest:

               

Real estate

          262  
                 

Total nonperforming loans

    1,903       2,696  
                 

Other real estate owned

    213       958  
                 

Total nonperforming assets

  $ 2,116     $ 3,654  

 

 

Impaired Loans

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The following table shows loans that were considered impaired, exclusive of purchased credit impaired loans, as of September 30, 2021 and December 31, 2020 (dollars in thousands):

 

Impaired Loans

    September 30, 2021     December 31, 2020  

Accruing

  $ 677     $ 758  

Nonaccruing

    1,540       2,094  

Total impaired loans

  $ 2,217     $ 2,852  

 

Troubled Debt Restructurings

 

TDRs exist whenever the Company makes a concession to a customer based on the customer's financial distress that would not have otherwise been made in the normal course of business.

 

There were $1,850,000 in TDRs at September 30, 2021 compared to $1,976,000 at December 31, 2020. These loans are included in the impaired loan table above.

 

During the third quarter, the remaining $2.3 million loans in the DAP program outstanding at the end of the second quarter of 2021 expired. At December 31, 2020the balance of outstanding loans in the program was $30.0 million, or 1.5%. 

 

Other Real Estate Owned

 

OREO was $213,000 and $958,000 as of September 30, 2021 and December 31, 2020, respectively. OREO is initially recorded at fair value, less estimated costs to sell, at the date of foreclosure. Loan losses resulting from foreclosure are charged against the ALLL at that time. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the new cost basis or fair value, less estimated costs to sell with any additional write-downs charged against earnings. For significant assets, these valuations are typically outside annual appraisals. The following table shows the Company's OREO as of September 30, 2021 and December 31, 2020 (dollars in thousands):

 

Other Real Estate Owned

 

    September 30, 2021     December 31, 2020  

Construction and land development

  $ 213     $ 443  

Commercial real estate - owner occupied

          230  

Residential real estate

          237  

Home equity

          48  

Total other real estate owned

  $ 213     $ 958  

 

Deposits

 

The Company's deposits consist primarily of checking, money market, savings, and consumer and commercial time deposits. Total deposits were $2,862,081,000 at September 30, 2021 compared to $2,611,330,000 at December 31, 2020, an increase of $250,751,000, or 9.6%. The growth during the nine months ended September 30, 2021 is a result of continued higher than average cash balances being maintained by customers as elevated savings rates and liquidity patterns continue. This pattern has been prevalent since the second quarter of 2020 and is consistent with trends at other commercial banks.

 

Average interest-bearing deposits were $1,817,595,000 for the third quarter of 2021, compared to $1,619,960,000 for the third quarter of 2020, an increase of $197,635,000, or 12.2%. Average noninterest-bearing deposits for the 2021 quarter were $950,673,000, compared to $814,685,000 for the 2020 quarter, an increase of $135,988,000 or 16.7%. 

 

The Company's primary focus on the liability side of the balance sheet is growing core deposits and their affiliated relationships. The Company's cost of interest-bearing deposits for the third quarter of 2021 was 0.17%, down from 0.52% for the third quarter of 2020.

 

 

Shareholders' Equity

 

The Company's capital management strategy is to be classified as "well capitalized" under regulatory capital ratios and provide as high as possible total return to shareholders.

 

Shareholders' equity was $350,387,000 at September 30, 2021 compared to $337,894,000 at December 31, 2020, an increase of $12,493,000, or 3.7%.

 

The Company paid cash dividends of $0.81 per share during the nine months of 2021 while the aggregate diluted earnings per share for the same period was $2.95.

 

On September 17, 2019, the federal banking agencies jointly issued a final rule required by the Economic Growth, Regulatory Relief, and Consumer Protection Act ("EGRRCPA") that will permit qualifying banks and bank holding companies that have less than $10 billion in consolidated assets to elect to opt into the Community Bank Leverage Ratio ("CBLR") framework. Under the final rule, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% would not be subject to other risk-based and leverage capital requirements under the Basel III Capital Rules and will be deemed to have met the well capitalized ratio requirements under the "prompt corrective action" framework. On April 6, 2020, the federal bank regulatory agencies announced the issuance of two interim final rules that make changes to the CBLR framework and implement Section 4012 of the CARES Act. The first lowered the required leverage ratio to 8% for the remainder of 2020 while the second provides a transition back to the 9% requirement. This transition will allow community banking organizations to focus on supporting lending to creditworthy households and businesses given the recent strains on the U.S. economy caused by COVID-19. The CBLR framework was first available for banking organizations to use in their March 31, 2020 regulatory reports. The Company and the Bank do not currently expect to opt into the CBLR framework.

 

The following table provides information on the regulatory capital ratios for the Company and the Bank at September 30, 2021 and December 31, 2020. Management believes, as of September 30, 2021, that the Company and the Bank more than satisfy all capital adequacy requirements to which they are subject.

 

    Percentage At September 30, 2021     Percentage At December 31, 2020  

Risk-Based Capital Ratios:

 

Company

   

Bank

   

Company

   

Bank

 
                                 

Common equity tier 1 capital ratio

    12.44 %     13.21 %     12.36 %     12.86 %

Tier 1 capital ratio

    13.78       13.21       13.78       12.86  

Total capital ratio

    14.78       14.21       15.18       13.97  
                                 

Leverage Capital Ratio:

                               
                                 

Tier 1 leverage ratio

    9.34       8.95       9.48       8.85  

 

Stock Repurchase Program

 

The Company has an approved one year stock repurchase plan that authorizes the repurchase of up to 350,000 shares of the Company's common stock through December 31, 2021.

 

The Company repurchased 100,764 shares at an average cost of $32.87 per share, for a total of $3,313,000, in the third quarter of 2021. During the nine month period ended September 30, 2021, the Company repurchased 247,999 shares at an average cost of $32.84 per share, for a total cost of $8,143,000. In the nine month period ended September 30, 2020, the Company repurchased 140,526 shares at an average cost of $35.44 per share, for a total cost of $4,981,000. 

 

 

Liquidity

 

Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities in a timely manner. Liquidity management involves maintaining the Company's ability to meet the daily cash flow requirements of its customers, whether they are borrowers requiring funds or depositors desiring to withdraw funds. Additionally, the Company requires cash for various operating needs including dividends to shareholders, the servicing of debt, and the payment of general corporate expenses. The Company manages its exposure to fluctuations in interest rates through policies approved by the Asset Liability Committee ("ALCO") and Board of Directors, both of which receive periodic reports of the Company's interest rate risk and liquidity position. The Company uses a computer simulation model to assist in the management of the future liquidity needs of the Company. 

 

Liquidity sources include on balance sheet and off balance sheet sources.

 

Balance sheet liquidity sources include cash, amounts due from banks, loan repayments, and increases in deposits. The Company also maintains a large, high quality, very liquid bond portfolio, which is generally 50% to 60% unpledged and would, accordingly, be available for sale if necessary.

     

 

Off balance sheet sources include lines of credit from the Federal Home Loan Bank of Atlanta ("FHLB"), federal funds lines of credit, and access to the Federal Reserve Bank of Richmond's discount window.

 

The Company has a line of credit with the FHLB, equal to 30% of the Bank's assets, subject to the amount of collateral pledged. Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, second mortgage loans, home equity lines of credit, and commercial real estate loans. In addition, the Company pledges as collateral its capital stock in and deposits with the FHLB. The Company had $275,000,000 and $245,000,000 outstanding in letters of credit at September 30, 2021 and December 31, 2020, respectively. These letters of credit provide the Bank with alternate collateral for securing public entity deposits above FDIC insurance levels, thereby providing less need for collateral pledging from the securities portfolio, and thereby maximizing on balance sheet liquidity.

 

Short-term borrowings are discussed in Note 7 and long-term borrowings are discussed in Note 8 in the Consolidated Financial Statements included in this report.

 

The Company has federal funds lines of credit established with correspondent banks in the amount of $60,000,000 and has access to the Federal Reserve Bank of Richmond's discount window.

 

The Company has a relationship with Promontory Network, the sponsoring entity for the Certificate of Deposit Account Registry Service® ("CDARS"). Through CDARS, the Company is able to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000. This gives the Company the ability, as and when needed, to attract and retain large deposits from insurance conscious customers. With CDARS, the Company has the option to keep deposits on balance sheet or sell them to other members of the network. Additionally, subject to certain limits, the Bank can use CDARS to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB. In this manner, CDARS can provide the Company with another funding option. Thus, CDARS serves as a deposit-gathering tool and an additional liquidity management tool. Under EGRRCPA, a well-capitalized bank with a CAMELS rating of 1 or 2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated as brokered deposits. Deposits through the CDARS program as of September 30, 2021 and December 31, 2020, were $550,000 and $4,342,000, respectively.

 

COVID-19 and the participation in the PPP and the DAP programs could significantly impact the Company's liquidity. Average deposits grew 13.7% in the third quarter of 2021 compared to the same quarter of 2020. Customers have continued to maintain higher cash balances through the third quarter of 2021 as future liquidity needs remain uncertain. This buildup of cash reserves primarily accounts for the significant increase over the same period of 2020. Management believes that the resources available to the Company will provide sufficient and timely liquidity, both on and off the balance sheet, to support its programs and operations.

 

Off-Balance Sheet Activities

 

The Company enters into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance sheet transactions. Other than subsidiaries to issue trust preferred securities, the Company does not have any off-balance sheet subsidiaries. Off-balance sheet transactions at September 30, 2021 and at December 31, 2020 were as follows (dollars in thousands):

 

    September 30, 2021     December 31, 2020  

Commitments to extend credit

  $ 556,151     $ 503,272  

Standby letters of credit

    12,402       17,355  

Mortgage loan rate-lock commitments

    14,976       26,883  

 

Commitments to extend credit to customers represent legally binding agreements with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future funding requirements. Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements.

 

 

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market Risk Management

 

Effectively managing market risk is essential to achieving the Company's financial objectives. Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. The Company is generally not subject to currency exchange risk or commodity price risk. The Company's primary market risk exposure is interest rate risk; however, market risk also includes liquidity risk. Both are discussed in the following sections.

 

Interest Rate Risk Management

 

Interest rate risk and its impact on net interest income is a primary market risk exposure. The Company manages its exposure to fluctuations in interest rates through policies approved by the ALCO and Board of Directors, both of which receive and review periodic reports of the Company's interest rate risk position.

 

The Company uses computer simulation analysis to measure the sensitivity of projected earnings to changes in interest rates. Simulation takes into account current balance sheet volumes and the scheduled repricing dates instrument level optionality, and maturities of assets and liabilities. It incorporates numerous assumptions including growth, changes in the mix of assets and liabilities, prepayments, and average rates earned and paid. Based on this information, management uses the model to project net interest income under multiple interest rate scenarios.

 

A balance sheet is considered asset sensitive when its earning assets (loans and securities) reprice faster or to a greater extent than its liabilities (deposits and borrowings). An asset sensitive balance sheet will produce relatively more net interest income when interest rates rise and less net interest income when they decline. Based on the Company's simulation analysis, management believes the Company's interest sensitivity position at September 30, 2021 is asset sensitive. Management expects that the general direction of short-term market interest rates will be stable, but the outlook is less certain for longer-term rates during the remainder of 2021. 

 

Earnings Simulation

 

The following table shows the estimated impact of changes in interest rates on net interest income as of September 30, 2021 (dollars in thousands), assuming instantaneous and parallel changes in interest rates, and expected levels of assets and liabilities. Net interest income for the following twelve months is projected to increase when interest rates are higher than current rates.

 

Estimated Changes in Net Interest Income

 

   

September 30, 2021

 
    Change in Net Interest Income  

Change in interest rates

 

Amount

   

Percent

 

Up 4.00%

  $ 21,456       26.5 %

Up 3.00%

    16,030       19.8  

Up 2.00%

    10,572       13.1  

Up 1.00%

    5,155       6.4  

Flat

           

Down 0.25%

    (1,016 )     (1.3 )

Down 1.00% (1)

    (3,193 )     (3.9 )

__________________________

(1) This scenario is deemed highly improbable at this time due to the current near zero interest rate environment.

 

Management cannot predict future interest rates or their exact effect on net interest income. Computations of future effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results. Certain limitations are inherent in such computations. Assets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag changes in market interest rates. Interest rate shifts may not be parallel.

 

Any changes in interest rates can cause substantial changes in the amount of prepayments of loans and mortgage-backed securities, which may in turn affect the Company's interest rate sensitivity position. Additionally, credit risk may rise if an interest rate increase adversely affects the ability of borrowers to service their debt. Decrease in yields due to the current rate environment have been projected in the model simulation.

 

 

Economic Value Simulation

 

Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in net economic value over different rate environments is an indication of the longer-term earnings capability of the balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation. The economic value simulation uses instantaneous rate shocks to the balance sheet.

 

The following table reflects the estimated change in net economic value over different rate environments using economic value simulation for the balances at the quarterly period ended September 30, 2021 (dollars in thousands):

 

Estimated Changes in Economic Value of Equity

 

   

September 30, 2021

 

Change in interest rates

 

Amount

   

$ Change

   

% Change

 

Up 4.00%

  $ 504,852     $ 206,761       69.4 %

Up 3.00%

    466,328       168,237       56.4  

Up 2.00%

    421,744       123,653       41.5  

Up 1.00%

    365,793       67,702       22.7  

Flat

    298,091              

Down 0.25%

    274,611       (23,480 )     (7.9 )

Down 1.00% (1)

    188,290       (109,801 )     (36.8 )

__________________________

(1) This scenario is deemed highly improbable at this time due to the current zero interest rate environment.

 

Due to the historically low interest rate environment, no measurement was considered necessary for a further decline in interest rates. Due to the significant drop in short-term interest rates as a result of the economic impact of the COVID-19 pandemic, the valuation of the deposit portfolio decreased significantly in addition to the earning asset portfolio.

 

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of September 30, 2021. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective, as of such date, to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. There were no significant changes in the Company's internal controls over financial reporting that occurred during the quarter ended September 30, 2021 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

 

 

 

PART II. OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

The nature of the business of the Company ordinarily results in a certain amount of litigation. The Company is involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that these proceedings will not have a material adverse effect on the consolidated financial position or consolidated results of operations of the Company.

 

ITEM 1A.  RISK FACTORS

 

There have been no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 8, 2021.  

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a) Sales of Unregistered Securities - None

 

(b) Use of Proceeds - Not applicable

 

(c) Issuer Purchases of Securities

 

Stock Repurchase Program; Other

 

The Company has an approved one year stock repurchase plan that authorizes the repurchase of up to 350,000 shares of the Company's common stock through December 31, 2021. Repurchases may be made through open market purchases or in privately negotiated transactions, and shares repurchased will be returned to the status of authorized and unissued shares of common stock. The actual timing, number, and value of shares repurchased under the program will be determined by management.

 

Shares of the Company's common stock were repurchased during the three months ended September 30, 2021 as detailed below. Under the stock repurchase program, the Company has the remaining authority to repurchase up to 102,001 shares of the Company's common stock as of September 30, 2021.

 

Period Beginning on First Day of Month Ended

 

Total Number of Shares Purchased

   

Average Price Paid Per Share

   

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

   

Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs

 
                                 

July 31, 2021

    6,618     $ 31.60       6,618       196,147  

August 31, 2021

    66,253       32.91       66,253       129,894  

September 30, 2021

    27,893       33.08       27,893       102,001  

Total

    100,764     $ 32.87       100,764          

 

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5.  OTHER INFORMATION

 

(a)  Required 8-K disclosures

None

 

(b)  Changes in Nominating Process

None

 

 

ITEM 6.  EXHIBITS

 

 

31.1

Section 302 Certification of Jeffrey V. Haley, President and Chief Executive Officer.

 

31.2

Section 302 Certification of Jeffrey W. Farrar, Executive Vice President, Chief Operating Officer and Chief Financial Officer.

 

32.1

Section 906 Certification of Jeffrey V. Haley, President and Chief Executive Officer.

 

32.2

Section 906 Certification of Jeffrey W. Farrar, Executive Vice President, Chief Operating Officer and Chief Financial Officer.

 

101.INS

Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).

  101.SCH Inline XBRL Taxonomy Extension Schema Document
  101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
 

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document
  101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
  101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
  104 The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101).

 

 

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.

 

AMERICAN NATIONAL BANKSHARES INC.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By:

/s/ Jeffrey V. Haley

 

 

 

Jeffrey V. Haley

 

 

 

President and Chief Executive Officer

 

Date - November 9, 2021

 

(principal executive officer)

 

 

 

 

 

 

By:

/s/ Jeffrey W. Farrar

 

 

 

Jeffrey W. Farrar

 

 

 

Executive Vice President,

 

 

 

Chief Operating Officer and

 

 

 

Chief Financial Officer

 

Date - November 9, 2021

 

(principal financial officer)

 

 

 

 

 

 

By:

/s/ Cathy W. Liles

 

 

 

Cathy W. Liles

 

 

 

Senior Vice President and

 

 

 

Chief Accounting Officer

 

Date - November 9, 2021

 

(principal accounting officer)

 

 

 

57