OLD POINT FINANCIAL CORPORATION
FORM 10-K
| PAGE | |||
| PART I | |||
| Item 1. | 3 | ||
| Item 1A. | 12 | ||
| Item 1B. | |||
| Item 1C. | 23 | ||
| Item 2. | |||
| Item 3. | |||
| Item 4. | |||
| PART II | |||
| Item 5. | |||
| Item 6. | |||
| Item 7. | |||
| Item 7A. | 40 | ||
| Item 8. | 40 | ||
| Item 9. | |||
| Item 9A. | |||
| Item 9B. | |||
| Item 9C. | |||
| PART III | |||
| Item 10. | |||
| Item 11. | |||
| Item 12. | |||
| Item 13. | |||
| Item 14. | |||
| PART IV | |||
| Item 15. | |||
| Item 16. | |||
GLOSSARY OF ACRONYMS AND DEFINED TERMS
| Annual Report on Form 10-K for the year ended December 31, | |
| Allowance for | |
| ACLL | Allowance for Credit Losses on Loans, a component of ACL |
| ASC | Accounting Standards Codification |
| ASU | Accounting Standards Update |
| Bank | The Old Point National Bank of Phoebus |
| BHCA | The Bank Holding Company Act, |
| CET1 | Common Equity Tier 1 |
| Company | Old Point Financial Corporation and its subsidiaries |
| CBB | Community Bankers Bank |
| CBLRF | Community Bank Leverage Ratio Framework |
| EGRRCPA | Economic Growth, Regulatory Relief, and Consumer Protection Act |
| EPS | |
| ESPP | Employee Stock Purchase Plan |
| Exchange Act | Securities Exchange Act of 1934, as amended |
| FASB | Financial Accounting Standards Board |
| FDIC | Federal Deposit Insurance Corporation |
| FFIEC | Federal Financial Institutions Examination Council |
| FHLB | Federal Home Loan Bank |
| Federal Reserve | Board of Governors of the Federal Reserve System |
| FRB | Federal Reserve Bank |
| GAAP | Generally Accepted Accounting Principles |
| Incentive Stock Plan | Old Point Financial Corporation 2016 Incentive Stock Plan |
| ISO | Information Security Officer |
| ISP | Information Security Policy |
| IT | Information Technology |
| NIM | Net Interest Margin |
| Notes | The Company’s 3.50% fixed-to-floating rate subordinated notes due 2031 |
| OAEM | Other Assets Especially Mentioned |
| OREO | Other Real Estate Owned |
| PPP | Paycheck Protection Program |
| PPPLF | Paycheck Protection Program Liquidity Facility |
| SEC | U.S. Securities and Exchange Commission |
| SBA | Small Business Administration |
| SOFR | Secured overnight financing rate |
| TDR | Troubled Debt Restructuring |
| Old Point Trust & Financial Services N.A. |
Cautionary Statement Regarding Forward-Looking Statements
Statements in this Annual Report on Form 10-K, which use language such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” and other statements that are not historical facts. These statementssimilar expressions, may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the beliefs of the Company’s management, as definedwell as estimates and assumptions made by, federal securities laws and information available to, management, as of the time such statements are made. These statements are inherently uncertain, and there can be no assurance that the underlying beliefs, estimates, or assumptions will prove to be accurate. Actual results, performance, achievements, or trends could differ materially from historical results or those expressed or implied by such statements. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on the Company or its businesses or operations. Forward-looking statements in this Annual Report on Form 10-K may include, but are not limited to:without limitation: statements regarding strategic business initiatives and the future financial impact of those initiatives; expected future operations and financial performance; the Company’s technologycurrent and efficiency initiativesfuture interest rate levels and anticipated completion timelines;fluctuations and potential effects of the COVID-19 pandemic, including on asset quality, the allowance for loan losses, provision for loan losses, interest rates, and results of operations; certain items that management does not expect to have an ongoing impact on consolidated net income; net interest margin compression and items affecting net interest margin; strategic business initiatives and the anticipated effects thereof, forgiveness of loans originated under the Paycheck Protection Program (PPP) of the Small Business Administration (SBA) and the related impactimpacts on the Company’s resultsNIM, future financial and economic conditions, industry conditions, and loan demand; impacts of operations;economic uncertainties; performance of loan and securities portfolios, asset quality; adequacyquality, future levels of allowancesthe ACL and the provision for loancredit losses and the level of future chargeoffs;charge-offs; deposit growth; management’s belief regarding liquidity and capital resources; changes in NIM and items affecting NIM; expected future recovery of investments in debt securities; expected impact of unrealized losses on earnings and regulatory capital of the Company or the Bank; liquidity and capital levels; the Company’s assessment of and ability to manage and remediate the impact of cyber incidents, including those involving theft and fraudulent activity directed at the Bank and its customers and employees, perpetrated by third-party cybercriminals;cybersecurity risks; inflation; the effect of future market and industry trendstrends; and the effectsother statements that include projections, predictions, expectations, or beliefs about future events or results, or otherwise are not statements of future interest rate levels and fluctuations. historical fact.
These forward-looking statements are subject to significant risks and uncertainties due to factors that could have a material adverse effect on the operations and future prospects of the Company including, but not limited to, changes in:in or the effects of:
interest rates and yields, such as increases or volatility in short-term interest rates or yields on U.S. Treasury bonds and increase or volatility in U.S. Treasury bonds and increases or volatility in mortgage interest rates, and the impacts on macroeconomic conditions, customer and client behavior, the Company’s funding costs, and the Company’s loan and securities portfolios;
adverse developments in the financial marketsservices industry, such as the bank failures in 2023, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer and client behavior;
the sufficiency of liquidity;
general economic and business conditions in the United States generally and particularly in the Company’s service area, including unemployment levels, supply chain disruptions, andhigher inflation, slowdowns in economic growth and particularly related to furtherthe impacts on customer and sustained economic impactsclient behavior;
conditions within the financial markets and in the banking industry, as well as the financial condition and capital adequacy of other participants in the banking industry, and the market reactions thereto;
monetary and fiscal policies of the COVID-19 pandemicU.S. Government, including policies of the U.S. Department of the Treasury and the Federal Reserve, the effect of these policies on interest rates and business in our markets and any changes associated with the current administration;
conditions in the banking industry and the financial condition and capital adequacy of other participants in the banking industry, and market, supervisory and regulatory reactions thereto;
the quality or composition of the loan or securities portfolios and changes therein;
effectiveness of expense control initiatives;
an insufficient ACL or volatility in the Company’s efforts to respond to COVID-19, the severity and duration of the pandemic, the impact of loosening of governmental restrictions, the uncertainty regarding new variants, the pace and efficacy of vaccinations and treatment developments, the pace and durability of economic recovery and the heightened impact that COVID-19 may have on many of the risks described herein
the Company’s branch realignment initiativesliquidity and capital positions;
the value of securities held in the Company’s investment portfolios;
deposit flows;
the Company’s technology, efficiency, and other strategic initiativesinitiatives;
the legislative/regulatory climate, regulatory initiatives with respect to financial institutions, products and services, the Consumer Financial Protection Bureau (the CFPB) and the regulatory and enforcement activities of the CFPB
future levels of government defense spending particularly in the Company’s service areaareas;
uncertainty over future federal spending or budget priorities, particularly in connection with the Department of Defense, on the Company’s service areas;
the impact of potential changes in the political landscape and related policy changes, including monetary, regulatory and trade policiespolicies;
the US.U.S. Government’s guarantee of repayment of student or small business loans purchased by the CompanyCompany;
demand for loan products and the impact of changes in demand on loan growthgrowth;
changes in the volume and mix of interest-earning assets and interest-bearing liabilitiesliabilities;
the effects of management’s investment strategy and strategy to manage the net interest marginNIM;
the level of net charge-offs on loans and the adequacy of our allowance for loan and lease lossesloans;
performance of the Company’s dealerdealer/indirect lending program
the strength of the Company’s counterpartiescounterparties;
the Company’s ability to compete in the market for financial services and increased competition from both banks and non-banks, including fintech companies;
demand for financial services in the Company’s market area
the Company’s ability to develop and maintain secure and reliable electronic systemssystems;
any interruption or breach of security in the Company’s information systems or those of the Company’s third-party vendors or their service providersproviders;
reliance on third parties for key servicesservices;
cyber threats, attacks, or events;
the impact of changes in the political landscape and related policy changes, including monetary, regulatory, and trade policies;
the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, financial crises, political crises, war, and other geopolitical conflicts, such as the war between Russia and Ukraine or in the Middle East, or public health events, and of governmental and societal responses thereto, on, among other things, the Company’s operations, liquidity and credit quality;
the use of inaccurate assumptions in management’s modeling systemssystems;
technological risks and developmentsdevelopments;
the commercial and residential real estate marketsmarkets;
the demand in the secondary residential mortgage loan marketsmarkets;
expansion of the Company’s product offeringsofferings;
effectiveness of expense control initiatives;
changes in management; and
changes in accounting principles, policiesstandards, rules and guidelinesinterpretations and elections made by the Company thereunder, and the related impact on the Company’s financial statements.
These risks and uncertainties, and the risksfactors discussed in more detail in Item 1A. “Risk Factors,” should be considered in evaluating the forward-looking statements contained herein. Forward-looking statements generally can be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could,” or similar expressions, are not statements of historical fact, and are based on management’s beliefs, assumptions and expectations regarding future events or performance as of the date of this report, taking into account all information currently available.fact. Readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes nodoes not intend or assume any obligation to update, revise or reviseclarify any forward-looking statement to reflectstatements that may be made from time-to-time or on behalf of the Company, whether as a result of new information, future events or circumstances after the date on which it is made,otherwise, except as otherwise required by law. In addition, past results of operations are not necessarily indicative of future results.
Old Point Financial Corporation (the Company) was incorporated under the laws of Virginia on February 16, 1984, for the purpose of acquiring all the outstanding common stock of The Old Point National Bank of Phoebus (the Bank), in connection with the reorganization of the Bank into a one-bank holding company structure. At the annual meeting of the stockholders on March 27, 1984, the proposed reorganization was approved by the requisite stockholder vote. At the effective date of the reorganization on October 1, 1984, the Bank merged into a newly formed national bank as a wholly-owned subsidiary of the Company, with each outstanding share of common stock of the Bank being converted into five shares of common stock of the Company.
The Company completed a spin-off of its trust department as of April 1, 1999. The organization is chartered as Old Point Trust & Financial Services, N.A. (Trust)(Wealth). TrustWealth is a nationally chartered trust company. The purpose of the spin-off was to have a corporate structure more ready to compete in the field of wealth management. TrustWealth is a wholly-owned subsidiary of the Company.
The Bank is a national banking association that was founded in 1922. As of the end of 2021,2023, the Bank had 1614 branch offices,. During the first quarter of 2022, the Bank completed the planned closure of two branches, creating a 14 branch office network serving the Hampton Roads localities of Hampton, Newport News, Norfolk, Virginia Beach, Chesapeake, Williamsburg/James City County, York County, and Isle of Wight County. The Bank offers a complete line of consumer, mortgage and business banking services, including loan, deposit, and cash management services to individual and commercial customers.
The Company’s primary activity is as a holding company for the common stock of the Bank and Trust.Wealth. The principal business of the Company is conducted through its subsidiaries, which continue to conduct business in substantially the same manner as before the reorganization and spin-off.subsidiaries.
As of December 31, 2021,2023, the Company had assets of $1.3$1.4 billion, gross loans of $843.5 million,$1.1 billion, deposits of $1.2 billion, and stockholders' equity of $120.8$106.8 million.
Human Capital Resources
The Company strives to foster a culture of respect, teamwork, ownership, responsibility, initiative, integrity, and service and believes our officers and employees are our most important assets. OurWe believe our people are critical to the Company’s performance and the achievement of our strategic goals, and they represent a key element of how the Company’s businesses compete and succeed.
Acquiring and retaining strong talent is a top strategic priority for the Company. We provide a competitive compensation and benefits program to help meet the needs of our employees, including benefits that incentivize retention and reward longevity. We support the health and well-being of our employees through a comprehensive program designed to increase employee focus on wellness and prevention, including through the benefit plans and health incentives offered. We work to encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the Company. We have created development plans that are designed to encourage an employee’s advancement and growth within our organization, and we aim to provide employees with the skills and opportunities needed to achieve their goals and become leaders in our businesses.
At December 31, 2021,2023, the Company employed 275,293, or 273291 full-time equivalent, employees. We consider relations with our employees to be strong. We strive for our workforce to reflect the diversity of the customers and communities we serve. Our selection and promotion processes are merit-based and include the active recruitment of minorities and women. At December 31, 2021,2023, women represented 73%70% of our employees, and racial and ethnic minorities represented 23%25% percent of our employees. We also aim for our employees to develop their careers in our businesses. At December 31, 2021, 24%2023, 23% percent of our employees have been employed by the Company for at least 15 years.
The Company’s primary market area is located in Hampton Roads, situated in the southeastern corner of Virginia and boasting the world’s largest natural deepwater harbor. The Hampton Roads Metropolitan Statistical Area (MSA) is the 37th most populous MSA in the United States according to the U.S. Census Bureau’s 2020 census and the 3rd largest deposit market in Virginia, after Richmond and the Washington Metropolitan area, according to the Federal Deposit Insurance Corporation (FDIC).FDIC. Hampton Roads includes the cities of Chesapeake, Hampton, Newport News, Norfolk, Poquoson, Portsmouth, Suffolk, Virginia Beach and Williamsburg, and the counties of Isle of Wight, Gloucester, James City, Mathews, York, and Surry. The financial services industry remains highly competitive and is constantly evolving. The Company experiences strong competition from national, regional, and other community financial institutions and credit unions, as well as finance companies, mortgage companies, wealth management companies, insurance companies, and fintech companies. The market area is serviced by 4651 banks, savings institutions, and credit unions and, in addition, branches of virtually every major brokerage house serve the Company’s market area. The Company continues to build a stronger presence, expanding into additional markets in the last twofour years, which include a Mortgage team based in Charlotte, North Carolina andincludes a commercial loan production office based in Richmond, Virginia.
The banking business in Virginia, and in the Company’s primary service areas in the Hampton Roads MSA, is highly competitive and dominated by a relatively small number of large banks with many offices operating over a wide geographic area. As a result, the Bank faces intense competition in all areas of its business. Among the advantages such large banks have over the Company is their ability to finance wide-ranging advertising campaigns, and by virtue of their greater total capitalization, to have substantially higher lending limits than the Company. Factors such as interest rates offered, the number and location of branches and the types of products offered, as well as the reputation of the institution affect competition for deposits and loans. The Company competes by emphasizing customer service and technology, establishing long-term customer relationships, and building customer loyalty, and providing products and services to address the specific needs of the Company’s customers. The Company targets individual and small-to-medium size business customers.customers which generally establishes a more durable deposit base. Competition among providers of financial products and services continues to increase as technology advances have lowered the barriers to entry for financial technology companies, with customers having the opportunity to select from a growing variety of traditional and nontraditional alternatives, and from a growing selection of products and services at banking institutions that are based on new financial technology. The ability of non-banking financial institutions to provide services previously limited to commercial banks has intensified competition. Because nonbank financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies, they can often operate with greater flexibility and lower cost structures. The Company also faces competitive pressure from large credit unions in the area. The three largest credit unions headquartered in the Hampton Roads MSA are Langley Federal Credit Union, Chartway Federal Credit Union, and BayPort Credit Union.
Wealth faces intense competition in all aspects and areas of its business from both regulated and unregulated financial services organizations, including a broad range of financial institutions, investment firms, benefits consultants, trustwealth companies, insurance companies, investment counseling firms, and various financial technology companies. Because TrustWealth focuses on managing client investment assets to generate fee income, TrustWealth faces significant competition from financial technologiestechnology companies that offer products and services that automate asset management or asset selection and, in turn, may charge lower asset management or administrative fees. Trust’sWealth’s non-bank competitors are not subject to the same regulatory restrictions as Trust,Wealth, and therefore may be able to operate with greater flexibility and lower cost structures. TrustWealth competes by emphasizing proactive, holistic solutions and top-tier client service, and focuses on developing client relationships that serve as a source of recurring fee-based income.
The Company continues to build a strong presence in the business banking market, as well as expanding into other fee-based lines of business. In 2017, theThe Company purchased full ownership of Old Point Mortgage, LLCprovides comprehensive mortgage origination and launched Old Point Insurance, LLC. Through theseinsurance services in addition to comprehensive business services and new lines of business, the Company is able to service a highly lucrative market that offersoffer increased opportunities for new fee-based revenue streams and to cross sell additional products.
The Company maintains a website on the Internet at www.oldpoint.com. The Company makes available free of charge, on or through its website, its proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC).SEC. This reference to the Company’s Internet address shall not, under any circumstances, be deemed to incorporate the information available at such Internet address into this Form 10-K or other SEC filings. The information available at the Company’s Internet address is not part of this Form 10-K or any other report filed by the Company with the SEC. The Company's SEC filings can also be obtained on the SEC’s website on the Internet at www.sec.gov.www.sec.gov.
General. Bank holding companies, banks and their affiliates are extensively regulated under both federal and state law. The following summary briefly describes significant provisions of currently applicable federal and state laws and certain regulations, proposed regulations, and the potential impact of such provisions. This summary is not complete and is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals. Because regulation of financial institutions changes regularly and is the subject of constant legislative and regulatory debate, no assurance can be given as to forecast how federal and state regulation and supervision of financial institutions may change in the future and affect the Company’s, and the Bank’s, and Wealth’s operations. See “Risks Related to the Regulation of the Company” below in Item 1A of this report on Form 10-K for further discussion.
As a public company, the Company is subject to the periodic reporting requirements of the Securities Exchange Act, of 1934, as amended (the Exchange Act), which include, but are not limited to, the filing of annual, quarterly, and other reports with the SEC. The Company is also required to comply with other laws and regulations of the SEC applicable to public companies.
As a national bank, the Bank is subject to regulation, supervision, and regular examination by the Office of the Comptroller of the Currency (the Comptroller). The prior approval of the Comptroller or other appropriate bank regulatory authority is required for a national bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the constituent organizations and the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant's performance record under the Community Reinvestment Act (the CRA) and fair housing initiatives, the data security and cybersecurity infrastructure of the constituent organizations and the combined organization, and the effectiveness of the subject organizations in combating money laundering activities. Each depositor's account with the Bank is insured by the FDIC to the maximum amount permitted by law. The Bank is also subject to certain regulations promulgated by the FRB and applicable provisions of Virginia law, insofar as they do not conflict with or are not preempted by federal banking law.
As a non-depository national banking association, TrustWealth is subject to regulation, supervision, and regular examination by the Comptroller. Trust'sWealth's exercise of fiduciary powers must comply with regulations promulgated by the Comptroller at 12 C.F.R. Part 9 and with Virginia law.
The regulations of the FRB, the Comptroller and the FDIC govern most aspects of the Company's business, including deposit reserve requirements, investments, loans, certain check clearing activities, issuance of securities, payment of dividends, branching, and numerous other matters. Further, the federal bank regulatory agencies have adopted guidelines and released interpretive materials that establish operational and managerial standards to promote the safe and sound operation of banks and bank holding companies. These standards relate to the institution's key operating functions, including but not limited to internal controls, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, compensation of management, information systems, data security and cybersecurity, and risk management. As a consequence of the extensive regulation of commercial banking activities in the United States, the Company's business is particularly susceptible to changes in state and federal legislation and regulations, which may have the effect of increasing the cost of doing business, limiting permissible activities or increasing competition.
As a bank holding company, the Company is subject to the BHCA and regulation and supervision by the FRB. A bank holding company is required to obtain the approval of the FRB before making certain acquisitions or engaging in certain activities. Bank holding companies and their subsidiaries are also subject to restrictions on transactions with insiders and affiliates.
A bank holding company is required to obtain the approval of the FRB before it may acquire all or substantially all of the assets of any bank, and before it may acquire ownership or control of the voting shares of any bank if, after giving effect to the acquisition, the bank holding company would own or control more than 5 percent of the voting shares of such bank. The approval of the FRB is also required for the merger or consolidation of bank holding companies.
Pursuant to the BHCA, the FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or ownership constitutes a serious risk to the financial soundness, safety, or stability of any bank subsidiary of the bank holding company.
The Company is required to file periodic reports with the FRB and provide any additional information the FRB may require. The FRB also has the authority to examine the Company and its subsidiaries, as well as any arrangements between the Company and its subsidiaries, with the cost of any such examinations to be borne by the Company. Banking subsidiaries of bank holding companies are also subject to certain restrictions imposed by federal law in dealings with their holding companies and other affiliates.
Regulatory Reform.Environment. The financial crisis of 2008, including the downturn of global economic, financial and money markets and the threat of collapse of numerous financial institutions,Banking and other events led tofinancial services statutes, regulations and policies are continually under review by the adoptionU.S. Congress, state legislatures and federal and state regulatory agencies. The scope of numerousthe laws and regulations, that applyand the intensity of the supervision to which the Company and focusits subsidiaries are subject, have increased in recent years, initially in response to the 2008 financial crisis, and more recently in light of other factors, including continued turmoil and stress in the financial markets, technological factors, market changes, and increased scrutiny of proposed bank mergers and acquisitions by federal and state bank regulators. Regulatory enforcement and fines have also increased across the banking and financial services sector.
The Company continues to experience ongoing regulatory reform and these regulatory changes could have a significant effect on financial institutions.how we conduct business. The most significantspecific impacts of these laws isregulatory reforms, including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank(the Dodd Frank Act), which was enacted on July 21,in 2010, and, in part, was intended to implement significant structural reforms to the financial services industry. The Dodd-Frank Act implemented far-reaching changes across the financial regulatory landscape, including changes that have significantly affected the business of all bank holding companies and banks, including the Company and the Bank. Some of the rules that have been proposed and, in some cases, adopted to comply with the Dodd-Frank Act’s mandates are discussed further below.
Capital Requirements and Prompt Corrective Action. The FRB, the Comptroller and the FDIC have adopted risk-based capital adequacy guidelines for bank holding companies and banks pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) and the Basel III Capital Accords. See "Management's Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources" in Item 7 of this report on Form 10-K.
The federal banking agencies have broad powers to take prompt corrective action to resolve problems of insured depository institutions. Under the FDICIA, there are five capital categories applicable to bank holding companies and insured institutions, each with specific regulatory consequences. The extent of the agencies' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." These terms are defined under uniform regulations issued by each of the federal banking agencies. If the appropriate federal banking agency determines that an insured institution is in an unsafe or unsound condition, it may reclassify the institution to a lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition.
Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution could subject the Company and its subsidiaries to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits, and other restrictions on its business. In addition, an institution may not make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized. Thus, if the making of such dividend would cause the Bank to become undercapitalized, it could not pay a dividend to the Company. Based on the Bank’s current financial condition, the Company does not expect that this provision will have any impact on its ability to receive dividends or other distributions from the Bank.
Basel III Capital Framework. The federal bank regulatory agencies have adopted rules to implement the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and standards for calculating risk-weighted assets and risk-based capital measurements (collectively, the Basel III Capital Rules). For purposes of these capital rules, (i) common equity Tier 1 capital (CET1) consists principally of common stock (including surplus) and retained earnings; (ii) Tier 1 capital consists principally of CET1 plus non-cumulative preferred stock and related surplus, and certain grandfathered cumulative preferred stock and trust preferred securities; and (iii) Tier 2 capital consists of other capital instruments, principally qualifying subordinated debt and preferred stock, and limited amounts of an institution's allowance for loancredit losses. Each regulatory capital classification is subject to certain adjustments and limitations, as implemented by the Basel III Capital Rules. The Basel III Capital Rules also establish risk weightings that are applied to many classes of assets held by community banks, including, importantly, applying higher risk weightings to certain commercial real estate loans.
The Basel III Capital Rules and minimum capital ratios required to be maintained by banks were effective on January 1, 2015. The Basel III Capital Rules also include a requirement that banks maintain additional capital, or a capital conservation buffer (as described below), which was phased in beginning January 1, 2016 and became fully phased in asis designed to absorb losses during periods of January 1, 2019. As fully phased in, theeconomic stress. The Basel III Capital Rules require banks to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% CET1 ratio, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%) and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average totaladjusted assets, subject to certain adjustments and limitations.
In July 2023, the Federal Reserve Board and adjustmentsthe FDIC issued proposed rules to regulatory capital measures,implement the final components of the Basel III agreement, often known as the “Basel III endgame.” These proposed rules contain provisions that apply to banks with $100 billion or more in total assets and primarilythat will significantly alter how those banks calculate risk-based assets. These proposed rules do not apply to CET1, including deductionsholding companies or banks with less than $100 billion in assets, such as the Company and adjustments that were not applied to reduce CET1 under historical regulatory capital rules. For example, mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities mustthe Bank, but the final impacts of these rules cannot yet be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.predicted. The comment window for these proposed rules closed on November 30, 2023.
Community Bank Leverage Ratio. As required by the EGRRCPA, the federal banking agencies have implemented the Community Bank Leverage Ratio Framework (the CBLRF),CBLRF, which is based on the ratio of a bank’s tangible equity capital to average total consolidated assets. To qualify for the CBLRF, a bank must have less than $10 billion in total consolidated assets, limited amounts of off-balance sheet exposures and trading assets and liabilities, and a leverage ratio greater than 9%. A bank that elects the CBLRF and has a leverage ratio greater than 9% will be considered to be in compliance with Basel III capital requirements and exempt from the complex Basel III calculations and will also be deemed “well capitalized” under Prompt Corrective Action regulations, discussed below. A bank that falls outabove. As of compliance withDecember 31, 2023, the CBLRF will have a two-quarter grace period to come back into full compliance, provided its leverage ratio remains above 8% (a bank will be deemed “well capitalized” during the grace period). The CBLRF became available beginning March 31, 2020, with the flexibility for banking organizations to subsequently opt into or out of the CBLRF, as applicable. The federal banking agencies issued an interim final rule in April 2020 to implement certain provisions of the CARES Act that temporarily modified the minimum leverage ratio requirements of the CBLRF. The minimum leverage ratio requirement was reduced from 9% to 8% for the second through fourth quarters of 2020 and 8.5% through 2021. A bank that falls out of compliance with the CBLRF will have a two-quarter grace period to come back into full compliance, provided its leverage ratio remains no more than 100 basis points below the applicable minimum leverage ratio requirement. The Bank has not elected to opt into the CBLRF.
Small Bank Holding Company. The EGRRCPA also expanded the category of bank holding companies that may rely on the FRB’sFederal Reserve Board’s Small Bank Holding Company Policy Statement by raising the maximum amount of assets a qualifying bank holding company may have from $1 billion to $3 billion. In addition to meeting the asset threshold, a bank holding company must not engage in significant nonbanking activities, not conduct significant off-balance sheet activities, and not have a material amount of debt or equity securities outstanding and registered with the SEC (subject to certain exceptions). The FRBFederal Reserve Board may, in its discretion, exclude any bank holding company from the application of the Small Bank Holding Company Policy Statement if such action is warranted for supervisory purposes.
In August 2018, the FRBFederal Reserve Board issued an interim final rule to apply the Small Bank Holding Company Policy Statement to bank holding companies with consolidated total assets of less than $3 billion. The policy statement, which, among other things, exempts certain bank holding companies from minimum consolidated regulatory capital ratios that apply to other bank holding companies. As a result of the interim final rule, which was effective August 30, 2018, the Company expects that it will be treated as a small bank holding company and will not be subject to regulatory capital requirements. The comment period on the interim final rule closed on October 29, 2018, and, to date, the FRBFederal Reserve Board has not issued a final rule to replace the interim final rule. The Bank remains subject to the regulatory capital requirements described above.
Insurance of Accounts, Assessments and Regulation by the FDIC. The Bank’s deposits are insured by the Deposit Insurance Fund (DIF) of the FDIC up to the standard maximum insurance amount for each deposit insurance ownership category. The basic limit on FDIC deposit insurance coverage is $250,000 per depositor. Under the Federal Deposit Insurance Act (FDIA), the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations as an insured institution, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC, subject to administrative and potential judicial hearing and review processes.The FDIC may also suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance if the institution has no tangible capital. If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period from six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that could result in termination of the Bank’s deposit insurance.
The DIF is funded by assessments on banks and other depository institutions calculated based on average consolidated total assets less average tangible equity (defined as Tier 1 capital). As required by the Dodd-Frank Act, the FDIC has adopted a large-bank pricing assessment scheme, set a target “designated reserve ratio” (described in more detail below) of 2% for the DIF and, in lieu of dividends, provides for a lower assessment rate schedule when the reserve ratio reaches 2% and 2.5%. An institution's assessment rate is based on a statistical analysis of financial ratios that estimates the likelihood of failure over a three-year period, which considers the institution’s weighted average CAMELS componentcomposite rating, and is subject to further adjustments including those related to levels of unsecured debt and brokered deposits (not applicable to banks with less than $10 billion in assets). At December 31, 2021,2023, total base assessment rates for institutions that have been insured for at least five years range from 1.5 to 30 basis points applying to banks with assets of less than $10 billion in assets.range from 2.5 to 32 basis points.
The Dodd-Frank Act transferred to the FDIC increased discretion with regard to managing the required amount of reserves for the DIF, or the “designated reserve ratio.” The FDIA requires that the FDIC consider the appropriate level for the designated reserve ratio on at least an annual basis. As of December 31, 2021, the designated reserve ratio was 2.00% and the minimum designated reserve ratio was 1.35%. Although the DIF declined below the minimum level of 1.35% during 2020 due to the impact of significant deposit increases which led the FDIC to adopt a DIF restoration plan, and the DIF was 1.27% at December 30, 2021, the FDIC has not increased base assessment rates.
In November 2023, the FDIC issued a final rule to implement a special DIF assessment following the FDIC’s use of the “systemic risk” exception to the bank’s total assessment amount forleast-cost resolution test in connection with the increase infailures and resolutions of Silicon Valley Bank and Signature Bank. Banks with less than $5 billion of uninsured deposits, such as the assessment base attributable to the bank’s participation in the PPP. This final rule began applying to FDIC deposit insurance assessments during the second quarter of 2020.Bank, are exempt from this special assessment.
Incentive Compensation. The FRB,Federal Reserve Board, the Comptroller and the FDIC have issued regulatory guidance intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The FRBFederal Reserve Board will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not "large, complex banking organizations." The findings will be included in reports of examination, and deficiencies will be incorporated into the organization's supervisory ratings. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization's safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
The Dodd-Frank Act requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities with at least $1 billion in total consolidated assets, that encourage inappropriate risks by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees or benefits that could lead to material financial loss to the entity. In addition, in 2016, the SEC and the federal banking agencies proposed rules that prohibit covered financial institutions (including bank holding companies and banks) from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risk taking by providing covered persons (consisting of senior executive officers and significant risk takers, as defined in the rules) with excessive compensation, fees or benefits that could lead to material financial loss to the financial institution. The proposed rules outline factors to be considered when analyzing whether compensation is excessive and whether an incentive-based compensation arrangement encourages inappropriate risks that could lead to material loss to the covered financial institution and establishes minimum requirements that incentive-based compensation arrangements must meet to be considered to not encourage inappropriate risks and to appropriately balance risk and reward. The proposed rules also impose additional corporate governance requirements on the boards of directors of covered financial institutions and impose additional record-keeping requirements. The comment period for these proposed rules has closed and a final rule has not yet been published. However, in 2021,If the rules are adopted as proposed, they will restrict the way executive compensation is structured.
In October 2022, the SEC signaledadopted a renewed interestfinal rule directing national securities exchanges and associations, including Nasdaq, the exchange on which the Company’s common stock is listed, to implement listing standards that require listed companies to adopt policies mandating the recovery or “clawback” of excess incentive compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in these matters by re-openinga material misstatement if the commenterror were corrected in the current period or left uncorrected in the current period. In February 2023, Nasdaq posted its initial rule filing with the SEC to implement this directive and the Nasdaq's listing standards pursuant to the SEC's rule became effective on a proposed rule regarding clawbacks of incentive-based executive compensation, which was originally proposed in 2015.October 2, 2023.
Federal Home Loan Bank of Atlanta. The Bank is a member of the Federal Home Loan Bank (FHLB)FHLB of Atlanta, which is one of 1211 regional FHLBs that provide funding to their members for making housing loans as well as for affordable housing and community development loans. Each FHLB serves as a reserve, or central bank, for the members within its assigned region. Each FHLB makes loans to members in accordance with policies and procedures established by the Board of Directors of the FHLB. As a member, the Bank must purchase and maintain stock in the FHLB. Additional information related to the Bank’s FHLB stock can be found in Note 16,“Note 14. Fair Value MeasurementsMeasurements” of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data,” of this report on Form 10-K.
Community Reinvestment Act. The Company is subject to the requirements of the CRA, which imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. A financial institution's efforts in meeting community credit needs are currently assessed based on specified factors. These factors also are considered in evaluating mergers, acquisitions, and applications to open a branch or facility. At its last evaluation in 2020,2022, the Bank received an “Outstanding” CRA rating.
On October 24, 2023, the federal banking regulatory agencies jointly issued a final rule to modernize CRA regulations consistent with the following key goals: (1) to encourage banks to expand access to credit, investment, and banking services in low- and moderate-income communities; (2) to adapt to changes in the banking industry, including internet and mobile banking and the growth of non-branch delivery systems; (3) to provide greater clarity and consistency in the application of the CRA regulations, including adoption of a new metrics-based approach to evaluating bank retail lending and community development financing; and (4) to tailor CRA evaluations and data collection to bank size and type, recognizing that differences in bank size and business models may impact CRA evaluations and qualifying activities. Most of the final CRA rule’s requirements will be applicable beginning January 1, 2026, with certain requirements, including the data reporting requirements, applicable as of January 1, 2027. The Bank is evaluating the expected impact of the modernized CRA regulations, but currently does not anticipate any material impact to its business, operations, or financial condition due to the modified CRA regulations.
Confidentiality and Required Disclosures of ConsumerCustomer Information. The Company isand the Bank are subject to various laws and regulations that address the privacy of nonpublic personal financial information of consumers. The Gramm-Leach-Bliley Act and certain regulations issued thereunder protect against the transfer and use by financial institutions of consumer nonpublic personal information. A financial institution must provide to its customers, at the beginning of the customer relationship and annually thereafter, the institution's policies and procedures regarding the handling of customers' nonpublic personal financial information. These privacy provisions generally prohibit a financial institution from providing a customer's personal financial information to unaffiliated third parties unless the institution discloses to the customer that the information may be so provided, and the customer is given the opportunity to opt out of such disclosure.
The Company is also subject to various laws and regulations that attempt to combat money laundering and terrorist financing. The Bank Secrecy Act requires all financial institutions to, among other things, create a system of controls designed to prevent money laundering and the financing of terrorism, and imposes recordkeeping and reporting requirements. The USA Patriot Act facilitates information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering and requires financial institutions to establish anti-money laundering programs. Regulations adopted under the Bank Secrecy Act impose on financial institutions customer due diligence requirements, and the federal banking regulators expect that customer due diligence programs will be integrated within a financial institution’s broader Bank Secrecy Act and anti-money laundering compliance program. The Office of Foreign Assets Control (OFAC), which is a division of the U.S. Department of the Treasury, is responsible for helping to ensure that United States entities do not engage in transactions with "enemies" of the United States, as defined by various Executive Orders and Acts of Congress. If the Bank finds a name of an "enemy" of the United States on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account or place transferred funds into a blocked account, file a suspicious activity report with the Treasury and notify the FBI.
Corporate Transparency Act. On January 1, 2021, as part of the 2021 National Defense Authorization Act, Congress enacted the Corporate Transparency Act (CTA), which requires. The CTA is a significant update to federal Bank Secrecy Act/Anti-money Laundering (BSA/AML) regulations. The CTA aims to eliminate the use of shell companies that facilitate the laundering of criminal proceeds and, for that purpose, directs the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) to issue regulations implementing reporting requirements for “reporting companies” (as defined in the CTA) to discloseestablish and maintain a national registry of beneficial ownership interests of certain U.S. and foreign entities by January 1, 2022.information for corporate entities. The CTA imposes additional reporting requirements on entities not previously subject to such beneficial ownership disclosure regulations and also contains exemptions for several different types of entities, including among others: (i) certain banks, bank holding companies, and credit unions; (ii) money transmitting businesses registered with FinCEN; and (iii) certain insurance companies. Reporting companies subject to the CTA will be required to provide specific information with respect to beneficial owner(s) (as– defined inas an individual who, directly or indirectly exercises substantial control over the CTA)entity or owns or controls not less than 25% of the ownership interests of the entity – as well as satisfy initial filing obligations (for newly-formed reporting companies) and submit on-going periodic reports. Non-compliance with FinCEN regulations promulgated under the CTA may result in civil fines as well as criminal penalties.
In December 2021, FinCEN proposed the first of the three sets of rules that it will issueissue. Thereafter, on September 29, 2022, FinCEN issued the final rule to implement the beneficial ownership reporting requirements of the CTA, with subsequentwhich was effective January 1, 2024. This rule does not apply to the Company or the Bank. Subsequent rulemakings are expected (i) to implement the CTA’s protocols for access to and disclosure of beneficial ownership information, and (ii) to revise the existing customer due diligence requirements that apply to the Company, the Bank, Trust, and many other financial institutions, to ensure consistency between these requirements and the beneficial ownership reporting rules. The Company is unable to determine the ultimate impact of the CTA and related regulations on the Company and its subsidiaries. The Company will continue to monitor regulatory developments related to the CTA, including future FinCEN rulemakings.rulemakings, and will continue to assess the ultimate impact of the CTA on the Company. The Bank continues to evaluate the impact of this final rule on the Bank’s BSA/AML policies and procedures, and the impact of continuing litigation regarding the constitutionality of the CTA.
Cybersecurity. The federal banking agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution’s board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services. The federal banking agencies expect financial institutions to establish lines of defense and ensure that their risk management processes also address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack. If the Company, the Bank or TrustWealth fails to meet the expectations set forth in this regulatory guidance, the Company, the Bank or TrustWealth could be subject to various regulatory actions and any remediation efforts may require significant resources. In addition, all federal and state bank regulatory agencies continue to increase focus on cybersecurity programs and risks as part of regular supervisory exams.
On November 18, 2021, the federal bank regulatory agencies issued a final rule to improve the sharing of information about cyber incidents that may affect the U.S. banking system. The rule requires a banking organization to notify its primary federal regulator of any significant computer-security incident as soon as possible and no later than 36 hours after the banking organization determines that a cyber incident has occurred. Notification is required for incidents that have materially affected—or are reasonably likely to materially affect—the viability of a banking organization’s operations, its ability to deliver banking products and services, or the stability of the financial sector. In addition, the rule requires a bank service provider to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect banking organization customers for four or more hours. Compliance with the finalThe rule is required bybecame effective on May 1, 2022. TheWith increased focus on cybersecurity, the Company, is currently assessing the impact of this rule, but does not anticipate any material impactBank and Wealth continue to operations at this time.monitor related legislative, regulatory, and supervisory developments.
Consumer Laws and Regulations. The Company is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, and the Fair Housing Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions transact business with customers. The Company must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing customer relations.
The CFPB is the federal regulatory agency responsible for implementing, examining, and enforcing compliance with federal consumer financial laws for institutions with more than $10 billion of assets and, to a lesser extent, smaller institutions. The CFPB supervises and regulates providers of consumer financial products and services and has rulemaking authority in connection with numerous federal consumer financial protection laws (for example, but not limited to, the Truth in Lending Act and the Real Estate Settlement Procedures Act). As a smaller institution (i.e., with assets of $10 billion or less), most consumer protection aspects of the Dodd-Frank Act will continue to be applied to the Company by the FRBFederal Reserve Board and to the Bank and TrustWealth by the Comptroller. However, the CFPB may include its own examiners in regulatory examinations by a smaller institution's prudential regulators and may require smaller institutions to comply with certain CFPB reporting requirements. In addition, regulatory positions taken by the CFPB, and administrative and legal precedents established by CFPB enforcement activities, including in connection with supervision of larger bank holding companies and banks, could influence how the FRBFederal Reserve Board and Comptroller apply consumer protection laws and regulations to financial institutions that are not directly supervised by the CFPB. The precise effect of the CFPB's consumer protection activities on the Company cannot be forecast.forecast at this time. As of January 1, 2021,December 31, 2023, the Company and the Bank are not subject to the direct supervision of the CFPB.
Mortgage Banking Regulation. In connection with making mortgage loans, the Bank is subject to rules and regulations that, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases, restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level. The Bank'sBank’s mortgage origination activities are subject to the Equal Credit Opportunity Act, Truth in Lending Act, Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, and Home Ownership Equity Protection Act, and the regulations promulgated under these acts, among other additional state and federal laws, regulations, and rules.
The Bank'sBank’s mortgage origination activities are also subject to Regulation Z, which implements the Truth in Lending Act. Certain provisions of Regulation Z require mortgage lenders to make a reasonable and good faith determination, based on verified and documented information, that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Alternatively, mortgage lenderlenders can originate "qualified mortgages",“qualified mortgages,” which are generally defined as mortgage loans without negative amortization, interest-only payments, balloon payments, terms exceeding 30 years, and points and fees paid by a consumer equal to or less than 3% of the total loan amount. Under the EGRRCPA, most residential mortgages loans originated and held in portfolio by a bank with less than $10 billion in assets will be designated as “qualified mortgages.” Higher-priced qualified mortgages (e.g., subprime loans) receive a rebuttable presumption of compliance with ability-to-repay rules, and other qualified mortgages (e.g., prime loans) are deemed to comply with the ability-to-repay rules. The Bank originates first mortgage loans that comply with Regulation Z's "qualified mortgage"“qualified mortgage” rules. The Bank also originates second mortgages, or equity loans, and these loans do not conform to the qualified mortgage criteria but comply with applicable ability-to-repay rules.
Volcker Rule. The Dodd-Frank Act prohibits bank holding companies and their subsidiary banks from engaging in proprietary trading except in limited circumstances, and places limits on ownership of equity investments in private equity and hedge funds (the Volcker Rule). The EGRRCPA, and final rules adopted to implement the EGRRCPA, exempt all banks with less than $10 billion in assets (including their holding companies and affiliates) from the Volcker Rule, provided that the institution has total trading assets and liabilities of five%five percent or less of total assets, subject to certain limited exceptions. The Company believes that its financial condition and its operations are not and will not be significantly affected by the Volcker Rule, amendments thereto, or its implementing regulations.
Call Reports and Examination Cycle. All institutions, regardless of size, submit a quarterly call report that includes data used by federal banking agencies to monitor the condition, performance, and risk profile of individual institutions and the industry as a whole. The EGRRCPA contained provisions expanding the number of regulated institutions eligible to use streamlined call report forms. In June 2019, consistent with the provisions of the EGRRCPA, the federal banking agencies issued a final rule to permit insured depository institutions with total assets of less than $5 billion that do not engage in certain complex or international activities to file the most streamlined version of the quarterly call report, and to reduce data reportable on certain streamlined call report submissions.
In December 2018, consistent with the provisions of the EGRRCPA, the federal banking agencies jointly adopted final rules that permit banks with up to $3 billion in total assets, that received a composite CAMELS rating of “1” or “2,” and that meet certain other criteria (including not having undergone any change in control during the previous 12-month period, and not being subject to a formal enforcement proceeding or order), to qualify for an 18-month on-site examination cycle.
Effect of Governmental Monetary Policies.
As with other financial institutions, the earnings of the Company and the Bank are affected by general economic conditions as well as by the monetary policies of the Federal Reserve Board. Such policies, which include regulating the national supply of bank reserves and bank credit, can have a major effect upon the source and cost of funds and the rates of return earned on loans and investments. The Federal Reserve Board exerts a substantial influence on interest rates and credit conditions, primarily through establishing target rates for federal funds, open market operations in U.S. Government securities, varying the discount rate on member bank borrowings and setting cash reserve requirements against deposits. Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the purchase of investments, the generation of deposits, and rates received on loans and investment securities and paid on deposits. Fluctuations in the Federal Reserve Board’s monetary policies have had a significant impact on the operating results of commercial banks, including the CorporationCompany and the Bank and are expected to continue to do so in the future.
Future Regulation. From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations, or regulatory policies applicable to the Company, or the Bank, (or Trust)or Wealth could have a material effect on our business.
| Item 1A. | Risk Factors |
In addition to the other information contained in this report, including the information contained in “Cautionary Statement Regarding Forward-Looking Statements,” investors in the Company’s securities should carefully consider the factors discussed below. An investment in the Company’s securities involves risks. The factors below, among others, could materially and adversely affect the Company’s business, financial condition, results of operations, liquidity, or capital position, or cause the Company’s results to differ materially from its historical results or the results expressed or implied in the forward-looking statements contained in this report, in which case the trading price of the Company’s common stock could decline. The risk factors discussed below highlight the risks that the Company believes are material to the Company, but do not necessarily include all risk that an investor may face, and investors should not interpret the disclosure of a risk to state or imply that the risk has not already materialized.
Risk Factors Related to our Lending Activities and Economic Conditions
Weaknesses in the commercial real estate markets could negatively affect the Company's financial performance and results of operations due to the Company's concentration in commercial real estate loans. At December 31, 2021,2023, the Company had $460.1$578.1 million, or 54.5%53.5%, of total loans concentrated in commercial real estate, which includes, for purposes of this concentration, all construction loans, loans secured by multifamily residential properties, loans secured by farmland and loans secured by nonfarm, nonresidential properties. Commercial real estate loans exposeare generally viewed as exposing the Company to a greater risk of loss than residential real estate and consumer loans. Commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate and consumer loans. Consequently, an adverse development with respect to one or a few commercial real estate loan or credit relationship exposesrelationships could expose the Company to a significantly greater risk of loss compared to an adverse development with respect to one or a few residential real estate loan.loans. Commercial real estate loans carry risks associated with the successful operation of a business if the properties are owner occupied. If the properties are non-owner occupied, the repayment of these loans may be dependent upon the profitability and cash flow from rent receipts. Repayment of commercial real estate loans may, to a greater extent than residential real estate loans, be subject to adverse conditions in the real estate market or economy. Weak economic or market conditions may impair a borrower's business operations, slow the execution of new leases and lead to turnover in existing leases. The combination of these factors could result in deterioration in value of some of the Company's loans. The deterioration of one or more of the Company's significant commercial real estate loans could cause a significant increase in nonaccrual loans. An increase in nonaccrual loans could result in a loss of interest income from those loans, an increase in the provision for loan losses, and an increase in loan charge-offs, all of which could have a material adverse effect on the Company's financial performance.
The federal bank regulatory agencies have recently expressed concerns about weaknesses in the current commercial real estate market. Banking regulators generally give commercial real estate lending greater scrutiny and may require banks with higher levels of commercial real estate loans to implement enhanced risk management practices, including stricter underwriting, internal controls, risk management policies, more granular reporting, and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures. If the Company’s banking regulators determine that the Company’s commercial real estate lending activities are particularly risky and are subject to such heightened scrutiny, the Company may incur significant additional costs or be required to restrict certain of our commercial real estate lending activities. Additionally, failures in the Company’s risk management policies, procedures and controls could adversely affect its ability to manage this portfolio going forward and could result in an increased rate of delinquencies in, and increased losses from, this portfolio, which could have a material adverse effect on the Company’s business, financial condition, and results of operations.
The Company's profitability depends significantly on local economic conditions and changes in the federal government's military or defense spending may negatively affect the local economy.economy, which could adversely affect the Company’s results of operations and financial condition. The Company's success depends primarily on the general economic conditions of the markets in which the Company operates. Unlike larger financial institutions that are more geographically diversified, the Company provides banking and financial services to customers primarily in the Hampton Roads MSA. The local economic conditions in this area have a significant impact on the demand for loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond the Company's control could impact these local economic conditions.
In addition, Hampton Roads is home to one of the largest military installations in the world and one of the largest concentrations of Department of Defense personnel in the United States. Some of the Company's customers may be particularly sensitive to the level of federal government spending on the military or on defense-related products.products or to a protracted U.S. government shutdown. Federal spending is affected by numerous factors, including macroeconomic conditions, presidential administration priorities, and the ability of the federal government to enact relevant appropriations bills and other legislation. Any of these factors could result in future cuts to military or defense spending or increased uncertainty about federal spending, which could have a severe negative impact on individuals and businesses in the Company's primary service area.
Any adverse developments in the Company’s primary service area, such as related increase in unemployment rates or reduction in business development activities, in the Company's primary service area could lead to reductions in loan demand, a reduction in the number of credit-worthy borrowers seeking loans, increases in loan delinquencies, problem assets and foreclosures, a decline in the financial condition of borrowers and guarantors, and reductions in loan collateral value, any of which could have a material adverse effect on the Company's operating results and financial condition.
Declines in loans outstanding could have a material adverse impact on the Company's operating results and financial condition. Growing and diversifying the loan portfolio is part of the Company's strategic initiative. If quality loan demand does not continue to increase and the Company's loan portfolio begins to decline, the Company expects that excess liquidity will be invested in marketable securities. Because loans typically yield higher returns than the Company's securities portfolio, a shift towards investments in the Company's asset mix would likely result in an overall reduction in net interest income and the net interest margin. The principal source of earnings for the Company is net interest income, and as discussed above, the Company's net interest margin is a major determinant of the Company's profitability. The effects of a reduction in net interest income and the net interest margin may be exacerbated by the intense competition for quality loans in the Company's primary service area and by rate reductions on loans currently held in the portfolio. As a result, a reduction in loans could have a material adverse effect on the Company's operating results and financial condition.
The small-to-medium size businesses the Company targets may have fewer financial resources to weather a downturn in the economy, which could materially harm operating results. The Company targets individual and small-to-medium size business customers. Small-to-medium size businesses frequently have smaller market shares than their competitors, may have fewer financial resources in terms of capital or borrowing capacity than larger entities, may be more vulnerable to economic downturns or periods of significant inflation, often need substantial additional capital to expand and compete and may experience significant volatility in operating results. Any one or more of these factors may impair a borrower's ability to repay a loan. In addition, the success of a small-to-medium size business often depends on the management talents and efforts of one person or a small group of persons, and the death, disability, or resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay a loan. The Company also made some of these loans in recent years, and the borrowers may not have experienced a complete business or economic cycle. Economic downturns and other events that negatively impact businesses in the Company's primary service area could have a proportionately greater impact on small-to-medium-size businesses and accordingly could cause the Company to incur substantial credit losses that could negatively affect its results of operations and financial condition.
The allowance for loancredit losses (ACL) may not be adequate to cover actual losses. A significant sourcelosses, which could adversely affect our results of operations, business, and financial condition. The Company’s success depends significantly on the quality of our assets, particularly loans. Like all financial institutions, the Company is exposed to the risk arises from the possibility that losses could be sustained because borrowers, guarantors, and related parties may fail to perform in accordance with the terms of their loans and leases. There is no precise methodleases and that the collateral securing the payment of loans may be insufficient to predict loan losses. Like all financial institutions,fully compensate the Company maintainsfor the outstanding balance of the loan plus the costs to dispose of the collateral. The Company attempts to maintain an appropriate allowance for loancredit losses (ALL) to provide for losses in our loan defaults and non-performance. Accounting measurements relatedportfolio. The process to impairment anddetermine the allowance for loancredit losses uses models and assumptions that require significant estimatesdifficult and complex judgments that are subject to uncertaintyoften interrelated. Because any estimate of credit losses is necessarily subjective and changes relating to new informationthe accuracy of any estimate depends on the outcome of future events that are not within our control, we face the risk that charge-offs in future periods will exceed our allowance for credits losses and changing circumstances.that additional provision for credit losses will be required, which would have an adverse effect on the Company’s net income. The allowance for loancredit losses is our best estimate of expected credit losses; however, there is no guarantee that it will be sufficient to address credit losses, particularly if the economic outlook deteriorates significantly and quickly. In such an event, the Company may not be adequate to cover actual loan losses. In addition, future provisions for loan losses could materially and adversely affect, and have in recent years materially and adversely affected, the Company's operating results.
On January 1, 2023, the Company cannot assure investors that it will not need to increase the allowance or that regulators will not require the allowance to be increased. Either of these occurrences could materially and adversely affect earnings and profitability.
The Company is subject to physical and financial risks associated with climate change and other weather and natural disaster impacts. The Company is subject to the growing risk of climate change. Among the risks associated with climate change are more frequent severe weather events, such as hurricanes, tropical storms, tornados, winter storms, freezes, flooding, and other large-scale weather catastrophes. Such weather events in the Company’s markets subject us to significant risks and more frequent severe weather events magnify those risks. Large-scale weather catastrophes or other significant climate change effects that either damage or destroy residential or multifamily real estate underlying mortgage loans or real estate collateral, could decrease the value of our real estate collateral, or increase our delinquency rates in the affected areas and thus diminish the value of the regulatory capitalCompany’s loan portfolio. In addition, the effects of climate change may have a significant effect on the Bank,Company’s geographic markets and could disrupt our operations or the initial reductionoperations of our customers, third party service providers or supply chains more generally. Those disruptions could result in regulatory capital will be phaseddeclines in over three years under regulatory guidanceeconomic conditions in the Company’s geographic markets or industries in which our borrowers operate and impact their ability to repay loans or maintain deposits. Climate change could also impact the Company’s assets or employees directly or lead to changes in customer preferences that could negatively affect our growth or business strategies. In addition, the SEC and federal banking regulators are increasingly focused on the physical and financial risks to financial institutions associated with climate change, which may result in increased requirements regarding the disclosure and management of climate risks and related lending activities, as well as increased compliance costs.
Risk Factors Related to our Industry
The Company is subject to interest rate risk and variations in interest rates may negatively affect its financial performance.condition and results of operations. The Company's profitability depends in substantial part on its net interest margin, which is the difference between the rates received on loans and investments and the rates paid for deposits and other sources of funds. The net interest margin depends on many factors that are partly or completely outside of the Company's control, including competition; federal economic, monetary, and fiscal policies; market interest rates; and economic conditions. Because of the differences in the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. IfTo combat rising inflation, the Federal Open Market Committee (FOMC) of the Federal Reserve raisesincreased the target range for the federal funds rate throughout 2022 and 2023 to its current range of 5.25% to 5.50%. While the FOMC foreshadowed decreases to the target rates in 2024, it also noted that it will continue to assess additional information and implications for monetary policy in determining future actions with respect to target rates. If market rates continue to rise or remain elevated for an extended period of time, the Company may experience more competitive pressures to increase the rates paid on deposits, which may decrease net interest income, a change in the mix of noninterest and interest-bearing accounts, reduced demand for loans or increases in the rate of default on existing loans. In addition, the Company could experience net interest margin compression if it is unable to maintain the current level of loans outstanding by continuing to originate new loans in the current higher rate environment, or if it experiences a decrease in deposit balances, which would require the Company to seek funding from other sources at relatively higher rates of interest. It is possible that significant or unexpected changes in interest rates may take place in the future, and the Company may not be able to reflect increasingaccurately predict the nature or magnitude of such changes or how such changes may affect business or results of operations.
The Company’s investment portfolio consists of fixed income debt securities, classified as available for sale, whose market values fluctuate with changes in interest rates. Available for sale debt securities are carried at estimated fair value with the corresponding unrealized gains and losses recognized in other comprehensive income. Gains or losses are only recognized in net income upon the sale of the security. Additionally, under ASC 326 a loss is recognized for expected credit losses on available for sale debt securities or when the Company does not expect to recover its investment in a debt security, to the extent that the carrying amount of the security exceeds its market value. As a result of increases in market interest rates during 2022 and 2023, the market value of the Company’s investment portfolio declined significantly. While the Company does not intend to sell any of its securities prior to maturity, the portfolio serves as a source of liquidity and consists of securities available for sale, which may be sold in rates charged on loans dueresponse to competitive pressures. Accordingly, fluctuationschanges in market interest rates, changes in prepayment risk, increases in loan demand, changes in deposit balances, general liquidity needs and other similar factors. If the Company sells any of its securities while in an unrealized loss position or determines that there is a credit loss with respect to any of the Company’s securities, the loss or impairment charge would be recognized in net income, which could adversely affecthave a material adverse effect on the Company'sCompany’s financial condition and results of operations. Additionally, while the regulatory capital of the Company or the Bank is currently not expected to be impacted by unrealized losses on securities, tangible common equity, a non-GAAP financial measure, is reduced for unrealized losses on securities, and regulatory capital would be reduced for any losses recognized in net interest margin and, in turn, its profitability.income.
The Company generally seeks to maintain a neutral position in terms of the volume of assets and liabilities that mature or re-price during any period so that it may reasonably maintain its net interest margin; however, interest rate fluctuations, loan prepayments, loan production, deposit flows, and competitive pressures are constantly changing and influence the ability to maintain a neutral position. Generally, the Company's earnings will be more sensitive to fluctuations in interest rates depending upon the variance in volume of assets and liabilities that mature and re-price in any period. The extent and duration of the sensitivity will depend on the cumulative variance over time, the velocity and direction of changes in interest rates, shape, and slope of the yield curve, and whether the Company is more asset sensitive or liability sensitive. Accordingly, the Company may not be successful in maintaining a neutral position and, as a result, the Company's net interest margin may be affected. For additional details, See "Management's Discussion and Analysis of Financial Condition and Results of Operations – Interest Sensitivity" in Item 7 of this report on Form 10-K.
If the Company is unable to access funding sufficient to support business operations and growth strategies or areis unable to access such funding on attractiveacceptable terms weto the Company, this could have a substantial negative effect on the Company’s liquidity. The Company may not be able to implement ourits business strategies, which may negatively affectoriginate loans, invest in securities, pay its expenses, distribute dividends to its stockholders, or fulfill its debt obligations or deposit withdrawal demands. A lack of liquidity also could result in the Company being forced to sell securities in an unrealized loss position. All these factors could have a material adverse impact on financial performance.performance, financial condition, and results of operations.
The Company’s liquidity could be impaired by an inability to access short-term funding or the inability to monetize liquid assets. If significant volatility or disruptions occur in the wholesale funding or investment securities markets, the Company’s ability to access short-term liquidity could be materially impaired. In addition, other factors outside of the Company’s control could limit the Company’s ability to access short-term funding or to monetize liquid assets, including by selling investment securities at an attractive price or at all, such as operational issues that impact third parties in the funding or securities markets or unforeseen significant deposit outflows. The Company’s inability to access short-term funding or inability to monetize liquid assets could impair the Company’s ability to make new loans or meet existing lending commitments and could adversely impact the Company’s overall liquidity and regulatory capital.
Competition from other financial institutions are introduced regularly. and financial intermediaries may adversely affect the Company’s future success, profitability, financial condition, and results of operations. The Company cannot predictfaces substantial competition in what formall aspects of its operations, including originating loans and attracting deposits, from a variety of competitors. Growth and success depend on the Company’s ability to compete effectively in this highly competitive financial services environment. The competition in originating loans and attracting deposits comes principally from other banks, mortgage banking companies, consumer finance companies, savings associations, credit unions, brokerage firms, insurance companies and other institutional lenders and purchasers of loans and includes firms that attract customers primarily through digital and online products which may offer greater convenience to customers than traditional banking products and services. Many competitors offer products and services that are not offered by the Company, and many have substantially greater resources, name recognition and market presence that benefit them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively and may have larger lending limits that would allow them to serve the credit needs of larger clients. Moreover, technological innovation continues to contribute to greater competition in financial services markets as technological advances enable more companies to provide financial products and services traditionally provided by banks, such as real-time transfer and payment systems. Some of the financial services organizations with which the Company competes are not subject to the same degree of regulation as bank holding companies and federally insured national banks and may have broader geographic service areas and lower cost structures. As a result, these competitors may have certain advantages over the Company in accessing funding and providing various services. Increased competition could require an increase of rates paid on deposits or whether a proposed statute or regulation will be adopted orlower the extentrates offered on loans, which could adversely affect the Company’s profitability. In addition, failure to which such adoptioncompete effectively to attract new and retain current customers in the Company’s markets could cause it to lose market share, slow its growth rate and may affecthave an adverse effect on its business.financial condition and results of operations.
Market risk affects the earnings of Trust.Wealth. The fee structure of TrustWealth is generally based upon the market value of accounts under administration. Most of these accounts are invested in equities of publicly traded companies and debt obligations of both government agencies and publicly traded companies. As such, fluctuations in the equity and debt markets in general have had a direct impact upon the earnings of Trust.Wealth.
The Bank is required to mortgage lending systems and processes that may adversely affect income from the Company's residential mortgage activities. The CFPB has finalized a number of significant rules that impact nearly every aspect of the lifecycle of a residential real estate loan. Among other things, the rules adopted by the CFPB require mortgage lenders eithermaintain capital to make a reasonable and good faith determination, based on verified and documented information, that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms, or to originate "qualified mortgages." In June 2015, the CFPB issued rules that combined disclosures previously established by the Truth in Lending Actmeet regulatory requirements, and the Real Estate Settlement Procedures Act into a single disclosure referredBank’s failure to as the TILA-RESPA Integrated Disclosure, or TRID. TRID applies to most closed-end mortgage loans and overhauls the manner in which mortgage loan origination disclosures are made.
If the Company were to require additional capital, including to fund additional capital contributions to the Bank, as a result of the Basel III Capital Rules, it could be required to access the capital markets on short notice and in relatively weak economic conditions, which could result in raising capital that significantly dilutes existing stockholders. Additionally, the Company may be forced to limit banking operations and activities, and growth of loan portfolios and interest income, to focus on retention of earnings to improve capital levels. Higher capital levels may also lower the Company's return on equity.
equity and result in regulatory actions if the Bank was unable to comply with such requirements. The CompanyBank’s failure to remain “well capitalized” for bank regulatory purposes could affect customer confidence, FDIC insurance costs and costs of funds, as well as the Company’s and the Bank’s ability to grow, business, financial condition, and results of operations. Under regulatory rules, if the Bank ceases to be a “well capitalized” institution for bank regulatory purposes, the interest rates it pays and its ability to accept brokered deposits may be adversely affected by changes in government monetary policy. As a bank holding company, the Company's business is affected by the monetary policies established by the FRB, which regulates the national money supply in order to mitigate recessionary and inflationary pressures. In setting its policy, the FRB may utilize techniques such as the following: (i) engaging in open market transactions in U.S. Government securities; (ii) setting the rate on member bank borrowings; and (iii) determining reserve requirements.
Risk Factors Related to our Operations and Technology
The Company and its subsidiaries are subject to operational risk, which could adversely affect business, financial condition, and results of operation. The Company and its subsidiaries, like all businesses, are subject to operational risk, including the risk of loss resulting from human error, fraud, or unauthorized transactions due to inadequate or failed internal processes and systems, and external events that are wholly or partially beyond the Company's control (including, for example, sudden increases in customer transaction volume, electrical or telecommunications outages, natural disasters, and cyber-attacks). Operational risk also encompasses compliance (legal) risk, which is the risk of loss from violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards. The Company and its subsidiaries have established a system of internal controls to address these risks, but there are inherent limitations to such risk management strategies as there may exist, or develop in the future, risks that are not anticipated, identified, or monitored. Any losses resulting from operational risk could take the form of explicit charges, increased operational costs, litigation costs, harm to reputation or forgone opportunities, loss of customer business, or the unauthorized release, misuse, loss, or destruction of proprietary information, any and all of which could have a material adverse effect on the Company's business, financial condition and results of operations.
System failures, interruptions, breaches of security, or the failure of a third-party provider to perform its obligations could adversely impact the Company's business operations and financial condition. Communications and information systems are essential to the conduct of the Company's businesses, as such systems are used to manage customer relationships, general ledger, deposits, and loans, as well as for other functions. While the Company has established policies and procedures to prevent or limit the impact of systems failures, interruptions and security breaches, the Company's information, security, and other systems may stop operating properly or become disabled or damaged as a result of a number of factors, including events beyond the Company's control, such as sudden increases in customer transaction volume, electrical or telecommunications outages, natural disasters, and cyber-attacks. Information security risks have increased in recent years and hackers, activists and other external parties have become more technically sophisticated and well-resourced. These parties use a variety of methods to attempt to breach security systems and access the data of financial services institutions and their customers. The Company may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. In addition, any compromise of the security systems could deter customers from using the Bank's website and online banking service, both of which involve the transmission of confidential information. The security and authentication precautions imposed by the Company and the Bank may not protect the systems from compromises or breaches of security, which would adversely affect the Company's results of operations and financial condition.
In addition, the Company relies on third parties to provide key components of its business operations, such as data processing, recording, and monitoring transactions, online banking interfaces and services, internet connections and network access outsources certain data processing to certain third-party providers. Accordingly, the Company's operations are exposed to risk that these third-party providers will not perform in accordance with the contracted arrangements under service agreements. If the third-party providers encounter difficulties, or if the Company has difficulty in communicating with them, the Company's ability to deliver products and services to its customers and otherwise conduct its business could be adversely affected, and the Company's reputation may be harmed. Further, each of these third-party providers faces the risk of a cyber-attack, information breach or loss, or technology failure, and there is no assurance that they have not or will not experience a system or network breach, a breach of a third-party provider's technology may cause loss to the Company's customers. Any failure by a third-party provider to maintain performance, reliability and security of these systems could have a significant adverse effect on the Company’s financial condition or results of operations. Replacing these third-party providers could also create significant delay and expense, and the Company cannot provide any assurance that it could negotiate terms with alternative service sources that are as favorable or could obtain similar services as found in the Company’s existing systems without expending substantial resources. Consequently, use of such third parties creates an unavoidable inherent risk to the Company’s business operations. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
The occurrence of any systems failure, interruption or breach of security, or the failure of a third-party provider to perform its obligations, could expose the Company to risks of data loss or data misuse, could result in violations of applicable privacy and other laws, could damage the Company's reputation and result in a loss of customers and business, or could subject it to additional regulatory scrutiny, civil litigation, or possible financial liability and costly response measures. Any of these occurrences could have a material adverse effect on the Company's financial condition and results of operations.
The Company and its subsidiaries, including the Bank, and its and their employees and customers may in the future be the target of criminal cyberattacks; and we could be exposed to liability and remedial costs, and our reputation and business could suffer. The Company’s business relies on the secure processing, transmission, storage, and retrieval of confidential, proprietary, and other information in our computer and data management systems and networks, and in the computer and data management systems and networks of third parties. In addition, to access our network, products and services, the Company’s customers and third parties may use personal mobile devices or computing devices that are outside of our network environment and are subject to their own cybersecurity risks. The Company, its customers, regulators and other third parties, including other financial services institutions and companies engaged in data processing, have been subject to, and are likely to continue to be the target of criminal cyber-attacks, phishing schemes and similar fraudulent activity and cyber incidents. One such event occurred during September 2022, when in a cybersecurity incident an email account of the Company was accessed by an authorized user, which may have compromised certain information about the Company and its customers. The Company expects these threats to continue. As the numerous and evolving cybersecurity threats, including advanced and persistent cyber-attacks and schemes, utilized by cybercriminals in attempts to obtain unauthorized access to our systems or our customers’ accounts have become increasingly more complex and sophisticated and may be difficult to detect for periods of time, we– like many other major financial institutions – may not be able to anticipate, safeguard against, or respond to, these acts adequately. As these threats continue to evolve and increase, we – like many other major financial institutions – may be required to devote significant additional resources in order to modify and enhance our security controls and to identify and remediate any security vulnerabilities.
The Company and the Bank also face indirect technology, cybersecurity and operational risks relating to the customers, clients and other third parties with whom the Company and the Bank do business or upon whom the Company and the Bank rely to facilitate or enable business activities, including, for example, financial counterparties, regulators, providers of critical infrastructure such as internet access, and software providers. As a result of increasing consolidation, interdependence and complexity of financial entities and technology systems, a technology failure, cyber-attack or other information or security breach that significantly degrades, deletes, or compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including the Company and the Bank. This consolidation, interconnectivity and complexity increases the risk of operational failure, on both individual and industry-wide bases, as disparate systems need to be integrated, often on an accelerated basis. Any third-party technology failure, cyber-attack or other information or security breach, termination or constraint could, among other things, adversely affect the Company and the Bank’s ability to effect transactions, service their clients, manage their exposure to risk or expand their business.
Though it is difficult to determine what, if any, harm may directly result from any specific cyber incident or cyber-attack, any failure to maintain the security of, or any actual or perceived loss or unauthorized disclosure or use of, customer or account information may result in a material loss or have material consequences. The public perception that a cyber-attack on the Bank’s systems have been successful, whether or not this perception is correct, may damage the Bank’s reputation with customers and third parties with whom the Bank does business. Actual or perceived loss or unauthorized disclosure or use of personal information and identify theft risks, in particular could cause serious reputational harm. Damage to our reputation could adversely affect deposits and loans and otherwise negatively affect the Company’s business, financial condition, and results of operations. In addition, it is possible that a cyber incident and any material fraudulent activity, cyber-attacks, breaches of our information security or successful penetration or circumvention of our system security may cause us significant negative consequences, including loss of Bank customers and financial assets and business opportunities, disruption to our operations and business, or misappropriation of our and/or our customers’ confidential information, and may expose us to additional regulatory scrutiny or may result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, devotion of substantial management time, costs associated with customer notification and credit monitoring services, increased costs to maintain insurance coverage (including increased deposit insurance premiums), or additional compliance costs, all of which could adversely impact our business, financial condition, liquidity and results of operations.
The Company's accounting estimates and risk management processes rely on analytical and forecasting models.Processes that management uses to measure the allowance for credit losses, fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on the Company's earnings performance and liquidity, depend upon the use of analytical and forecasting models. These models include assumptions about future credit losses, discount rates, future interest rates and economic conditions, that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are accurate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation.
If the model that management uses for the calculation of the allowance for credit losses is inadequate, the Company may not be able to accurately predict the timing and extent of expected credit losses and record an accurate allowance for these credit losses. If the models that management uses for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected losses upon changes in market interest rates or other market measures and may be unable to maintain sufficient liquidity. If the models that management uses to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what the Company could realize upon sale or settlement of such financial instruments. Any such failure in management's analytical or forecasting models could have a material adverse effect on the Company's business, financial condition, and results of operations.
The Company is dependent on key personnel and the loss of one or more of those key personnel could harm its business. The banking business in Virginia, and in the Company's primary service area in the Hampton Roads MSA, is highly competitive and dominated by a relatively small number of large banks. Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of and experience in the Virginia community banking industry, which could increase labor costs. In addition, the Company’s ability to attract and retain employees could be impacted by changing workforce concerns, expectations, practices, and preferences, including remote and hybrid work preferences, labor shortagesand competition for labor, which could increase labor costs. The Company's success depends to a significant degree upon its ability to attract and retain qualified management, loan origination, administrative, marketing, and technical personnel and upon the continued contributions of and customer relationships developed by management and other key personnel.
In particular, the Company believes that its success is highly dependent upon the capabilities of its senior executive management. The Company believes that its management team, comprised of individuals who have worked in the banking industry for many years, is integral to implementing the Company's business plan. The loss of any of the Company’s senior executive management could disrupt the Company’s operations and have a material adverse effect on the Company’s ability to build on the efforts they have undertaken, and the Company may not be able to find adequate replacements. Most recently, the Company hired a new Chief Financial Officer in October 2023. Management transitions may create uncertainty and involve a diversion of resources and management attention, be disruptive to the Company’s daily operations or impact public or market perception, any of which could negatively impact our ability to operate effectively or execute our strategies and result in a material adverse impact on the Company’s business, financial condition, results of operations or cash flows. The Company has entered into employment agreements with certain members of executive management, and the loss of the services of one or more of them could harm the Company's business.
The Company may not be able to compete effectively without the appropriate use of current technology. The use of technology in the financial services market, including the banking industry, evolves frequently. The Company may be unable to attract and maintain banking relationships with certain customers if it does not offer appropriate technology-driven products and services. In addition to better serving customers, the effective use of technology may increase efficiency and reduce costs. Developing or acquiring access to new technologies and incorporating those technologies into the Company’s products and services or using them to expand the Company’s products and services, may require significant investments, may take considerable time to complete, and ultimately may not be successful. The Company may not be able to effectively implement new technology-driven products or services or be successful in marketing these products and services to its customers. As a result, the Company's ability to compete effectively may be impaired, which could lead to a material adverse effect on the Company's financial condition and results of operations and could lead to the incurrence of additional expense. Additionally, any future implementation of technological changes and upgrades to maintain current systems may cause operational and customer challenges upon implementation and for some time afterwards. Key challenges include service interruptions, transaction processing errors and system conversion delays, which may cause the Company to lose customers or fail to comply with applicable laws, and may cause the incurrence of additional expenses, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations and prospects.
Risks Related to the Regulation of the Company
The Company may be adversely affected by changes in government monetary policy. As a bank holding company, the Company's business is affected by the monetary policies established by the FRB, which regulates the national money supply in order to mitigate recessionary and inflationary pressures. The policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments held by the Company.
These policies determine, to a significant extent, the Company's cost of funds for lending and investing, and can also affect the Company’s borrowers. Changes in these policies are beyond the Company’s controls and are difficult to predict. These policies may have an adverse effect on deposit levels, net interest margin, loan demand or the Company's business and operations.
The Company and its subsidiaries are subject to extensive regulation which could adversely affect them. The Company is subject to extensive regulation by federal, state, and local governmental authorities and is subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of its operations. Regulations adopted by these agencies, which are generally intended to protect depositors and customers rather than to benefit stockholders, govern a comprehensive range of matters including, without limitation, ownership and control of the Company's shares, acquisition of other companies and businesses, permissible activities that the Company and its subsidiaries may engage in, maintenance of adequate capital levels and other aspects of operations. See “Regulation and Supervision” included in Item 1. Business, of this Annual Report on Form 10-K for a more detailed description of certain regulatory requirements applicable to the Company and the Bank. These regulations are costly to comply with and could limit the Company's growth by restricting certain of its activities. Failure to comply with these laws, rules and regulations could result in financial, structural, and operational penalties, including receivership. The laws, rules, and regulations applicable to the Company could change at any time. The extent and timing of any regulatory reform as well as any effect on the Company’s business and financial results, are uncertain. Regulatory changes could subject the Company to more demanding regulatory compliance requirements, which could affect the Company in unpredictable and adverse ways. Such changes could subject the Company to additional costs, limit the types of financial services and products it may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Legislation or regulation may also impose unexpected or unintended consequences, the impact of which is difficult to predict. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or damage to the Company's reputation, which could have a material adverse effect on the Company's business, financial condition, and results of operations.
The CFPB may increase our regulatory compliance burden and could affect the consumer financial products and services that the Company offers. The CFPB significantly influences consumer financial laws, regulation and policy through rulemaking related to enforcement of the Dodd-Frank Act’s prohibitions against unfair, deceptive, and abusive consumer finance products or practices, which are directly affecting the business operations of financial institutions offering consumer financial products or services, including the Company. This agency’s broad rulemaking authority includes identifying practices or acts that are unfair, deceptive, or abusive in connection with any consumer financial transaction, financial product, or service. In particular, the CFPB’s interpretation of the Dodd-Frank Act’s prohibitions against unfair, deceptive, and abusive consumer finance products or practices and the application of those prohibitions to so-called “junk fees” may ultimately affect products or services currently offered by the Company and its subsidiaries and may affect the amount of revenue that may be derived from these products and services in the future, especially revenue from overdraft products offered by the Bank. Although the CFPB has jurisdiction over banks with $10 billion or greater in assets, rules, regulations, and policies issued by the CFPB may also apply to the Company or its subsidiaries by virtue of the adoption of such policies and practices by the Federal Reserve and the FDIC. Further, the CFPB may include its own examiners in regulatory examinations by the Company’s primary regulators. The limitations and restrictions imposed by the CFPB may produce significant, material effects on our business, financial condition, and results of operations.
Increased scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to environmental, social and governance (ESG) practices may impose additional costs on the Company or expose it to new or additional risks. As a regulated financial institution and a publicly traded company, the Company is facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to ESG practices and disclosure. Investor advocacy groups, investment funds, influential investors, and regulators are increasingly focused on these practices, especially as they relate to climate risk, hiring practices, the diversity of the work force, and racial and social justice issues. Views about ESG are diverse, dynamic, and rapidly changing. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact the Company’s reputation, ability to attract and retain certain customers and employees, and stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanded mandatory and voluntary reporting, diligence, and disclosure. ESG related costs, including with respect to compliance with any additional regulatory or disclosure requirements or expectations, could adversely impact our results of operations.
Failure to comply with the USA Patriot Act, OFAC, the Bank Secrecy Act and related FinCEN guidelines and related regulations could have a material impact on the Company. Bank regulatory agencies routinely examine financial institutions for compliance with the USA Patriot Act, OFAC, the Bank Secrecy Act and related FinCEN guidelines and related regulations. Failure to maintain and implement adequate programs as required by these obligations to combat terrorist financing, elder abuse, human trafficking, anti-money laundering and other suspicious activity and to fully comply with all of the relevant laws or regulations, could have serious legal, financial and reputational consequences for the Company. For example, such a failure could cause a bank regulatory agency not to approve a merger or acquisition transaction or to prohibit such a transaction even if formal approval is not required to restrict the Company’s ability to pay dividends or to require the Company to obtain regulatory approvals to proceed with certain aspects of its business. In addition, such a failure could result in a regulatory authority imposing a formal enforcement action or civil money penalty for regulatory violations.
Current and to-be-effective laws and regulations addressing consumer privacy and data use and security could increase our costs and failure to comply with such laws and regulations could impact our business, financial condition, and reputation. The Company is subject to a number of laws concerning consumer privacy and data use and security, including information safeguard rules under the Gramm-Leach-Bliley Act. These rules require that financial institutions develop, implement, and maintain a written, comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial institution’s activities and the sensitivity of any customer information at issue. The United States has experienced a heightened legislative and regulatory focus on privacy and data security, including requiring consumer notification in the event of a data breach. In addition, most states have enacted security breach legislation requiring varying levels of consumer notification in the event of certain types of security breaches, and certain states, including Virginia, have enacted significant new consumer data privacy protections that can significantly limit a company’s use of customer financial data and impose significant compliance burdens on companies that collect or use that data. Additional new regulations in these areas may increase compliance costs, which could negatively impact the Company’s earnings. In addition, failure to comply with these privacy and data use and security laws and regulations, including by reason of inadvertent disclosure of confidential information, could result in fines, sanctions, penalties, or other adverse consequences and loss of consumer confidence, which could materially adversely affect the Company’s business, results of operations, and reputation.
Risks Related to Our Common Stock
The Company’s common stock price may be volatile, which could result in losses to investors. Stock price volatility may make it more difficult for stockholder to resell the Company’s common stock when the stockholder wants and at prices the stockholder finds attractive. The common stock price has been volatile in the past, and several factors could cause the price to fluctuate in the future. These factors include, but are not limited to, actual or anticipated variations in earnings, changes in analysts’ recommendations or projections with regard to the Company’s common stock or the markets and businesses in which the Company operates, stock performance of other companies deemed to be peers, perceptions in the marketplace regarding the Company and/or its competitors, and reports of trends and concerns and other issues related to the financial services industry. Fluctuations in our common stock price may be unrelated to the Company’s performance. General market fluctuations, including real or anticipated changes in the strength of the local economy, industry factors and general economic and political conditions and events, could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices. Additionally, in the past, securities class action lawsuits have been instituted against some companies following periods of volatility in the market price of its securities. The Company could in the future be the target of similar litigation, which could result in substantial costs and divert management’s attention and resources from normal business.
The Company's substantial dependence on dividends from its subsidiaries may prevent it from paying dividends to its stockholders and adversely affect its business, results of operations or financial condition. The Company is a separate legal entity from its subsidiaries and does not have significant operations or revenues of its own. The Company substantially depends on dividends from its subsidiaries to pay dividends to stockholders and to pay its operating expenses. The availability of dividends from the subsidiaries is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Company and other factors, that the Comptroller could assert that payment of dividends by the subsidiaries is an unsafe or unsound practice. In the event the subsidiaries are unable to pay dividends to the Company, the Company may not be able to pay dividends on the Company's common stock, service debt or pay operating expenses. Consequently, the inability to receive dividends from the subsidiaries could adversely affect the Company's financial condition, results of operations, cash flows and limit stockholders' return, if any, to capital appreciation. Any declaration and payment of dividends on the Company’s common stock will depend on the Company’s earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, the Company’s ability to service any equity or debt obligations senior to the common stock, and other facts deemed relevant by the Company’s Board of Directors. Also, the Company has made, and will continue to make, capital management decisions and policies consistent with the Company’s business plans, capital availability, projected liquidity needs and other factors, that could adversely impact the amount of dividends, if any, paid to our stockholders. Although the Company has historically paid cash dividends to holders of its common stock, holders of common stock are not entitled to receive dividends, and any future determination relating to our dividend policy will be made by the Company’s Board of Directors and will depend on a number of factors.
The trading volume of our common stock may not provide adequate volume for investors, and future sales of the Company's common stock by stockholders or the perception that those sales could occur may cause the common stock price to decline. Although the Company's common stock is listed for trading on the NASDAQ stock market, the trading volume in the common stock may be lower than that of other larger financial institutions. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. Given these factors, a stockholder may have difficult selling shares of the Company’s common stock at an attractive price (or at all). Additionally, stockholders may not be able to sell a substantial number of the Company’s common stock shares for the same price at which stockholders could sell a smaller number of shares. Given the potential for lower relative trading volume in the common stock, significant sales of the common stock in the public market, or the perception that those sales may occur, could cause the trading price of the Company's common stock to decline or to be lower than it otherwise might be in the absence of these sales or perceptions.
Future issuances of the Company's common stock could adversely affect the market price of the common stock and could be dilutive. The Company may issue additional shares of common stock or securities that are convertible into or exchangeable for, or that represent the right to receive, shares of the Company's common stock. Issuances of a substantial number of shares of common stock, or the expectation that such issuances might occur, could materially adversely affect the market price of the common stock and could be dilutive to stockholders. Any decision the Company makes to issue common stock in the future will depend on market conditions and other factors, and the Company cannot predict or estimate the amount, timing, or nature of possible future issuances of common stock. Accordingly, holders of the Company's common stock bear the risk that future issuances of securities will reduce the market price of the common stock and dilute their stock holdings in the Company.
General Risk Factors
Negative public opinion could damage the Company's reputation and adversely impact the Company's business, financial condition, and results of operation. Reputation risk, or the risk to the Company's business, financial condition, and results of operation from negative public opinion, is inherent in the financial services industry. Negative public opinion can result from actual or alleged conduct in any number of activities, including lending or foreclosure practices, regulatory compliance, corporate governance and sharing or inadequately protecting customer information, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion once was driven primarily by adverse news coverage in traditional media, but the widespread use of social media platforms facilitates the rapid dissemination of information or misinformation, which may increase the risk of negative public opinion and potential harm to the Company’s reputation. Negative public opinion could adversely affect the Company's ability to keep and attract customers and employees, could impair the confidence of counterparties and business parties, could expose it to litigation and regulatory action, and could adversely affect its access to the capital markets. Damage to the Company's reputation could adversely affect deposits and loans and otherwise negatively affect the Company's business, financial condition, and results of operation.
The Company may need to raise additional capital in the future and such capital may not be available when needed or at all. The Company may need to raise additional capital in the future to provide it with sufficient capital resources and liquidity to meet its commitments and business needs, particularly if its asset quality or earnings were to deteriorate significantly. Economic conditions and the loss of confidence in financial institutions may increase the Company's cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the Federal Reserve Bank's discount window. The Company's ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of the Company's control, and the Company's financial performance.
The Company cannot assure that such capital will be available on acceptable terms or at all. Any occurrence that may limit the Company's access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of the Bank or counterparties participating in the capital markets, or a downgrade of the parent company or the Bank's ratings, may adversely affect the Company's capital costs and its ability to raise capital and, in turn, its liquidity. Moreover, if the Company needs to raise capital in the future, it may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on the Company's liquidity, business, financial condition, and results of operations.
Natural disasters, severe weather events, acts of war or terrorism, pandemics or endemics, climate change and other external events could significantly impact our business. Natural disasters, including severe weather events of increasing strength and frequency due to climate change, acts of war (including the ongoing conflictwars in Ukraine)Ukraine and in the Middle East) or terrorism, pandemics (including the COVID-19 pandemic) or endemics and other adverse external events could have a significant adverse impact on the business operations of the Company, third parties who perform operational services for the Company or its customers and the Company’s borrowers and customers. Such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in lost revenue, or cause the Company to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.
| Item 1B. | Unresolved Staff Comments |
None.
| Item 1C. | Cybersecurity |
The Company considers cybersecurity a subset of information security, and as such, cybersecurity risks and controls are assessed in our information security risk assessment and managed in our ISP. The ISP is developed and maintained utilizing the FFIEC Information Technology Examination Handbook and represents the standards, policies, procedures, and guidelines defining the Company’s security requirements and related activities, which includes risk management and risk assessment practices. Management has designated the ISO, along with the IT Steering Committee, with implementing and monitoring the ISP. The Company’s IT department is led by CTO, Senior Vice President of IT who has over 30 years of experience in the IT field, and other key personnel who have years of experience and various certifications related to assessing and managing cybersecurity risk. Additionally, the Company has established a comprehensive enterprise risk management program to monitor risks related to its operations, including cybersecurity risk, and the Company’s ISO has primary responsibility for the information security risk management program. Management also engages the services of third parties to assist IT with their tasks. The Company believes that risk management is a component of overall governance, and that IT risk management is a component of overall risk management.
The Company recognizes that our overall security culture contributes to the effectiveness of our ISP. The Company maintains an information security risk management program that identifies, prioritizes, and provides a formal structure for the internal and external risks that impact the organization. The Board of Directors sets the tone and direction for the Company’s use of IT and has identified the Audit Committee as having primary responsibility for oversight of the Company’s risk exposures and risk assessments and policies, including risks related to cybersecurity. The Board of Directors and Audit Committee approve and periodically review and re-approve the ISP and other IT related policies. While the Board of Directors may delegate the design, implementation, and monitoring of certain IT activities to the CTO, Senior Vice President of IT or designee, the full Board of Directors remains responsible for overseeing IT strategies and policies, including cybersecurity. To help carry out their responsibilities, Directors, management, and all employees are periodically trained to understand IT activities and risks, including cybersecurity risks. Management, via the Senior Vice President of IT and ISO, or combination, provides a status report to the Board of Directors at least annually, with more frequent communications, as necessary. The report describes the overall status of the ISP and material matters related to the program, including security breaches, cybersecurity assessments, cybersecurity awareness training for employees and the Board of Directors and results of incident response testing.
The Company utilizes third-party threat analysis tools such as penetration testing and vulnerability scanning to assist in understanding and supporting the measurement of information security related risks. Additionally, the Company uses third-party tools to help management identify current cybersecurity risks and control maturity levels, and to evaluate overall cybersecurity preparedness. The Company has also implemented an action plan designed to identify potential actions that would improve our overall cybersecurity posture, and periodically reevaluates both cybersecurity risks and controls to assure they are commensurate with our size and complexity and are keeping pace with the overall cybersecurity threat environment.
Management also obtains, analyzes, and responds to information from various sources on cybersecurity threats and vulnerabilities that may affect the Company, while incorporating available information on cybersecurity events into our ISP. Additionally, management develops, maintains, and updates a repository of cybersecurity threat and vulnerability information that may be used in conducting risk assessments, and ultimately provide updates to the Board of Directors on cybersecurity risk trends. The Company has not experienced any cybersecurity incidents in the past that have individually or in the aggregate had a materially adverse effect on our business, financial condition, or results of operations.
Additionally, the Company conducts due diligence in the selection and on-going monitoring of third-party service providers. Management is responsible for ensuring that such third parties use suitable information security controls when providing services to us. As part of the oversight of third-party service providers, management will determine whether cybersecurity risks are identified, measured, mitigated, monitored, and reported by such third parties.
| Item 2. | Properties |
As of December 31, 2021,2023, the Company owned and leased buildings in the normal course of business. It owns its main office, which representshouses its corporate headquarters and includes a branch at 101 East Queen Street, Hampton, Virginia. Additionally, the Company owns its Wealth headquarters. As of March 25, 2022,19, 2024, the Bank operated fourteen14 branches in the Hampton Roads area of Virginia.
For more information concerning the amounts recorded for premises and equipment and commitments under current leasing agreements, see Note 6,“Note 4. Premises and EquipmentEquipment” and Note 7, Leases“Note 5. Leases” of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this report on Form 10-K.
| Item 3. | Legal Proceedings |
Neither the Company nor any of its subsidiaries is a party to any material pending legal proceedings before any court, administrative agency, or other tribunal.
| Item 4. | Mine Safety Disclosures |
None.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
| Name (Age) And Present Position | Served as an Executive Officer Since | Principal Occupation During Past Five Years |
Robert F. Shuford, Jr. | ||
Chairman, President & Chief Executive Officer Old Point Financial Corporation | 2003 | Chairman of the Board, President & Chief Executive Officer of the Company and the Bank since 2020. Executive Vice President/Bank of the Company since 2015; Chief Operating Officer & Senior Vice President/Operations of the Company from 2003 to 2015 President & Chief Executive Officer of the Bank since 2015; Senior Executive Vice President & Chief Operating Officer of the Bank from 2012 to 2015; Executive Vice President & Chief Operating Officer of the Bank from 2003 to 2012; Chairman of the Board of the Bank |
Chief Financial Officer & Senior Vice President/Finance Old Point Financial Corporation | Chief Financial Officer & Senior Vice President/Finance of the Chief Financial Officer & Executive Vice President of the Bank | |
Donald S. Buckless | ||
Chief Lending Officer & Senior Vice President Old Point Financial Corporation | 2016 | Chief Lending Officer & Senior Vice President of the Company since 2016 Chief Lending Officer & Executive Vice President of the Bank since 2016; Chief Lending Officer & Senior Vice President of the Bank from 2015 to |
Thomas L. Hotchkiss | ||
Chief Credit Officer & Executive Vice President Old Point National Bank | 2019 | Chief Credit Officer & Executive Vice President of the Bank since 2019; Chief Credit Officer of finanical institution in Maryland from February 2015 to February |
Old Point Financial Corporation | President and Chief Executive Officer of Trust from 2003 to September 2021; Chairman of the Trust Board | |
A. Eric Kauders, Jr. | ||
Old Point | 2021 | Senior Vice President/ President and Chief Executive Officer of |
Susan R. Ralston | ||
Chief Operating Officer & Executive Vice President Old Point National Bank | 2019 | Chief Operating Officer & Executive Vice President of the Bank since 2019; President & Founder of Ralston Coaching and Consulting, LLC from 2018 to 2019; Chief Operating Officer & Senior Vice President of Dollar Bank from 2016 to |
Joseph R. Witt | ||
Old Point Financial Corporation | 2008 | Executive Vice President/Financial Services since 2020. Chief Business Development Officer & Senior Vice President of the Company since 2015; Chief Administrative Officer & Senior Vice President/Administration of the Company from 2012 to 2015; Senior Vice President/Corporate Banking/Human Resources of the Company from 2010 to 2012; Senior Vice President/Corporate Banking of the Company from 2008 to 2010 Chief Strategy Officer & President, Financial Services of the Bank beginning in 2020. Senior Executive Vice President & Chief Business Development Officer of the Bank from 2015 to 2019; Senior Executive Vice President & Chief Administrative Officer of the Bank from 2012 to 2015; Executive Vice President/Corporate Banking & Human Resources Director of the Bank from 2010 to 2012 |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The common stock of thethe Company is quoted on the NASDAQ Capital Market under the symbol "OPOF". The approximate number of stockholders of record as of March 15, 202219, 2024, was 1,568.1,535. On that date, the closing price of the Company’s common stock on the NASDAQ Capital Market was $25.05.$16.48. Payment of dividends is at the discretion of the Company’s Board of Directors and is subject to various regulatory restrictions. Additional information related to restrictions on funds available for dividend declaration can be found in Note 17,“Note 15. Regulatory MattersMatters” of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this report on Form 10-K.
During the year ended December 31, 2023, the Company did not have an effective share repurchase program that was authorized by the Company’s Board of Directors approved a stock repurchase program. The Company is authorized pursuant to this program to repurchase up to 10% of the Company’s issued and outstanding common stock through November 30, 2022. Repurchases under the program may be made through privately negotiated transactions or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Securities Exchange Act of 1934, as amended, and shares repurchased will be returned to the status of authorized and unissued shares of common stock. The timing, number and purchase price of shares repurchased under the program, if any, will be determined by management in its discretion and will depend on a number of factors, including the market price of the shares as a percentage of tangible book value, general market and economic conditions, applicable legal requirements and other conditions, and there is no assurance that the Company will purchase any shares under the program. The Company repurchased 6,600 shares of the Company’s common stock at an aggregate cost of $150,000 under this plan during 2021. During the first quarter of 2022, approximately 111,000 shares were repurchased by the Company under this plan.Directors.
| Period | Total number of shares repurchased | Average price paid per share ($) | Total number of shares purchased as part of publicly announced plans or programs | Maximum number (or approximaate dollar value) of shares that may yet be purchased under the plans or programs ($) | ||||||||||||
October 1, 2021 - October 31, 2021 | - | $ | - | - | - | |||||||||||
November 1, 2021 - November 30, 2021 | - | - | - | - | ||||||||||||
December 1, 2021 - December 31, 2021 | 6,600 | 22.76 | 6,600 | $ | 14,002,000 | |||||||||||
Total | 6,600 | $ | 22.76 | 6,600 | ||||||||||||
Pursuant to the Company’s equity compensation plans, participants may exercise stock options by surrendering shares of the Company’s common stock that the participants already own. Additionally, participants may also surrender shares upon the vesting of restricted stock awards to pay certain taxes. Shares surrendered by participants of these plans are repurchasedvalued at current market valueprices pursuant to the terms of the applicable awards. No such repurchasessurrenders occurred during 2021.2023.
| Item 6. | Reserved |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion is intended to assist readers in understanding and evaluating the financial condition, changes in financial condition and the results of operations of the Company, consisting of the parent company (the Parent) and its wholly-owned subsidiaries, the Bank and Trust.Wealth. This discussion should be read in conjunction with the Consolidated Financial Statements and other financial information contained elsewhere in this report. In addition to current and historical information, the following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to the Company’s future business, financial condition, or results of operations. For a description of certain factors that may have a significant impact on the Company’s future business, financial condition, or results of operations, see “Cautionary Statement Regarding Forward-Looking Statements” prior to Item 1. “Business.”
Overview
The Company’s primary goals are to maximize earnings by maintaining strong asset quality and deploying capital in profitable growth initiatives that will enhance long-term stockholder value. The Company operates in three principal business segments: the Bank, the Trust,Wealth, and the Company as a separate segment, the Parent. Revenues from the Bank’s operations consist primarily of interest earned on loans and investment securities, fees earned on deposit accounts, debit card interchange, and treasury and commercial services and mortgage banking income. Trust’sWealth’s operating revenues consist principally of income from fiduciary and asset management fees. The Parent’s revenues are mainly fees and dividends received from the Bank and Trust.Wealth.
Net income for 2021the year ended December 31, 2023, was $8.4$7.7 million ($1.611.54 per diluted share) compared to $5.4$9.1 million ($1.031.80 per diluted share) in 2020.for the year ended December 31, 2022. Assets as of December 31, 20212023, were $1.3$1.4 billion, an increase of $111.7$91.0 million or 9.1%6.7% compared to assets as of December 31, 2020.2022.
Key factors affecting comparisons of consolidated net income for the years ended December 31, 20212023 and 20202022 are as follows:discussed below. Comparisons are to prior year unless otherwise stated.
Loans held for investment (net of deferred fees and costs), excluding PPP (non-GAAP), increased 9.9%5.1%.
Total deposits were $1.2 billion at December 31, 2023, up $74.4 million, or 6.4%.
Average earning assets increased $104.5$100.2 million, or 9.6%8.1%.
Interest income increased $2.2$18.6 million, or 5.6%38.7%.
Interest expense decreased $1.8increased $14.8 million, or 34.7%411.2%, due primarily to lowerincreased expense from FHLB borrowings and higher interest rates shifts in funding to lower cost deposits, and prepayment of FHLB advances during the fourth quarter of 2020.on deposits.
Consolidated net interest margin (NIM) was 3.26%3.61% for 20212023 compared to 3.19%.3.60% in 2022.
Liquidity, defined as cash and due from banks, unpledged securities, and available secured borrowing capacity, totaled $342.5 million, at December 31, 2020. NPAs as a percentagerepresenting 23.7% of total assets was 0.11% and 0.16% at December 31, 2021 and 2020, respectively.assets.
For more information about financial measures that are not calculated in accordance with three strategic initiatives: prepayment of FHLB advances, a voluntary Early Retirement Incentive Plan (ERIP), and a loss on sale of a loan pool effectively removing non- or under-performing credit relationships from the balance sheet.GAAP, please see “Non-GAAP Financial Measures” below.
Capital Management and Dividends
Total equity was $120.8$106.8 million at December 31, 2021,2023, compared to $117.1$98.7 million at December 31, 2020. Capital growth resulted primarily from earnings for the year ended2022. Total capital increased $8.0 million at December 31, 2021, partially offset by increased cash dividends2023 compared to December 31, 2022 due tocurrent year earnings and netan increase in the market value of investment securities resulting in lower unrealized losses on securities available-for-sale, securities,which are recorded as a component of accumulated other comprehensive income.loss, partially offset by dividends paid and the adoption of the CECL standard related to the calculation of expected credit losses. The unrealized loss in market value of securities available-for-sale was a result of rising market interest rates since the securities were purchased rather than credit quality issues. The Company does not expect these unrealized losses to affect the earnings or regulatory capital of the Company or its subsidiaries.
For the year ended December 31, 2021,2023, the Company declared dividends of $0.50$0.56 per share. Annual dividends per share increased 4.2%7.7% over dividends of $0.48$0.52 per share declared in 2020.2022. The Board of Directors of the Company continually reviews the amount of cash dividends per share and the resulting dividend payout ratio.ratioin light of changes in economic conditions, current and future capital requirements, and expected future earnings. The Company’s principal goals related to the maintenance of capital are to provide adequate capital to support the Company’s risk profile consistent with the boardBoard approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, and provide a competitive return to stockholders. Risk-based capital ratios, which include CET1 capital, Tier 1 capital and Total capital for the Bank are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets. See “Table 13. Regulatory Capital” below for additional information.
At December 31, 2021,2023, the book value per share of the Company’s common stock was $23.06,$21.19, and tangible book value per share (non-GAAP) was $22.69,$20.82, compared to $22.42$19.75 and $22.05,$19.37, respectively, at December 31, 2020.2022. Refer to “Non-GAAP Financial Measures,” below, for information about non-GAAP financial measures, including a reconciliation to the most directly comparable financial measures calculated in accordance with U.S. GAAP.
Critical Accounting Estimates
The accounting and reporting policies of the Company are in accordance with U.S. generally accepted accounting principles (GAAP)GAAP and conform to general practices within the banking industry. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses, and related disclosures.Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations. Those accounting policies with the greatest uncertainty and that require management’s most difficult, subjective, or complex judgments affecting the application of these policies, and the greatest likelihood that materially different amounts would be reported under different conditions, or using different assumptions, are described below.
Allowance for Credit Losses on Loans
Determining the appropriateness of the ACLL is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the ACLL in future periods. There are both internal factors (i.e., loan balances, credit quality, and the contractual lives of loans) and external factors (i.e., economic conditions such as trends in interest rates, GDP, inflation, and unemployment) that can impact the ACLL estimate.
For instance, the Company considers the Virginia and regional unemployment rate as an external economic variable in developing the ACLL. The quantitative ACLL estimate is sensitive to changes in the unemployment rate. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans and therefore the appropriateness of the ACLL, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall ACLL because changes in those factors and inputs may not occur at the same rate and may not be consistent across all loan types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.
The Company reviews its ACLL estimation process regularly for appropriateness as the economic and internal environment are constantly changing. While the ACLL estimate represents management’s current estimate of expected credit losses, due to uncertainty surrounding internal and external factors, there is potential that the estimate may not be adequate over time to cover credit losses in the portfolio. While management uses available information to estimate expected losses on loans, future changes in the ACLL may be necessary based on changes in portfolio composition, portfolio credit quality, economic conditions and/or other factors.
For further information concerning accounting policies, refer to Note 1,“Note 1. Description of Business and Summary of Significant Accounting PoliciesPolicies” and “Note 3. Loans and Allowance for Credit Losses on Loans” of the Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” of this report on Form 10-K.
Results of Operations
Net Interest Income
The principal source of earnings for the Company is net interest income. Net interest income is the difference between interest and fees generated by earning assets and interest expense paid to fund them. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. The NIM is calculated by dividing net interest income by average earning assets, or on a fully tax-equivalent basis, tax-equivalent net interest income by average earning assets.
Net interest income was $38.8$48.2 million in 2021,for the year ended December 31, 2023, an increase of $4.1$3.8 million from 2020.for the year ended December 31, 2022. The NIM was 3.24% in 20213.61% for the year ended December 31, 2023, as compared to 3.18% in 2020.3.60% for the year ended December 31, 2022. Net interest income, on a fully tax-equivalent basis (non-GAAP), was $39.0$48.4 million in 2021,2023, an increase of $4.2$3.7 million from 2020.2022. On a fully tax-equivalent basis (non-GAAP), NIM was 3.26%3.62% in 2021 as compared to 3.19% in 2020.2022 and 2023. Year-over-year, average loaninvestment yields were higher by 19117 basis points. While the lower interest rate environment during 2021 resulted in lower average yields on new loan originations, including PPP loans, which earn interest at a fixed 1%, and repricing within the existing loan portfolio,points, average loan yields wereincreased 72 basis points, and average interest-bearing liability costs increased 149 basis points. Year-over-year NIM was impacted by 2023 having earning assets repricing to higher dueyields and interest-bearing liabilities at higher average rates compared to accelerated recognition of deferred fees2022. Beginning in 2022 and costs relatedcontinuing in 2023, market interest rates increased significantly,and while the Company expects asset yields to PPP forgiveness and the collection of prepayment penalties on one commercial relationship. Loan fees and costs related to PPP loans are deferred at time of loan origination, are amortized into interest income over the remaining terms of the loans and accelerated upon forgiveness or repayment of the PPP loans. Net PPP fees of $3.2 million and $813 thousand were recognized in 2021 and 2020, respectively. As of December 31, 2021, unamortized net deferred PPP fees were $630 thousand. High levels of liquidity invested at lower yielding short-term levels in the low interest rate environment also continue to rise, the cost of funds is expected to continue to rise as well. The Company cannot predict the impact that future fluctuations in interest rates will have on the Company’s NIM.For more information about these FTE financial measures, please see “Non-GAAP Financial Measures” below.
Average loans, which includes both loans held for investment and loans held for sale, increased $7.5$158.3 million to $841.7 million$1.1 billion for the year ended December 31, 2021,2023, compared to 2020.2022. Average loans held for investment included $53.5 million$257 thousand and $63.8$5.2 million of average balances of loans originated under the PPP for 20212023 and 2020,2022, respectively. The remaining increase in average loans outstanding 2021in 2023 compared to 20202022 was due primarily to growth in the commercial real estate segmentestate-construction, real estate-mortgage, real estate-commercial, and other segments of the loan portfolio. Average securities available for sale increased $42.5decreased $22.8 million for 2021,2023, compared to 2020,2022, due primarily to higher purchasessales and maturities of certain securities. The average yield on the securities portfolio on a taxable-equivalent basis decreased 22increased 117 basis points for 2021,2023, compared to 2020,2022, due primarily to rising interest rates during 2023 and purchases of securities in 2020 and 2021 at lowerhigher average yields relative to the average yield of the portfolio as a whole. Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the FRB, decreased $36.4 million during 2023, compared to 2022, due primarily to utilizing cash to fund growth in higher yielding loans and securities. The average yield on interest-bearing deposits in other banks increased 453 basis points for 2023, compared to 2022. The FRB interest rate on excess cash reserve balances was 5.40 percent at December 31, 2023.
Average money market, savings and interest-bearing demand deposits, and time deposits increased $99.3$116.2 million and average timesavings deposits decreased $29.5$21.9 million, for the year ended 2021,2023, respectively, compared to the same periods in 2020,2022, due to growth in consumer and business deposits primarily as a result of new accounts and liquidity from government stimulus programs as well as a shift from time deposits as a result of lower interest rates.noninterest-bearing demand deposits. Average noninterest-bearing demand deposits increased $66.1decreased $48.1 million for the year ended December 31, 20212023, compared to December 31, 2020.2022. The average cost of interest-bearing deposits decreased 27increased 136 basis points for 20212023 compared to the same 20202022 period, due primarily to lowerhigher rates on deposits and a shift in composition from timeto higher yielding deposits. WhileOffered rates on interest-bearing deposit accounts increased in response to changes in market interest rates during the fourth quarter of 2022 and in 2023.While changes in rates take effect immediately for interest checking, money market and savings accounts, changes in the average cost of time deposits lag changes in pricing based on the repricing of time deposits at maturity.
Average borrowings decreased $44.8increased $59.8 million year-over-year due primarily to the repaymentfull year impact of PPPLF borrowings$46.1 million in FHLB advances during 2021the fourth quarter of 2022 and long-term borrowingsthe additional $23.4 million of FHLB advances in 2020.2023. The average cost of borrowings increased 8798 basis points during 20212023 compared to 20202022 due primarily to the issuancehigher rates on FHLB advances in 2023 compared to 2022.
The Company believes that higher interest rates will continue to have effect on yields of subordinated notes bycash reserves, variable rate loans, new loan originations and purchases of securities available for sale. Although the Company during July 2021 partially offset byexpects the repaymentcost of higher-cost long-termdeposits and borrowings during 2020.to increase in connection with higher rates, the extent to which higher interest rates affect NIM will depend on a number of factors, including (1) the Company’s ability to continue to grow loans because of competition for loans, and (2) the continued availability of funding through low-cost deposits, the level of competition for deposits and other lower-cost funding sources, and the Company’s ability to compete for deposits. The Company can give no assurance as to the timing or extent of further increases in market interest rates or the impact of rising interest rates or any other factor on the Company’s NIM. Alternatively, if market interest rates begin to decline, the Company believes that its NIM would be adversely affected as the Company generally expects its assets to reprice more quickly than its deposits and borrowings.
The following table shows an analysis of average earning assets, interest-bearing liabilities and rates and yields.yields for the periods indicated. Nonaccrual loans are included in loans outstanding.
| For the years ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Average Balance | Interest Income/ Expense | Yield/ Rate** | Average Balance | Interest Income/ Expense | Yield/ Rate** | Average Balance | Interest Income/ Expense | Yield/ Rate | |||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||
| Loans* | $ | 1,078,303 | $ | 56,305 | 5.22 | % | $ | 919,990 | $ | 41,440 | 4.50 | % | $ | 841,748 | $ | 37,960 | 4.51 | % | ||||||||||||||||||
| Investment securities: | ||||||||||||||||||||||||||||||||||||
| Taxable | 179,576 | 7,177 | 4.00 | % | 192,639 | 4,936 | 2.56 | % | 173,661 | 3,284 | 1.89 | % | ||||||||||||||||||||||||
| Tax-exempt* | 33,053 | 910 | 2.75 | % | 42,792 | 1,258 | 2.94 | % | 32,158 | 953 | 2.96 | % | ||||||||||||||||||||||||
| Total investment securities | 212,629 | 8,087 | 3.80 | % | 235,431 | 6,194 | 2.63 | % | 205,819 | 4,237 | 2.06 | % | ||||||||||||||||||||||||
| Interest-bearing due from banks | 38,746 | 2,067 | 5.33 | % | 75,111 | 598 | 0.80 | % | 145,425 | 230 | 0.16 | % | ||||||||||||||||||||||||
| Federal funds sold | 698 | 34 | 4.87 | % | 2,694 | 21 | 0.77 | % | 2,932 | 3 | 0.09 | % | ||||||||||||||||||||||||
| Other investments | 4,610 | 326 | 7.07 | % | 1,554 | 87 | 5.63 | % | 1,104 | 70 | 6.35 | % | ||||||||||||||||||||||||
| Total earning assets | 1,334,986 | $ | 66,819 | 5.01 | % | 1,234,780 | $ | 48,340 | 3.91 | % | 1,197,028 | $ | 42,500 | 3.55 | % | |||||||||||||||||||||
| Allowance for credit losses | (11,694 | ) | (9,958 | ) | (9,621 | ) | ||||||||||||||||||||||||||||||
| Other nonearning assets | 105,759 | 99,272 | 98,597 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 1,429,051 | $ | 1,324,094 | $ | 1,286,004 | ||||||||||||||||||||||||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits: | ||||||||||||||||||||||||||||||||||||
| Interest-bearing transaction accounts | $ | 85,939 | $ | 13 | 0.02 | % | $ | 78,167 | $ | 10 | 0.01 | % | $ | 71,841 | $ | 13 | 0.02 | % | ||||||||||||||||||
| Money market deposit accounts | 432,758 | 6,766 | 1.56 | % | 385,067 | 697 | 0.18 | % | 372,193 | 879 | 0.24 | % | ||||||||||||||||||||||||
| Savings accounts | 103,372 | 31 | 0.03 | % | 125,310 | 39 | 0.03 | % | 114,285 | 46 | 0.04 | % | ||||||||||||||||||||||||
| Time deposits | 220,674 | 7,057 | 3.20 | % | 159,889 | 1,403 | 0.88 | % | 180,255 | 1,941 | 1.08 | % | ||||||||||||||||||||||||
| Total time and savings deposits | 842,743 | 13,867 | 1.65 | % | 748,433 | 2,149 | 0.29 | % | 738,574 | 2,879 | 0.39 | % | ||||||||||||||||||||||||
| Federal funds purchased, repurchase | ||||||||||||||||||||||||||||||||||||
| agreements and other borrowings | 4,245 | 40 | 0.94 | % | 6,170 | 69 | 1.12 | % | 14,178 | 35 | 0.25 | % | ||||||||||||||||||||||||
| Federal Home Loan Bank advances | 67,248 | 3,339 | 4.97 | % | 5,606 | 207 | 3.69 | % | - | - | 0.00 | % | ||||||||||||||||||||||||
| Long term borrowings | 29,601 | 1,181 | 3.99 | % | 29,469 | 1,180 | 4.01 | % | 13,784 | 544 | 3.95 | % | ||||||||||||||||||||||||
| Total interest-bearing liabilities | 943,837 | 18,427 | 1.95 | % | 789,678 | 3,605 | 0.46 | % | 766,536 | 3,458 | 0.45 | % | ||||||||||||||||||||||||
| Demand deposits | 374,716 | 422,849 | 391,673 | |||||||||||||||||||||||||||||||||
| Other liabilities | 8,876 | 5,221 | 7,473 | |||||||||||||||||||||||||||||||||
| Stockholders' equity | 101,622 | 105,345 | 120,322 | |||||||||||||||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 1,429,051 | $ | 1,323,093 | $ | 1,286,004 | ||||||||||||||||||||||||||||||
| Net interest margin | $ | 48,392 | 3.62 | % | $ | 44,735 | 3.62 | % | $ | 39,042 | 3.26 | % | ||||||||||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Average Balance | Interest Income/ Expense | Yield/ Rate | Average Balance | Interest Income/ Expense | Yield/ Rate | Average Balance | Interest Income/ Expense | Yield/ Rate | |||||||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||||||||||
| Loans* | $ | 841,748 | $ | 37,960 | 4.51 | % | $ | 834,247 | $ | 36,061 | 4.32 | % | $ | 757,677 | $ | 35,771 | 4.72 | % | ||||||||||||||||||
| Investment securities: | ||||||||||||||||||||||||||||||||||||
| Taxable | 173,661 | 3,284 | 1.89 | % | 145,029 | 3,068 | 2.12 | % | 116,930 | 2,827 | 2.42 | % | ||||||||||||||||||||||||
| Tax-exempt* | 32,158 | 953 | 2.96 | % | 18,270 | 654 | 3.58 | % | 29,425 | 955 | 3.25 | % | ||||||||||||||||||||||||
| Total investment securities | 205,819 | 4,237 | 2.06 | % | 163,299 | 3,722 | 2.28 | % | 146,355 | 3,782 | 2.58 | % | ||||||||||||||||||||||||
| Interest-bearing due from banks | 145,425 | 230 | 0.16 | % | 91,160 | 267 | 0.29 | % | 34,592 | 689 | 1.99 | % | ||||||||||||||||||||||||
| Federal funds sold | 2,932 | 3 | 0.09 | % | 841 | 12 | 1.45 | % | 1,546 | 31 | 2.01 | % | ||||||||||||||||||||||||
| Other investments | 1,104 | 70 | 6.35 | % | 3,020 | 134 | 4.43 | % | 3,484 | 221 | 6.36 | % | ||||||||||||||||||||||||
| Total earning assets | 1,197,028 | $ | 42,500 | 3.55 | % | 1,092,567 | $ | 40,196 | 3.68 | % | 943,654 | $ | 40,494 | 4.29 | % | |||||||||||||||||||||
| Allowance for loan losses | (9,621 | ) | (9,723 | ) | (10,562 | ) | ||||||||||||||||||||||||||||||
| Other nonearning assets | 98,597 | 104,414 | 105,422 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 1,286,004 | $ | 1,187,258 | $ | 1,038,514 | ||||||||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||||||||||||||
| Time and savings deposits: | ||||||||||||||||||||||||||||||||||||
| Interest-bearing transaction accounts | $ | 71,841 | $ | 13 | 0.02 | % | $ | 55,667 | $ | 12 | 0.02 | % | $ | 32,603 | $ | 11 | 0.03 | % | ||||||||||||||||||
| Money market deposit accounts | 372,193 | 879 | 0.24 | % | 307,190 | 1,012 | 0.33 | % | 257,884 | 1,037 | 0.40 | % | ||||||||||||||||||||||||
| Savings accounts | 114,285 | 46 | 0.04 | % | 96,149 | 56 | 0.06 | % | 86,787 | 88 | 0.10 | % | ||||||||||||||||||||||||
| Time deposits | 180,255 | 1,941 | 1.08 | % | 209,727 | 3,337 | 1.59 | % | 231,774 | 3,845 | 1.66 | % | ||||||||||||||||||||||||
| Total time and savings deposits | 738,574 | 2,879 | 0.39 | % | 668,733 | 4,417 | 0.66 | % | 609,048 | 4,981 | 0.82 | % | ||||||||||||||||||||||||
| Federal funds purchased, repurchase | ||||||||||||||||||||||||||||||||||||
| agreements and other borrowings | 14,178 | 35 | 0.25 | % | 33,846 | 150 | 0.44 | % | 22,302 | 132 | 0.59 | % | ||||||||||||||||||||||||
| Long terrn borrowings | 13,784 | 544 | 3.95 | % | - | - | 0.00 | % | - | - | 0.00 | % | ||||||||||||||||||||||||
| Federal Home Loan Bank advances | - | - | 0.00 | % | 38,942 | 725 | 1.86 | % | 50,397 | 1,309 | 2.60 | % | ||||||||||||||||||||||||
| Total interest-bearing liabilities | 766,536 | 3,458 | 0.45 | % | 741,521 | 5,292 | 0.71 | % | 681,747 | 6,422 | 0.94 | % | ||||||||||||||||||||||||
| Demand deposits | 391,673 | 325,596 | 245,518 | |||||||||||||||||||||||||||||||||
| Other liabilities | 7,473 | 5,055 | 3,947 | |||||||||||||||||||||||||||||||||
| Stockholders' equity | 120,322 | 115,086 | 107,302 | |||||||||||||||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 1,286,004 | $ | 1,187,258 | $ | 1,038,514 | ||||||||||||||||||||||||||||||
| Net interest margin | $ | 39,042 | 3.26 | % | $ | 34,904 | 3.19 | % | $ | 34,072 | 3.61 | % | ||||||||||||||||||||||||
*Computed on a fully tax-equivalent (non-GAAP) basis (non-GAAP) using a 21% rate, adjusting interest incomebyincome by $193 thousand, $297 thousand, and $248 thousand, $187 thousand, and $253 thousand, respectively.
Interest income and expense are affected by fluctuations in interest rates, by changes in volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. The following table shows the direct causes of the year-to-year changes in the components of net interest income. The Company calculates the rate and volume variances using a formula prescribed by the SEC. Rate/volume variances, the third element in the calculation, are not show separately in the table, but are allocated to the rate and volume variances in proportion to the absolute dollar amounts of each.
Table 2: VOLUME AND RATE ANALYSIS*Volume and Rate Analysis*
| 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
| Increase (Decrease) | Increase (Decrease) | For the years ended December 31, 2023 from 2022 Increase (Decrease) | For the years ended December 31, 2022 from 2021 Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||||||||
| Due to Changes in: | Due to Changes in: | Due to Changes in: | Due to Changes in: | |||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Volume | Rate | Total | Volume | Rate | Total | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||||||||||||||||||||
| EARNING ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||
| Loans | $ | 324 | $ | 1,575 | $ | 1,899 | $ | 3,723 | $ | (3,433 | ) | $ | 290 | |||||||||||||||||||||||||||||||||||
| Earning Assets | ||||||||||||||||||||||||||||||||||||||||||||||||
| Loans* | $ | 7,131 | $ | 7,734 | $ | 14,865 | $ | 3,528 | $ | (48 | ) | $ | 3,480 | |||||||||||||||||||||||||||||||||||
| Investment securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Taxable | 607 | (391 | ) | 216 | 689 | (448 | ) | 241 | (335 | ) | 2,576 | 2,241 | 359 | 1,293 | 1,652 | |||||||||||||||||||||||||||||||||
| Tax-exempt | 497 | (198 | ) | 299 | (360 | ) | 59 | (301 | ) | |||||||||||||||||||||||||||||||||||||||
| Tax-exempt* | (286 | ) | (62 | ) | (348 | ) | 315 | (10 | ) | 305 | ||||||||||||||||||||||||||||||||||||||
| Total investment securities | 1,104 | (589 | ) | 515 | 329 | (389 | ) | (60 | ) | (621 | ) | 2,514 | 1,893 | 674 | 1,283 | 1,957 | ||||||||||||||||||||||||||||||||
| Federal funds sold | 30 | (39 | ) | (9 | ) | (14 | ) | (5 | ) | (19 | ) | (16 | ) | 29 | 13 | - | 18 | 18 | ||||||||||||||||||||||||||||||
| Other investments ** | 72 | (173 | ) | (101 | ) | 1,345 | (1,854 | ) | (509 | ) | ||||||||||||||||||||||||||||||||||||||
| Other investments** | (119 | ) | 1,827 | 1,708 | (82 | ) | 467 | 385 | ||||||||||||||||||||||||||||||||||||||||
| Total earning assets | 1,531 | 773 | 2,304 | 5,383 | (5,681 | ) | (298 | ) | 6,375 | 12,104 | 18,479 | 4,120 | 1,720 | 5,840 | ||||||||||||||||||||||||||||||||||
| INTEREST-BEARING LIABILITIES | ||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-Bearing Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing transaction accounts | 3 | (2 | ) | 1 | 8 | (7 | ) | 1 | 1 | 2 | 3 | 1 | (4 | ) | (3 | ) | ||||||||||||||||||||||||||||||||
| Money market deposit accounts | 215 | (348 | ) | (133 | ) | 202 | (227 | ) | (25 | ) | 86 | 5,983 | 6,069 | 30 | (212 | ) | (182 | ) | ||||||||||||||||||||||||||||||
| Savings accounts | 11 | (21 | ) | (10 | ) | 10 | (42 | ) | (32 | ) | (7 | ) | (1 | ) | (8 | ) | 4 | (11 | ) | (7 | ) | |||||||||||||||||||||||||||
| Time deposits | (469 | ) | (927 | ) | (1,396 | ) | (356 | ) | (152 | ) | (508 | ) | 533 | 5,121 | 5,654 | (219 | ) | (319 | ) | (538 | ) | |||||||||||||||||||||||||||
| Total time and savings deposits | (240 | ) | (1,298 | ) | (1,538 | ) | (136 | ) | (428 | ) | (564 | ) | 613 | 11,105 | 11,718 | (184 | ) | (546 | ) | (730 | ) | |||||||||||||||||||||||||||
Federal funds purchased, repurchase agreements and other borrowings | (87 | ) | (28 | ) | (115 | ) | 68 | (50 | ) | 18 | ||||||||||||||||||||||||||||||||||||||
| Federal funds purchased, repurchase | ||||||||||||||||||||||||||||||||||||||||||||||||
| agreements and other borrowings | (22 | ) | (7 | ) | (29 | ) | (20 | ) | 54 | 34 | ||||||||||||||||||||||||||||||||||||||
| Federal Home Loan Bank advances | 2,276 | 856 | 3,132 | - | 207 | 207 | ||||||||||||||||||||||||||||||||||||||||||
| Long term borrowings | - | 544 | 544 | - | - | - | 5 | (4 | ) | 1 | 619 | 17 | 636 | |||||||||||||||||||||||||||||||||||
| Federal Home Loan Bank advances | (724 | ) | (1 | ) | (725 | ) | (298 | ) | (286 | ) | (584 | ) | ||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | (1,051 | ) | (1,327 | ) | (1,834 | ) | (366 | ) | (764 | ) | (1,130 | ) | 2,872 | 11,950 | 14,822 | 415 | (268 | ) | 147 | |||||||||||||||||||||||||||||
| Change in net interest income | $ | 2,582 | $ | 2,100 | $ | 4,138 | $ | 5,749 | $ | (4,917 | ) | $ | 832 | $ | 3,503 | $ | 154 | $ | 3,657 | $ | 3,705 | $ | 1,988 | $ | 5,693 | |||||||||||||||||||||||
* Computed on a fully tax-equivalent basis, non-GAAP, using a 21% rate.
** Other investments include interest-bearing balances due from banks.
The Company believes NIM may be affected in future periods by several factors that are difficult to predict, including (1) changes in interest rates, which may depend on the severity of adverse economic conditions, inflationary pressures, the timing and extent of any economic recovery, and the extent or continuing impact of government stimulus measures, which are inherently uncertain,uncertain; (2) possible changes in the composition of earning assets which may result from decreased loan demand as a result of the current economic environment; and (3) the recognition of net deferred fees on PPP loans, which is subject to the timing of repayment or forgiveness. However, if market interest rates rise to a meaningful degree in 2022, as some financial markets predict, the Company may benefit from higher yields on certain interest earning assets, which would be expected to outpace any increasespossible changes in the costcomposition of interest-bearing liabilities, which may result from decreased deposit balances or increased competition for deposits, or from changes in the availability of certain types of wholesale funding.
Discussion of net interest income for the year ended December 31, 20192021, has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Net Interest Income” in the Company’s 20202022 Form 10-K, which was filed with the SEC on March 30, 2021,31, 2023, and is incorporated herein by reference.
Provision for LoanCredit Losses
The provision for loancredit losses is a charge against earnings necessary to maintain the allowance for loancredit losses at a level consistent with management's evaluation of the portfolio. This expense is based on management's estimate of probable credit losses inherent in the loan portfolio. Management’s evaluation included credit quality trends, collateral values, discounted cash flow analysis, loan volumes, geographic, borrower and industry concentrations, the findings of internal credit quality assessments and results from external regulatory examinations. These factors, as well as identified impairedindividually evaluated loans, historical losses and current economic and business conditions including uncertainties associated with the COVID-19 pandemic, were used in developing estimated loss factors for determining the loancredit loss provision.provision on loans. Based on its analysis of the adequacy of the allowance for loancredit losses, management concluded that the provision was appropriate.
The provision for loancredit losses was $794 thousand$2.6 million for the year ended December 31, 2021,2023, as compared to $1.0$1.7 million for 2020. Historical loss rates, levels of non-performing assets,the year ended December 31, 2022. The increased level is primarily due to the increase in loans held for investment, to replenish the allowance for net charge-offs during the year, and an increase in expected credit quality continued to improve in 2021 and contributed to a lower provision recognized in 2021; however, these developments were partially offset by the impact of two commercial relationships that were downgraded during 2021 and qualitative factor adjustments for loan volume trends. During 2020, increased qualitative reserves primarilylosses related to uncertainties associated with expected asset quality deteriorationthe consumer automobile segment as a result of the COVID-19 pandemic and related economic disruption offsetreflected by improvements in qualitative historical loss factors.increased delinquencies. Charged-off loans totaled $1.1$2.4 million in 2021,for the year ended December 31, 2023, compared to $2.0 million in 2020.for the year ended December 31, 2022. Recoveries amounted to $649$676 thousand in 20212023 and $886$977 thousand in 2020.2022. The Company’s net loans charged off to average loans were 0.06%0.16% in 20212023 as compared to 0.13%0.12% in 2020.2022.
In considering current trends that may have an impact on future loan losses and therefore the ACL, management considers changes in both internal and external qualitative factors. These include (i) lending policies and procedures, including changes in underwriting standards and collections, charge offs, and recovery practices; (ii) international, national, regional, and local economic conditions; (iii) the nature and volume of the portfolio and terms of loans; (iv) the experience, depth, and ability of lending management (v) the volume and severity of past due loans and other similar conditions; (vi) the quality of the organization's loan review system; (vii) the value of underlying collateral for collateral dependent loans; (viii) concentrations of credit and changes in the levels of such concentrations; and (ix) other external factors such as legislation or regulatory requirements. Based on management’s assessment of these factors, on average an additional loss allocation of .51% was added to the loan segments at the adoption of CECL on January 1, 2023. This allocation was increased to an average additional loss allocation of .58% as of December 31, 2023.
The state of the local economy can have a significant impact on the level of loan charge-offs. If the economy begins to contract, nonperforming assets could increase as a result of declines in real estate values and home sales or increases in unemployment rates and financial stress on borrowers. Increased nonperforming assets would increase charge-offs and reduce earnings due to larger contributions to the loan loss provision.provision for credit losses.
Noninterest Income
Unless otherwise noted, all comparisons in this section are between the twelve months ended December 31, 20212023 and the twelve months ended December 31, 2020.2022.
Noninterest income increased $187$368 thousand or 1.3%11.8% for the year ended December 31, 2021,2023, as compared to the year ended December 31, 2020. In 2021, increases in fiduciary2022. This increase was driven primarily by the sale of the third-party administrator service line of business and asset management fees ($321 thousand or 8.3%), other service charges, commissions and fees ($141 thousand or 3.50%), bank-owned life insurance income ($175 thousand or 20.9%), and mortgage banking income ($499 thousand or 28.0%) weresmaller losses on available-for-sale securities partially offset by nonrecurring gainsdecreases in the gain on salesales of real estate ($818 thousand) which occurred in 2020. Trust’s operating results improved significantly from 2020fixed assets. In 2023, the Company recognized losses of $134 thousand compared to 2021, primarily due$1.9 million on sales of available-for-sale securities related to increased fiduciary andits reinvestment strategy to increase yields on the asset management fees across Trust’s retirement solutions, wealth management and trust business lines, as well as strong market performance during 2021 that increased Trust client account balances.
The Company continues to focus on diversifying noninterest income through efforts to expand Trust,Wealth and insurance and mortgage banking activities, and a continued focus on business checking and other corporate services.
Discussion of noninterest income for the year ended December 31, 20192021, has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Noninterest Income” in the Company’s 20202022 Form 10-K. which was filed with the SEC on March 30, 2021,31, 2023, and is incorporated by reference herein.
Noninterest Expense
Unless otherwise noted, all comparisons in this section are between the twelve months ended December 31, 20212023 and the twelve months ended December 31, 2020.2022.
The Company’s noninterest expense increased $644 thousand$4.8 million or 1.5%10.4%. Year-over-year increases were primarily related to salaries and employee benefits of $3.4 million, other operating expenses of $404 thousand, data processing professional servicesof $380 thousand, and other operating expense partially offset by decreased ATM and other losses $247 thousand. The increase in salaries and losses related to FHLB prepayments.
The provision for income taxes is based upon the results of operations, adjusted for the effect of certain tax-exempt income, non-deductible expenses, and tax credits. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.
The effective tax rates for the years ended December 31, 20212023 and 20202022 were 13.3%14.7% and 8.8%13.9%, respectively. The increase in the effective tax rate was affected by to higher pre-tax income.less tax-exempt interest income and a larger amount of disallowed interest expense.
Discussion of noninterest expense and income taxes for the year ended December 31, 20192021, has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Noninterest Expense” in the Company’s 20202022 Form 10-K, which was filed with the SEC on March 30, 2021,31, 2023, and inis incorporated by reference herein.
Balance Sheet Review
At December 31, 2021,2023, the Company had total assets of $1.3$1.4 billion, an increase of $112.0$91.0 million or 9.1%6.7% compared to assets as of December 31, 2020.2022.
Net loans held for investment increased $6.9$51.5 million or 0.8%5.1%, from $826.8 million$1.0 billion at December 31, 20202022, to $833.7 million$1.1 billion at December 31, 2021. The change in net loans held for investment2023. This increase was primarily affecteddriven by a decline of $67.0 million in the PPP loan segment due to forgiveness of $115.3 million of PPP loans, partially offset by new PPP originations of $48.3 million. Loans held for investment, excluding PPP, grew 9.9%, or $74.2 million, driven bydiversified loan growth in the following segments: construction and land development of $29.2 million, residential real estate of $24.8 million, and commercial real estate of $66.6 million, construction, land development, and other land loans of $14.9 million, and automobile of $4.7$11.9 million. This segmented growth was partially offset by decreases in commercial and industrial and multi-family residential real estate. Cash and cash equivalents increased $67.5$59.5 million or 56.0%309.1% from December 31, 20202022 to December 31, 2021, and securities available for sale increased $47.9 million or 25.7% over the same period2023 as additional liquidity was provided by growth in deposit accounts was deployed inand FHLB advances. Securities available for sale decreased $21.2 million or 9.4% over the Company’s investment portfolio.same perioddue primarily to the sales and maturities of certain securities.
Total deposits of $1.2 billion as of December 31, 20212023, increased $109.9$74.4 million, or 10.3%6.4%, from December 31, 2020.2022. Noninterest-bearing deposits increased $60.9decreased $86.6 million, or 16.9%20.7%, savings deposits increased $73.5$71.2 million, or 14.3%12.2%, and time deposits decreased $24.5increased $89.8 million, or 12.7%. Liquidity continues58.7%, driven by depositors seeking increased yields. Decreases in overnight repurchase agreements and federal funds purchased were offset by increases in FHLB advances and long-term borrowings, resulting in a net increase of $9.3 million to be impacted by record cumulative levels of consumer savings, government stimulus, and PPP loan related deposits. Expanding the low-cost deposit base and re-pricing to reduce interest expense to buffer NIM compression during the low rate environment were key strategies in 2021.
Securities Portfolio
When comparing December 31, 2023 to December 31, 2022, securities available-for-sale decreased $21.2 million, or 9.4%. The Company also utilizes FHLB advancesinvestment portfolio plays a primary role in the management of the Company’s interest rate sensitivity. In addition, the portfolio serves as a source of liquidity and is used as needed.needed to meet collateral requirements. The investment portfolio consists of securities available for sale, which may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors. These securities are carried at estimated fair value. At December 31, 2021,2023 and 2022, all securities in the Company had no FHLB advances.
The following table sets forth a summary of the securities portfolio:portfolio in dollar amounts at fair value and as a percentage of the Company’s total securities available for sale as of the dates indicated:
Table 3: SECURITIES PORTFOLIOSecurities Portfolio
| As of December 31, | December 31, | |||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||||||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||||||||||||||||||
| U.S. Treasury securities | $ | 14,904 | $ | 7,043 | $ | 3,857 | 2 | % | $ | 7,671 | 3 | % | ||||||||||||
| Obligations of U.S. Government agencies | 38,558 | 36,696 | 42,735 | 21 | % | 42,399 | 19 | % | ||||||||||||||||
| Obligations of state and policitcal subdivisions | 65,803 | 45,995 | ||||||||||||||||||||||
| Obligations of state and political subdivisions | 50,597 | 24 | % | 59,384 | 26 | % | ||||||||||||||||||
| Mortgage-backed securities | 89,058 | 73,501 | 81,307 | 39 | % | 88,913 | 39 | % | ||||||||||||||||
| Money market investments | 2,413 | 4,743 | 2,047 | 1 | % | 1,816 | 1 | % | ||||||||||||||||
| Corporate bonds and other securities | 23,585 | 18,431 | 23,735 | 11 | % | 25,335 | 11 | % | ||||||||||||||||
234,321 | 186,409 | 204,278 | 98 | % | 225,518 | 99 | % | |||||||||||||||||
| Restricted securities: | ||||||||||||||||||||||||
| Federal Home Loan Bank stock | $ | 609 | 943 | $ | 4,242 | 2 | % | 2,709 | 1 | % | ||||||||||||||
| Federal Reserve Bank stock | 383 | 382 | 892 | - | 683 | - | ||||||||||||||||||
| Community Bankers' Bank stock | 42 | 42 | 42 | - | 42 | - | ||||||||||||||||||
1,034 | 1,367 | 5,176 | 3,434 | |||||||||||||||||||||
| Total Securities | $ | 235,355 | $ | 187,776 | $ | 209,454 | 100 | % | $ | 228,952 | 100 | % | ||||||||||||
In order to utilize excess liquidity rather than holding excess cash reserves, the Company invested in U.S. government agencies and corporations, obligations of states and political subdivisions, and mortgage-backed securities. Net unrealized losses on the market value of securities available for sale were $22.2 million at December 31, 2023 and $26.3 million at December 31, 2022. The decline in market value of securities available for sale during 2023 was due primarily to the sales and maturities of certain securities.
The Company seeks to diversify its portfolio to minimize risk, including by purchasing (1) shorter-duration mortgage backed-securities to reduce interest rate risk and for cash flow and reinvestment opportunities and (2) securities issued by states and political subdivisions due to the tax benefits and the higher tax-adjusted yield obtained from these securities. All of the Company’s mortgage-backed securities are direct issues of United States government agencies or government-sponsored enterprises. Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the U.S. government, that investors in such mortgage-backed securities will receive timely principal and interest payments. The Company also invests in the debt securities of corporate issuers, primarily financial institutions, that the Company views as having a strong financial position and earnings potential.
The following table summarizes the contractual maturity of the securities portfolio and their weighted average yields as of December 31, 2021:2023:
Table 4: MATURITY OF SECURITIESMaturity of Securities
| 1 year or less | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 1-5 years | 5-10 years | Over 10 years | Total | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 1 year or less | 1-5 years | 5-10 years | Over 10 years | Total | |||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | $ | - | $ | - | $ | 14,904 | $ | - | $ | 14,904 | $ | - | $ | 3,857 | $ | - | $ | - | $ | 3,857 | ||||||||||||||||||||
| Weighted average yield | - | - | 1.21 | % | - | 1.21 | % | - | 1.70 | % | - | - | 1.70 | % | ||||||||||||||||||||||||||
| Obligations of U.S. Government agencies | $ | - | $ | 3,178 | $ | 3,053 | $ | 32,327 | $ | 38,558 | $ | 1,371 | $ | 3,210 | $ | 1,964 | $ | 36,190 | $ | 42,735 | ||||||||||||||||||||
| Weighted average yield | - | 0.90 | % | 1.42 | % | 0.91 | % | 0.95 | % | 1.07 | % | 2.45 | % | 4.19 | % | 6.45 | % | 5.87 | % | |||||||||||||||||||||
| Obligations of state and policitcal subdivisions | $ | - | $ | 2,853 | $ | 16,898 | $ | 46,052 | $ | 65,803 | ||||||||||||||||||||||||||||||
| Obligations of state and political subdivisions | $ | 170 | $ | 1,443 | $ | 21,773 | $ | 27,211 | $ | 50,597 | ||||||||||||||||||||||||||||||
| Weighted average yield | - | 3.14 | % | 2.44 | % | 2.65 | % | 2.62 | % | 0.75 | % | 2.73 | % | 2.27 | % | 2.36 | % | 2.32 | % | |||||||||||||||||||||
| Mortgage-backed securities | $ | - | $ | 6,792 | $ | 12,832 | $ | 69,434 | $ | 89,058 | $ | - | $ | 3,668 | $ | 7,334 | $ | 70,305 | $ | 81,307 | ||||||||||||||||||||
| Weighted average yield | - | 1.79 | % | 2.29 | % | 1.65 | % | 1.76 | % | - | 2.44 | % | 2.21 | % | 3.14 | % | 3.03 | % | ||||||||||||||||||||||
| Money market investments | $ | 2,413 | $ | - | $ | - | $ | - | $ | 2,413 | $ | 2,047 | $ | - | $ | - | $ | - | $ | 2,047 | ||||||||||||||||||||
| Weighted average yield | 0.03 | % | - | - | - | 0.03 | % | 3.57 | % | - | - | - | 3.57 | % | ||||||||||||||||||||||||||
| Corporate bonds and other securities | $ | 195 | $ | 518 | $ | 22,872 | $ | - | $ | 23,585 | $ | - | $ | - | $ | 23,735 | $ | - | $ | 23,735 | ||||||||||||||||||||
| Weighted average yield | 2.05 | % | 3.44 | % | 4.55 | % | - | 4.50 | % | - | - | 4.43 | % | - | 4.43 | % | ||||||||||||||||||||||||
| Federal Home Loan Bank stock | $ | - | $ | - | $ | - | $ | 609 | $ | 609 | $ | - | $ | - | $ | - | $ | 4,242 | $ | 4,242 | ||||||||||||||||||||
| Weighted average yield | - | - | - | 5.60 | % | 5.60 | % | - | - | - | 5.22 | % | 5.22 | % | ||||||||||||||||||||||||||
| Federal Reserve Bank stock | $ | - | $ | - | $ | - | $ | 383 | $ | 383 | $ | - | $ | - | $ | - | $ | 892 | $ | 892 | ||||||||||||||||||||
| Weighted average yield | - | - | - | 6.00 | % | 6.00 | % | - | - | - | 3.57 | % | 3.57 | % | ||||||||||||||||||||||||||
| Community Bankers' Bank stock | $ | - | $ | - | $ | - | $ | 42 | $ | 42 | $ | - | $ | - | $ | - | $ | 42 | $ | 42 | ||||||||||||||||||||
| Weighted average yield | - | - | - | 0.00 | % | 0.00 | % | - | - | - | 0.00 | % | 0.00 | % | ||||||||||||||||||||||||||
| Total Securities | $ | 2,608 | $ | 13,341 | $ | 70,559 | $ | 148,847 | $ | 235,355 | $ | 3,588 | $ | 12,178 | $ | 54,806 | $ | 138,882 | $ | 209,454 | ||||||||||||||||||||
| Weighted average yield | 0.18 | % | 1.80 | % | 2.79 | % | 1.81 | % | 2.09 | % | 2.48 | % | 2.24 | % | 3.26 | % | 3.89 | % | 3.61 | % | ||||||||||||||||||||
The table above is based on maturity. Therefore,maturity; therefore, it does not reflect cash flow from principal payments or prepayments prior to maturity. The weighted average life of the $89.1 million in mortgage-backed securities as of December 31, 2021 was 6.1 years. The weighted average yield is calculated on a fully tax-equivalent basis using a 21% rate on a pro rata basis for each security based on its relative amortized cost.
For more information about the Company’s securities available-for-sale, including information about securities in an unrealized loss position as of December 31, 2023 and December 31, 2022, see “Note 2. Securities” of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this report on Form 10-K.
Loan Portfolio
The following table shows a breakdown of total loans by segment at December 31, 20212023 and 2020:2022:
Table 5: LOAN PORTFOLIOLoan Portfolio
| December 31, | ||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||
| Commercial and industrial | $ | 64,112 | $ | 72,578 | ||||
| Real estate-construction | 107,179 | 77,944 | ||||||
| Real estate-mortgage (1) | 283,853 | 259,091 | ||||||
| Real estate-commercial (2) | 441,716 | 429,863 | ||||||
| Consumer (3) | 180,155 | 185,269 | ||||||
| Other | 3,237 | 2,340 | ||||||
| Ending Balance | $ | 1,080,252 | $ | 1,027,085 | ||||
(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.
(2) The real estate-commercial\l segment included commercial-owner occupied and commercial non-owner occupied.
(3) The consumer segment includes consumer automobile loans.
| As of December 31, | ||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Commercial and industrial | $ | 68,690 | $ | 141,746 | ||||
| Real estate-construction | 58,440 | 43,732 | ||||||
| Real estate-mortgage (1) | 206,368 | 207,536 | ||||||
| Real estate-commercial | 382,603 | 316,851 | ||||||
| Consumer | 118,441 | 118,368 | ||||||
| Other | 8,984 | 8,067 | ||||||
| Ending Balance | $ | 843,526 | $ | 836,300 | ||||
As of December 31, 2021,2023, the total loan portfolio increased by $7.2$53.2 million or 0.9%5.2% from December 31, 2020, primarily2022, due to increases in real estate construction and real estate-commercial which were offset by reductions in commercialdiversified over each segment besides Commercial and industrial due to a decline of $67.0 million inand Consumer. PPP loans outstanding. Net loans held for investment increased 0.8% fromoutstanding decreased $497 thousand to $33 thousand at December 31, 2020 to2023 from $530 thousand at December 31, 2021. Loans held for investment (net of deferred fees and costs), excluding PPP (non-GAAP), grew 9.9%2022.
The maturity distribution and rate sensitivity of the Company's loan portfolio at December 31, 20212023 is presented below:
TABLE 6: MATURITY/REPRICING SCHEDULE OF LOAN PORTFOLIOMaturity/Repricing Schedule of Loan Portfolio
| As of December 31, 2021 | As of December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Commercial and industrial | Real estate-construction | Real estate-mortgage (1) | Real estate-commercial | Consumer | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Commercial and industrial | Real estate- construction | Real estate- mortgage (1) | Real estate- commercial (2) | Consumer (3) | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| Variable Rate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Within 1 year | $ | 6,787 | $ | 33,513 | $ | 4,813 | $ | 25,790 | $ | 1,613 | $ | 2,657 | $ | 75,173 | $ | 12,165 | $ | 64,589 | $ | 63,691 | $ | 47,404 | $ | 7,353 | $ | 2,720 | $ | 197,922 | ||||||||||||||||||||||||||||
| 1 to 5 years | 31,628 | 10,735 | 58,889 | 165,466 | 46,752 | 4,627 | 318,097 | - | 390 | 25,679 | 25,762 | 2 | 127 | 51,960 | ||||||||||||||||||||||||||||||||||||||||||
| 5 to 15 years | 21,017 | 454 | 36,540 | 109,754 | 43,064 | - | 210,829 | - | 5,228 | 39,295 | 2,126 | 26 | - | 46,675 | ||||||||||||||||||||||||||||||||||||||||||
| After 15 years | - | - | 40,911 | 6,348 | 12,499 | 326 | 60,084 | - | - | - | - | 77 | - | 77 | ||||||||||||||||||||||||||||||||||||||||||
| Fixed Rate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Within 1 year | $ | 8,457 | $ | 9,178 | $ | 35,371 | $ | 45,047 | $ | 7,108 | $ | 986 | $ | 106,147 | $ | 1,607 | $ | 7,689 | $ | 7,154 | $ | 29,027 | $ | 1,338 | $ | 98 | $ | 46,913 | ||||||||||||||||||||||||||||
| 1 to 5 years | 801 | 2,552 | 9,705 | 25,656 | 463 | 388 | 39,565 | 27,606 | 17,262 | 42,513 | 200,208 | 94,951 | - | 382,540 | ||||||||||||||||||||||||||||||||||||||||||
| 5 to 15 years | - | 2,008 | 20,139 | 4,542 | 4,286 | - | 30,975 | 22,734 | 11,978 | 39,307 | 135,604 | 67,300 | 292 | 277,215 | ||||||||||||||||||||||||||||||||||||||||||
| After 15 years | - | - | - | - | 2,656 | - | 2,656 | - | 43 | 66,214 | 1,585 | 9,108 | - | 76,950 | ||||||||||||||||||||||||||||||||||||||||||
$ | 68,690 | $ | 58,440 | $ | 206,368 | $ | 382,603 | $ | 118,441 | $ | 8,984 | $ | 843,526 | $ | 64,112 | $ | 107,179 | $ | 283,853 | $ | 441,716 | $ | 180,155 | $ | 3,237 | $ | 1,080,252 | |||||||||||||||||||||||||||||
(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.
(2) The real estate-commercial\l segment included commercial-owner occupied and commercial non-owner occupied. (3) The consumer segment includes consumer automobile loans. |
Nonperforming Assets
Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more and accruing interest, nonperforming restructured loans, and other real estate owned (OREO). Restructured loans are loans with terms that were modified in a troubled debt restructuring (TDR) for borrowers experiencing financial difficulties. Refer to Note 4,“Note 3. Loans and Allowance for LoanCredit Losses on Loans” of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report Form 10-K for more information.
Nonperforming assets decreased by $455$115 thousand or 23.3%5.5%, from $2.1 million at December 31, 2022 to $2.0 million at December 31, 2020 to $1.5 million at December 31, 2021.2023. The 20212023 total consisted of $1.0$1.8 million in loans still accruing interest but past due 90 days or more and $478$188 thousand in nonaccrual loans. All of the nonaccrual loans are classified as impairedindividually evaluated for reserves and 63.6% of the nonaccrual loanssecured by real estate at December 31, 2021 were secured by real estate. Impaired2023. Individually evaluated loans are a component of the allowance for loan losses.ACLL. When a loan changes from “90 days past due but still accruing interest” to “nonaccrual” status, the loan is normally reviewed for impairment.the need for individual reserve. If impairmentthe need for individual reserve is identified, then the Company records a charge-off based on the value of the collateral or the present value of the loan’s expected future cash flows, discounted at the loan's effective interest rate. If the Company is waiting on an appraisal to determine the collateral’s value, management allocates funds to cover the deficiency to the allowance for loan lossesACLL based on information available to management at the time.
The adoption of ASC 326 replaced previous impaired loan and TDR accounting guidance, and the evaluation of ACLL includes loans previously designated as impaired or TDRs together with other loans that share similar risk characteristics. The recorded investment in impaired loans decreased to $1.3was $1.9 million as of December 31, 2021 from $2.1 million as of December 31, 20202022 as detailed in Note 4,“Note 3. Loans and Allowance for LoanCredit Losses on Loans” of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this report on Form 10-K. The majority of these loans were collateralized.
The following table presentssummarizes information concerning the aggregate amountcredit ratios and nonperforming assets. Balances and ratios presented as of nonperforming assets, which includes nonaccrual loans, past due loans, TDRsDecember 31, 2023, are in accordance with ASC 326, whereas balances and OREO:ratios presented as of December 31, 2022, are presented in accordance with previously applicable GAAP.
| As of December 31, | ||||||||
| (dollars in thousands) | 2021 | 2020 | ||||||
| Nonaccrual loans | ||||||||
| Commercial and industrial | $ | 174 | $ | - | ||||
| Real estate-mortgage (1) | 191 | 311 | ||||||
| Real estate-commercial | 113 | 903 | ||||||
| Total nonaccrual loans | $ | 478 | $ | 1,214 | ||||
| Loans past due 90 days or more and accruing interest | ||||||||
| Commercial and industrial | $ | 169 | $ | - | ||||
| Consumer loans (2) | 846 | 744 | ||||||
| Other | 10 | - | ||||||
| Total loans past due 90 days or more and accruing interest | $ | 1,025 | $ | 744 | ||||
| Restructured loans | ||||||||
| Real estate-construction | $ | 79 | $ | 83 | ||||
| Real estate-mortgage (1) | 450 | 492 | ||||||
| Real estate-commercial | 413 | 1,352 | ||||||
| Total restructured loans | $ | 942 | $ | 1,927 | ||||
| Less nonaccrual restructured loans (included above) | 191 | 1,120 | ||||||
| Less restructured loans currently in compliance (3) | 751 | 807 | ||||||
| Net nonperforming, accruing restructured loans | $ | - | $ | - | ||||
| Nonperforming loans | $ | 1,503 | $ | 1,958 | ||||
| Total nonperforming assets | $ | 1,503 | $ | 1,958 | ||||
| Interest income that would have been recorded under original loan terms on nonaccrual loans above | $ | 11 | $ | 45 | ||||
| Interest income recorded for the period on nonaccrual loans included above | $ | 2 | $ | 34 | ||||
| Total loans | $ | 843,526 | $ | 836,300 | ||||
| ALLL | $ | 9,865 | $ | 9,541 | ||||
| Nonaccrual loans to total loans | 0.06 | % | 0.15 | % | ||||
| ALLL to total loans | 1.17 | % | 1.14 | % | ||||
| ALLL to nonaccrual loans | 2063.81 | % | 785.91 | % | ||||
| For the year ended December 31: | ||||||||
| Provision for loan losses | $ | 794 | $ | 1,000 | ||||
| Net charge-offs to average total loans | 0.06 | % | 0.14 | % | ||||
| December 31, | December 31, | |||||||
| (dollars in thousands) | 2023 | 2022 | ||||||
| Total loans | $ | 1,080,252 | $ | 1,027,085 | ||||
| Nonaccrual loans | 188 | 1,243 | ||||||
| Loans past due 90 days or more and accruing interest | 1,780 | 840 | ||||||
| Total Nonperforming Assets | $ | 1,968 | $ | 2,083 | ||||
| ACLL | $ | 12,206 | $ | 10,526 | ||||
| Nonaccrual loans to total loans | 0.02 | % | 0.12 | % | ||||
| ACLL to total loans | 1.13 | % | 1.02 | % | ||||
| ACLL to nonaccrual loans | 6492.55 | % | 846.82 | % | ||||
| Annualized year-to-date net charge-offs to average loans | 0.16 | % | 0.02 | % | ||||
As shown in the table above, as of December 31, 20212023 compared to December 31, 2020,2022, the nonaccrual loan category decreased by $736 thousand$1.1 million or 60.6%84.9% and the 90-days past due and still accruing interest category increased by $281$940 thousand or 37.8%111.9%.
The nonaccrual loans at December 31, 20212023, were related to fourthree credit relationships. All loans in these relationships have been analyzed to determine whether the cash flow of the borrower and the collateral pledged to secure the loans is sufficient to cover outstanding principal balances. The Company has set aside specificindividual allocations for those loans without sufficient cash flow or collateral and charged off any balance that management does not expect to collect.
Management believes the Company has excellent credit quality review processes in place to identify problem loans quickly. For a detailed discussion of the Company’s nonperforming assets, refer to Note 4,“Note 3. Loans and Allowance for LoanCredit Losses and Note 5, Other Real Estate Owned (OREO)on Loans” of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this report on Form 10-K.
Table 8: Allowance for Credit Losses
| December 31, | ||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||
| Total ACLL | $ | 12,206 | $ | 10,526 | ||||
| Total reserve for unfunded commitments | 236 | - | ||||||
| Total ACL | $ | 12,442 | $ | 10,526 | ||||
For more information regarding the ACL and ACLL, refer to “Note 1. Description of Business and Summary of Significant Accounting Policies” and “Note 3. Loans and Allowance for LoanCredit Losses on Loans” of the Notes to Consolidated Financial Statements included in Item 8,8. “Financial Statements and Supplementary Data” of this report on Form 10-K.
The overall historical loss rate from December 31, 2020 to December 31, 2021, improved 12 basis points as a percentage of loans evaluated collectively for impairment as a result of overall improving asset quality combined with continued improvement in non-performing assets. For the same period, the qualitative factor components increased 3 basis points as a percentage of loans evaluated collectively for impairment overall. This increase was primarily due to segment adjustments for economic conditions and uncertainty related to the COVID-19 pandemic and change in volume for certain segments. While there have not been significant changes in overall credit quality of the loan portfolio from December 31, 2020 to December 31, 2021, management will continue to monitor economic recovery challenges at macro and micro levels, including levels of inflation, the impacts of new COVID-19 variants, expansion and contraction of pandemic-related government stimulus efforts, supply chain disruption, and employment levels, which may be delaying signs of credit deterioration. If there are further challenges to the economic recovery, elevated levels of risk within the loan portfolio may require additional increases in the allowance for loan losses.
For the year ended December 31, 2023
| For the Year ended December 31, 2021 | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Commercial and Industrial | Real Estate Construction | Real Estate - Mortgage (1) | Real Estate - Commercial | Consumer | Other | Unallocated | Total | ||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Balance, beginning | $ | 650 | $ | 339 | $ | 2,560 | $ | 4,434 | $ | 1,302 | $ | 123 | $ | 133 | $ | 9,541 | ||||||||||||||||
| Charge-offs | (27 | ) | - | (14 | ) | - | (800 | ) | (278 | ) | - | (1,119 | ) | |||||||||||||||||||
| Recoveries | 41 | - | 76 | 44 | 390 | 98 | - | 649 | ||||||||||||||||||||||||
| Provision for loan losses | 19 | 120 | (232 | ) | 309 | 470 | 241 | (133 | ) | 794 | ||||||||||||||||||||||
| Ending Balance | $ | 683 | $ | 459 | $ | 2,390 | $ | 4,787 | $ | 1,362 | $ | 184 | $ | - | $ | 9,865 | ||||||||||||||||
| Average loans | 101,016 | 52,811 | 199,904 | 356,643 | 117,343 | 7,911 | 835,628 | |||||||||||||||||||||||||
| Ratio of net charge-offs to average loans | -0.01 | % | 0.00 | % | -0.03 | % | -0.01 | % | 0.35 | % | 2.28 | % | 0.06 | % | ||||||||||||||||||
| For the Year ended December 31, 2020 | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Commercial and Industrial | Real Estate Construction | Real Estate - Mortgage (1) | Real Estate - Commercial | Consumer | Other | Unallocated | Total | ||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Balance, beginning | $ | 1,244 | $ | 258 | $ | 2,505 | $ | 3,663 | $ | 1,694 | $ | 296 | $ | - | $ | 9,660 | ||||||||||||||||
| Charge-offs | (25 | ) | - | (149 | ) | (654 | ) | (822 | ) | (355 | ) | - | (2,005 | ) | ||||||||||||||||||
| Recoveries | 47 | 10 | 69 | 317 | 377 | 66 | - | 886 | ||||||||||||||||||||||||
| Provision for loan losses | (616 | ) | 71 | 135 | 1,108 | 53 | 116 | 133 | 1,000 | |||||||||||||||||||||||
| Ending Balance | $ | 650 | $ | 339 | $ | 2,560 | $ | 4,434 | $ | 1,302 | $ | 123 | $ | 133 | $ | 9,541 | ||||||||||||||||
| Average loans | 140,818 | 40,967 | 209,102 | 301,563 | 123,694 | 10,337 | 826,481 | |||||||||||||||||||||||||
| Ratio of net charge-offs to average loans | -0.02 | % | -0.02 | % | 0.04 | % | 0.11 | % | 0.36 | % | 2.80 | % | 0.14 | % | ||||||||||||||||||
| (dollars in thousands) | Commercial and Industrial | Real Estate Construction | Real Estate - Mortgage (1) | Real Estate - Commercial | Consumer (2) | Other | Unallocated | Total | ||||||||||||||||||||||||
| Allowance for credit losses on loans: | ||||||||||||||||||||||||||||||||
Balance, beginning | $ | 673 | $ | 552 | $ | 2,575 | $ | 4,499 | $ | 2,065 | $ | 156 | $ | 6 | $ | 10,526 | ||||||||||||||||
Day 1 impact of adoption of CECL | (11 | ) | 19 | 87 | 1,048 | (365 | ) | (137 | ) | - | 641 | |||||||||||||||||||||
Charge-offs | (492 | ) | - | - | - | (1,613 | ) | (298 | ) | - | (2,403 | ) | ||||||||||||||||||||
Recoveries | 69 | - | 42 | - | 506 | 59 | - | 676 | ||||||||||||||||||||||||
Provision for c losses | 334 | 411 | 200 | 195 | 1,234 | 398 | (6 | ) | 2,766 | |||||||||||||||||||||||
Ending Balance | $ | 573 | $ | 982 | $ | 2,904 | $ | 5,742 | $ | 1,827 | $ | 178 | $ | - | $ | 12,206 | ||||||||||||||||
Average loans | 73,878 | 92,429 | 275,411 | 437,826 | 196,560 | 2,199 | 1,078,303 | |||||||||||||||||||||||||
Ratio of net charge-offs to average loans | 0.57 | % | 0.00 | % | -0.02 | % | 0.00 | % | 0.56 | % | 10.87 | % | 0.16 | % | ||||||||||||||||||
| For the year ended December 31, 2022 | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | Commercial and Industrial | Real Estate Construction | Real Estate - Mortgage (1) | Real Estate - Commercial | Consumer (2) | Other | Unallocated | Total | ||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Balance, beginning | $ | 683 | $ | 459 | $ | 2,390 | $ | 4,787 | $ | 1,362 | $ | 184 | $ | - | $ | 9,865 | ||||||||||||||||
Charge-offs | (297 | ) | - | (25 | ) | - | (1,368 | ) | (332 | ) | - | (2,022 | ) | |||||||||||||||||||
Recoveries | 134 | - | 61 | 22 | 648 | 112 | - | 977 | ||||||||||||||||||||||||
Provision for loan losses | 153 | 93 | 149 | (310 | ) | 1,423 | 192 | 6 | 1,706 | |||||||||||||||||||||||
Ending Balance | $ | 673 | $ | 552 | $ | 2,575 | $ | 4,499 | $ | 2,065 | $ | 156 | $ | 6 | $ | 10,526 | ||||||||||||||||
Average loans | 69,329 | 67,570 | 233,758 | 405,970 | 136,596 | 5,729 | 918,952 | |||||||||||||||||||||||||
Ratio of net charge-offs to average loans | 0.24 | % | 0.00 | % | -0.02 | % | -0.01 | % | 0.53 | % | 3.84 | % | 0.11 | % | ||||||||||||||||||
(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.
(2) The consumer segment includes consumer automobile loans.
The following table shows the amount of the allowance for loan lossesACLL allocated to each category and the ratio of corresponding outstanding loan balances at December 31, of the years presented.2023 and 2022. Although the allowance for loan lossesACLL is allocated into these categories, the entire allowance for loan lossesACLL is available to cover loancredit losses in any category.
Table 10: Allocation of the Allowance for Credit Losses on Loans
| December 31, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| (dollars in thousands) | Amount | Percent of Loans to Total Loans | Amount | Percent of Loans to Total Loans | ||||||||||||
| Commercial and industrial | $ | 573 | 5.93 | % | $ | 673 | 7.07 | % | ||||||||
| Real estate-construction | 982 | 9.92 | % | 552 | 7.59 | % | ||||||||||
| Real estate-mortgage (1) | 2,904 | 26.28 | % | 2,575 | 25.23 | % | ||||||||||
| Real estate-commercial | 5,742 | 40.89 | % | 4,499 | 41.85 | % | ||||||||||
| Consumer (2) | 1,827 | 16.68 | % | 2,065 | 18.04 | % | ||||||||||
| Other | 178 | 0.30 | % | 156 | 0.23 | % | ||||||||||
| Unallocated | - | - | 6 | - | ||||||||||||
| Ending Balance | $ | 12,206 | 100.00 | % | $ | 10,526 | 100.00 | % | ||||||||
(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.
| As of December 31, | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| (Dollars in thousands) | Amount | Percent of Loans to Total Loans | Amount | Percent of Loans to Total Loans | ||||||||||||
| Commercial and industrial | $ | 698 | 8.14 | % | $ | 650 | 16.95 | % | ||||||||
| Real estate-construction | 459 | 6.93 | % | 339 | 5.23 | % | ||||||||||
| Real estate-mortgage (1) | 2,390 | 24.46 | % | 2,560 | 24.82 | % | ||||||||||
| Real estate-commercial | 4,787 | 45.36 | % | 4,434 | 37.89 | % | ||||||||||
| Consumer | 1,362 | 14.04 | % | 1,302 | 14.15 | % | ||||||||||
| Other | 169 | 1.07 | % | 123 | 0.96 | % | ||||||||||
| Unallocated | - | - | 133 | - | ||||||||||||
| Ending Balance | $ | 9,865 | 100.00 | % | $ | 9,541 | 100.00 | % | ||||||||
(2) The consumer segment includes consumer automobile loans.
Deposits
The Company’s predominant source of funds is depository accounts, which are comprised of demand deposits, savings and money market accounts and time deposits. The Company’s deposits are principally provided by individuals and businesses located within the communities served.
The following table shows the average balances and average rates paid on deposits for the periods presented.
| Years ended December 31, | Years ended December 31, | |||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Average Balance | Average Rate | Average Balance | Average Rate | Average Balance | Average Rate | Average Balance | Average Rate | Average Balance | Average Rate | ||||||||||||||||||||||||||||||
| Interest-bearing transaction | $ | 71,841 | 0.02 | % | $ | 55,667 | 0.02 | % | $ | 32,603 | 0.03 | % | $ | 85,939 | 0.02 | % | $ | 78,167 | 0.01 | % | ||||||||||||||||||||
| Money market | 372,193 | 0.24 | % | 307,190 | 0.33 | % | 257,884 | 0.40 | % | 432,758 | 1.56 | % | 385,067 | 0.18 | % | |||||||||||||||||||||||||
| Savings | 114,285 | 0.04 | % | 96,149 | 0.06 | % | 86,787 | 0.10 | % | 103,372 | 0.03 | % | 125,310 | 0.03 | % | |||||||||||||||||||||||||
| Time deposits | 180,255 | 1.08 | % | 209,727 | 1.59 | % | 231,774 | 1.66 | % | 220,674 | 3.20 | % | 159,889 | 0.88 | % | |||||||||||||||||||||||||
| Total interest bearing | 738,574 | 0.39 | % | 668,733 | 0.66 | % | 609,048 | 0.82 | % | 842,743 | 1.65 | % | 748,433 | 0.29 | % | |||||||||||||||||||||||||
| Demand | 391,673 | 325,596 | 245,518 | 374,716 | 422,849 | |||||||||||||||||||||||||||||||||||
| Total deposits | $ | 1,130,247 | $ | 994,329 | $ | 854,566 | $ | 1,217,459 | $ | 1,171,282 | ||||||||||||||||||||||||||||||
The Company’s average total deposits were $1.1$1.2 billion for the year ended December 31, 2021,2023, an increase of $135.9$46.2 million or 13.7%3.9% from average total deposits for the year ended December 31, 2020. Demand deposit2022. Money market and money market account categoriestime deposits had the largest increases from the prior year, totaling $66.1$47.7 million and $65.0$60.8 million, respectively. Average timewhile savings and demand deposits which is the Company’s most expensive deposit category, decreased by a total of $29.5$21.9 million and $48.1 million as seen in the table above. This increase in money market and time deposits was driven in part by depositors seeking increased yields.
The average rate paid on interest-bearing deposits by the Company in 20212023 was 0.39%1.65% compared to 0.66%0.29% in 2020.
As of December 31, 20212023 and 2020,2022, the estimated amounts of total uninsured deposits were $271.7$220.3 million and $209.5$254.7 million, respectively. The following table shows maturities of the estimated amounts of uninsured time deposits at December 31, 2021.2023 and 2022. The estimate of uninsured deposits generally represents the portion of deposit accounts that exceed the FDIC insurance limit of $250,000 and is calculated based on the same methodologies and assumptions used for purposes of the Bank’s regulatory reporting requirements.
Table 12: Maturities of Uninsured Time Deposits
| As of December 31, | As of December 31, | |||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2023 | 2022 | ||||||||||||
| Maturing in: | ||||||||||||||||
| Within 3 months | $ | 17,994 | $ | 15,916 | $ | 35,496 | $ | 13,369 | ||||||||
| 4 through 6 months | 2,330 | 2,934 | 11,839 | 1,264 | ||||||||||||
| 7 through 12 months | 9,476 | 6,348 | 17,878 | 8,307 | ||||||||||||
| Greater than 12 months | 10,123 | 19,177 | 8,700 | 22,861 | ||||||||||||
$ | 39,923 | $ | 44,375 | $ | 73,913 | $ | 45,801 | |||||||||
Capital Resources
Total stockholders' equity as of December 31, 20212023, was $120.8$106.8 million, up 3.1%8.1% from $117.1$98.7 million on December 31, 20202022. The increase was primarily related to current year earnings and an increase in the market value of investment securities resulting in lower unrealized losses in securities available-for-sale, which are recorded asthe result of increased retained earnings partially offset by net unrealized loss on available-for-sale securities, a component of accumulated other comprehensive income onloss, partially offset by dividends paid and the consolidated balance sheets. The changeadoption of the CECL standard related to the calculation of expected credit losses. During 2023, the Company declared common stock dividends of $0.56 per share, compared to $0.52 per share declared in the unrealized gain/loss position was driven by changes in market rates and shift in portfolio composition.2022.
The assessment of capital adequacy depends on such factors as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the Company’s and the Bank’s capital is regularly reviewed. The Company targets regulatory capital levels that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. While the Company will continue to look for opportunities to invest capital in profitable growth, the Company will also consider investing capital in other transactions, such as share repurchases, that facilitate improving shareholder return, as measured by ROE and earnings per share.EPS.
The Bank’s capital position remains strong as evidenced by the regulatory capital measurements. Under the banking regulations, Total Capital is composed of core capital (Tier 1) and supplemental capital (Tier 2). Tier 1 capital consists of common stockholders' equity less goodwill. Tier 2 capital consists of certain qualifying debt and a qualifying portion of the allowance for loan losses.
ACL. In June 2013,addition, the federal bankBank has made the one-time irrevocable election to continue treating accumulated other comprehensive (loss) income under regulatory agencies adoptedstandards that were in place prior to the Basel III Capital Rules (i)in order to implementeliminate volatility of regulatory capital that can result from fluctuations in accumulated other comprehensive (loss) income and the inclusion of accumulated other comprehensive (loss) income in regulatory capital, as would otherwise be required under the Basel III capital framework and (ii) for calculating risk-weighted assets. These rules became effective January 1, 2015, subject to limited phase-in periods. The EGRRCPA, enacted in May 2018, required action by the FRB to expand the applicability of its Small Bank Holding Company Policy Statement, which, among other things, exempts certain bank holding companies from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements that apply to other bank holding companies. In August 2018, the FRB issued an interim final rule provisionally expanding the applicability of the small bank holding company policy statement to bank holding companies with consolidated total assets of less than $3 billion. The statement previously applied only to bank holding companies with consolidated total assets of less than $1 billion.Capital Rule. As a result of this election, changes in accumulated other comprehensive (loss) income, including unrealized losses on securities available for sale, do not affect regulatory capital amounts shown in the interim final rule, which was effective upon its issuance,table below for the Bank, but transactions that would cause the Bank to realize such unrealized losses would affect such regulatory capital amounts.
Pursuant to applicable regulations and regulatory guidance, the Company expects that it will beis treated as a small bank holding company and will not be subject to regulatory capital requirements. For an overview of the Basel III Capital Rules and the EGRRCPA,more information, refer to “Regulation and Supervision” included in Item 1, “Business” of this report on Form 10-K.
On September 17, 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the EGRRCPA. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.
In order to qualify for the CBLR framework, a community banking organization must have a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. The CBLR framework was available for banks to begin using in their March 31, 2020, Call Report. The Bank did not opt into the CBLR framework.
The following is a summary of the Bank’s capital ratios for the past two years.as of December 31, 2023 and 2022. As shown below, these ratios were all well above the recommended regulatory minimum levels.
Table 13: Regulatory Capital
2021 Regulatory Minimums | December 31, 2021 | 2020 Regulatory Minimums | December 31, 2020 | |||||||||||||||||||||||||||||
| (dollars in thousands) | 2023 Regulatory Minimums | December 31, 2023 | 2022 Regulatory Minimums | December 31, 2022 | ||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital to Risk-Weighted Assets | 4.500 | % | 12.57 | % | 4.500 | % | 11.69 | % | 4.500 | % | 11.45 | % | 4.500 | % | 10.80 | % | ||||||||||||||||
| Tier 1 Capital to Risk-Weighted Assets | 6.000 | % | 12.57 | % | 6.000 | % | 11.69 | % | 6.000 | % | 11.45 | % | 6.000 | % | 10.80 | % | ||||||||||||||||
| Total Capital to Risk-Weighted Assets | 8.000 | % | 12.46 | % | 8.000 | % | 11.70 | % | ||||||||||||||||||||||||
| Tier 1 Leverage to Average Assets | 4.000 | % | 9.09 | % | 4.000 | % | 8.56 | % | 4.000 | % | 9.46 | % | 4.000 | % | 9.43 | % | ||||||||||||||||
| Total Capital to Risk-Weighted Assets | 8.000 | % | 13.61 | % | 8.000 | % | 12.77 | % | ||||||||||||||||||||||||
| Capital Conservation Buffer | 2.500 | % | 5.61 | % | 2.500 | % | 4.77 | % | ||||||||||||||||||||||||
| Risk-Weighted Assets (in thousands) | $ | 952,218 | $ | 890,091 | ||||||||||||||||||||||||||||
| Risk-Weighted Assets | $ | 1,222,320 | $ | 1,177,600 | ||||||||||||||||||||||||||||
The Basel III Capital Rules established a “capital conservation buffer” of 2.5 percent above the regulatory minimum risk-based capital ratios, which is not included in the table above. Including the capital conservation buffer, the minimum ratios are a Common Equity Tier 1 capital risk-based ratio of 7.0 percent, a Tier 1 capital risk-based ratio of 8.5 percent, and a Total capital risk-based ratio of 10.5 percent. The Bank exceeded these ratios as of December 31, 2023 and December 31, 2022.
On July 14, 2021, the Company issued $30.0 million in aggregate principal amount($29.4 million, net of 3.50%issuance costs) of 3.5 percent fixed-to-floating rate subordinated notes due 2031 (the Notes) in a private placement transaction. The Notes initially bear interest at a fixed rate of 3.50%3.5 percent for five years and convert to three monththree-month SOFR plus 286 basis points, resetting quarterly, thereafter. The Notes were structured to qualify as Tier 2 capital of the Company for regulatory purposes (should the Company be subject to regulatory capital requirements) and are included in the Company’s Tier 2 capital as of December 31, 2021.2023 and 2022.
Year-end book value per share was $23.06$21.19 in 20212023 and $22.42$19.75 in 2020.2022. The common stock of the Company has not been extensively traded. The stock is quoted on the NASDAQ Capital Market under the symbol “OPOF.” There were 1,5681,535 stockholders of record of the Company as of March 15, 2022.19, 2024. This stockholder count does not include stockholders who hold their stock in a nominee registration.
Liquidity
Liquidity is the ability of the Company to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments in securities and loans maturing within one year. Additional sources of liquidity available to the Company include cash flows from operations, loan payments and payoffs, deposit growth, maturities, calls and sales of securities, the issuance of brokered certificates of deposits and the capacity to borrow additional funds.
The Bank also participates in the IntraFi Cash Sweep, a product which provides the Bank the capability of providing additional deposit insurance to customers through three types of account arrangements. The Company experienced a change in liquidity mix beginning during the fourth quarter of 2022 and in 2023 as short-term FHLB borrowings were utilized to fund loan growth. Notwithstanding the foregoing, the Company’s ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in the Company’s markets. The Company is closely monitoring changes in the industry and market conditions that may affect the Company’s liquidity, including the potential impacts on the Company’s liquidity of declines in the fair value of the Company’s securities portfolio as a result of rising market interest rates and developments in the financial services industry that may change the availability of traditional sources of liquidity or market expectations with respect to available sources and amounts of additional liquidity. Depending on its liquidity levels, its capital position, conditions in the capital markets and other factors, the Company may from time to time consider the issuance of debt, equity, other securities or other possible capital markets transactions, the proceeds of which could provide additional liquidity for the Company’s operations.
The following table sets forth information relating to the Company’s sources of liquidity and the outstanding commitments for use of liquidity at December 31, 20212023 and December 31, 2020.2022. Dividing the total short-term sources of liquidity by the outstanding commitments for use of liquidity derives the liquidity coverage ratio.
| December 31, | December 31, | December 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Total | In Use | Available | Total | In Use | Available | Total | In Use | Available | Total | In Use | Available | ||||||||||||||||||||||||||||||||||||
| Sources: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Federal funds lines of credit | $ | 115,000 | $ | - | $ | 115,000 | $ | 100,000 | $ | - | $ | 100,000 | $ | 90,000 | $ | - | $ | 90,000 | $ | 115,000 | $ | 11,378 | $ | 103,622 | ||||||||||||||||||||||||
| Federal Home Loan Bank advances | 391,287 | - | 391,287 | 374,743 | - | 374,743 | 431,580 | 69,450 | 362,130 | 392,628 | 46,100 | 346,528 | ||||||||||||||||||||||||||||||||||||
| Federal funds sold & balances at the Federal Reserve | 159,346 | 93,727 | - | - | 63,715 | - | - | 1,777 | ||||||||||||||||||||||||||||||||||||||||
| Securities, available for sale and unpledged at fair value | 172,562 | 112,229 | - | - | 120,719 | - | - | 141,145 | ||||||||||||||||||||||||||||||||||||||||
| Total short-term funding sources | $ | 838,195 | $ | 680,699 | ||||||||||||||||||||||||||||||||||||||||||||
| Total funding sources | $ | 636,564 | $ | 593,072 | ||||||||||||||||||||||||||||||||||||||||||||
Uses: (1) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Unfunded loan commitments and lending lines of credit | 69,215 | 71,742 | 89,807 | 84,261 | ||||||||||||||||||||||||||||||||||||||||||||
| Letters of credit | 1,085 | 1,452 | 226 | 271 | ||||||||||||||||||||||||||||||||||||||||||||
| Total potential short-term funding uses | 70,300 | 73,194 | 90,033 | 84,532 | ||||||||||||||||||||||||||||||||||||||||||||
| Liquidity coverage ratio | 1192.3 | % | 930.0 | % | 707.0 | % | 701.6 | % | ||||||||||||||||||||||||||||||||||||||||
(1) Represents partial draw levels based on loan segment.
The fair value of unpledged available-for-sale securities increaseddecreased from December 31, 20202022 to December 31, 20212023 primarily due to an increasechanges in market values in the securities portfolio.portfolio, sales, and the maturities of certain securities.
The Company’s operating activities provided $23.2$10.8 million of cash during the year ended December 31, 2021,2023, compared to $8.6$17.6 million usedprovided during 2020.2022. The decrease in cash provided by operating activities is primarily driven by less net income in 2023. The Company’s investing activities used $60.7$32.3 million of cash during 2021,2023, compared to $122.2$213.4 million of cash used during 2020.2022. The decrease in cash used in operating activities is primarily driven by less loans originated and purchased in 2023. The Company’s financing activities provided $105.0$81.1 million of cash during 20212023 compared to $161.4$27.2 million of cash provided during 2020.
2022. The increase in cash provided by financing activities is primarily driven by an increase in customer deposits in 2023.In the ordinary course of business, the Company has entered into contractual obligations and has made other commitments to make future payments. For further information concerning the Company’s expected timing of such payments as of December 31, 2021,2023, refer to Note 7,“Note 5. Leases, Note 10,” “Note 8. Borrowings,” and Note 15,“Note 13. Commitments and ContingenciesContingencies” of the Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” of this report on Form 10-K.
Off-Balance Sheet Arrangements
To meet the financing needs of customers, the Company is a party, in the normal course of business, to financial instruments with off-balance-sheet risk. These financial instruments include commitments to extend credit, commitments to sell loans and standby letters of credit. These instruments involve elements of credit and interest rate risk in addition to the amount on the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of these instruments. The same credit policies are used in making these commitments and conditional obligations as used for on-balance-sheet instruments. Collateral is obtained based on the credit assessment of the customer in each circumstance.
Loan commitments are agreements to extend credit to a customer provided that there are no violations of the terms of the contract prior to funding. Commitments have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The total amount of unused loan commitments at the Bank was $167.1$213.7 million at December 31, 2021,2023, and $151.6$206.6 million at December 31, 2020.2022.
Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The total contract amount of standby letters of credit was $3.6 million$802 thousand at December 31, 20212023 and $4.8 million$904 thousand at December 31, 2020.2022.
Management believes that the Company has the liquidity and capital resources to handle these commitments in the normal course of business. See Note 15“Note 13. Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this report on Form 10-K.
Recent accounting pronouncements affecting the CorporationCompany are described in Item 8. “Financial Statements and Supplementary Data” under the heading “Note 1:1. Description of Business and Summary of Significant Accounting Policies-Recent Significant Accounting Pronouncements.Policies.”
Non-GAAP Financial Measures
In reporting the results of the year ended December 31, 2021,2023, the Company has provided supplemental financial measures on a tax-equivalent or an adjusted basis. These non-GAAP financial measures are a supplement to GAAP, which is used to prepare the Company’s financial statements, and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, the Company’s non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. The Company uses the non-GAAP financial measures discussed herein in its analysis of the Company’s performance. The Company’s management believes that these non-GAAP financial measures provide additional understanding of ongoing operations and enhance comparability of results of operations with prior periods presented without the impact of items or events that may obscure trends in the Company’s underlying performance. A reconciliation of the non-GAAP financial measures used by the Company to evaluate and measure the Company’s performance to the most directly comparable GAAP financial measures is presented below.
| Years Ended December 31, | ||||||||
| (dollar in thousands, except share and per share data) | 2023 | 2022 | ||||||
| Fully Taxable Equivalent Net Interest Income | ||||||||
| Net interest income (GAAP) | $ | 48,199 | $ | 44,438 | ||||
| FTE adjustment | 193 | 297 | ||||||
| Net interest income (FTE) (non-GAAP) | $ | 48,392 | $ | 44,735 | ||||
| Noninterest income (GAAP) | 13,873 | 13,505 | ||||||
| Total revenue (FTE) (non-GAAP) | $ | 62,265 | $ | 58,240 | ||||
| Noninterest expense (GAAP) | 50,407 | 45,655 | ||||||
| Average earning assets | $ | 1,334,986 | $ | 1,234,780 | ||||
| Net interest margin | 3.61 | % | 3.60 | % | ||||
| Net interest margin (FTE) (non-GAAP) | 3.62 | % | 3.62 | % | ||||
| Efficiency ratio | 81.21 | % | 78.79 | % | ||||
| Efficiency ratio (FTE) (non-GAAP) | 80.96 | % | 78.39 | % | ||||
| Tangible Book Value Per Share | ||||||||
| Total Stockholders Equity (GAAP) | $ | 106,778 | $ | 98,734 | ||||
| Less goodwill | 1,650 | 1,650 | ||||||
| Less core deposit intangible | 187 | 231 | ||||||
| Tangible Stockholders Equity (non-GAAP) | $ | 104,941 | $ | 96,853 | ||||
| Shares issued and outstanding, including nonvested restricted stock | 5,040,095 | 4,999,083 | ||||||
| Book value per share | $ | 21.19 | $ | 19.75 | ||||
| Tangible book value per share | $ | 20.82 | $ | 19.37 | ||||
| Years Ended December 31, | ||||||||
| (dollar in thousands, except per share data) | 2021 | 2020 | ||||||
| Fully Taxable Equivalent Net Interest Income | ||||||||
| Net interest income (GAAP) | $ | 38,794 | $ | 34,717 | ||||
| FTE adjustment | 248 | 187 | ||||||
| Net interest income (FTE) (non-GAAP) | $ | 39,042 | $ | 34,904 | ||||
| Noninterest income (GAAP) | 14,885 | 14,698 | ||||||
| Total revenue (FTE) (non-GAAP) | $ | 53,927 | $ | 49,602 | ||||
| Noninterest expense (GAAP) | 43,149 | 42,505 | ||||||
| Average earning assets | $ | 1,197,028 | $ | 1,092,567 | ||||
| Net interest margin | 3.24 | % | 3.18 | % | ||||
| Net interest margin (FTE) (non-GAAP) | 3.26 | % | 3.19 | % | ||||
| Tangible Book Value Per Share | ||||||||
| Total Stockholders Equity (GAAP) | $ | 120,818 | $ | 117,145 | ||||
| Less goodwill | 1,650 | 1,650 | ||||||
| Less core deposit intangible | 275 | 319 | ||||||
| Tangible Stockholders Equity (non-GAAP) | $ | 118,893 | $ | 115,176 | ||||
| Shares issued and outstanding | 5,239,707 | 5,224,019 | ||||||
| Book value per share | $ | 23.06 | $ | 22.42 | ||||
| Tangible book value per share | $ | 22.69 | $ | 22.05 | ||||
| ALLL as a Percentage of Loans Held for Investment | ||||||||
| Loans held for investment (net of deferred fees and costs) (GAAP) | $ | 843,526 | $ | 836,300 | ||||
| Less PPP originations | 19,008 | 85,983 | ||||||
| Loans held for investment, (net of deferred fees and costs), excluding PPP (non-GAAP) | $ | 824,518 | $ | 750,317 | ||||
| ALLL | $ | 9,865 | $ | 9,541 | ||||
| ALLL as a Percentage of Loans Held for Investment | 1.17 | % | 1.14 | % | ||||
| ALLL as a Percentage of Loans Held for Investment, net of PPP originations | 1.20 | % | 1.27 | % | ||||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Not required.
| Item 8. | Financial Statements and Supplementary Data |
The Consolidated Financial Statements and related footnotes of the Company are presented below followed by the financial statements of the Parent.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors
Old Point Financial Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Old Point Financial Corporation and its subsidiaries (the Company) as of December 31, 20212023 and 2020,2022, the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20212023 and 2020,2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Adoption of New Accounting Standard
As discussed in Notes 1 and 3 to the financial statements, the Company has changed its method of accounting for the allowance for credit losses in 2023 due to the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, including all related amendments.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for LoanCredit Losses – Loans Collectively Evaluated for Impairment – Qualitative Adjustment Factors
As described in Note 1 (Significant– Description of Business and Summary of Significant Accounting Policies)Policies and Note 4 (Loans3 – Loans and Allowance for Loan Losses)Credit Losses on Loans to the consolidated financial statements, the Company’sCompany changed its method of accounting for credit losses on January 1, 2023, due to the adoption of Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as amended. The allowance for loancredit losses on loans (ACLL) is establisheda valuation allowance that represents management’s best estimate of expected credit losses on loans measured at amortized cost considering available information, from internal and external sources, relevant to assessing collectability over the loans’ contractual terms. Loans which share common risk characteristics are pooled and collectively evaluated by the Company using historical data, as losses are estimated to have occurred through a provision for loan losses charged against earnings.well as assessments of current conditions and reasonable and supportable forecasts of future conditions. The Company’s allowance for loan losses has three basic components, an allocated component and two general components. At December 31, 2021, the allocated component amountedACLL related to $128,000collectively evaluated loans made up substantially all of the total allowance forrecorded ACLL of $12.2 million as of December 31, 2023. The collectively evaluated ACLL consists of quantitative and qualitative components.
The quantitative component consists of loss estimates derived from both a discounted cash flow (“DCF”) model and a weighted average remaining maturity (“WARM”) model using external observations of historical loan losses adjusted for estimated attrition and forecasts of $9,865,000. The remaining $9,737,000 was comprisedfuture conditions over a reasonable and supportable period. These estimates consider large amounts of two general components: (1) a historicaldata in tabulating loss and attrition rates and require complex calculations as well as management judgment in the selection of appropriate inputs.
In addition to the quantitative component, amounting to $1,846,000 and (2)the collectively evaluated ACLL also includes a qualitative adjustment factor component amountingwhich aggregates management’s assessment of available information relevant to $7,891,000. For loansassessing collectability that areis not specifically identified for impairment,captured in the general allowance uses historicalquantitative loss experience along with various qualitative factors to develop adjusted loss factors for each loan segment. The qualitative adjustment factors to the historical loss experience are established by applying an allocation to the loan segments identifiedestimation process. Factors considered by management based on their assessment of shared risk characteristics within groups of similar loans in addition to their historical loss experience calculated using a migration analysis. Qualitative adjustment factors are determined based on management’s continuing evaluation of inputsdeveloping its qualitative estimates include: changes in lending policies, procedures and assumptions underlying the quality of the loan portfolio. Management evaluates qualitative factors, primarily consideringstrategies, changes in international, national, regional and local economic trends and business conditions; concentrations of credit; trendsconditions, changes in delinquencies, nonaccrual loans, and classified loans; trends inthe nature and volume of loans; trendsthe portfolio and terms of loans, changes in the experience, depth, and ability of lending management, changes in the volume and severity of past due loans and other similar conditions, changes in the quality of the Company’s loan review system, changes in the value of underlying collateral values for collateral dependent loans, underwriting standards,the existence and lending policies; experienceeffect of lending officers, managementany concentrations of credit and other staff; changes in loan review systems;the level of such concentrations and the effect of other external competitive pressures,factors (i.e. competition, legal and regulatory factors. requirements, etc.) on the level of credit losses.
Management exercised significant judgment when assessing the qualitative adjustment factors in estimating the allowance for loan losses.ACLL on collectively evaluated loans. We identified the assessmentestimation of the qualitative adjustment factorscollectively evaluated ACLL as a critical audit matter as auditing the qualitative adjustment factorscollectively evaluated ACLL involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.
The primary audit procedures we performed to address this critical audit matter included:
| • Substantively testing management’s process for measuring the collectively evaluated ACLL, including: |
Evaluating conceptual soundness, assumptions, and reviewkey data inputs of the dataCompany’s DCF and WARM methodologies, including the identification of loan pools, the calculation of loss rate inputs, used asand the basiscalculation of prepayment/attrition rate inputs for each pool.
Evaluating the allocation factorsmethodology and management's reviewtesting the accuracy of incorporating reasonable and approval ofsupportable forecasts in the reasonableness of the assumptions used to develop the qualitative adjustmentscollectively evaluated ACLL estimate.
Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative adjustment factors.
Evaluating the qualitative adjustment factors for directional consistency in comparison to prior periods and for reasonableness.reasonableness in comparison to underlying supporting data.
Testing the mathematical accuracy of the allowance calculation,ACLL for collectively evaluated loans including both the applicationquantitative and qualitative components of the qualitative adjustment factors.calculation.
/s/ Yount, Hyde & Barbour, P.C.
We have served as the Company’sCompany's auditor since 2004.
Richmond, Virginia
April 1, 2024
Old Point Financial Corporation and Subsidiaries
Consolidated Balance Sheets
| December 31, | December 31, | December 31, | ||||||||||||||
| (dollars in thousands, except share data) | 2021 | 2020 | 2023 | 2022 | ||||||||||||
| Assets | ||||||||||||||||
| Cash and due from banks | $ | 13,424 | $ | 21,799 | $ | 14,731 | $ | 15,670 | ||||||||
| Interest-bearing due from banks | 164,073 | 98,633 | 63,539 | 3,580 | ||||||||||||
| Federal funds sold | 10,425 | 5 | 489 | - | ||||||||||||
| Cash and cash equivalents | 187,922 | 120,437 | 78,759 | 19,250 | ||||||||||||
| Securities available-for-sale, at fair value | 234,321 | 186,409 | 204,278 | 225,518 | ||||||||||||
| Restricted securities, at cost | 1,034 | 1,367 | 5,176 | 3,434 | ||||||||||||
| Loans held for sale | 3,287 | 14,413 | 470 | 421 | ||||||||||||
| Loans, net | 833,661 | 826,759 | 1,068,046 | 1,016,559 | ||||||||||||
| Premises and equipment, net | 32,134 | 33,613 | 29,913 | 31,008 | ||||||||||||
| Premises and equipment, held for sale | 871 | 0 | 344 | 987 | ||||||||||||
| Bank-owned life insurance | 28,168 | 28,386 | 35,088 | 34,049 | ||||||||||||
| Goodwill | 1,650 | 1,650 | 1,650 | 1,650 | ||||||||||||
| Core deposit intangible, net | 275 | 319 | 187 | 231 | ||||||||||||
| Other assets | 14,832 | 12,838 | 22,471 | 22,228 | ||||||||||||
| Total assets | $ | 1,338,155 | $ | 1,226,191 | $ | 1,446,382 | $ | 1,355,335 | ||||||||
| Liabilities & Stockholders’ Equity | ||||||||||||||||
| Deposits: | ||||||||||||||||
| Noninterest-bearing deposits | $ | 421,531 | $ | 360,602 | $ | 331,992 | $ | 418,582 | ||||||||
| Savings deposits | 586,450 | 512,936 | 655,694 | 584,527 | ||||||||||||
| Time deposits | 169,118 | 193,698 | 242,711 | 152,910 | ||||||||||||
| Total deposits | 1,177,099 | 1,067,236 | 1,230,397 | 1,156,019 | ||||||||||||
| Overnight repurchase agreements | 4,536 | 6,619 | 2,383 | 4,987 | ||||||||||||
| Federal Reserve Bank borrowings | 480 | 28,550 | ||||||||||||||
| Long term borrowings | 29,407 | 1,350 | ||||||||||||||
| Federal funds purchased and other short-term borrowings | - | 11,378 | ||||||||||||||
| Federal Home Loan Bank advances | 69,450 | 46,100 | ||||||||||||||
| Long-term borrowings | 29,668 | 29,538 | ||||||||||||||
| Accrued expenses and other liabilities | 5,815 | 5,291 | 7,706 | 8,579 | ||||||||||||
| Total liabilities | 1,217,337 | 1,109,046 | 1,339,604 | 1,256,601 | ||||||||||||
| Stockholders’ equity: | ||||||||||||||||
Common stock, $5 par value, 10,000,000 shares authorized; 5,239,707 and 5,224,019 shares outstanding (includes 38,435 and 29,576 of nonvested restricted stock, respectively) | 26,006 | 25,972 | ||||||||||||||
Common stock, $5 par value, 10,000,000 shares authorized; 5,040,095 and 4,999,083 shares outstanding (includes 53,660 and 46,989 of nonvested restricted stock, respectively) | 24,932 | 24,761 | ||||||||||||||
| Additional paid-in capital | 21,458 | 21,245 | 17,099 | 16,593 | ||||||||||||
| Retained earnings | 71,679 | 65,859 | 82,277 | 78,147 | ||||||||||||
| Accumulated other comprehensive income, net | 1,675 | 4,069 | ||||||||||||||
| Accumulated other comprehensive loss, net | (17,530 | ) | (20,767 | ) | ||||||||||||
| Total stockholders’ equity | 120,818 | 117,145 | 106,778 | 98,734 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 1,338,155 | $ | 1,226,191 | $ | 1,446,382 | $ | 1,355,335 | ||||||||
See Notesaccompanying notes to Consolidated Financial Statements.consolidated financial statements.
Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, | Years Ended | |||||||||||||||
| (dollars in thousands, except per share data) | 2021 | 2020 | ||||||||||||||
| Interest and Dividend Income: | ||||||||||||||||
| December 31, | ||||||||||||||||
| (dollars in thousands, except share and per share data) | 2023 | 2022 | ||||||||||||||
| Interest and dividend income: | ||||||||||||||||
| Loans, including fees | $ | 37,912 | $ | 36,012 | $ | 56,303 | $ | 41,407 | ||||||||
| Due from banks | 230 | 267 | 2,067 | 598 | ||||||||||||
| Federal funds sold | 3 | 12 | 34 | 21 | ||||||||||||
| Securities: | ||||||||||||||||
| Taxable | 3,284 | 3,068 | 7,177 | 4,936 | ||||||||||||
| Tax-exempt | 753 | 516 | 719 | 994 | ||||||||||||
| Dividends and interest on all other securities | 70 | 134 | 326 | 87 | ||||||||||||
| Total interest and dividend income | 42,252 | 40,009 | 66,626 | 48,043 | ||||||||||||
| Interest Expense: | ||||||||||||||||
| Interest expense: | ||||||||||||||||
| Checking and savings deposits | 938 | 1,080 | 6,810 | 746 | ||||||||||||
| Time deposits | 1,941 | 3,337 | 7,057 | 1,403 | ||||||||||||
Federal funds purchased, securities sold under agreements to repurchase and other borrowings | 35 | 150 | 40 | 69 | ||||||||||||
| Long term borrowings | 544 | 0 | ||||||||||||||
| Federal Home Loan Bank advances | 0 | 725 | 3,339 | 1,180 | ||||||||||||
| Long-term borrowings | 1,181 | 207 | ||||||||||||||
| Total interest expense | 3,458 | 5,292 | 18,427 | 3,605 | ||||||||||||
| Net interest income | 38,794 | 34,717 | 48,199 | 44,438 | ||||||||||||
| Provision for loan losses | 794 | 1,000 | ||||||||||||||
| Net interest income after provision for loan losses | 38,000 | 33,717 | ||||||||||||||
| Provision for credit losses | 2,601 | 1,706 | ||||||||||||||
| Net interest income after provision for credit losses | 45,598 | 42,732 | ||||||||||||||
| Noninterest Income: | ||||||||||||||||
| Noninterest income: | ||||||||||||||||
| Fiduciary and asset management fees | 4,198 | 3,877 | 4,632 | 4,097 | ||||||||||||
| Service charges on deposit accounts | 2,866 | 2,872 | 3,077 | 3,069 | ||||||||||||
| Other service charges, commissions and fees | 4,169 | 4,028 | 4,143 | 4,383 | ||||||||||||
| Bank-owned life insurance income | 1,014 | 839 | 1,038 | 909 | ||||||||||||
| Mortgage banking income | 2,280 | 1,781 | 433 | 497 | ||||||||||||
| Gain on sale of available-for-sale securities, net | 0 | 264 | ||||||||||||||
| Gain on sale of fixed assets | 0 | 818 | ||||||||||||||
| Loss on sale of available-for-sale securities, net | (134 | ) | (1,870 | ) | ||||||||||||
| Loss on sale of repossessed assets | (69 | ) | - | |||||||||||||
Gain on sale of premises and equipment | 220 | 1,690 | ||||||||||||||
| Other operating income | 358 | 219 | 533 | 730 | ||||||||||||
| Total noninterest income | 14,885 | 14,698 | 13,873 | 13,505 | ||||||||||||
| Noninterest Expense: | ||||||||||||||||
| Noninterest expense: | ||||||||||||||||
| Salaries and employee benefits | 25,361 | 25,512 | 30,429 | 27,055 | ||||||||||||
| Occupancy and equipment | 4,694 | 4,852 | 4,889 | 4,720 | ||||||||||||
| Data processing | 4,557 | 3,478 | 5,010 | 4,630 | ||||||||||||
| Customer development | 370 | 381 | 548 | 473 | ||||||||||||
| Professional services | 2,521 | 2,196 | 2,664 | 2,673 | ||||||||||||
| Employee professional development | 719 | 658 | 1,002 | 991 | ||||||||||||
| Other taxes | 794 | 661 | 950 | 849 | ||||||||||||
| ATM and other losses | 504 | 871 | 782 | 535 | ||||||||||||
| Loss on extinguishment of borrowings | 0 | 490 | ||||||||||||||
| (Gain) on other real estate owned | 0 | (62 | ) | |||||||||||||
| Loss on sale of loans | 0 | 99 | ||||||||||||||
| Other operating expenses | 3,629 | 3,369 | 4,133 | 3,729 | ||||||||||||
| Total noninterest expense | 43,149 | 42,505 | 50,407 | 45,655 | ||||||||||||
| Income before income taxes | 9,736 | 5,910 | 9,064 | 10,582 | ||||||||||||
| Income tax expense | 1,296 | 521 | 1,334 | 1,474 | ||||||||||||
| Net income | $ | 8,440 | $ | 5,389 | $ | 7,730 | $ | 9,108 | ||||||||
| Basic Earnings per Share: | ||||||||||||||||
| Weighted average shares outstanding | 5,238,318 | 5,216,237 | 5,025,006 | 5,071,130 | ||||||||||||
| Net income per share of common stock | $ | 1.61 | $ | 1.03 | $ | 1.54 | $ | 1.80 | ||||||||
| Diluted Earnings per Share: | ||||||||||||||||
| Weighted average shares outstanding | 5,238,352 | 5,216,441 | 5,025,139 | 5,071,169 | ||||||||||||
| Net income per share of common stock | $ | 1.61 | $ | 1.03 | $ | 1.54 | $ | 1.80 | ||||||||
See Notesaccompanying notes to Consolidated Financial Statements.consolidated financial statements.
Old Point Financial Corporation
Consolidated Statements of Comprehensive Income (Loss)
| Years Ended | ||||||||||||||||
Years Ended December 31, | December 31, | |||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2023 | 2022 | ||||||||||||
| Net income | $ | 8,440 | $ | 5,389 | $ | 7,730 | $ | 9,108 | ||||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||
| Net unrealized gain (loss) on available-for-sale securities | (2,394 | ) | 4,357 | 3,131 | (23,919 | ) | ||||||||||
| Reclassification for gain included in net income | 0 | (209 | ) | |||||||||||||
| Reclassification for loss included in net income | 106 | 1,477 | ||||||||||||||
| Other comprehensive income (loss), net of tax | (2,394 | ) | 4,148 | 3,237 | (22,442 | ) | ||||||||||
| Comprehensive income | $ | 6,046 | $ | 9,537 | ||||||||||||
Comprehensive income (loss) | $ | 10,967 | $ | (13,334 | ) | |||||||||||
See Notesaccompanying notes to Consolidated Financial Statements.consolidated financial statements.
Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
| Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of | Additional | Other | ||||||||||||||||||||||||||||||||||||||||||||||
| Common | Common | Paid-in | Retained | Comprehensive | ||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands, except share and per share data) | Shares of Common Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | Stock | Stock | Capital | Earnings | Income (Loss) | Total | ||||||||||||||||||||||||||||||||||||
| YEAR ENDED DECEMBER 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | 5,194,443 | $ | 25,972 | $ | 21,245 | $ | 65,859 | $ | 4,069 | $ | 117,145 | |||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 5,201,272 | $ | 26,006 | $ | 21,458 | $ | 71,679 | $ | 1,675 | $ | 120,818 | |||||||||||||||||||||||||||||||||||||
| Net income | - | 0 | 0 | 8,440 | 0 | 8,440 | - | - | - | 9,108 | - | 9,108 | ||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | - | 0 | 0 | 0 | (2,394 | ) | (2,394 | ) | - | - | - | - | (22,442 | ) | (22,442 | ) | ||||||||||||||||||||||||||||||||
| Employee Stock Purchase Plan share issuance | 4,908 | 24 | 79 | 0 | 0 | 103 | 5,765 | 29 | 100 | - | - | 129 | ||||||||||||||||||||||||||||||||||||
| Common stock purchased | (6,600 | ) | (33 | ) | (117 | ) | 0 | 0 | (150 | ) | (268,095 | ) | (1,340 | ) | (5,315 | ) | - | - | (6,655 | ) | ||||||||||||||||||||||||||||
| Restricted stock vested | 8,521 | 43 | (43 | ) | 0 | 0 | 0 | 13,152 | 66 | (66 | ) | - | - | - | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | 0 | 294 | 0 | 0 | 294 | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.50 per share) | - | 0 | 0 | (2,620 | ) | 0 | (2,620 | ) | ||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | - | - | 416 | - | - | 416 | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.52 per share) | - | - | - | (2,640 | ) | - | (2,640 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance at end of period | 5,201,272 | $ | 26,006 | $ | 21,458 | $ | 71,679 | $ | 1,675 | $ | 120,818 | |||||||||||||||||||||||||||||||||||||
| YEAR ENDED DECEMBER 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 5,180,105 | $ | 25,901 | $ | 20,959 | $ | 62,975 | $ | (79 | ) | $ | 109,756 | ||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 4,952,094 | $ | 24,761 | $ | 16,593 | $ | 78,147 | $ | (20,767 | ) | $ | 98,734 | ||||||||||||||||||||||||||||||||||||
| Net income | - | 0 | 0 | 5,389 | 0 | 5,389 | - | - | - | 7,730 | - | 7,730 | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | - | 0 | 0 | 0 | 4,148 | 4,148 | - | - | - | - | 3,237 | 3,237 | ||||||||||||||||||||||||||||||||||||
| Impact of adoption of new accounting pronouncement | - | - | - | (783 | ) | - | (783 | ) | ||||||||||||||||||||||||||||||||||||||||
| Employee Stock Purchase Plan share issuance | 5,819 | 29 | 67 | 0 | 0 | 96 | 7,425 | 37 | 94 | - | - | 131 | ||||||||||||||||||||||||||||||||||||
| Restricted stock vested | 8,519 | 42 | (42 | ) | 0 | 0 | 0 | 26,916 | 134 | (134 | ) | - | - | - | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | 0 | 261 | 0 | 0 | 261 | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.48 per share) | - | 0 | 0 | (2,505 | ) | 0 | (2,505 | ) | ||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | - | - | 546 | - | - | 546 | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.56 per share) | - | - | - | (2,817 | ) | - | (2,817 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance at end of period | 5,194,443 | $ | 25,972 | $ | 21,245 | $ | 65,859 | $ | 4,069 | $ | 117,145 | |||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | 4,986,435 | $ | 24,932 | $ | 17,099 | $ | 82,277 | $ | (17,530 | ) | $ | 106,778 | ||||||||||||||||||||||||||||||||||||
See Notesaccompanying notes to Consolidated Financial Statements.consolidated financial statements.
Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
| Years Ended December 31, | ||||||||
| (unaudited dollars in thousands) | 2021 | 2020 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | $ | 8,440 | $ | 5,389 | ||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 2,091 | 2,145 | ||||||
| Amortization of right of use lease asset | 347 | 380 | ||||||
| Accretion related to acquisition, net | (2 | ) | (176 | ) | ||||
| Amortization of subordinated debt issuance costs | 60 | 0 | ||||||
| Provision for loan losses | 794 | 1,000 | ||||||
| Gain on sale of securities, net | 0 | (264 | ) | |||||
| Net amortization of securities | 989 | 627 | ||||||
| Decrease (increase) in loans held for sale, net | 11,126 | (13,823 | ) | |||||
| Net (gain) loss on disposal of premises and equipment | 0 | (818 | ) | |||||
| Net gain on write-down/sale of other real estate owned | 0 | (62 | ) | |||||
| Income from bank owned life insurance | (1,014 | ) | (839 | ) | ||||
| Stock compensation expense | 294 | 261 | ||||||
| Deferred tax expense (benefit) | 275 | (634 | ) | |||||
| Decrease in other assets | (748 | ) | (966 | ) | ||||
| Increase (decrease) in accrued expenses and other liabilities | 524 | (855 | ) | |||||
| Net cash provided by (used in) operating activities | 23,176 | (8,635 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of available-for-sale securities | (90,070 | ) | (73,057 | ) | ||||
| Proceeds from redemption (purchase) of restricted securities, net | 333 | 1,559 | ||||||
| Proceeds from maturities and calls of available-for-sale securities | 11,780 | 10,747 | ||||||
| Proceeds from sales of available-for-sale securities | 6,880 | 13,944 | ||||||
| Paydowns on available-for-sale securities | 19,479 | 12,559 | ||||||
| Net increase in loans held for investment | (7,650 | ) | (89,588 | ) | ||||
| Proceeds from sales of other real estate owned | 0 | 316 | ||||||
| Purchases of premises and equipment | (1,514 | ) | (924 | ) | ||||
| Proceeds from sale of premises and equipment | 31 | 2,203 | ||||||
| Net cash used in investing activities | (60,731 | ) | (122,241 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Increase in noninterest-bearing deposits | 60,929 | 98,044 | ||||||
| Increase in savings deposits | 73,514 | 113,916 | ||||||
| Decrease in time deposits | (24,580 | ) | (34,220 | ) | ||||
| Increase (decrease) in federal funds purchased, repurchase agreements and other borrowings, net | (3,433 | ) | (5,433 | ) | ||||
| Increase in Federal Home Loan Bank advances | 0 | 25,000 | ||||||
| Repayment of Federal Home Loan Bank advances | 0 | (62,000 | ) | |||||
| Increase in Federal Reserve Bank borrowings | 0 | 37,515 | ||||||
| Repayment of Federal Reserve Bank borrowings | (28,070 | ) | (8,965 | ) | ||||
| Increase in long term borrowings | 29,347 | 96 | ||||||
| Proceeds from ESPP issuance | 103 | 0 | ||||||
| Repurchase of common stock | (150 | ) | 0 | |||||
| Cash dividends paid on common stock | (2,620 | ) | (2,505 | ) | ||||
| Net cash provided by financing activities | 105,040 | 161,448 | ||||||
| Net increase in cash and cash equivalents | 67,485 | 30,572 | ||||||
| Cash and cash equivalents at beginning of period | 120,437 | 89,865 | ||||||
| Cash and cash equivalents at end of period | $ | 187,922 | $ | 120,437 | ||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
| Cash payments for: | ||||||||
| Interest | $ | 3,149 | $ | 5,528 | ||||
| SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS | ||||||||
| Unrealized (loss) gain on securities available-for-sale | $ | (3,030 | ) | $ | 5,250 | |||
| Loans transferred to other real estate owned | $ | 0 | $ | 254 | ||||
| Former bank property transferred from fixed assets to held for sale assets | $ | 902 | $ | 0 | ||||
| Right of use lease asset and liability | $ | 0 | $ | 1,312 | ||||
| Receivable for BOLI death benefit | $ | 1,232 | $ | 0 | ||||
| Years Ended December 31, | ||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||
| Operating activities: | ||||||||
| Net income | $ | 7,730 | $ | 9,108 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 2,148 | 2,073 | ||||||
| Amortization of right of use lease asset | 430 | 350 | ||||||
| Accretion related to acquisition, net | 44 | 21 | ||||||
| Amortization of subordinated debt issuance costs | 130 | 131 | ||||||
| Provision for credit losses | 2,601 | 1,706 | ||||||
| Loss on sale of securities, net | 134 | 1,870 | ||||||
| Net amortization of securities | 710 | 1,193 | ||||||
| (Increase) decrease in loans held for sale, net | (49 | ) | 2,866 | |||||
| Net gain on disposal of premises and equipment | (220 | ) | (1,690 | ) | ||||
| Net gain on write-down/sale of repossessed assets | 69 | - | ||||||
| Income from bank owned life insurance | (1,038 | ) | (909 | ) | ||||
| Stock compensation expense | 546 | 416 | ||||||
| Deferred tax expense | (88 | ) | (51 | ) | ||||
| Increase in other assets | (1,093 | ) | (1,371 | ) | ||||
| (Decrease) increase in accrued expenses and other liabilities | (1,058 | ) | 1,852 | |||||
| Net cash provided by operating activities | 10,996 | 17,565 | ||||||
| Investing activities: | ||||||||
| Purchases of available-for-sale securities | (16,315 | ) | (71,218 | ) | ||||
| Purchase of redemption of restricted securities, net | (681 | ) | (2,400 | ) | ||||
| Proceeds from maturities and calls of available-for-sale securities | 890 | 5,750 | ||||||
| Proceeds from sales of available-for-sale securities | 24,171 | 26,000 | ||||||
| Paydowns on available-for-sale securities | 14,687 | 16,799 | ||||||
| Proceeds from sale of loans held for investment | - | 7,328 | ||||||
| Purchases of loans held for investment | - | (68,216 | ) | |||||
| Net increase in loans held for investment | (55,109 | ) | (123,110 | ) | ||||
| Proceeds from sales of other real estate owned | - | 986 | ||||||
| Purchases of bank-owned life insurance | - | (5,000 | ) | |||||
| Purchases of premises and equipment | (1,053 | ) | (1,354 | ) | ||||
| Proceeds from sale of premises and equipment | 863 | 995 | ||||||
| Net cash used in investing activities | (32,547 | ) | (213,440 | ) | ||||
| Financing activities: | ||||||||
| Decrease in noninterest-bearing deposits | (86,590 | ) | (2,949 | ) | ||||
| Increase (decrease) in savings deposits | 71,167 | (1,923 | ) | |||||
| Increase (decrease) in time deposits | 89,801 | (16,208 | ) | |||||
| (Decrease) increase in federal funds purchased, repurchase agreements and other borrowings, net | (13,982 | ) | 11,829 | |||||
| Increase in Federal Home Loan Bank advances | 457,300 | 118,100 | ||||||
| Repayment of Federal Home Loan Bank advances | (433,950 | ) | (72,000 | ) | ||||
| Repayment of Federal Reserve Bank borrowings | - | (480 | ) | |||||
| Proceeds from Employee Stock Purchase Plan issuance | 131 | 129 | ||||||
| Repurchase of common stock | - | (6,655 | ) | |||||
| Cash dividends paid on common stock | (2,817 | ) | (2,640 | ) | ||||
| Net cash provided by financing activities | 81,060 | 27,203 | ||||||
| Net increase (decrease) in cash and cash equivalents | 59,509 | (168,672 | ) | |||||
| Cash and cash equivalents at beginning of period | 19,250 | 187,922 | ||||||
| Cash and cash equivalents at end of period | $ | 78,759 | $ | 19,250 | ||||
| Supplemental disclosures of cash flow information | ||||||||
| Cash payments for: | ||||||||
| Interest | $ | 17,159 | $ | 3,333 | ||||
| Supplemental schedule of noncash transactions | ||||||||
| Unrealized gain (loss) on securities available-for-sale | $ | 4,098 | $ | (28,409 | ) | |||
| Loans transferred to repossessed assets | $ | 215 | $ | 279 | ||||
| Former bank property transferred from fixed assets to held for sale assets | $ | - | $ | 345 | ||||
| Right of use lease asset and liability | $ | - | $ | 911 | ||||
| Impact of adoption of ASC 326 | $ | 991 | $ | - | ||||
See Notesaccompanying notes to Consolidated Financial Statements.consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Headquartered in Hampton, Virginia, Old Point Financial Corporation (NASDAQ: OPOF) (the Company) is a holding company that conducts substantially all of its operations through 2two wholly-owned subsidiaries, The Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services, N.A. (Wealth). The Bank serves individual and commercial customers, the majority of which are in the Hampton Roads region of Virginia. As of December 31, 2021,2023, the Bank had 1614 branch offices. During the first quarter of 2022, two planned branch closures were completed.TheThe Bank offers a full range of deposit and loan products to its retail and commercial customers, including mortgage loan products offered through Old Point Mortgage. A full array of insurance products is also offered through Old Point Insurance, LLC in partnership with Morgan Marrow Company. TrustWealth offers a full range of services for individuals and businesses. Products and services include retirement planning, estate planning, financial planning, estate and trust administration, retirement plan administration, tax services and investment management services.
The consolidated financial statements are presented on a consolidated basis and include the accounts of Old Point Financial Corporation (the Company)the Company, and its wholly-owned subsidiaries, The Old Point Nationalthe Bank of Phoebus (the Bank) and Old Point Trust & Financial Services N.A. (Trust).Wealth. All significant intercompany balances and transactions have been eliminated in consolidation.
In preparing Consolidated Financial Statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets and 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 loancredit losses and evaluation of goodwill for impairment. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made.
Most of the Company’s activities are with customers located within the Hampton Roads region. The types of securities that the Company invests in are included in Note 3.“Note 2. Securities.” The types of lending that the Company engages in are included in Note 4.“Note 3. Loans and Allowance for Credit Losses on Loans.” The Company has significant concentrations in the following industries: construction, lessors of real estate, activities related to real estate, ambulatory health carehotels, motels, and religious organizations. The Company does not have any significant concentrations to any one customer.
At December 31, 20212023 and 2020,2022, there were $460.1$578.1 million and $383.4$534.5 million, or 54.5%53.5% and 45.8%52.0%, respectively, of total loans concentrated in commercial real estate. Commercial real estate for purposes of this note includes all construction loans, loans secured by multifamily residential properties, loans secured by farmland and loans secured by nonfarm, nonresidential properties. Refer to Note 4“Note 3. Loans and Allowance for Credit Losses on Loans” for further detail.
For purposes of the consolidated statements of cash flows, cash and cash equivalents includes cash and balances due from banks and federal funds sold, all of which mature within 90 days. The Bank is typically required to maintain cash reserve balances on hand or with the Federal Reserve Bank (FRB).FRB. At December 31, 2021,2023, there was no minimum reserve requirement as a result of a rule adopted by the FRB in March 2020 eliminating the reserve requirement.
Interest-bearing deposits in banks mature within one year and are carried at cost.
Certain debt securities that management has the positive intent and ability to hold until maturity are classified as held-to-maturity and recorded at amortized cost. Securities not classified as held-to-maturity, excluding equity securities with readily determinable fair values which are recorded at fair value through the income statement, are classified as available-for-sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income.income (loss). Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. The Company has no trading securities.
Impairment of debt securities occurs when the fair value of a security is less than its amortized cost. The Company evaluateshas elected to exclude accrued interest receivable from the amortized cost basis. For debt securities for other-than-temporaryavailable-for-sale, impairment at least on a quarterly basis, and more frequently when economicis recognized in its entirety in net income if either (i)the Company intends to sell the security or market concerns warrant such evaluation. The(ii) it is more-likely-than-not that the Company employs a systematic methodology that considers available evidence in evaluating potential impairmentwill be required to sell the security before recovery of its investments. Inamortized cost basis. If, however, the eventCompany does not intend to sell the security and it is not more-likely-than-not that the Company will be required to sell the security before recovery, the Company evaluates unrealized losses to determine whether a decline in fair value below amortized cost basis is a result of 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, or other factors such as changes in market interest rates. If a credit loss exists, an investmentallowance for credit losses is recorded that reflects the amount of the impairment related to credit losses, limited by the amount by which the security’s amortized cost basis exceeds its fair value. Changes in the allowance for credit losses are recorded in net income in the period of change and are included in provision for credit losses. Changes in the fair value theof debt securities available-for-sale not resulting from credit losses are recorded in other comprehensive loss. The Company evaluates, among other factors, the magnituderegularly reviews unrealized losses in its investments in securities and duration of the decline in fair value; the expected cash flows ofexpected to be collected from impaired securities based on criteria including the securities;extent to which market value is below amortized cost, the financial health of and business outlookspecific prospects for the issuer;issuer, the performance ofCompany’s intention with regard to holding the underlying assets for interests in securitized assets;security to maturity and the Company’s intent and abilitylikelihood that the Company would be required to holdsell the investment. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in investment income and a new cost basis in the investment is established.security before recovery.
The Company, as a member of the Federal Reserve Bank (FRB)FRB and the Federal Home Loan BankFHLB of Atlanta (FHLB), is required to maintain an investment in the capital stock of both the FRB and the FHLB. The Company also has an investment in the capital stock of Community Bankers’ Bank (CBB).CBB. Based on the redemption provisions of these investments, the stocks have no quoted market value, are carried at cost, and are listed as restricted securities. The Company reviews its holdings for impairment based on the ultimate recoverability of the cost basis in the FRB, FHLB, and CBB stock.
The Company records loans held for sale using the lower of cost or fair value. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Any changes in the application of lower of cost or market accounting of loans held for sale is recorded as a component of “Mortgage banking income” within the Company’s Consolidated Statements of Income.
The Company extends loans to individual consumers and commercial customers for various purposes. Most of the Company’s loans are secured by real estate, including real estate construction loans, real estate commercial loans, and real estate mortgage loans (i.e., residential 1-4 family mortgages, second mortgages and equity lines of credit). Other loans are secured by collateral that is not real estate, which may include inventory, accounts receivable, equipment or other personal property. A substantial portion of the loan portfolio is represented by real estate mortgage loans throughout Hampton Roads. The ability of the Company’s debtors to honor their contracts is dependent in part upon the real estate and general economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for unearned income, the allowance for loan lossesACLL and any unamortized deferred fees or costs on originated loans.
For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.
The accrual of interest on commercial loans (including construction loans and commercial loans secured and not secured by real estate) is generally discontinued at the time the loan is 90 days past due unless the credit is well-secured and in the process of collection. Consumer loans not secured by real estate and consumer real estate secured loans (i.e., residential 1-4 family mortgages, second mortgages and equity lines of credit) are generally placed on nonaccrual status when payments are 120 days past due. Past due status is based on the contractual terms of the loan agreement, and loans are considered past due when a payment of principal and/or interest is due but not paid. Regular payments not received within the payment cycle are considered to be 30, 60, or 90 or more days past due accordingly. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual status or charged off. Loans are generally returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, or when the borrower has resumed paying the full amount of the scheduled contractual interest and principal payments for at least six months.
Loans are generally fully charged off or partially charged down to the fair value of collateral securing the asset when:
Management determines the asset to be uncollectible;
Repayment is deemed to be protracted beyond reasonable time frames;
The asset has been classified as a loss by either the internal loan review process or external examiners;
The borrower has filed for bankruptcy protection and the loss becomes evident due to a lack of borrower assets; or
The loan is 120 days or more past due unless the loan is both well secured and in the process of collection.
On January 1, 2023, the Company adopted ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the CECL model, which requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to unfunded credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 modified the impairment for available-for-sale debt securities, requiring credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell. It also modified the measurement principles for modifications of loans to borrowers experiencing financial difficulty, including how the ACL is measured for such loans.
The ALLLCompany adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2023, are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. As a result of adopting ASC 326, the Company recorded a net decrease to retained earnings of $783 thousand.
The Company adopted ASC 326 using the prospective transition approach for debt securities. The adoption did not affect the carrying value of debt securities or the amount of unrealized gains and losses recorded in accumulated other comprehensive loss. Upon adoption of ASC 326, the Company did not have any securities included in its portfolio where other-than-temporary impairment had previously been recognized or that required an ACL.
The following table illustrates the impact of ASC 326 on the allowance for credit losses.
| December 31, 2022 | January 1, 2023 | |||||||||||
| (dollars in thousands) | As Previously Reported (Incurred Loss) | Impact of CECL Adoption | As Reported Under CECL | |||||||||
| Assets | ||||||||||||
| Loans | ||||||||||||
| Commercial and industrial | $ | 673 | $ | (11 | ) | $ | 662 | |||||
| Real estate construction | 552 | 19 | 571 | |||||||||
| Real estate mortgage | 2,575 | 87 | 2,662 | |||||||||
| Real estate commercial | 4,499 | 1,048 | 5,547 | |||||||||
| Consumer | 2,065 | (365 | ) | 1,700 | ||||||||
| Other | 162 | (137 | ) | 25 | ||||||||
| Allowance for credit losses on loans | 10,526 | 641 | 11,167 | |||||||||
| Liabilities: | ||||||||||||
| Allowance for credit losses on unfunded credit exposure | 51 | 350 | 401 | |||||||||
| Total allowance for credit losses | $ | 10,577 | $ | 991 | $ | 11,568 | ||||||
The following accounting policies have been updated in connection with the adoption of ASC 326 and apply to periods beginning on January 1, 2023.
Loans Held for Investment
The Company makes commercial, consumer, and mortgage loans to customers. The Company’s recorded investment in loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally is establishedreported at the unpaid principal balances adjusted for charges-offs, unearned discounts, any deferred fees or costs on originated loans, and the ACLL. Interest on loans is accrued based on the unpaid principal balance. Loan fees and origination costs are deferred, and the net amount is amortized as a level yield adjustment over the respective term of the related loans.
The past due status of a loan is based on the contractual due date of the most delinquent payment due. Commercial loans are generally placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if the full and timely collection of interest or principal becomes uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Consumer loans are generally placed on nonaccrual status when payments are 120 days past due. Any accrued interest receivable on loans placed on nonaccrual status is reversed by an adjustment to interest income. Loans greater than 90 days past due may remain on accrual status if determined to have adequate collateral to cover the principal and interest. For those loans that are carried on nonaccrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. These policies are applied consistently across the loan portfolio.
In the ordinary course of business, the Company enters commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the Consolidated Balance Sheets when they are funded.
Allowance for Credit Losses on Loans
The provision for credit losses on loans charged to operations is an amount sufficient to bring the allowance to an estimated balance that management considers adequate to absorb expected credit losses in the Company’s loan portfolio. The ACLL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Amortized cost is the principal balance outstanding, net of any purchase premiums and discounts and net of any deferred loan fees and costs.
The ACLL represents management’s estimate of credit losses over the remaining life of the loan portfolio. Loans are charged off against the ACLL when management believes the loan balance is no longer collectible. Subsequent recoveries of previously charged off amounts are recorded as increases to the ACLL.
Management’s determination of the adequacy of the ACLL is based on an evaluation of the composition of the loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, delinquency status, reasonable and supportable forecasts, and other risk factors. The ACLL is estimated by pooling loans by call code and similar risk characteristics and applying a loan-level discounted cash flows method for all loans except for its automobile, farmland, and consumer portfolios. For automobile, farmland, and consumer portfolios, the Company has elected to pool those loans based on similar risk characteristics to determine the ACLL using the remaining life method. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company utilizes a forecast period of one year and then reverts to the mean of historical loss rates on a straight-line basis over the following one-year period. The Company considers economic forecasts and recession probabilities from highly recognized third-parties to inform the model for loss estimation. For instance, the Company considers the Virginia and regional unemployment rate as an external economic variable in developing the ACLL. The quantitative ACLL estimate is sensitive to changes in the unemployment rate. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans and therefore the appropriateness of the ACLL, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall ACLL because changes in those factors and inputs may not occur at the same rate and may not be consistent across all loan types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. Management also considers qualitative factors when estimating loan losses to take into account model limitations. Factors considered by management include changes and expected changes in general market, economic and business conditions; the nature and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances and the value of underlying collateral. While management uses available information to estimate expected losses on loans, future changes in the ACLL may be necessary based on changes in portfolio composition, portfolio credit quality, and/or economic conditions.
Loans that do not share risk characteristics are evaluated on an individual basis. The individual reserve component relates to loans that have shown substantial credit deterioration as measured by risk rating and/or delinquency status. In addition, the Company has elected the practical expedient that would include loans for individual assessment consideration if the repayment of the loan is expected substantially through the operation or sale of collateral because the borrower is experiencing financial difficulty. Where the source of repayment is the sale of collateral, the ACLL is based on the fair value of the underlying collateral, less selling costs, compared to the amortized cost basis of the loan. If the ACLL is based on the operation of the collateral, the reserve is calculated based on the fair value of the collateral calculated as the present value of expected cash flows from the operation of the collateral, compared to the amortized cost basis. If the Company determines that the value of a collateral dependent loan is less than the recorded investment in the loan, the Company charges off the deficiency if it is determined that such amount is deemed to be a confirmed loss. Typically, a loss is confirmed when the Company is moving towards foreclosure (or final disposition).
Reserve for Unfunded Commitments
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The reserve for unfunded commitments is measured based on the principles utilized in estimating the allowance for credit losses on loans and an estimate of the amount of unfunded commitments expected to be advanced. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded and is included in “Other Liabilities” within the Company’s Consolidated Balance Sheets.
Accrued Interest Receivable
The Company has elected to exclude accrued interest from the amortized cost basis in its determination of the ACLL, as well as elected the policy to write-off accrued interest receivable directly through the reversal of interest income. Accrued interest receivable totaled $3.5 million on loans held for investment as of December 31, 2023, and is included in “Other Assets” on the Company’s Consolidated Balance Sheet.
Allowance for Credit Losses – Available-For-Sale Securities
Investments in debt securities are classified as either held to maturity, available-for-sale, or trading, based on management’s intent. Currently, all the Company’s debt securities are classified as available-for-sale. Available-for-sale debt securities are carried at estimated fair value with the corresponding unrealized gains and losses recognized in other comprehensive income (loss). Gains or losses are estimatedrecognized in net income on the trade date using the amortized cost of the specific security sold. Purchase premiums are recognized in interest income using the effective interest rate method over the period from purchase to have occurredmaturity or, for callable securities, the earliest call date, and purchase discounts are recognized in the same manner from purchase to maturity.
For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell are met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a provisionrating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for loan losses charged to earnings. Loan lossesthe credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income (loss).
Changes in the ACL are recorded as a credit loss expense or reversal. Losses are charged against the allowance when management believes the uncollectibilityuncollectability of a loan balancean available-for-sale security is confirmed. Subsequent recoveries, if any, are credited to the allowance.
Other accounting guidance for loan impairment. All loans, including consumer loans, whose termsstandards that have been modified in a TDR are also individually analyzed for estimated impairment. Impairment is measured on a loan-by-loan basis for construction loans and commercial loans (i.e., commercial mortgage loans on real estate and commercial loans not securedadopted by real estate) by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. For those loans that are classified as impaired, an allowance is established when the discounted value of expected future cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company (i.e., put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership); (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Other Real Estate Owned (OREO)
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance (direct write-downs) are included in gain on other real estate owned on the Consolidated Statements of Income.
The Company’s goodwill was recognized in connection with a past business combination and is reported at the Bank segment. The Company reviews the carrying value of 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 the carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than the 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 the Company concludes that it is more likely than not that the fair value of a reporting unit is less than the carrying amount, then the fair value of the reporting unit is compared with its carrying amount to determine whether an impairment exists.
Bank-Owned Life Insurance
The Company owns insurance on the lives of a certain group of key employees. The cash surrender value of these policies is included as an asset on the consolidated balance sheets, and the increase in cash surrender value is recorded as noninterest income on the Consolidated Statements of Income. In the event of the death of an insured individual under these policies, the Company would receive a death benefit payment. Any excess in the amount received over the recorded cash surrender value would be recorded as other operating income on the Consolidated Statements of Income.
Land is carried at cost. Buildings and equipment are stated at cost, less accumulated depreciation and amortization computed on the straight-line method over the estimated useful lives of the assets. Buildings and equipment are depreciated over their estimated useful lives ranging from 3 to 39 years; leasehold improvements are amortized over the lives of the respective leases or the estimated useful life of the leasehold improvement, whichever is less. Software is amortized over its estimated useful life ranging from 3 to 5 years.
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under commercial letters of credit and lines of credit. Such financial instruments are recorded when they are funded.
Stock compensation accounting guidance (FASB ASC 718, “Compensation -- Stock Compensation”) requires that the compensation cost related to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans.
The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black Scholes model is used to estimate the fair value of the stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards.
Revenue Recognition
Revenue recognized from contracts with customers is accounted for under ASC 606 and is primarily included in the Company’s noninterest income. Fiduciary and asset management fees are earned as the Company satisfies it performance obligation over time. Additional services are transactional-based and the revenue is recognized as incurred. Service charges on deposit accounts consist of account analysis fees, monthly service fees, and other deposit account related fees. Account analysis and monthly service fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Other deposit account related fees are largely transactionaltransaction based and therefore fees are recognized at the point in time when the Company has satisfied its performance obligation. The Company earns other service charges, commissions, and fees from its customers for transaction-based services. Such services include debit card, ATM, merchant services, investment services, and other service charges. In each case, these service charges and fees are recognized in income at the time or within the same period that the Company’s performance obligation is satisfied. The Company earns interchange fees from debit cardholder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services.
The Company accounts for income taxes in accordance with income tax accounting guidance (FASB ASC 740, “Income Taxes”). The Company adopted the accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions.
Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability or balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax effects of the difference between the book and tax basis of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more-likely-than-not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more-likely-than-not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of both positive and negative evidence available, it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.
The Company recognizes interest and penalties on income taxes as a component of income tax expense. NaNNo uncertain tax positions were recorded in 2021 or 2020.the years ended December 31, 2023 and 2022.
Basic earnings per common share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflects additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to shares to be issued as part of the employee stock purchase plan and are determined using the treasury stock method. Nonvested restricted stock shares are included in the calculation of basic earnings per common share due to their rights to voting and dividends.
Securities and other property held by TrustWealth in a fiduciary or agency capacity are not assets of the Company and are not included in the accompanying Consolidated Financial Statements.
Derivative Financial Instruments
The Company recognizes derivative financial instruments at fair value as either an other asset or other liability in the Consolidated Balance Sheets. The Company’s derivative financial instruments include interest rate swaps with certain qualifying commercial loan customers and dealer counterparties and interest rate contracts arising from mortgage banking activities, including interest rate lock commitments (IRLCs) on mortgage loans and related forward sales of mortgage loans. The change in fair value of these instruments is reported as noninterest income.
Advertising Expenses
Advertising expenses are expensed as incurred. Advertising expense for the years ended 2021December 31, 2023 and 20202022 was $217$226 thousand and $230$202 thousand, respectively.
Comprehensive (loss) income consists of net income and other comprehensive (loss) income, net of tax. Other comprehensive (loss) income, net of tax includes unrealized gains and losses on securities available-for-sale which is also recognized a separate component of equity.
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 16.“Note 14. Fair Value Measurements.” Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.
In June 2016,March 2020, the Financial Accounting Standards Board (FASB)FASB issued Accounting Standards Update (ASU) No. 2016-13, “Financial InstrumentsASU 2020-04, “Reference Rate Reform (Topic 848) – Credit Losses (Topic 326): MeasurementFacilitation of Credit Lossesthe Effects of Reference Rate Reform on Financial Instruments.Reporting.” Subsequently, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This guidance provides temporary, optional expedients and exceptions to ease the potential burden in accounting for modifications of loan contracts, borrowings, and other transactions related to reference rate reform associated with the LIBOR transition if certain criteria are met. The amendments are effective as of March 12, 2020 through December 31, 2024 and can be adopted at an instrument level. These modifications have not had and are not expected to have a material impact on the consolidated financial statements.
In November 2023, FASB issued ASU 2023-07, “Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures.” The amendments in this ASU among2023-07 require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, require other things,segment items by reportable segment to be disclosed and a description of their composition, and 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. Manydisclosure of the title and position of the chief operating decision maker and an explanation of how they use the reported measure of segment profit or loss estimation techniquesin assessing segment performance and deciding how to allocate resources. The amendments apply to all public entities that are required to report segment information in accordance with Topic 280, “Segment Reporting,” and are effective for fiscal years beginning after December 15, 2023, and interim periods with fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments are to be applied today will still be permitted, althoughretrospectively to all prior periods presented. The Company does not expect the inputsadoption of ASU 2023-07 to those techniques will changehave a material effect on its consolidated financial statements.
In November 2023, FASB issued ASU 2023-09, “Income Taxes (Topic 740) – Improvements to reflectIncome Tax Disclosures.” The amendments in ASU 2023-09 require that a public entity disclose, on an annual basis, specific categories in the fullrate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, the amount of expected credit losses. In addition,income taxes paid disaggregated by federal, state and foreign taxes, and the ASU amends the accounting for credit losses on available-for-sale debt securitiesamount of income taxes paid disaggregated by individual jurisdictions in which income taxes paid is equal to or greater than five percent of total income taxes paid. The amendments also require that entities disclose income from continuing operations before income tax expense disaggregated between domestic and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU No. 2016-13 as codified in Topic 326, including ASU No. 2019-04, ASU No. 2019-05, ASU No. 2019-10, ASU No. 2019-11, ASU No. 2020-02, and ASU No. 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codificationforeign, as well as other transition matters.income tax expense from continuing operations disaggregated by federal, state, and foreign. The new standard will beamendments apply to all public entities that are subject to Topic 740, “Income Taxes,” and are effective for the Companyannual periods beginning on January 1, 2023.
after December 15, 2024. Early adoption is permitted. The amendments of ASC 326, upon adoption, willare to be applied on a modifiedprospective basis; however, retrospective basis, with the cumulative effect of adopting the new standard being recorded as an adjustment to opening retained earnings in the period of adoption.application is permitted. The Company has established a committee to overseedoes not expect the adoption of ASC 326. The Company has engagedASU 2023-09 to have a vendor to assist in modeling expected lifetime losses under ASC 326, gathered historical loan loss data for purposes of evaluating appropriate portfolio segmentation and modeling methods under the standard, performed procedures to validate the historical loan loss data to ensurematerial effect on its suitability and reliability for purposes of developing an estimate of expected credit losses under ASC 326, and is continuing to develop and refine an approach to estimating the allowance for credit losses. The adoption of ASC 326 will result in significant changes to the Company’s consolidated financial statements, which may include changes in the level of the allowance for credit losses that will be considered adequate, a reduction in total equity and regulatory capital of the Bank, differences in the timing of recognizing changes to the allowance for credit losses and expanded disclosures about the allowance for credit losses. The Company has not yet determined an estimate of the effect of these changes. The adoption of the standard will also result in significant changes in the Company’s internal control over financial reporting related to the allowance for credit losses.statements.
Other accounting standards that have been adopted by the Company or issued by the FASB or other standards-setting bodies have not or are not currently expected to have a material effect on the Company’s financial position, results of operations or cash flows.
On January 1, 2023, the Company adopted ASC 326, which made changes to the accounting for available-for-sale debtsecurities whereby credit losses should be presented as an allowance, rather than as a write-down when management does not intend to sell and does not believe that it is subjectmore likely than not, they will be required to reserve balance requirements determined by applyingsell prior to maturity. For further discussion on the reserve ratios specifiedCompany’s accounting policies and policy elections related to the accounting standard update refer to “Note 1. Description of Business and Summary of Significant Accounting Policies.”
All securities information presented as of December 31, 2023, is in accordance with ACS 326. All securities information presented as of December 31, 2022, or a prior date is in accordance with previous applicable GAAP. See information regarding the Company’s prior accounting policies in “Note 1. Significant Accounting Policies” in the FRB’s Regulation D. AtCompany’s 2022 Form 10-K. Securities had no associated ACL as of December 31, 2021 and 2020, the Company had 0 balance requirements on any of its accounts. The Company had approximately $3.9 million and $9.8 million in deposits in financial institutions in excess of amounts insured by the FDIC at December 31, 2021 and December 31, 2020, respectively.
2023.
The amortized cost and fair value, with gross unrealized gains and losses, of securities available-for-sale were:as of the dates indicated were as follows:
| December 31, 2021 | December 31, 2023 | |||||||||||||||||||||||||||||||
| Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||||||||||
| (Dollars in thousands) | Cost | Gains | (Losses) | Value | ||||||||||||||||||||||||||||
| (dollars in thousands) | Cost | Gains | (Losses) | Value | ||||||||||||||||||||||||||||
| U.S. Treasury securities | $ | 15,052 | $ | 0 | $ | (148 | ) | $ | 14,904 | $ | 4,068 | $ | - | $ | (211 | ) | $ | 3,857 | ||||||||||||||
| Obligations of U.S. Government agencies | 38,651 | 75 | (168 | ) | 38,558 | 43,233 | 167 | (665 | ) | 42,735 | ||||||||||||||||||||||
| Obligations of state and political subdivisions | 64,132 | 1,948 | (277 | ) | 65,803 | 58,292 | 13 | (7,708 | ) | 50,597 | ||||||||||||||||||||||
| Mortgage-backed securities | 88,511 | 1,348 | (801 | ) | 89,058 | 91,328 | 84 | (10,105 | ) | 81,307 | ||||||||||||||||||||||
| Money market investments | 2,413 | 0 | 0 | 2,413 | 2,047 | - | - | 2,047 | ||||||||||||||||||||||||
| Corporate bonds and other securities | 23,441 | 261 | (117 | ) | 23,585 | 27,500 | - | (3,765 | ) | 23,735 | ||||||||||||||||||||||
$ | 232,200 | $ | 3,632 | $ | (1,511 | ) | $ | 234,321 | $ | 226,468 | $ | 264 | $ | (22,454 | ) | $ | 204,278 | |||||||||||||||
| December 31, 2020 | December 31, 2022 | |||||||||||||||||||||||||||||||
| Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||||||||||
| (Dollars in thousands) | Cost | Gains | (Losses) | Value | ||||||||||||||||||||||||||||
| (dollars in thousands) | Cost | Gains | (Losses) | Value | ||||||||||||||||||||||||||||
| U.S. Treasury securities | $ | 6,980 | $ | 63 | $ | 0 | $ | 7,043 | $ | 8,013 | $ | - | $ | (342 | ) | $ | 7,671 | |||||||||||||||
| Obligations of U.S. Government agencies | 36,858 | 35 | (197 | ) | 36,696 | 43,622 | 10 | (1,233 | ) | 42,399 | ||||||||||||||||||||||
| Obligations of state and political subdivisions | 43,517 | 2,478 | 0 | 45,995 | 70,491 | - | (11,107 | ) | 59,384 | |||||||||||||||||||||||
| Mortgage-backed securities | 70,866 | 2,759 | (124 | ) | 73,501 | 99,874 | - | (10,961 | ) | 88,913 | ||||||||||||||||||||||
| Money market investments | 4,743 | 0 | 0 | 4,743 | 1,816 | - | - | 1,816 | ||||||||||||||||||||||||
| Corporate bonds and other securities | 18,295 | 158 | (22 | ) | 18,431 | 27,990 | - | (2,655 | ) | 25,335 | ||||||||||||||||||||||
$ | 181,259 | $ | 5,493 | $ | (343 | ) | $ | 186,409 | $ | 251,806 | $ | 10 | $ | (26,298 | ) | $ | 225,518 | |||||||||||||||
Securities with a fair value of $59.3$81.5 million and $69.4$82.6 million at December 31, 20212023 and 2020,2022, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, FHLB advances and for other purposes required or permitted by law.
At December 31, 2021,2023, the Company held 0no securities of any single issuer (excluding U.S. Government agencies) with a book value that exceeded 10 percent of stockholders’ equity.
The amortized cost and fair value of securities by contractual maturity are shown below.
| December 31, 2021 | December 31, 2023 | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| (Dollars in thousands) | Cost | Value | ||||||||||||||
| (dollars in thousands) | Cost | Value | ||||||||||||||
| Due in one year or less | $ | 200 | $ | 195 | $ | 1,570 | $ | 1,541 | ||||||||
| Due after one year through five years | 13,045 | 13,341 | 12,962 | 12,178 | ||||||||||||
| Due after five through ten years | 69,739 | 70,559 | 63,248 | 54,806 | ||||||||||||
| Due after ten years | 146,803 | 147,813 | 146,641 | 133,706 | ||||||||||||
| Other securities, restricted | 2,413 | 2,413 | 2,047 | 2,047 | ||||||||||||
$ | 232,200 | $ | 234,321 | $ | 226,468 | $ | 204,278 | |||||||||
The following table provides information aboutshows realized gains and losses on the sale of investment securities sold induring the years ended December 31:31, 2023 and 2022:
Year Ended December 31, | ||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Securities Available-for-sale | ||||||||
| Realized gains on sales of securities | $ | 0 | $ | 265 | ||||
| Realized losses on sales of securities | 0 | (1 | ) | |||||
| Net realized gain | $ | 0 | $ | 264 | ||||
| Years Ended | ||||||||
| December 31, | ||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||
| Realized gains on sales of securities | $ | 1,061 | $ | - | ||||
| Realized losses on sales of securities | (1,195 | ) | (1,870 | ) | ||||
| Net realized loss | $ | (134 | ) | $ | (1,870 | ) | ||
Securities in an unrealized loss position at December 31, 2023, by duration of the period of unrealized loss, are shown below.
| December 31, 2023 | ||||||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||
| Gross | Gross | Gross | Number | |||||||||||||||||||||||||
| Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | of | ||||||||||||||||||||||
| (dollars in thousands) | Losses | Value | Losses | Value | Losses | Value | Securities | |||||||||||||||||||||
| U.S. Treasury securities | $ | - | $ | - | $ | 211 | $ | 3,857 | $ | 211 | $ | 3,857 | 1 | |||||||||||||||
| Obligations of U.S. Government agencies | 91 | 8,803 | 574 | 22,817 | 665 | 31,620 | 43 | |||||||||||||||||||||
| Obligations of state and political subdivisions | - | - | 7,708 | 49,597 | 7,708 | 49,597 | 43 | |||||||||||||||||||||
| Mortgage-backed securities | 96 | 4,423 | 10,009 | 73,347 | 10,105 | 77,770 | 40 | |||||||||||||||||||||
| Corporate bonds and other securities | - | - | 3,765 | 22,735 | 3,765 | 22,735 | 23 | |||||||||||||||||||||
| Total securities available-for-sale | $ | 187 | $ | 13,226 | $ | 22,267 | $ | 172,353 | $ | 22,454 | $ | 185,579 | 150 | |||||||||||||||
There were 150 debt securities totaling $185.6 million of aggregate fair value below amortized cost basis at December 31, 2023. The Company concluded that a credit loss did not exist in its securities portfolio at December 31, 2023, and no impairment loss has been recognized based on the fact that (1) changes in fair value were caused primarily by fluctuations in interest rates, (2) securities with unrealized losses had generally high credit quality, (3) the Company intends to sell orhold these investments in debt securities to maturity and it is more-likely-than-not that the Company will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, the Company separates the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of expected future cash flows is due to factors that are not credit related and is recognized in accumulated other comprehensive income on the consolidated balance sheets.
| December 31, 2021 | ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | |||||||||||||||||||
| (Dollars in thousands) | Losses | Value | Losses | Value | Losses | Value | ||||||||||||||||||
| U.S. Treasury securities | $ | 148 | $ | 14,904 | $ | 0 | $ | 0 | $ | 148 | $ | 14,904 | ||||||||||||
| Obligations of U.S. Government agencies | 131 | 19,181 | 37 | 5,042 | 168 | 24,223 | ||||||||||||||||||
| Obligations of state and political subdivisions | 277 | 20,673 | 0 | 0 | 277 | 20,673 | ||||||||||||||||||
| Mortgage-backed securities | 608 | 35,882 | 193 | 6,450 | 801 | 42,332 | ||||||||||||||||||
| Corporate bonds and other securities | 117 | 9,833 | 0 | 0 | 117 | 9,833 | ||||||||||||||||||
| Total securities available-for-sale | $ | 1,281 | $ | 100,473 | $ | 230 | $ | 11,492 | $ | 1,511 | $ | 111,965 | ||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | |||||||||||||||||||
| (Dollars in thousands) | Losses | Value | Losses | Value | Losses | Value | ||||||||||||||||||
| Obligations of U.S. Government agencies | $ | 8 | $ | 2,810 | $ | 189 | $ | 17,191 | $ | 197 | $ | 20,001 | ||||||||||||
| Mortgage-backed securities | 118 | 14,291 | 6 | 1,285 | 124 | 15,576 | ||||||||||||||||||
| Corporate bonds and other securities | 22 | 5,977 | 0 | 0 | 22 | 5,977 | ||||||||||||||||||
| Total securities available-for-sale | $ | 148 | $ | 23,078 | $ | 195 | $ | 18,476 | $ | 343 | $ | 41,554 | ||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||
| Gross | Gross | Gross | Number | |||||||||||||||||||||||||
| Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | of | ||||||||||||||||||||||
| (dollars in thousands) | Losses | Value | Losses | Value | Losses | Value | Securities | |||||||||||||||||||||
| U.S. Treasury securities | $ | 342 | $ | 7,671 | $ | - | $ | - | $ | 342 | $ | 7,671 | 4 | |||||||||||||||
| Obligations of U.S. Government agencies | 258 | 13,873 | 975 | 22,851 | 1,233 | 36,724 | 43 | |||||||||||||||||||||
| Obligations of state and political subdivisions | 5,386 | 33,720 | 5,721 | 23,856 | 11,107 | 57,576 | 56 | |||||||||||||||||||||
| Mortgage-backed securities | 4,157 | 52,717 | 6,804 | 36,196 | 10,961 | 88,913 | 38 | |||||||||||||||||||||
| Corporate bonds and other securities | 1,084 | 12,906 | 1,571 | 11,429 | 2,655 | 24,335 | 21 | |||||||||||||||||||||
| Total securities available-for-sale | $ | 11,227 | $ | 120,887 | $ | 15,071 | $ | 94,332 | $ | 26,298 | $ | 215,219 | 162 | |||||||||||||||
The restricted stock category is comprised of FHLB, Federal Reserve Bank,FRB, and CBB stock. These stocks are classified as restricted securities because their ownership is restricted to certain types of entities and the securities lack a market. Therefore, these investmentsFHLB, FRB, and CBB stock are carried at cost and evaluated for impairment. When evaluating these stocks for impairment, their value is determined based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Restricted stock is viewed as a long-term investment and management believes that the Company has the ability and the intent to hold this stock until its value is recovered. The Company did not consider its investment in restricted stock to be impaired at December 31, 2023 and no impairment has been recognized.
Note 3. Loans and Allowance for LoanCredit Losses on Loans
On January 1, 2023, the Company adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. For further discussion on the Company’s accounting policies and policy elections related to the accounting standard update refer to “Note 1. Description of Business and Summary of Significant Accounting Policies.” All loan information presented as of December 31, 2023, is in accordance with ASC 326. All loan information presented as of December 31, 2022, or a prior date is in accordance with previous applicable GAAP.
The following is a summary of the balances in each class of the Company’s loan portfolio of loans held for investment as of the dates indicated:
| (dollars in thousands) | December 31, 2021 | December 31, 2020 | ||||||
| Mortgage loans on real estate: | ||||||||
| Residential 1-4 family | $ | 130,776 | $ | 122,800 | ||||
| Commercial - owner occupied | 198,413 | 153,955 | ||||||
| Commercial - non-owner occupied | 184,190 | 162,896 | ||||||
| Multifamily | 19,050 | 22,812 | ||||||
| Construction | 58,440 | 43,732 | ||||||
| Second mortgages | 7,877 | 11,178 | ||||||
| Equity lines of credit | 48,665 | 50,746 | ||||||
| Total mortgage loans on real estate | 647,411 | 568,119 | ||||||
| Commercial and industrial loans | 68,690 | 141,746 | ||||||
| Consumer automobile loans | 85,023 | 80,390 | ||||||
| Other consumer loans | 33,418 | 37,978 | ||||||
Other (1) | 8,984 | 8,067 | ||||||
| Total loans, net of deferred fees | 843,526 | 836,300 | ||||||
| Less: Allowance for loan losses | 9,865 | 9,541 | ||||||
Loans, net of allowance and deferred fees (2) | $ | 833,661 | $ | 826,759 | ||||
| December 31, | ||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||
| Mortgage loans on real estate: | ||||||||
| Residential 1-4 family | $ | 188,517 | $ | 169,248 | ||||
| Commercial - owner occupied | 156,466 | 184,586 | ||||||
| Commercial - non-owner occupied | 285,250 | 245,277 | ||||||
| Multifamily | 29,207 | 26,675 | ||||||
| Construction and land development | 107,179 | 77,944 | ||||||
| Second mortgages | 10,148 | 8,828 | ||||||
| Equity lines of credit | 55,981 | 54,340 | ||||||
| Total mortgage loans on real estate | 832,748 | 766,898 | ||||||
| Commercial and industrial loans | 64,112 | 72,578 | ||||||
| Consumer automobile loans | 160,437 | 163,018 | ||||||
| Other consumer loans | 19,718 | 22,251 | ||||||
Other (1) | 3,237 | 2,340 | ||||||
Total loans, net of deferred fees (2) | 1,080,252 | 1,027,085 | ||||||
| Less: Allowance for credit losses on loans | 12,206 | 10,526 | ||||||
Loans, net of allowance and deferred fees (2) | $ | 1,068,046 | $ | 1,016,559 | ||||
| (1) | Overdrawn accounts are reclassified as loans and included in the Other catergory in the table above. Overdrawn deposit accounts, excluding internal use accounts, totaled |
| (2) | Net deferred loan costs totaled |
All classes of loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Interest and fees continue to accrue on past due loans until the date the loan is placed in nonaccrual status, if applicable. The following table includes an aging analysis of the recorded investment in past due loans as of the dates indicated. Also included in the table below are loans that are 90 days or more past due as to interest and principal and still accruing interest, because they are well-secured and in the process of collection. The following table shows the aging of the Company’s loan portfolio, by class, as of December 31, 2023.
Age Analysis of Past Due Loans as of December 31, 2023
| (dollars in thousands) | 30 - 59 Days Past Due | 60 - 89 Days Past Due | 90 or More Days Past Due and still Accruing | Nonaccrual (2) | Total Current Loans (1) | Total Loans | ||||||||||||||||||
| Mortgage loans on real estate: | ||||||||||||||||||||||||
| Residential 1-4 family | $ | 1,194 | $ | - | $ | 368 | $ | 142 | $ | 186,813 | $ | 188,517 | ||||||||||||
| Commercial - owner occupied | 100 | - | 322 | - | 156,044 | 156,466 | ||||||||||||||||||
| Commercial - non-owner occupied | - | 896 | - | - | 284,354 | 285,250 | ||||||||||||||||||
| Multifamily | - | - | - | - | 29,207 | 29,207 | ||||||||||||||||||
| Construction and land development | - | - | - | - | 107,179 | 107,179 | ||||||||||||||||||
| Second mortgages | 160 | 6 | - | - | 9,982 | 10,148 | ||||||||||||||||||
| Equity lines of credit | 205 | - | - | 46 | 55,730 | 55,981 | ||||||||||||||||||
| Total mortgage loans on real estate | $ | 1,659 | $ | 902 | $ | 690 | $ | 188 | $ | 829,309 | $ | 832,748 | ||||||||||||
| Commercial and industrial loans | 527 | 427 | 306 | - | 62,852 | 64,112 | ||||||||||||||||||
| Consumer automobile loans | 3,254 | 706 | 661 | - | 155,816 | 160,437 | ||||||||||||||||||
| Other consumer loans | 634 | 264 | 123 | - | 18,697 | 19,718 | ||||||||||||||||||
| Other | 29 | - | - | - | 3,208 | 3,237 | ||||||||||||||||||
| Total | $ | 6,103 | $ | 2,299 | $ | 1,780 | $ | 188 | $ | 1,069,882 | $ | 1,080,252 | ||||||||||||
| (1) | For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due. |
| (2) | For purposes of this table, if a loan is past due and on nonaccrual, it is included in the nonaccrual column and not also in its respective past due column. |
The following table shows the Company’s amortized cost basis of loans on nonaccrual status as of January 1, 2023, as well as the amortized cost basis of loans on nonaccrual status and loans past due 90 days and accruing as of December 31, 2023 by class of loan.
| Nonaccrual | ||||||||||||||||
| (dollars in thousands) | January 1, 2023 | December 31, 2023 | Nonaccrual with no ACLL | 90 Days and still Accruing | ||||||||||||
| Mortgage loans on real estate: | ||||||||||||||||
| Residential 1-4 family | $ | 154 | $ | 142 | $ | - | $ | 368 | ||||||||
| Commercial - owner occupied | - | - | - | 322 | ||||||||||||
| Construction and land development | 945 | - | - | - | ||||||||||||
| Equity lines of credit | - | 46 | - | - | ||||||||||||
| Total mortgage loans on real estate | 1,099 | 188 | - | 690 | ||||||||||||
| Commercial and industrial loans | 144 | - | - | 306 | ||||||||||||
| Consumer automobile loans | - | - | - | 661 | ||||||||||||
| Other consumer loans | - | - | - | 123 | ||||||||||||
| Total | $ | 1,243 | $ | 188 | $ | - | $ | 1,780 | ||||||||
The Company’s loan portfolio may include certain loans modified, where economic concessions have been granted to borrowers who are experiencing financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reduction in the interest rate below current market rates for borrowers with similar risk profiles, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The Company closely monitors the performance of modified loans to understand the effectiveness of modification efforts. Upon the determination that all or a portion of a modified loan is uncollectible, that amount is charged against the ACL. The Company did not grant any such modifications during the year ended December 31, 2023.
Allowance for Credit Losses on Loans
ACLL is a material estimate for the Company. The Company estimates its ACLL on a quarterly basis. The Company models the ACLL using two primary segments, commercial and consumer. Within each segment, loan classes are further identified based on similar risk characteristics. The Company has identified the following classes within each segment:
| • | Commercial: commercial and industrial, real estate - construction and land development, real estate – commercial (owner occupied and non-owner occupied), and other loans |
| • | Consumer: real estate – mortgage, and consumer loans |
Each portfolio class has risk characteristics as follows:
| (dollars in thousands) | December 31, 2021 | December 31, 2020 | ||||||
| Outstanding principal balance | $ | 5,087 | $ | 8,671 | ||||
| Carrying amount | 5,087 | 8,602 | ||||||
| • | Commercial and industrial: Commercial and industrial loans carry risks associated with the successful operation of a business or project, in addition to other risks associated with the ownership of a business. The repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision. |
| • | Real estate - construction and land development: Construction loans carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may at any point in time be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be the loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project. |
| • | Real estate - commercial: Commercial real estate loans carry risks associated with the successful operation of a business if owner occupied. If non-owner occupied, the repayment of these loans may be dependent upon the profitability and cash flow from rent receipts. |
| • | Real estate - mortgage: Residential mortgage loans and equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral. |
| • | Consumer loans: Consumer loans carry risks associated with the continued credit-worthiness of the borrowers and the value of the collateral. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness, or personal bankruptcy. |
| • | Other loans: Other loans are loans to mortgage companies, loans for purchasing or carrying securities, and loans to insurance, investment, and finance companies. These loans carry risks associated with the successful operation of a business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time, depend on interest rates, or fluctuate in active trading markets. |
The Company did 0t have any outstanding principal balance or related carrying amount of purchased credit-impaired loans as offollowing tables presents the activity in the ACLL by portfolio class for the year ended December 31, 20212023.
Allowance for Credit Losses and 2020, respectively. Recorded Investment in Loans
For the Year Ended December 31, 2023
| (dollars in thousands) | Commercial and Industrial | Real Estate Construction and Land Development | Real Estate - Mortgage (1) | Real Estate- Commercial (2) | Consumer (3) | Other | Unallocated | Total | ||||||||||||||||||||||||
| Allowance for credit losses on loans: | ||||||||||||||||||||||||||||||||
| Balance, beginning | $ | 673 | $ | 552 | $ | 2,575 | $ | 4,499 | $ | 2,065 | $ | 156 | $ | 6 | $ | 10,526 | ||||||||||||||||
| Day 1 impact of adoption of CECL | (11 | ) | 19 | 87 | 1,048 | (365 | ) | (137 | ) | - | 641 | |||||||||||||||||||||
| Charge-offs | (492 | ) | - | - | - | (1,613 | ) | (298 | ) | - | (2,403 | ) | ||||||||||||||||||||
| Recoveries | 69 | - | 42 | - | 506 | 59 | - | 676 | ||||||||||||||||||||||||
| Provision for loan losses | 334 | 411 | 200 | 195 | 1,234 | 398 | (6 | ) | 2,766 | |||||||||||||||||||||||
| Ending Balance | $ | 573 | $ | 982 | $ | 2,904 | $ | 5,742 | $ | 1,827 | $ | 178 | $ | - | $ | 12,206 | ||||||||||||||||
| (1) | The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit. |
| (2) | The real estate-commerical segment included commerical-owner occupied and commercial non-owner occupied |
| (3) | The consumer segment includes consumer automobile loans. |
The following table presents changes ina breakdown of the accretable yield on purchasedprovision for credit impaired loans,losses for which the Company applies FASB ASC 310-30:periods indicated.
| (dollars in thousands) | December 31, 2021 | December 31, 2020 | ||||||
| Balance at January 1 | $ | 0 | $ | 72 | ||||
| Accretion | 0 | (156 | ) | |||||
| Other changes, net | 0 | 84 | ||||||
| Balance at end of period | $ | 0 | $ | 0 | ||||
| Year Ended December 31, | ||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||
| Provision for credit losses: | ||||||||
| Provision for loans | $ | 2,766 | $ | 1,706 | ||||
| Provison for (recovery of) unfunded commitments | (165 | ) | - | |||||
| Total | $ | 2,601 | $ | 1,706 | ||||
Credit Quality Indicators
Credit quality indicators are utilized to help estimate the collectability of each loan. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on days past due, while all other loans, including loans to consumers that are secured by real estate, are segmented by risk grades. While other credit quality indicators are evaluated and analyzed as part of the Company’s credit risk management activities, the Company uses internally-assigned risk grades as the primary indicator to estimate the capability of borrowers to repay the contractual obligations of their loan agreements as scheduled or at all. The Company’s internal risk grade system is based on experiences with similarly graded loans. Credit risk grades are updated at least quarterly as additional information becomes available, at which time management analyzes the resulting scores to track loan performance.
The Company’s internally assigned risk grades are as follows:
| • | Pass: Loans are of acceptable risk. |
| • | Other Assets Especially Mentioned (OAEM): Loans have potential weaknesses that deserve management’s close attention. |
| • | Substandard: Loans reflect significant deficiencies due to several adverse trends of a financial, economic or managerial nature. |
| • | Doubtful: Loans have all the weaknesses inherent in a substandard loan with added characteristics that make collection or liquidation in full based on currently existing facts, conditions, and values highly questionable or improbable. |
| • | Loss: Loans have been identified for charge-off because they are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. |
The following tables present credit quality exposures by internally assigned risk ratings originated as of the dates indicated:
| Credit Quality Information | ||||||||||||||||||||
| As of December 31, 2021 | ||||||||||||||||||||
| (dollars in thousands) | Pass | OAEM | Substandard | Doubtful | Total | |||||||||||||||
| Mortgage loans on real estate: | ||||||||||||||||||||
| Residential 1-4 family | $ | 130,584 | $ | 0 | $ | 192 | $ | 0 | $ | 130,776 | ||||||||||
| Commercial - owner occupied | 195,512 | 788 | 2,113 | 0 | 198,413 | |||||||||||||||
| Commercial - non-owner occupied | 183,093 | 434 | 663 | 0 | 184,190 | |||||||||||||||
| Multifamily | 19,050 | 0 | 0 | 0 | 19,050 | |||||||||||||||
| Construction | 57,224 | 218 | 998 | 0 | 58,440 | |||||||||||||||
| Second mortgages | 7,877 | 0 | 0 | 0 | 7,877 | |||||||||||||||
| Equity lines of credit | 48,665 | 0 | 0 | 0 | 48,665 | |||||||||||||||
| Total mortgage loans on real estate | $ | 642,005 | $ | 1,440 | $ | 3,966 | $ | 0 | $ | 647,411 | ||||||||||
| Commercial and industrial loans | 68,261 | 0 | 429 | 0 | 68,690 | |||||||||||||||
| Consumer automobile loans | 85,002 | 0 | 21 | 0 | 85,023 | |||||||||||||||
| Other consumer loans | 33,418 | 0 | 0 | 0 | 33,418 | |||||||||||||||
| Other | 8,984 | 0 | 0 | 0 | 8,984 | |||||||||||||||
| Total | $ | 837,670 | $ | 1,440 | $ | 4,416 | $ | 0 | $ | 843,526 | ||||||||||
| Credit Quality Information | ||||||||||||||||||||
| As of December 31, 2020 | ||||||||||||||||||||
| (dollars in thousands) | Pass | OAEM | Substandard | Doubtful | Total | |||||||||||||||
Mortgage loans on real estate: | ||||||||||||||||||||
| Residential 1-4 family | $ | 122,621 | $ | 0 | $ | 179 | $ | 0 | $ | 122,800 | ||||||||||
| Commercial - owner occupied | 148,738 | 2,462 | 2,755 | 0 | 153,955 | |||||||||||||||
| Commercial - non-owner occupied | 162,148 | 748 | 0 | 0 | 162,896 | |||||||||||||||
| Multifamily | 22,812 | 0 | 0 | 0 | 22,812 | |||||||||||||||
| Construction | 42,734 | 998 | 0 | 0 | 43,732 | |||||||||||||||
| Second mortgages | 11,178 | 0 | 0 | 0 | 11,178 | |||||||||||||||
| Equity lines of credit | 50,746 | 0 | 0 | 0 | 50,746 | |||||||||||||||
| Total mortgage loans on real estate | $ | 560,977 | $ | 4,208 | $ | 2,934 | $ | 0 | $ | 568,119 | ||||||||||
| Commercial and industrial loans | 141,391 | 355 | 0 | 0 | 141,746 | |||||||||||||||
| Consumer automobile loans | 79,997 | 0 | 393 | 0 | 80,390 | |||||||||||||||
| Other consumer loans | 37,978 | 0 | 0 | 0 | 37,978 | |||||||||||||||
| Other | 8,067 | 0 | 0 | 0 | 8,067 | |||||||||||||||
| Total | $ | 828,410 | $ | 4,563 | $ | 3,327 | $ | 0 | $ | 836,300 | ||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||||||||
| Term Loans Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans | Total | ||||||||||||||||||||||||
| Construction and land development | ||||||||||||||||||||||||||||||||
| Pass | $ | 40,168 | $ | 36,581 | $ | 25,770 | $ | 3,630 | $ | 297 | $ | 285 | $ | 448 | $ | 107,179 | ||||||||||||||||
| OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total construction and land development | $ | 40,168 | $ | 36,581 | $ | 25,770 | $ | 3,630 | $ | 297 | $ | 285 | $ | 448 | $ | 107,179 | ||||||||||||||||
| Commercial real estate - owner occupied | ||||||||||||||||||||||||||||||||
| Pass | $ | 10,145 | $ | 33,720 | $ | 21,058 | $ | 13,708 | $ | 12,025 | $ | 56,978 | $ | 5,680 | $ | 153,314 | ||||||||||||||||
| OAEM | - | - | - | - | 77 | 2,985 | - | 3,062 | ||||||||||||||||||||||||
| Substandard | - | - | - | - | - | 90 | - | 90 | ||||||||||||||||||||||||
| Total commercial real estate - owner occupied | $ | 10,145 | $ | 33,720 | $ | 21,058 | $ | 13,708 | $ | 12,102 | $ | 60,053 | $ | 5,680 | $ | 156,466 | ||||||||||||||||
| Commercial real estate - non-owner occupied | ||||||||||||||||||||||||||||||||
| Pass | $ | 31,539 | $ | 53,217 | $ | 96,755 | $ | 38,704 | $ | 10,517 | $ | 51,451 | $ | 2,263 | $ | 284,446 | ||||||||||||||||
| OAEM | - | - | - | - | 804 | - | - | 804 | ||||||||||||||||||||||||
| Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total commercial real estate - non-owner occupied | $ | 31,539 | $ | 53,217 | $ | 96,755 | $ | 38,704 | $ | 11,321 | $ | 51,451 | $ | 2,263 | $ | 285,250 | ||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||
| Pass | $ | 18,248 | $ | 21,698 | $ | 4,300 | $ | 1,691 | $ | 2,192 | $ | 2,075 | $ | 13,908 | $ | 64,112 | ||||||||||||||||
| OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total commercial and industrial | $ | 18,248 | $ | 21,698 | $ | 4,300 | $ | 1,691 | $ | 2,192 | $ | 2,075 | $ | 13,908 | $ | 64,112 | ||||||||||||||||
| Multifamily real estate | ||||||||||||||||||||||||||||||||
| Pass | $ | 6,568 | $ | 3,841 | $ | 2,151 | $ | 605 | $ | 5,955 | $ | 9,005 | $ | 1,082 | $ | 29,207 | ||||||||||||||||
| OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total multifamily real estate | $ | 6,568 | $ | 3,841 | $ | 2,151 | $ | 605 | $ | 5,955 | $ | 9,005 | $ | 1,082 | $ | 29,207 | ||||||||||||||||
| Residential 1-4 family | ||||||||||||||||||||||||||||||||
| Pass | $ | 27,497 | $ | 41,062 | $ | 39,937 | $ | 26,368 | $ | 13,009 | $ | 52,148 | $ | 54,087 | $ | 254,108 | ||||||||||||||||
| OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Substandard | - | - | - | 350 | 46 | 142 | - | 538 | ||||||||||||||||||||||||
| Total residential 1-4 family | $ | 27,497 | $ | 41,062 | $ | 39,937 | $ | 26,718 | $ | 13,055 | $ | 52,290 | $ | 54,087 | $ | 254,646 | ||||||||||||||||
| Consumer - automobile | ||||||||||||||||||||||||||||||||
| Pass | $ | 52,750 | $ | 83,885 | $ | 13,184 | $ | 4,152 | $ | 1,618 | $ | 4,848 | $ | - | $ | 160,437 | ||||||||||||||||
| OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total consumer - automobile | $ | 52,750 | $ | 83,885 | $ | 13,184 | $ | 4,152 | $ | 1,618 | $ | 4,848 | $ | - | $ | 160,437 | ||||||||||||||||
| Consumer - other | ||||||||||||||||||||||||||||||||
| Pass | $ | 323 | $ | 765 | $ | 330 | $ | 109 | $ | 11 | $ | 16,089 | $ | 2,091 | $ | 19,718 | ||||||||||||||||
| OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total consumer - other | $ | 323 | $ | 765 | $ | 330 | $ | 109 | $ | 11 | $ | 16,089 | $ | 2,091 | $ | 19,718 | ||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Pass | $ | 1,620 | $ | - | $ | 292 | $ | - | $ | - | $ | 1,325 | $ | - | $ | 3,237 | ||||||||||||||||
| OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total other | $ | 1,620 | $ | - | $ | 292 | $ | - | $ | - | $ | 1,325 | $ | - | $ | 3,237 | ||||||||||||||||
| Total loans | ||||||||||||||||||||||||||||||||
| Pass | $ | 188,858 | $ | 274,769 | $ | 203,777 | $ | 88,967 | $ | 45,624 | $ | 194,204 | $ | 79,559 | $ | 1,075,758 | ||||||||||||||||
| OAEM | - | - | - | - | 881 | 2,985 | - | 3,866 | ||||||||||||||||||||||||
| Substandard | - | - | - | 350 | 46 | 232 | - | 628 | ||||||||||||||||||||||||
| Total loans | $ | 188,858 | $ | 274,769 | $ | 203,777 | $ | 89,317 | $ | 46,551 | $ | 197,421 | $ | 79,559 | $ | 1,080,252 | ||||||||||||||||
The following table details the current period gross charge-offs of loans by year of origination as of December 31, 2023:
| December 31, 2023 | ||||||||||||||||||||||||||||||||
| Current Period Charge-offs by Origination Year | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Total | ||||||||||||||||||||||||
| Commercial and industrial | $ | - | $ | 436 | $ | 18 | $ | 21 | $ | - | $ | 17 | $ | - | $ | 492 | ||||||||||||||||
| Consumer - automobile | 54 | 987 | 318 | 110 | 18 | 64 | - | 1,551 | ||||||||||||||||||||||||
| Consumer - other | 5 | - | 5 | - | 3 | 49 | - | 62 | ||||||||||||||||||||||||
Other (1) | 277 | 21 | - | - | - | - | - | 298 | ||||||||||||||||||||||||
| Total | $ | 336 | $ | 1,444 | $ | 341 | $ | 131 | $ | 21 | $ | 130 | $ | - | $ | 2,403 | ||||||||||||||||
| (1) | Gross charge-offs of other loans for the year ended December 31, 2023 included $277 thousand of demand deposit overdrafts that originated in 2023. |
As of December 31, 2021 and 20202023, the Company did 0t have anyhad no collateral dependent loans internally classified as Lossfor which repayment was expected to be derived substantially through the operation or Doubtful.sale of the collateral and where the borrower is experiencing financial difficulty.
Prior to the adoption of loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Interest and fees continue to accrue on past due loans until the date the loan is placed in nonaccrual status, if applicable. ASC 326
The following table includes anshows the aging analysis of the recorded investment in past due loansCompany’s loan portfolio, by class, as of the dates indicated. Also included in the table below are loans that are 90 days or more past due as to interest and principal and still accruing interest, because they are well-secured and in the process of collection.December 31, 2022.
Age Analysis of Past Due Loans as of December 31, 20212022
| (dollars in thousands) | 30 - 59 Days Past Due | 60 - 89 Days Past Due | 90 or More Days Past Due and still Accruing | Nonaccrual (2) | Total Current Loans (1) | Total Loans | ||||||||||||||||||
Mortgage loans on real estate: | ||||||||||||||||||||||||
| Residential 1-4 family | $ | 120 | $ | 0 | $ | 0 | $ | 191 | $ | 130,465 | $ | 130,776 | ||||||||||||
| Commercial - owner occupied | 0 | 0 | 0 | 0 | 198,413 | 198,413 | ||||||||||||||||||
| Commercial - non-owner occupied | 0 | 0 | 0 | 113 | 184,077 | 184,190 | ||||||||||||||||||
| Multifamily | 0 | 0 | 0 | 0 | 19,050 | 19,050 | ||||||||||||||||||
| Construction | 0 | 0 | 0 | 0 | 58,440 | 58,440 | ||||||||||||||||||
| Second mortgages | 24 | 0 | 0 | 0 | 7,853 | 7,877 | ||||||||||||||||||
| Equity lines of credit | 51 | 0 | 0 | 0 | 48,614 | 48,665 | ||||||||||||||||||
| Total mortgage loans on real estate | $ | 195 | $ | 0 | $ | 0 | $ | 304 | $ | 646,912 | $ | 647,411 | ||||||||||||
| Commercial and industrial loans | 37 | 0 | 169 | 174 | 68,310 | 68,690 | ||||||||||||||||||
| Consumer automobile loans | 814 | 118 | 296 | 0 | 83,795 | 85,023 | ||||||||||||||||||
| Other consumer loans | 1,284 | 439 | 550 | 0 | 31,145 | 33,418 | ||||||||||||||||||
| Other | 31 | 3 | 10 | 0 | 8,940 | 8,984 | ||||||||||||||||||
| Total | $ | 2,361 | $ | 560 | $ | 1,025 | $ | 478 | $ | 839,102 | $ | 843,526 | ||||||||||||
| (dollars in thousands) | 30 - 59 Days Past Due | 60 - 89 Days Past Due | 90 or More Days Past Due and still Accruing | Nonaccrual (2) | Total Current Loans (1) | Total Loans | ||||||||||||||||||
| Mortgage loans on real estate: | ||||||||||||||||||||||||
| Residential 1-4 family | $ | 290 | $ | - | $ | 525 | $ | 154 | $ | 168,279 | $ | 169,248 | ||||||||||||
| Commercial - owner occupied | 20 | - | - | - | 184,566 | 184,586 | ||||||||||||||||||
| Commercial - non-owner occupied | 206 | - | - | - | 245,071 | 245,277 | ||||||||||||||||||
| Multifamily | - | - | - | - | 26,675 | 26,675 | ||||||||||||||||||
| Construction and land development | - | - | - | 945 | 76,999 | 77,944 | ||||||||||||||||||
| Second mortgages | 19 | - | - | - | 8,809 | 8,828 | ||||||||||||||||||
| Equity lines of credit | 56 | 288 | - | - | 53,996 | 54,340 | ||||||||||||||||||
| Total mortgage loans on real estate | $ | 591 | $ | 288 | $ | 525 | $ | 1,099 | $ | 764,395 | $ | 766,898 | ||||||||||||
| Commercial and industrial loans | 221 | 284 | 23 | 144 | 71,906 | 72,578 | ||||||||||||||||||
| Consumer automobile loans | 1,538 | 221 | 212 | - | 161,047 | 163,018 | ||||||||||||||||||
| Other consumer loans | 445 | 372 | 80 | - | 21,354 | 22,251 | ||||||||||||||||||
| Other | 47 | - | - | - | 2,293 | 2,340 | ||||||||||||||||||
| Total | $ | 2,842 | $ | 1,165 | $ | 840 | $ | 1,243 | $ | 1,020,995 | $ | 1,027,085 | ||||||||||||
| (1) | For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due. |
| (2) | For purposes of this table, if a loan is past due and on nonaccrual, it is included in the |
| (dollars in thousands) | 30 - 59 Days Past Due | 60 - 89 Days Past Due | 90 or More Days Past Due and still Accruing | Nonaccrual (2) | Total Current Loans (1) | Total Loans | ||||||||||||||||||
Mortgage loans on real estate: | ||||||||||||||||||||||||
| Residential 1-4 family | $ | 478 | $ | 164 | $ | 0 | $ | 311 | $ | 121,847 | $ | 122,800 | ||||||||||||
| Commercial - owner occupied | 0 | 0 | 0 | 903 | 153,052 | 153,955 | ||||||||||||||||||
| Commercial - non-owner occupied | 0 | 0 | 0 | 0 | 162,896 | 162,896 | ||||||||||||||||||
| Multifamily | 0 | 0 | 0 | 0 | 22,812 | 22,812 | ||||||||||||||||||
| Construction | 0 | 88 | 0 | 0 | 43,644 | 43,732 | ||||||||||||||||||
| Second mortgages | 41 | 0 | 0 | 0 | 11,137 | 11,178 | ||||||||||||||||||
| Equity lines of credit | 0 | 0 | 0 | 0 | 50,746 | 50,746 | ||||||||||||||||||
| Total mortgage loans on real estate | $ | 519 | $ | 252 | $ | 0 | $ | 1,214 | $ | 566,134 | $ | 568,119 | ||||||||||||
| Commercial and industrial loans | 753 | 0 | 0 | 0 | 140,993 | 141,746 | ||||||||||||||||||
| Consumer automobile loans | 1,159 | 190 | 196 | 0 | 78,845 | 80,390 | ||||||||||||||||||
| Other consumer loans | 1,120 | 555 | 548 | 0 | 35,755 | 37,978 | ||||||||||||||||||
| Other | 24 | 3 | 0 | 0 | 8,040 | 8,067 | ||||||||||||||||||
| Total | $ | 3,575 | $ | 1,000 | $ | 744 | $ | 1,214 | $ | 829,767 | $ | 836,300 | ||||||||||||
| (dollars in thousands) | December 31, 2021 | December 31, 2020 | ||||||
| Mortgage loans on real estate: | ||||||||
| Residential 1-4 family | $ | 191 | $ | 311 | ||||
| Commercial - owner occupied | 0 | 903 | ||||||
| Commercial - non-owner occupied | 113 | 0 | ||||||
| Total mortgage loans on real estate | 304 | 1,214 | ||||||
| Commercial and industrial loans | 174 | 0 | ||||||
| Consumer loans | 0 | 0 | ||||||
| Total | $ | 478 | $ | 1,214 | ||||
| Years Ended December 31, | ||||||||
| (dollars in thousand) | 2021 | 2020 | ||||||
| Interest income that would have been recorded under original loan terms | $ | 11 | $ | 45 | ||||
| Actual interest income recorded for the period | 2 | 34 | ||||||
| Reduction in interest income on nonaccrual loans | $ | 9 | $ | 11 | ||||
individually. The following table includes the recorded investment and unpaid principal balances (a portion of which may have been charged off) for impaired loans exclusive of purchased credit-impaired loans, with the associated allowance amount, if applicable, as of the dates presented.applicable. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized for the periodsperiod presented. The average balances are calculated based on daily average balances.
| For the Year Ended | ||||||||||||||||||||||||
| As of December 31, 2021 | December 31, 2021 | |||||||||||||||||||||||
| (Dollars in thousands) | Unpaid Principal Balance | Without Valuation Allowance | With Valuation Allowance | Associated Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||||
Mortgage loans on real estate: | ||||||||||||||||||||||||
| Residential 1-4 family | $ | 353 | $ | 25 | $ | 300 | $ | 30 | $ | 328 | $ | 7 | ||||||||||||
| Commercial | 610 | 178 | 413 | 8 | 601 | 1 | ||||||||||||||||||
| Construction | 80 | 79 | 0 | 0 | 80 | 4 | ||||||||||||||||||
| Second mortgages | 127 | 0 | 125 | 3 | 126 | 5 | ||||||||||||||||||
| Total mortgage loans on real estate | 1,170 | 282 | 838 | 41 | 1,135 | 17 | ||||||||||||||||||
| Commercial and industrial loans | 188 | 0 | 174 | 87 | 181 | 17 | ||||||||||||||||||
| Other consumer loans | 9 | 7 | 0 | 0 | 8 | 0 | ||||||||||||||||||
| Total | $ | 1,367 | $ | 289 | $ | 1,012 | $ | 128 | $ | 1,324 | $ | 34 | ||||||||||||
| For the Year Ended | ||||||||||||||||||||||||
| As of December 31, 2020 | December 31, 2020 | |||||||||||||||||||||||
| (Dollars in thousands) | Unpaid Principal Balance | Without Valuation Allowance | With Valuation Allowance | Associated Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||||
Mortgage loans on real estate: | ||||||||||||||||||||||||
| Residential 1-4 family | $ | 474 | $ | 366 | $ | 87 | $ | 1 | $ | 458 | $ | 10 | ||||||||||||
| Commercial | 3,490 | 1,306 | 121 | 1 | 2,559 | 46 | ||||||||||||||||||
| Construction | 83 | 0 | 83 | 0 | 84 | 5 | ||||||||||||||||||
| Second mortgages | 133 | 0 | 133 | 9 | 134 | 5 | ||||||||||||||||||
| Total mortgage loans on real estate | 4,180 | 1,672 | 424 | 11 | 3,235 | 66 | ||||||||||||||||||
| Commercial and industrial loans | 6 | 6 | 0 | 0 | 7 | 0 | ||||||||||||||||||
| Other consumer loans | 14 | 14 | 0 | 0 | 15 | 1 | ||||||||||||||||||
| Total | $ | 4,200 | $ | 1,692 | $ | 424 | $ | 11 | $ | 3,257 | $ | 67 | ||||||||||||
| For the Year Ended | ||||||||||||||||||||||||
| As of December 31, 2022 | December 31, 2022 | |||||||||||||||||||||||
| (dollars in thousands) | Unpaid Principal Balance | Without Valuation Allowance | With Valuation Allowance | Associated Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||||
| Mortgage loans on real estate: | ||||||||||||||||||||||||
| Residential 1-4 family | $ | 285 | $ | 44 | $ | 235 | $ | 21 | $ | 282 | $ | 7 | ||||||||||||
| Commercial | 430 | 55 | 358 | 3 | 420 | - | ||||||||||||||||||
| Construction | 1,321 | 829 | 191 | 6 | 1,208 | 3 | ||||||||||||||||||
| Total mortgage loans on real estate | 2,036 | 928 | 784 | 30 | 1,910 | 10 | ||||||||||||||||||
| Commercial and industrial loans | 144 | 144 | - | - | 144 | 5 | ||||||||||||||||||
| Total | $ | 2,180 | $ | 1,072 | $ | 784 | $ | 30 | $ | 2,054 | $ | 15 | ||||||||||||
The following tables present credit quality exposures by internally assigned risk grade or days past due, depending on the typeratings as of loan. Based on credit risk assessments and management’s analysis of qualitative factors (including uncertainties associated with the COVID-19 pandemic), additional loss factors are applied to loan balances. These additional qualitative factors include: economic conditions, trends in growth, loan concentrations, changes in certain loans, changes in underwriting, changes in management and changes in the legal and regulatory environment.December 31, 2022:
Credit Quality Information
| (dollars in thousands) | Pass | OAEM | Substandard | Total | ||||||||||||
| Mortgage loans on real estate: | ||||||||||||||||
| Residential 1-4 family | $ | 188,025 | $ | - | $ | 492 | $ | 188,517 | ||||||||
| Commercial - owner occupied | 153,314 | 3,062 | 90 | 156,466 | ||||||||||||
| Commercial - non-owner occupied | 284,446 | 804 | - | 285,250 | ||||||||||||
| Multifamily | 29,207 | - | - | 29,207 | ||||||||||||
| Construction and land development | 107,179 | - | - | 107,179 | ||||||||||||
| Second mortgages | 10,148 | - | - | 10,148 | ||||||||||||
| Equity lines of credit | 55,935 | - | 46 | 55,981 | ||||||||||||
| Total mortgage loans on real estate | $ | 828,254 | $ | 3,866 | $ | 628 | $ | 832,748 | ||||||||
| Commercial and industrial loans | 64,112 | - | - | 64,112 | ||||||||||||
| Consumer automobile loans | 160,437 | - | - | 160,437 | ||||||||||||
| Other consumer loans | 19,718 | - | - | 19,718 | ||||||||||||
| Other | 3,237 | - | - | 3,237 | ||||||||||||
| Total | $ | 1,075,758 | $ | 3,866 | $ | 628 | $ | 1,080,252 | ||||||||
The following tabletables presents the activity in the ACLL by portfolio segment the changes in the allowance for loan losses and the recorded investment in loans for the periods presented. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
| (Dollars in thousands) | Commercial and Industrial | Real Estate Construction | Real Estate - Mortgage (1) | Real Estate - Commercial | Consumer (2) | Other | Unallocated | Total | ||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Balance, beginning | $ | 650 | $ | 339 | $ | 2,560 | $ | 4,434 | $ | 1,302 | $ | 123 | $ | 133 | $ | 9,541 | ||||||||||||||||
| Charge-offs | (27 | ) | 0 | (14 | ) | 0 | (800 | ) | (278 | ) | 0 | (1,119 | ) | |||||||||||||||||||
| Recoveries | 41 | 0 | 76 | 44 | 390 | 98 | 0 | 649 | ||||||||||||||||||||||||
| Provision for loan losses | 19 | 120 | (232 | ) | 309 | 470 | 241 | (133 | ) | 794 | ||||||||||||||||||||||
| Ending Balance | $ | 683 | $ | 459 | $ | 2,390 | $ | 4,787 | $ | 1,362 | $ | 184 | $ | 0 | $ | 9,865 | ||||||||||||||||
| Individually evaluated for impairment | $ | 87 | $ | 0 | $ | 33 | $ | 8 | $ | 0 | $ | 0 | $ | 0 | $ | 128 | ||||||||||||||||
| Collectively evaluated for impairment | 596 | 459 | 2,357 | 4,779 | 1,362 | 184 | 0 | 9,737 | ||||||||||||||||||||||||
| Ending Balance | $ | 683 | $ | 459 | $ | 2,390 | $ | 4,787 | $ | 1,362 | $ | 184 | $ | 0 | $ | 9,865 | ||||||||||||||||
| Loans Balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | 174 | 79 | 450 | 591 | 7 | 0 | 0 | 1,301 | ||||||||||||||||||||||||
| Collectively evaluated for impairment | 68,516 | 58,361 | 205,918 | 382,012 | 118,434 | 8,984 | 0 | 842,225 | ||||||||||||||||||||||||
| Ending Balance | $ | 68,690 | $ | 58,440 | $ | 206,368 | $ | 382,603 | $ | 118,441 | $ | 8,984 | $ | 0 | $ | 843,526 | ||||||||||||||||
| For the Year ended December 31, 2022 | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | Commercial and Industrial | Real Estate Construction | Real Estate - Mortgage (1) | Real Estate- Commercial | Consumer (2) | Other | Unallocated | Total | ||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Balance, beginning | $ | 683 | $ | 459 | $ | 2,390 | $ | 4,787 | $ | 1,362 | $ | 184 | $ | - | $ | 9,865 | ||||||||||||||||
| Charge-offs | (297 | ) | - | (25 | ) | - | (1,368 | ) | (332 | ) | - | (2,022 | ) | |||||||||||||||||||
| Recoveries | 134 | - | 61 | 22 | 648 | 112 | - | 977 | ||||||||||||||||||||||||
| Provision for loan losses | 153 | 93 | 149 | (310 | ) | 1,423 | 192 | 6 | 1,706 | |||||||||||||||||||||||
| Ending Balance | $ | 673 | $ | 552 | $ | 2,575 | $ | 4,499 | $ | 2,065 | $ | 156 | $ | 6 | $ | 10,526 | ||||||||||||||||
| Individually evaluated for impairment | $ | - | $ | 6 | $ | 21 | $ | 3 | $ | - | $ | - | $ | - | $ | 30 | ||||||||||||||||
| Collectively evaluated for impairment | 673 | 546 | 2,554 | 4,496 | 2,065 | 156 | 6 | 10,496 | ||||||||||||||||||||||||
| Ending Balance | $ | 673 | $ | 552 | $ | 2,575 | $ | 4,499 | $ | 2,065 | $ | 156 | $ | 6 | $ | 10,526 | ||||||||||||||||
| (Dollars in thousands) | Commercial and Industrial | Real Estate Construction | Real Estate - Mortgage (1) | Real Estate - Commercial | Consumer (2) | Other | Unallocated | Total | ||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Balance, beginning | $ | 1,244 | $ | 258 | $ | 2,505 | $ | 3,663 | $ | 1,694 | $ | 296 | $ | 0 | $ | 9,660 | ||||||||||||||||
| Charge-offs | (25) | 0 | (149 | ) | (654 | ) | (822 | ) | (355 | ) | 0 | (2,005 | ) | |||||||||||||||||||
| Recoveries | 47 | 10 | 69 | 317 | 377 | 66 | 0 | 886 | ||||||||||||||||||||||||
| Provision for loan losses | (616 | ) | 71 | 135 | 1,108 | 53 | 116 | 133 | 1,000 | |||||||||||||||||||||||
| Ending Balance | $ | 650 | $ | 339 | $ | 2,560 | $ | 4,434 | $ | 1,302 | $ | 123 | $ | 133 | $ | 9,541 | ||||||||||||||||
| Individually evaluated for impairment | $ | 0 | $ | 0 | $ | 10 | $ | 1 | $ | 0 | $ | 0 | $ | 0 | $ | 11 | ||||||||||||||||
| Collectively evaluated for impairment | 650 | 339 | 2,550 | 4,433 | 1,302 | 123 | 133 | 9,530 | ||||||||||||||||||||||||
| Ending Balance | $ | 650 | $ | 339 | $ | 2,560 | $ | 4,434 | $ | 1,302 | $ | 123 | $ | 133 | $ | 9,541 | ||||||||||||||||
| Loans Balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | 6 | 83 | 586 | 1,427 | 14 | 0 | 0 | 2,116 | ||||||||||||||||||||||||
| Collectively evaluated for impairment | 141,740 | 43,649 | 206,950 | 315,424 | 118,354 | 8,067 | 0 | 834,184 | ||||||||||||||||||||||||
| Ending Balance | $ | 141,746 | $ | 43,732 | $ | 207,536 | $ | 316,851 | $ | 118,368 | $ | 8,067 | $ | 0 | $ | 836,300 | ||||||||||||||||
| (1) | The real |
| (2) | The consumer segment includes consumer automobile loans. |
| Years Ended December 31, | ||||||||
| (dollars in thousands) | 2021 | 2020 | ||||||
| Balance at beginning of year | $ | 0 | $ | 0 | ||||
| Transfers to OREO due to foreclosure | 0 | 254 | ||||||
| Properties sold | 0 | (254 | ) | |||||
| Balance at end of year | $ | 0 | $ | 0 | ||||
| Years Ended December 31, | ||||||||
| (dollars in thousands) | 2021 | 2020 | ||||||
| Net gain on sales of real estate | $ | 0 | $ | 62 | ||||
| Operating expenses, net of income (1) | 0 | (20 | ) | |||||
| Total Income | $ | 0 | $ | 42 | ||||
Premises and equipment consisted of the following at December 31:following:
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2023 | 2022 | ||||||||||||
| Land | $ | 7,270 | $ | 7,709 | $ | 7,062 | $ | 7,062 | ||||||||
| Buildings | 36,418 | 37,530 | 34,297 | 34,187 | ||||||||||||
| Construction in process | 279 | 239 | 281 | 335 | ||||||||||||
| Leashold improvements | 867 | 867 | 1,151 | 1,130 | ||||||||||||
| Furniture, fixtures and equipment | 21,991 | 21,235 | 23,842 | 22,867 | ||||||||||||
66,825 | 67,580 | 66,633 | 65,581 | |||||||||||||
| Less accumulated depreciation and amortization | 34,691 | 33,967 | 36,720 | 34,573 | ||||||||||||
| Balance at end of year | $ | 32,134 | $ | 33,613 | $ | 29,913 | $ | 31,008 | ||||||||
Depreciation expense was $2.1 million for each of the years ended December 31, 20212023 and 2020.2022.
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 if the rate implicit in the lease is unattainable.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 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 assured 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 right-of-use asset and lease liability are included in “Other Assets” and “Other Liabilities,” respectively, in the Consolidated Balance Sheets. There were no new leases executed during the year ended December 31, 2023. The following tables present information about the Company’s leases:
| (dollars in thousands) | December 31, 2021 | December 31, 2023 | ||||||
| Lease liabilities | $ | 1,041 | $ | 1,248 | ||||
| Right-of-use assets | $ | 1,017 | $ | 1,148 | ||||
| Weighted average remaining lease term | 3.64 years | 3.37 years | ||||||
| Weighted average discount rate | 1.73 | % | 3.06 | % | ||||
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||
Lease cost (in thousands) | 2021 | 2020 | ||||||||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||||||||||
| Operating lease cost | $ | 347 | $ | 380 | $ | 439 | $ | 349 | ||||||||
| Total lease cost | $ | 347 | $ | 380 | $ | 439 | $ | 349 | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 351 | $ | 377 | $ | 417 | $ | 351 | ||||||||
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows:
Lease payments due (in thousands) | As of December 31, 2021 | |||||||
Twelve months ending December 31, 2022 | $ | 339 | ||||||
Twelve months ending December 31, 2023 | 248 | |||||||
| As of | ||||||||
| (dollars in thousands) | December 31, 2023 | |||||||
Twelve months ending December 31, 2024 | 240 | $ | 423 | |||||
Twelve months ending December 31, 2025 | 193 | 382 | ||||||
Twelve months ending December 31, 2026 | 278 | |||||||
Twelve months ending December 31, 2027 | 208 | |||||||
| Thereafter | 70 | 24 | ||||||
| Total undiscounted cash flows | $ | 1,090 | $ | 1,315 | ||||
| Discount | (49 | ) | (67 | ) | ||||
| Lease liabilities | $ | 1,041 | $ | 1,248 | ||||
The aggregate rental expense of premises and equipment was $470$446 thousand and $415 thousand for years ended December 31, 20212023 and 2020,2022, respectively.
Note 6. Low-Income Housing Tax Credits
The Company was invested in 4four separate housing equity funds at both December 31, 20212023 and December 31, 2020.2022. The general purpose of these funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, deliver Federal Low Income Housing Credits to investors, allocate tax losses and other possible tax benefits to investors, and preserve and protect project assets.
The investments in these funds were recorded as other assets on the consolidated balance sheets and were $1.9$1.1 million and $2.3$1.4 million at December 31, 20212023 and December 31, 2020,2022, respectively. The expected terms of these investments and the related tax benefits run through 2033. There were 0no additional committed capital calls as of December 31, 2021 compared to $18 thousand at December 31, 2020. Additional committed capital calls are recorded in accrued expenses and other liabilities on the corresponding consolidated balance sheets.2023 or 2022. During the years ended December 31, 20212023 and 2020,2022, the Company recognized amortization expense of $410$367 thousand and $688$425 thousand, respectively, which was included within noninterest expense on the Consolidated Statements of Income.
The table below summarizes the tax credits and other tax benefits recognized by the Company and related to these investments, as of the periods indicated:
| Years Ended | Years Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2021 | 2020 | |||||||||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||||||||||
| Tax credits and other benefits | ||||||||||||||||
| Amortization of operating losses | $ | 410 | $ | 688 | $ | 367 | $ | 425 | ||||||||
| Tax benefit of operating losses* | 86 | 144 | ||||||||||||||
Tax benefit of operating losses* | 77 | 89 | ||||||||||||||
| Tax credits | 361 | 419 | 309 | 349 | ||||||||||||
| Total tax benefits | $ | 447 | $ | 563 | $ | 386 | $ | 438 | ||||||||
The aggregate amount of time deposits in denominations of $250 thousand or more at December 31, 20212023 and 20202022 was $39.9$75.9 million and $45.4$47.3 million, respectively. As of December 31, 2021, 02023, no single customer relationship exceeded 5 percent of total deposits.
At December 31, 20212023, the scheduled maturities of time deposits (in thousands) are as follows:
| (dollars in thousands) | ||||||||
2022 | $ | 99,749 | ||||||
2023 | 39,040 | |||||||
2024 | 15,095 | $ | 200,113 | |||||
2025 | 7,680 | 23,567 | ||||||
2026 | 7,554 | 8,088 | ||||||
2027 | 8,851 | |||||||
2028 | 2,092 | |||||||
| Balance at end of year | $ | 169,118 | $ | 242,711 | ||||
Short-Term Borrowings
The Company classifies all borrowings that will mature within a year from the date on which the Company enters into them as short-term borrowings. Short-term borrowings sources consist of federal funds purchased, overnight repurchase agreements (which are secured transactions with customers that generally mature within one to four days), and advances from the FHLB.
The Company maintains federal funds lines with several correspondent banks to address short-term borrowing needs. At December 31, 20212023 and 20202022, the remaining credit available from these lines totaled $115.0$90.0 million and $100.0$103.6 million, respectively. The Company has a collateral dependent line of credit with the FHLB with remaining credit availability of $391.3$362.1 million and $374.7$346.5 million as of December 31, 20212023 and December 31, 2020,2022, respectively.
The following table presents total short-term borrowings as of the dates indicated (dollars in thousands):indicated:
| (dollar in thousands) | December 31, 2021 | December 31, 2020 | ||||||||||||||
| (dollars in thousands) | December 31, 2023 | December 31, 2022 | ||||||||||||||
| Federal funds purchased | $ | - | $ | 11,378 | ||||||||||||
| Overnight repurchase agreements | $ | 4,536 | $ | 6,619 | 2,383 | 4,987 | ||||||||||
| Federal Home Loan Bank advances | 9,450 | 46,100 | ||||||||||||||
| Total short-term borrowings | $ | 4,536 | $ | 6,619 | $ | 11,833 | $ | 62,465 | ||||||||
| Maximum month-end outstanding balance | $ | 12,239 | $ | 9,080 | ||||||||||||
| Maximum month-end outstanding balance (year-to-date) | $ | 84,360 | $ | 62,465 | ||||||||||||
| Average outstanding balance during the period | $ | 7,293 | $ | 21,092 | $ | 53,466 | $ | 11,776 | ||||||||
| Average interest rate (year-to-date) | 0.10 | % | 0.19 | % | 4.90 | % | 2.34 | % | ||||||||
| Average interest rate at end of period | 0.10 | % | 0.10 | % | 5.65 | % | 4.58 | % | ||||||||
Long-Term Borrowings
The Company also obtained a loan maturing on April 1, 2023 from a correspondent bank during the second quarter of 2018 to provide partial funding for the Citizens acquisition. The terms of the loan include a LIBOR based interest rate that adjusts monthly and quarterly principal curtailments. Athad long-term FHLB advances totaling $60.0 million outstanding at December 31, 2020, the outstanding balance was $1.4 million,2023 with scheduled maturities through November 29, 2028 and the then-current interest rate was 2.61%rates ranging from 3.37% to 4.28%. The Company elected to pay the loan in full during the first quarter of 2021.did not have any long-term FHLB advances at December 31, 2022.
On July 14, 2021, the Company completed thea $30.0 million issuance, of $29.4($29.4 million, net of issuance costs, or $30.0 million in aggregate principal amountcosts) of subordinated notes (the Notes) due in 2031 in a private placement transaction. The Notes are due in 2031 and bear interest at a fixed rate of 3.5% for five years and at the three-month SOFR plus 286 basis points, resetting quarterly, thereafter.
Employee Stock Purchase Plan
The Company has adopted an employee stock purchase planESPP and offers share-based compensation through its equity compensation plan. Share-based compensation arrangements may include stock options, restricted and unrestricted stock awards, restricted stock units, performance units and stock appreciation rights. Accounting standards require all share-based payments to employees and non-employee directors to be valued using a fair value method on the date of grant and to be expensed based on that fair value over the applicable vesting period. The Company accounts for forfeitures during the vesting period as they occur.
| Weighted Average | ||||||||
| Grant Date | ||||||||
| Shares | Fair Value | |||||||
Nonvested, January 1, 2021 | 29,576 | $ | 18.46 | |||||
| Issued | 18,048 | 22.35 | ||||||
| Vested | (8,521 | ) | 17.50 | |||||
| Forfeited | (668 | ) | 18.89 | |||||
Nonvested, December 31, 2021 | 38,435 | $ | 20.49 | |||||
Under the Company’s Employee Stock Purchase Plan (ESPP),ESPP, substantially all employees of the Company and its subsidiaries can authorize a specific payroll deduction from their base compensation for the periodic purchase of the Company’s common stock. Shares of stock are issued quarterly at a discount to the market price of the Company’s stock on the day of purchase, which can range from 0-15% and for 20212023 and 20202022 was set at 5%.
Total stock purchases under the ESPP amounted to 4,9087,425 shares during 20212023 and 5,8195,765 shares during 2020.2022. At December 31, 2021,2023, the Company had 227,543214,353 remaining shares reserved for issuance under the ESPP.
Incentive Stock Plan
The Incentive Stock Plan permits the issuance of up to 300,000 shares of common stock for awards to key employees and non-employee directors of the Company and its subsidiaries in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards and performance units. As of December 31, 2023, only restricted stock had been granted under the Incentive Stock Plan.
Restricted stock activity for the year ended December 31, 2023 is summarized below.
| Weighted Average | ||||||||
| Grant Date | ||||||||
| Shares | Fair Value | |||||||
Nonvested, January 1, 2023 | 46,989 | $ | 22.49 | |||||
| Issued | 35,763 | 17.21 | ||||||
| Vested | (26,916 | ) | 20.14 | |||||
| Forfeited | (2,176 | ) | 18.25 | |||||
Nonvested, December 31, 2023 | 53,660 | $ | 20.32 | |||||
The weighted average period over which nonvested awards are expected to be recognized in compensation expense is 1.43 years.
The fair value of restricted stock granted during the year ended December 31, 2023 and 2022 was $615 thousand and $558 thousand, respectively.
The remaining unrecognized compensation expense for nonvested restricted stock shares totaled $523 thousand as of December 31, 2023 and $493 thousand as of December 31, 2022.
Stock-based compensation expense was $546 thousand and $416 thousand for the years ended December 31, 2023 and 2022, respectively.
Note 10. Stockholders’ Equity and Earnings per Common Share
The following table presents information on amounts reclassified out of accumulated other comprehensive loss, by category, during the periods indicated:
| (dollars in thousands) | Years Ended December 31, | Affected Line Item on | |||||||
| 2021 | 2020 | Consolidated Statement of Income | |||||||
| Available-for-sale securities | |||||||||
| Realized gains on sales of securities | $ | 0 | $ | 264 | Gain on sale of available-for-sale securities, net | ||||
| Tax effect | 0 | 55 | Income tax expense | ||||||
$ | 0 | $ | 209 | ||||||
| Years Ended | |||||||||
| (dollars in thousands) | December 31, | Affected Line Item on Consolidated Statement of Income | |||||||
| 2023 | 2022 | ||||||||
| Sale of securities | |||||||||
| Realized loss on sale of securities | $ | (134 | ) | $ | (1,870 | ) | Loss on sale of securities, net | ||
| Tax effect | (28 | ) | (393 | ) | Income tax benefit | ||||
$ | (106 | ) | $ | (1,477 | ) | ||||
The following table presents the changes in accumulated other comprehensive loss, by category, net of tax, for the periods indicated:
| (dollars in thousands) | Unrealized Gains (Losses) on Available-for-Sale Securities | Accumulated Other Comprehensive Income | Unrealized Gains (Losses) on Available-for-Sale Securities | Accumulated Other Comprehensive (Loss) Income | ||||||||||||
Year Ended December 31, 2021 | ||||||||||||||||
Year Ended December 31, 2023 | ||||||||||||||||
| Balance at beginning of period | $ | (20,767 | ) | $ | (20,767 | ) | ||||||||||
| Net other comprehensive income | 3,237 | 3,237 | ||||||||||||||
| Balance at end of period | $ | (17,530 | ) | $ | (17,530 | ) | ||||||||||
Year Ended December 31, 2022 | ||||||||||||||||
| Balance at beginning of period | $ | 4,069 | $ | 4,069 | $ | 1,675 | $ | 1,675 | ||||||||
| Net other comprehensive loss | (2,394 | ) | (2,394 | ) | (22,442 | ) | (22,442 | ) | ||||||||
| Balance at end of period | $ | 1,675 | $ | 1,675 | $ | (20,767 | ) | $ | (20,767 | ) | ||||||
Year Ended December 31, 2020 | ||||||||||||||||
| Balance at beginning of period | $ | (79 | ) | $ | (79 | ) | ||||||||||
| Net other comprehensive income | 4,148 | 4,148 | ||||||||||||||
| Balance at end of period | $ | 4,069 | $ | 4,069 | ||||||||||||
The following table presents the change in each component of accumulated other comprehensive income net of tax(loss), on a pre-tax and after-tax basis for the periods indicated.
| Years Ended December 31, 2021 | Year Ended December 31, 2023 | |||||||||||||||||||||||
| (dollars in thousands) | Pretax | Tax | Net-of-Tax | Pretax | Tax | Net-of-Tax | ||||||||||||||||||
| Unrealized losses on available-for-sale securities: | ||||||||||||||||||||||||
| Unrealized holding losses arising during the period | $ | (3,030 | ) | $ | (636 | ) | $ | (2,394 | ) | |||||||||||||||
| Unrealized gains on available-for-sale securities: | ||||||||||||||||||||||||
| Unrealized holding gains arising during the period | $ | 3,964 | $ | (833 | ) | $ | 3,131 | |||||||||||||||||
| Reclassification adjustment for net losses recognized in income | 134 | (28 | ) | 106 | ||||||||||||||||||||
| 4,098 | (861 | ) | 3,237 | |||||||||||||||||||||
| Total change in accumulated other comprehensive income, net | $ | (3,030 | ) | $ | (636 | ) | $ | (2,394 | ) | $ | 4,098 | $ | (861 | ) | $ | 3,237 | ||||||||
| Years Ended December 31, 2020 | ||||||||||||
| (dollars in thousands) | Pretax | Tax | Net-of-Tax | |||||||||
| Unrealized gains on available-for-sale securities: | ||||||||||||
| Unrealized holding gains arising during the period | $ | 5,514 | $ | 1,157 | $ | 4,357 | ||||||
| Reclassification adjustment for gains recognized in income | (264 | ) | (55 | ) | (209 | ) | ||||||
| Total change in accumulated other comprehensive income, net | $ | 5,250 | $ | 1,102 | $ | 4,148 | ||||||
| Year Ended December 31, 2022 | ||||||||||||
| (dollars in thousands) | Pretax | Tax | Net-of-Tax | |||||||||
| Unrealized losses on available-for-sale securities: | ||||||||||||
| Unrealized holding losses arising during the period | $ | (30,382 | ) | $ | 6,463 | $ | (23,919 | ) | ||||
Reclassification adjustment for losses recognized in income | 1,870 | (393 | ) | 1,477 | ||||||||
| (28,512 | ) | 6,070 | (22,442 | ) | ||||||||
| Total change in accumulated other comprehensive loss, net | $ | (28,512 | ) | $ | 6,070 | $ | (22,442 | ) | ||||
Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of potentially dilutive potential common shares attributable to the ESPP.
| (dollars in thousands except per share data) | Net Income Available to Common Shareholders (Numerator) | Weighted Average Common Shares (Denominator) | Per Share Amount | |||||||||
Year Ended December 31, 2021 | ||||||||||||
| Net income, basic | $ | 8,440 | 5,238 | $ | 1.61 | |||||||
| Potentially dilutive common shares - employee stock purchase program | - | 0 | - | |||||||||
| Diluted | $ | 8,440 | 5,238 | $ | 1.61 | |||||||
Year Ended December 31, 2020 | ||||||||||||
| Net income, basic | $ | 5,389 | 5,216 | $ | 1.03 | |||||||
| Potentially dilutive common shares - employee stock purchase program | - | 0 | - | |||||||||
| Diluted | $ | 5,389 | 5,216 | $ | 1.03 | |||||||
The Company had 0no antidilutive shares outstanding in 20212023 or 2020.2022. Non-vested restricted common shares, which carry all rights and privileges of a common share with respect to the stock, including the right to vote, were included in the basic and diluted per common share calculations.
In the ordinary course of business, the Company has granted loans to principal stockholders, executive officers and directors and their affiliates. These loans were made on substantially the same terms and conditions, including interest rates, collateral and repayment terms, as those prevailing at the same time for comparable transactions with unrelated persons, and, in the opinion of management and the Company’s board of directors, do not involve more than normal risk or present other unfavorable features. None of the principal stockholders, executive officers or directors had direct or indirect loans exceeding 10 percent of stockholders’ equity at December 31, 2021.
Annual activity consisted of the following:
| (dollars in thousands) | 2021 | 2020 | 2023 | 2022 | ||||||||||||
| Balance, beginning of year | $ | 4,220 | $ | 3,910 | $ | 2,724 | $ | 1,889 | ||||||||
| Additions | 1,822 | 3,531 | 198 | 1,092 | ||||||||||||
| Reductions | (4,153 | ) | (3,221 | ) | (755 | ) | (257 | ) | ||||||||
| Balance, end of year | $ | 1,889 | $ | 4,220 | $ | 2,167 | $ | 2,724 | ||||||||
Deposits from related parties held by the Company at December 31, 20212023 and 20202022 amounted to $19.8$11.7 million and $17.2$24.5 million, respectively.
The components of income tax expense for the current and prior year-ends are as follows:
| (dollars in thousands) | 2021 | 2020 | 2023 | 2022 | ||||||||||||
| Current income tax expense | $ | 1,021 | $ | 1,155 | $ | 1,422 | $ | 1,525 | ||||||||
| Deferred income tax expense (benefit) | 275 | (634 | ) | |||||||||||||
| Deferred income tax benefit | (88 | ) | (51 | ) | ||||||||||||
| Reported income tax expense | $ | 1,296 | $ | 521 | $ | 1,334 | $ | 1,474 | ||||||||
A reconciliation of the expected federal income tax expense on income before income taxes with the reported income tax expense for the same periods follows:
| Years Ended December 31, | ||||||||
| (dollars in thousands) | 2021 | 2020 | ||||||
| Expected tax expense | $ | 2,045 | $ | 1,241 | ||||
| Interest expense on tax-exempt assets | 3 | 5 | ||||||
| Low-income housing tax credit | (361 | ) | (413 | ) | ||||
| Tax-exempt interest, net | (195 | ) | (147 | ) | ||||
| Bank-owned life insurance | (213 | ) | (176 | ) | ||||
| Other, net | 17 | 11 | ||||||
| Reported tax expense | $ | 1,296 | $ | 521 | ||||
| Years Ended December 31, | ||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||
| Federal statutory rate times financial statement income | $ | 1,903 | $ | 2,222 | ||||
| Low-income housing tax credits | (309 | ) | (349 | ) | ||||
| Tax-exempt interest income, net | (70 | ) | (220 | ) | ||||
| Bank-owned life insurance | (218 | ) | (191 | ) | ||||
| Other, net | 28 | 12 | ||||||
| Reported income tax expense | $ | 1,334 | $ | 1,474 | ||||
The effective tax rates for 20212023 and 20202022 were 13.3%14.7% and 8.8%13.9%, respectively.
The components of the net deferred tax asset, included in other assets, are as follows:
| (dollars in thousands) | 2021 | 2020 | 2023 | 2022 | ||||||||||||
| Deferred tax assets: | ||||||||||||||||
| Allowance for loan losses | $ | 2,072 | $ | 2,017 | ||||||||||||
| Allowance for credit losses | $ | 2,563 | $ | 2,211 | ||||||||||||
| Nonaccrual loans | 10 | 9 | 56 | 9 | ||||||||||||
| Acquisition accounting | 5 | 14 | ||||||||||||||
| Net operating losses | 609 | 643 | 540 | 574 | ||||||||||||
| Investments in pass-through entities | 267 | 224 | 355 | 320 | ||||||||||||
| Bank owned life insurance benefit | 72 | 68 | ||||||||||||||
| Securities available-for-sale | 0 | 0 | ||||||||||||||
| Unrealized losses on securities available-for-sale | 4,660 | 5,520 | ||||||||||||||
| Stock awards | 116 | 97 | 140 | 117 | ||||||||||||
| Deferred compensation | 314 | 397 | ||||||||||||||
| Other accrued compensation | 272 | 498 | ||||||||||||||
| Deferred loan fees and costs | 270 | 443 | 258 | 217 | ||||||||||||
| Lease liability | 262 | 343 | ||||||||||||||
| Other | 66 | 55 | 49 | 11 | ||||||||||||
$ | 3,801 | $ | 3,967 | $ | 9,155 | $ | 9,820 | |||||||||
| Deferred tax liabilities: | ||||||||||||||||
| Premises and equipment | $ | 481 | $ | 363 | $ | 606 | $ | 606 | ||||||||
| Acquisition accounting | 58 | 67 | 39 | 49 | ||||||||||||
| Deferred loan fees and costs | 0 | 0 | ||||||||||||||
| Securities available-for-sale | 445 | 1,081 | ||||||||||||||
| Right of use asset | 241 | 332 | ||||||||||||||
984 | 1,511 | 886 | 987 | |||||||||||||
| Net deferred tax assets | $ | 2,817 | $ | 2,456 | $ | 8,269 | $ | 8,833 | ||||||||
The Company files income tax returns in the U.S. federal jurisdiction and the Commonwealth of Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years prior to 2018.2020.
Credit-Related Financial Instruments
The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making such commitments as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk were outstanding at:as of December 31, 2023 and December 31, 2022 were as follows:
| December 31, | December 31, | December 31, | ||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2023 | 2022 | ||||||||||||
| Commitments to extend credit: | ||||||||||||||||
| Home equity lines of credit | $ | 71,751 | $ | 66,999 | $ | 91,885 | $ | 87,722 | ||||||||
| Commercial real estate, construction and development loans committed but not funded | 42,683 | 20,258 | 74,218 | 67,107 | ||||||||||||
| Other lines of credit (principally commercial) | 52,695 | 64,329 | 47,622 | 51,742 | ||||||||||||
| Total | $ | 167,129 | $ | 151,586 | $ | 213,725 | $ | 206,571 | ||||||||
| Letters of credit | $ | 3,617 | $ | 4,841 | $ | 802 | $ | 904 | ||||||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extensions of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.
Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are not collateralized and usually do not contain a specified maturity date, and ultimately may or may not be drawn upon to the total extent to which the Company is committed.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year, with the exception of 4 letters of credit which expire in 2023, all of which are secured by real estate.year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various collateral supporting those commitments for which collateral is deemed necessary.
Various legal claims arise from time to time in the normal course of business, which, in the opinion of management, will not have a material effect on the Company’s Consolidated Financial Statements.
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurements and Disclosures” topics of FASB ASU No. 2010-06, and FASB ASU No. 2011-04, and FASB ASU No. 2016-01, the fair value of a financial instrument is the price that would be received in the sale of an asset or transfer of a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value can be a reasonable point within a range that is most representative of fair value under current market conditions.
In estimating the fair value of assets and liabilities, the Company relies mainly on two models. The first model, used by the Company’s bond accounting service provider, determines the fair value of securities. Securities are priced based on an evaluation of observable market data, including benchmark yield curves, reported trades, broker/dealer quotes, and issuer spreads. Pricing is also impacted by credit information about the issuer, perceived market movements, and current news events impacting the individual sectors. The second source is a third partythird-party vendor the Company utilizes to provide fair value exit pricing for loans and interest bearinginterest-bearing deposits in accordance with guidance.
In accordance with ASC 820, “Fair Value Measurements and Disclosures,” the Company groups its financial assets and financial liabilities generally measured at fair value into three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
| Level 1 – | Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. |
| Level 2 – | Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. |
| Level 3 – | Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation. |
An instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Debt securities with readily determinable fair values that are classified as “available-for-sale” are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.income (loss). Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s available-for-sale securities are considered to be Level 2 securities.
The Company recognizes IRLCs at fair value. Fair value of IRLCs is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best-efforts basis or (ii) the observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis. All the Company’s IRLCs are classified as Level 2.
The Company recognizes interest rate swaps on loans at fair value. The Company has contracted with a third-party vendor to provide valuations for these interest rate swaps using standard valuation techniques. All the Company’s interest rate swaps on loans are classified as Level 2.
The following tables present the balances of certain assets measured at fair value on a recurring basis as of the dates indicated:
| Fair Value Measurements at December 31, 2021 Using | ||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||
| (dollars in thousands) | Balance | |||||||||||||||
| Assets: | ||||||||||||||||
| Available-for-sale securities | ||||||||||||||||
| U.S. Treasury securities | $ | 14,904 | $ | 0 | $ | 14,904 | $ | 0 | ||||||||
| Obligations of U.S. Government agencies | 38,558 | 0 | 38,558 | 0 | ||||||||||||
| Obligations of state and political subdivisions | 65,803 | 0 | 65,803 | 0 | ||||||||||||
| Mortgage-backed securities | 89,058 | 0 | 89,058 | 0 | ||||||||||||
| Money market investments | 2,413 | 0 | 2,413 | �� | 0 | |||||||||||
| Corporate bonds and other securities | 23,585 | 0 | 23,585 | 0 | ||||||||||||
| Total available-for-sale securities | 234,321 | 0 | 234,321 | 0 | ||||||||||||
Derivatives | ||||||||||||||||
| Interest rate lock | 43 | 0 | 43 | 0 | ||||||||||||
| Interest rate swap on loans | 181 | 0 | 181 | 0 | ||||||||||||
| Total assets | $ | 234,545 | $ | 0 | $ | 234,545 | $ | 0 | ||||||||
| Liabilities: | ||||||||||||||||
| Derivatives | ||||||||||||||||
| Interest rate swap on loans | 181 | 0 | 181 | 0 | ||||||||||||
| Total liabilities | $ | 181 | $ | 0 | $ | 181 | $ | 0 | ||||||||
| Fair Value Measurements at December 31, 2020 Using | ||||||||||||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||||
| Fair Value Measurements at December 31, 2023 Using | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | Balance | Balance | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||
| Available-for-sale securities | ||||||||||||||||||||||||||||||||
| U.S. Treasury securities | $ | 7,043 | $ | 0 | $ | 7,043 | $ | 0 | $ | 3,857 | $ | - | $ | 3,857 | $ | - | ||||||||||||||||
| Obligations of U.S. Government agencies | 36,696 | 0 | 36,696 | 0 | 42,735 | - | 42,735 | - | ||||||||||||||||||||||||
| Obligations of state and political subdivisions | 45,995 | 0 | 45,995 | 0 | 50,597 | - | 50,597 | - | ||||||||||||||||||||||||
| Mortgage-backed securities | 73,501 | 0 | 73,501 | 0 | 81,307 | - | 81,307 | - | ||||||||||||||||||||||||
| Money market investments | 4,743 | 0 | 4,743 | 0 | 2,047 | - | 2,047 | - | ||||||||||||||||||||||||
| Corporate bonds and other securities | 18,431 | 0 | 18,431 | 0 | 23,735 | - | 23,735 | - | ||||||||||||||||||||||||
| Total available-for-sale securities | $ | 186,409 | $ | 0 | $ | 186,409 | $ | 0 | 204,278 | - | 204,278 | - | ||||||||||||||||||||
Derivatives | ||||||||||||||||||||||||||||||||
| Interest rate lock | 10 | - | 10 | - | ||||||||||||||||||||||||||||
| Interest rate swap on loans | 1,249 | - | 1,249 | - | ||||||||||||||||||||||||||||
| Total assets | $ | 205,537 | $ | - | $ | 205,537 | $ | - | ||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Derivatives | ||||||||||||||||||||||||||||||||
| Interest rate swap on loans | 1,249 | - | 1,249 | - | ||||||||||||||||||||||||||||
| Total liabilities | $ | 1,249 | $ | - | $ | 1,249 | $ | - | ||||||||||||||||||||||||
| Fair Value Measurements at December 31, 2022 Using | ||||||||||||||||
| (dollars in thousands) | Balance | Level 1 | Level 2 | Level 3 | ||||||||||||
| Available-for-sale securities | ||||||||||||||||
| U.S. Treasury securities | $ | 7,671 | $ | - | $ | 7,671 | $ | - | ||||||||
| Obligations of U.S. Government agencies | 42,399 | - | 42,399 | - | ||||||||||||
| Obligations of state and political subdivisions | 59,384 | - | 59,384 | - | ||||||||||||
| Mortgage-backed securities | 88,913 | - | 88,913 | - | ||||||||||||
| Money market investments | 1,816 | - | 1,816 | - | ||||||||||||
| Corporate bonds and other securities | 25,335 | - | 25,335 | - | ||||||||||||
| Total available-for-sale securities | $ | 225,518 | $ | - | $ | 225,518 | $ | - | ||||||||
Derivatives | ||||||||||||||||
| Interest rate lock | 23 | - | 23 | - | ||||||||||||
| Interest rate swap on loans | 1,447 | - | 1,447 | - | ||||||||||||
| Total assets | $ | 226,988 | $ | - | $ | 226,988 | $ | - | ||||||||
| Liabilities: | ||||||||||||||||
| Derivatives | ||||||||||||||||
| Interest rate swap on loans | 1,447 | - | 1,447 | - | ||||||||||||
| Total liabilities | $ | 1,447 | $ | - | $ | 1,447 | $ | - | ||||||||
Under certain circumstances, adjustments are made to the fair value for assets and liabilities although they are not measured at fair value on an ongoing basis.
Impaired loans
The value of real estate collateral is determined utilizing an income, market, or cost valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company. In the case of loans with lower balances, the Company may obtain a real estate evaluation instead of an appraisal. Evaluations utilize many of the same techniques as appraisals and are typically performed by independent appraisers. Once received, appraisals and evaluations are reviewed by trained staff independent of the lending function to verify consistency and reasonability. Appraisals and evaluations are based on significant unobservable inputs, including but not limited to: adjustments made to comparable properties, judgments about the condition of the subject property, the availability and suitability of comparable properties, capitalization rates, projected income of the subject or comparable properties, vacancy rates, projected depreciation rates, and the state of the local and regional economy. The Company may also elect to make additional reductions in the collateral value based on management’s best judgment, which represents another source of unobservable inputs. Because of the subjective nature of collateral valuation, impaired loans are considered Level 3.
Impaired loans may be secured by collateral other than real estate. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). If a loan is not collateral-dependent, its impairment may be measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate. Because the loan is discounted at its effective rate of interest, rather than at a market rate, the loan is not considered to be held at fair value and is not included in the tables below. Collateral-dependent impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as part of the provision for loan losses on the Consolidated Statements of Income. As of December 31, 2023, there were no collateral dependent loans measured at fair value.
Other Real Estate Owned (OREO)
As of December 31, 2023 and December 31, 2022, there was no OREO below the original book value are recorded in the period incurred and expensed against current earnings.that was measured at fair value.
Loans Held Forfor Sale
Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are reported on a separate line item on the Company’s Consolidated Statements of Income.
The following table presentstables present the assets carried on the consolidated balance sheetsConsolidated Balance Sheets for which a nonrecurring change in fair value has been recorded. Assets are shown by class of loan and by level in the fair value hierarchy, as of the dates indicated. Certain impaired loans are valued by the present value of the loan’s expected future cash flows, discounted at the loan’s effective interest rate rather than at a market rate. These loans are not carried on the consolidated balance sheetsConsolidated Balance Sheets at fair value and, as such, are not included in the tabletables below.
| Carrying Value at December 31, 2021 | Carrying Value at December 31, 2023 | |||||||||||||||||||||||||||||||
| (dollars in thousands) | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Impaired loans | ||||||||||||||||||||||||||||||||
| Commercial loans | $ | 87 | $ | 0 | $ | 0 | $ | 87 | ||||||||||||||||||||||||
| Total | $ | 87 | $ | 0 | $ | 0 | $ | 87 | ||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||
| Loans held for sale | $ | 3,287 | $ | 0 | $ | 3,287 | $ | 0 | $ | 470 | $ | - | $ | 470 | $ | - | ||||||||||||||||
| Carrying Value at December 31, 2020 | ||||||||||||||||
| (dollars in thousands) | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Loans | ||||||||||||||||
| Loans held for sale | $ | 14,413 | $ | 0 | $ | 14,413 | $ | 0 | ||||||||
| Carrying Value at December 31, 2022 | ||||||||||||||||
| (dollars in thousands) | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Impaired loans | ||||||||||||||||
| Mortgage loans on real estate: | ||||||||||||||||
| Construction | $ | 110 | $ | - | $ | - | $ | 110 | ||||||||
| Total | $ | 110 | $ | - | $ | - | $ | 110 | ||||||||
| Loans | ||||||||||||||||
| Loans held for sale | $ | 421 | $ | - | $ | 421 | $ | - | ||||||||
The Company did not have any Level 3 Fair Value Measurements at December 31, 2020. The following table displaystables display quantitative information about Level 3 Fair Value Measurements as of December 31, 2021:2022:
| Quantitative Information About Level 3 Fair Value Measurements | Quantitative Information About Level 3 Fair Value Measurements | |||||||||||||||||||
| (dollars in thousands) | Fair Value at December 31, 2021 | Valuation Techniques | Unobservable Input | Range (Weighted Average) | Fair Value at December 31, 2022 | Valuation Techniques | Unobservable Input | Range (Weighted Average) | ||||||||||||
| Impaired loans | ||||||||||||||||||||
| Commercial loans | $ | 87 | Market comparables | Selling costs | 0.00% - 8.00% (7.00 | %) | ||||||||||||||
| Construction | $ | 110 | Market comparables | Selling costs | 3.00% - 8.00% (7.25 | %) | ||||||||||||||
FASB ASC 825, “Financial Instruments,” requires disclosure about fair value of financial instruments and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company’s assets.
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 20212023 and December 31, 2020.2022. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between origination of the instrument and its expected realization. For non-marketable equity securities such as Federal Home Loan BankFHLB and Federal Reserve BankFRB stock, the carrying amount is a reasonable estimate of fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government-supported institution or to another member institution. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity. Fair values for December 31, 20212023 and 20202022 are estimated under the exit price notion in accordance with ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”
The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments as of the dates indicated are as follows:
| Fair Value Measurements at December 31, 2021 Using | ||||||||||||||||
| Carrying Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets | ||||||||||||||||
| Cash and cash equivalents | $ | 187,922 | $ | 187,922 | $ | 0 | $ | 0 | ||||||||
| Securities available-for-sale | 234,321 | 0 | 234,321 | 0 | ||||||||||||
| Restricted securities | 1,034 | 0 | 1,034 | 0 | ||||||||||||
| Loans held for sale | 3,287 | 0 | 3,287 | 0 | ||||||||||||
| Loans, net of allowances for loan losses | 833,661 | 0 | 0 | 834,693 | ||||||||||||
| Derivatives | ||||||||||||||||
| Interest rate lock | 43 | 0 | 43 | 0 | ||||||||||||
| Interest rate swap on loans | 181 | 0 | 181 | 0 | ||||||||||||
| Bank owned life insurance | 28,168 | 0 | 28,168 | 0 | ||||||||||||
| Accrued interest receivable | 3,339 | 0 | 3,339 | 0 | ||||||||||||
| Liabilities | ||||||||||||||||
| Deposits | $ | 1,177,099 | $ | 0 | $ | 1,179,631 | $ | 0 | ||||||||
| Overnight repurchase agreements | 4,536 | 0 | 4,536 | 0 | ||||||||||||
| Federal Reserve Bank borrowings | 480 | 0 | 480 | 0 | ||||||||||||
| Long term borrowings | 29,407 | 0 | 29,657 | 0 | ||||||||||||
| Derivatives | ||||||||||||||||
Interest rate swap on loans | 181 | 0 | 181 | 0 | ||||||||||||
| Accrued interest payable | 693 | 0 | 693 | 0 | ||||||||||||
| Fair Value Measurements at December 31, 2020 Using | Fair Value Measurements at December 31, 2023 Using | |||||||||||||||||||||||||||||||
| (dollars in thousands) | Carrying Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 120,437 | $ | 120,437 | $ | 0 | $ | 0 | $ | 78,759 | $ | 78,759 | $ | - | $ | - | ||||||||||||||||
| Securities available-for-sale | 186,409 | 0 | 186,409 | 0 | 204,278 | - | 204,278 | - | ||||||||||||||||||||||||
| Restricted securities | 1,367 | 0 | 1,367 | 0 | 5,176 | - | 5,176 | - | ||||||||||||||||||||||||
| Loans held for sale | 14,413 | 0 | 14,413 | 0 | 470 | - | 470 | - | ||||||||||||||||||||||||
| Loans, net of allowances for loan losses | 826,759 | 0 | 0 | 825,963 | ||||||||||||||||||||||||||||
| Loans, net | 1,068,046 | - | - | 1,025,622 | ||||||||||||||||||||||||||||
| Derivatives | ||||||||||||||||||||||||||||||||
| Interest rate lock | 10 | - | 10 | - | ||||||||||||||||||||||||||||
| Interest rate swap on loans | 1,249 | - | 1,249 | - | ||||||||||||||||||||||||||||
| Bank owned life insurance | 28,386 | 0 | 28,386 | 0 | 35,088 | - | 35,088 | - | ||||||||||||||||||||||||
| Accrued interest receivable | 3,613 | 0 | 3,613 | 0 | 4,921 | - | 4,921 | - | ||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Deposits | $ | 1,067,236 | $ | 0 | $ | 1,070,236 | $ | 0 | $ | 1,230,397 | $ | - | $ | 1,228,477 | $ | - | ||||||||||||||||
| Overnight repurchase agreements | 6,619 | 0 | 6,619 | 0 | 2,383 | - | 2,383 | - | ||||||||||||||||||||||||
| Federal Reserve Bank borrowings | 28,550 | 0 | 28,550 | 0 | ||||||||||||||||||||||||||||
| Other borrowings | 1,350 | 0 | 1,350 | 0 | ||||||||||||||||||||||||||||
| Federal Home Loan Bank advances | 69,450 | - | 69,450 | - | ||||||||||||||||||||||||||||
| Long term borrowings | 29,668 | - | 25,561 | - | ||||||||||||||||||||||||||||
| Derivatives | ||||||||||||||||||||||||||||||||
Interest rate swap on loans | 1,249 | - | 1,249 | - | ||||||||||||||||||||||||||||
| Accrued interest payable | 384 | 0 | 384 | 0 | 1,972 | - | 1,972 | - | ||||||||||||||||||||||||
| Fair Value Measurements at December 31, 2022 Using | ||||||||||||||||
| (dollars in thousands) | Carrying Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Assets | ||||||||||||||||
| Cash and cash equivalents | $ | 19,250 | $ | 19,250 | $ | - | $ | - | ||||||||
| Securities available-for-sale | 225,518 | - | 225,518 | - | ||||||||||||
| Restricted securities | 3,434 | - | 3,434 | - | ||||||||||||
| Loans held for sale | 421 | - | 421 | - | ||||||||||||
| Loans, net | 1,016,559 | - | - | 996,807 | ||||||||||||
| Derivatives | ||||||||||||||||
| Interest rate lock | 23 | - | 23 | - | ||||||||||||
| Interest rate swap on loans | 1,447 | - | 1,447 | - | ||||||||||||
| Bank owned life insurance | 34,049 | - | 34,049 | - | ||||||||||||
| Accrued interest receivable | 4,253 | - | 4,253 | - | ||||||||||||
| Liabilities | ||||||||||||||||
| Deposits | $ | 1,156,019 | $ | - | $ | 1,156,547 | $ | - | ||||||||
| Federal funds purchased | 11,378 | - | 11,378 | - | ||||||||||||
| Overnight repurchase agreements | 4,987 | - | 4,987 | - | ||||||||||||
| Federal Reserve Bank borrowings | 46,100 | - | 46,100 | - | ||||||||||||
| Long term borrowings | 29,538 | - | 25,539 | - | ||||||||||||
| Derivatives | ||||||||||||||||
| Interest rate swap on loans | 1,447 | - | 1,447 | - | ||||||||||||
| Accrued interest payable | 834 | - | 834 | - | ||||||||||||
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can cause certain mandatory and possibly additional discretionary actions to be initiated by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Federal banking regulations also impose regulatory capital requirements on bank holding companies. Under the small bank holding company policy statement of the FRB, which applies to certain bank holding companies with consolidated total assets of less than $3 billion, the Company is not subject to regulatory capital requirements.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total, Tier 1, and common equity tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. The terms Tier 1 and common equity tier 1 capital, risk-weighted assets, and average assets, as used in this note, are as defined in the applicable regulations. Management believes, as of December 31, 20212023 and 2020,2022, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2021,2023, the most recent notification from the Comptroller categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, common equity tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category. The Bank’s actual capital amounts and ratios as of December 31, 20212023 and 20202022 are presented in the table below.
| 2021 | 2020 | 2023 | 2022 | |||||||||||||||||||||||||||||
| Regulatory | Regulatory | Regulatory | Regulatory | |||||||||||||||||||||||||||||
| Minimums | December 31, 2021 | Minimums | December 31, 2020 | |||||||||||||||||||||||||||||
| (dollars in thousands) | Minimums | December 31, 2023 | Minimums | December 31, 2022 | ||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital to Risk-Weighted Assets | 4.500 | % | 12.57 | % | 4.500 | % | 11.69 | % | 4.500 | % | 11.45 | % | 4.500 | % | 10.80 | % | ||||||||||||||||
| Tier 1 Capital to Risk-Weighted Assets | 6.000 | % | 12.57 | % | 6.000 | % | 11.69 | % | 6.000 | % | 11.45 | % | 6.000 | % | 10.80 | % | ||||||||||||||||
| Total Capital to Risk-Weighted Assets | 8.000 | % | 12.46 | % | 8.000 | % | 11.70 | % | ||||||||||||||||||||||||
| Tier 1 Leverage to Average Assets | 4.000 | % | 9.09 | % | 4.000 | % | 8.56 | % | 4.000 | % | 9.46 | % | 4.000 | % | 9.43 | % | ||||||||||||||||
| Total Capital to Risk-Weighted Assets | 8.000 | % | 13.61 | % | 8.000 | % | 12.77 | % | ||||||||||||||||||||||||
| Capital Conservation Buffer | 2.500 | % | 5.61 | % | 2.500 | % | 4.77 | % | ||||||||||||||||||||||||
| Risk-Weighted Assets (in thousands) | $ | 952,218 | $ | 890,091 | ||||||||||||||||||||||||||||
| Risk-Weighted Assets | $ | 1,222,320 | $ | 1,177,600 | ||||||||||||||||||||||||||||
The Basel III Capital Rules established a “capital conservation buffer” of 2.5 percent above the regulatory minimum risk-based capital ratios, which is not included in the table above. Including the capital conservation buffer, the minimum ratios are a Common Equity Tier 1 capital risk-based ratio of 7.0 percent, a Tier 1 capital risk-based ratio of 8.5 percent, and a Total capital risk-based ratio of 10.5 percent. The Bank exceeded these ratios as of December 31, 2023 and December 31, 2022.
The approval of the Comptroller is required if the total of all dividends declared by a national bank in any calendar year exceeds the bank’s net profits for that year combined with its retained net profits for the preceding two calendar years. Under this formula, the Bank and
The Company operates in a decentralized fashion in 3three principal business segments: the Bank, the Trust,Wealth, and the Company (for purposes of this Note)Note, the Parent). Revenues from the Bank’s operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Trust’sWealth’s operating revenues consist principally of income from fiduciary and asset management fees. The Parent’s revenues are mainly interest and dividends received from the Bank and Trust companies.Wealth. The Company has no other segments. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and, accordingly, requires different technologies and marketing strategies.
Information about reportable segments, and reconciliation of such information to the Consolidated Financial Statements as of and for the years ended December 31 2023 and 2022 follows:
| Year Ended December 31, 2021 | Year Ended December 31, 2023 | |||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Bank | Trust | Unconsolidated Parent | Eliminations | Consolidated | Bank | Wealth | Parent | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||||||||||||||||
| Interest and dividend income | $ | 42,226 | $ | 26 | $ | 9,643 | $ | (9,643 | ) | $ | 42,252 | $ | 66,484 | $ | 142 | $ | 9,462 | $ | (9,462 | ) | $ | 66,626 | ||||||||||||||||||
| Income from fiduciary activities | 0 | 4,198 | 0 | 0 | 4,198 | - | 4,632 | - | - | 4,632 | ||||||||||||||||||||||||||||||
| Other income | 9,681 | 1,067 | 201 | (262 | ) | 10,687 | 8,390 | 913 | 200 | (262 | ) | 9,241 | ||||||||||||||||||||||||||||
| Total operating income | 51,907 | 5,291 | 9,844 | (9,905 | ) | 57,137 | 74,874 | 5,687 | 9,662 | (9,724 | ) | 80,499 | ||||||||||||||||||||||||||||
| Expenses | ||||||||||||||||||||||||||||||||||||||||
| Interest expense | 2,909 | 0 | 549 | 0 | 3,458 | 17,246 | - | 1,181 | - | 18,427 | ||||||||||||||||||||||||||||||
| Provision for loan losses | 794 | 0 | 0 | 0 | 794 | |||||||||||||||||||||||||||||||||||
| Provision for credit losses | 2,601 | - | - | - | 2,601 | |||||||||||||||||||||||||||||||||||
| Salaries and employee benefits | 21,682 | 3,012 | 667 | 0 | 25,361 | 25,526 | 4,138 | 765 | - | 30,429 | ||||||||||||||||||||||||||||||
| Other expenses | 16,412 | 1,131 | 507 | (262 | ) | 17,788 | 18,447 | 1,344 | 449 | (262 | ) | 19,978 | ||||||||||||||||||||||||||||
| Total operating expenses | 41,797 | 4,143 | 1,723 | (262 | ) | 47,401 | 63,820 | 5,482 | 2,395 | (262 | ) | 71,435 | ||||||||||||||||||||||||||||
Income before taxes | 10,110 | 1,148 | 8,121 | (9,643 | ) | 9,736 | ||||||||||||||||||||||||||||||||||
Income (loss) before taxes | 11,054 | 205 | 7,267 | (9,462 | ) | 9,064 | ||||||||||||||||||||||||||||||||||
Income tax expense (benefit) | 1,372 | 243 | (319 | ) | 0 | 1,296 | 1,754 | 43 | (463 | ) | - | 1,334 | ||||||||||||||||||||||||||||
Net income | $ | 8,738 | $ | 905 | $ | 8,440 | $ | (9,643 | ) | $ | 8,440 | $ | 9,300 | $ | 162 | $ | 7,730 | $ | (9,462 | ) | $ | 7,730 | ||||||||||||||||||
Capital expenditures | $ | 1,473 | $ | 41 | $ | 0 | $ | 0 | $ | 1,514 | $ | 1,053 | $ | - | $ | - | $ | - | $ | 1,053 | ||||||||||||||||||||
Total assets | $ | 1,330,337 | $ | 7,227 | $ | 150,943 | $ | (150,352 | ) | $ | 1,338,155 | $ | 1,437,603 | $ | 7,235 | $ | 137,004 | $ | (135,460 | ) | $ | 1,446,382 | ||||||||||||||||||
| Year Ended December 31, 2020 | Year Ended December 31, 2022 | |||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Bank | Trust | Unconsolidated Parent | Eliminations | Consolidated | Bank | Wealth | Parent | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||||||||||||||||
| Interest and dividend income | $ | 39,966 | $ | 43 | $ | 6,069 | $ | (6,069 | ) | $ | 40,009 | $ | 47,963 | $ | 80 | $ | 10,873 | $ | (10,873 | ) | $ | 48,043 | ||||||||||||||||||
| Income from fiduciary activities | 0 | 3,877 | 0 | 0 | 3,877 | - | 4,097 | - | - | 4,097 | ||||||||||||||||||||||||||||||
| Other income | 9,899 | 983 | 200 | (261 | ) | 10,821 | 8,307 | 1,162 | 200 | (261 | ) | 9,408 | ||||||||||||||||||||||||||||
| Total operating income | 49,865 | 4,903 | 6,269 | (6,330 | ) | 54,707 | 56,270 | 5,339 | 11,073 | (11,134 | ) | 61,548 | ||||||||||||||||||||||||||||
| Expenses | ||||||||||||||||||||||||||||||||||||||||
| Interest expense | 5,237 | 0 | 55 | 0 | 5,292 | 2,424 | - | 1,181 | - | 3,605 | ||||||||||||||||||||||||||||||
| Provision for loan losses | 1,000 | 0 | 0 | 0 | 1,000 | |||||||||||||||||||||||||||||||||||
| Provision for credit losses | 1,706 | - | - | - | 1,706 | |||||||||||||||||||||||||||||||||||
| Salaries and employee benefits | 21,652 | 3,191 | 669 | 0 | 25,512 | 22,751 | 3,613 | 691 | - | 27,055 | ||||||||||||||||||||||||||||||
| Other expenses | 15,840 | 1,078 | 336 | (261 | ) | 16,993 | 17,135 | 1,164 | 562 | (261 | ) | 18,600 | ||||||||||||||||||||||||||||
| Total operating expenses | 43,729 | 4,269 | 1,060 | (261 | ) | 48,797 | 44,016 | 4,777 | 2,434 | (261 | ) | 50,966 | ||||||||||||||||||||||||||||
Income before taxes | 6,136 | 634 | 5,209 | (6,069 | ) | 5,910 | 12,254 | 562 | 8,639 | (10,873 | ) | 10,582 | ||||||||||||||||||||||||||||
Income tax expense (benefit) | 565 | 136 | (180 | ) | 0 | 521 | 1,822 | 121 | (469 | ) | - | 1,474 | ||||||||||||||||||||||||||||
Net income | $ | 5,571 | $ | 498 | $ | 5,389 | $ | (6,069 | ) | $ | 5,389 | $ | 10,432 | $ | 441 | $ | 9,108 | $ | (10,873 | ) | $ | 9,108 | ||||||||||||||||||
Capital expenditures | $ | 901 | $ | 23 | $ | 0 | $ | 0 | $ | 924 | $ | 1,341 | $ | 13 | $ | - | $ | - | $ | 1,354 | ||||||||||||||||||||
Total assets | $ | 1,218,766 | $ | 6,957 | $ | 118,558 | $ | (118,090 | ) | $ | 1,226,191 | $ | 1,347,151 | $ | 7,048 | $ | 128,849 | $ | (127,713 | ) | $ | 1,355,335 | ||||||||||||||||||
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains or losses.
Both the Parent and the Trust companiesWealth maintain deposit accounts with the Bank, on terms substantially similar to those available to other customers. These transactions are eliminated to reach consolidated totals.
The Company operates in 1one geographical area and does not have a single external customer from which it derives 10 percent or more of its revenues.
Financial information pertaining to Old Point Financial Corporation (parent company only) is as follows:
| Balance Sheets | December 31, | December 31, | ||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2023 | 2022 | ||||||||||||
| Assets | ||||||||||||||||
| Cash and cash equivalents | $ | 20,012 | $ | 1,203 | $ | 3,977 | $ | 12,255 | ||||||||
| Securities available-for-sale | 0 | 0 | ||||||||||||||
| Investment in common stock of subsidiaries | 130,123 | 116,848 | 131,219 | 115,303 | ||||||||||||
| Other assets | 808 | 507 | 1,808 | 1,291 | ||||||||||||
| Total assets | $ | 150,943 | $ | 118,558 | $ | 137,004 | $ | 128,849 | ||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||
| Other borrowings | $ | 29,407 | $ | 1,350 | $ | 29,668 | $ | 29,538 | ||||||||
| Other liability | 718 | 63 | 558 | 577 | ||||||||||||
| Common stock | 26,006 | 25,972 | 24,932 | 24,761 | ||||||||||||
| Additional paid-in capital | 21,458 | 21,245 | 17,099 | 16,593 | ||||||||||||
| Retained earnings | 71,679 | 65,859 | 82,277 | 78,147 | ||||||||||||
| Accumulated other comprehensive income (loss) | 1,675 | 4,069 | ||||||||||||||
| Accumulated other comprehensive loss | (17,530 | ) | (20,767 | ) | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 150,943 | $ | 118,558 | $ | 137,004 | $ | 128,849 | ||||||||
| Statements of Income | Years Ended December 31, | Years Ended December 31, | ||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2023 | 2022 | ||||||||||||
| Income: | ||||||||||||||||
| Dividends from subsidiary | $ | 3,975 | $ | 3,425 | $ | 3,000 | $ | 3,250 | ||||||||
| Other income | 201 | 200 | 200 | 200 | ||||||||||||
| Total income | 4,176 | 3,625 | 3,200 | 3,450 | ||||||||||||
| Expenses: | ||||||||||||||||
| Salary and benefits | 667 | 669 | 765 | 691 | ||||||||||||
| Subordinated debt | 549 | 0 | 1,181 | 1,181 | ||||||||||||
| Legal expenses | 274 | 108 | 174 | 298 | ||||||||||||
| Service fees | 146 | 135 | 146 | 142 | ||||||||||||
| Other operating expenses | 87 | 148 | 129 | 122 | ||||||||||||
| Total expenses | 1,723 | 1,060 | 2,395 | 2,434 | ||||||||||||
| Income before income taxes and equity in | ||||||||||||||||
| undistributed net income of subsidiaries | 2,453 | 2,565 | ||||||||||||||
| Income before income taxes and equity in undistributed net income of subsidiaries | 805 | 1,016 | ||||||||||||||
| Income tax benefit | (319 | ) | (180 | ) | (463 | ) | (469 | ) | ||||||||
2,772 | 2,745 | 1,268 | 1,485 | |||||||||||||
| Equity in undistributed net income of subsidiaries | 5,668 | 2,644 | 6,462 | 7,623 | ||||||||||||
| Net income | $ | 8,440 | $ | 5,389 | $ | 7,730 | $ | 9,108 | ||||||||
| Statements of Cash Flows | Years Ended December 31, | |||||||
| (dollars in thousands) | 2023 | 2022 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 7,730 | $ | 9,108 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Equity in undistributed net income of subsidiaries | (6,462 | ) | (7,623 | ) | ||||
| Amortization of subordinated debt issuance costs | 130 | 131 | ||||||
| Stock compensation expense | 46 | 37 | ||||||
| Increase in other assets | (17 | ) | (104 | ) | ||||
| Decrease in other liabilities | (19 | ) | (140 | ) | ||||
| Net cash provided by operating activities | 1,408 | 1,409 | ||||||
| Cash flows from investing activities: | ||||||||
| Cash distributed to subsidiary | (7,000 | ) | - | |||||
| Net cash used in investing activities | (7,000 | ) | - | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of stock | 131 | 129 | ||||||
| Repurchase and retirement of common stock | - | (6,655 | ) | |||||
| Cash dividends paid on common stock | (2,817 | ) | (2,640 | ) | ||||
| Net cash used in financing activities | (2,686 | ) | (9,166 | ) | ||||
| Net decrease in cash and cash equivalents | (8,278 | ) | (7,757 | ) | ||||
| Cash and cash equivalents at beginning of year | 12,255 | 20,012 | ||||||
| Cash and cash equivalents at end of year | $ | 3,977 | $ | 12,255 | ||||
Note 18. Subsequent Events
| Statements of Cash Flows | Years Ended December 31, | |||||||
| (dollars in thousands) | 2021 | 2020 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 8,440 | $ | 5,389 | ||||
| Adjustments to reconcile net income to net cash | ||||||||
| provided by operating activities: | ||||||||
| Equity in undistributed net income of subsidiaries | (5,668 | ) | (2,644 | ) | ||||
| Amortization of subordinated debt issuance costs | 60 | 0 | ||||||
| Stock compensation expense | 32 | 55 | ||||||
| (Decrease) increase in other assets | (40 | ) | 8 | |||||
| Increase in other liabilities | 655 | 5 | ||||||
| Net cash provided by operating activities | 3,479 | 2,813 | ||||||
| Cash flows from investing activities: | ||||||||
| Cash distributed to subsidiary | (10,000 | ) | 0 | |||||
| Net cash used in investing activities | (10,000 | ) | 0 | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of stock | 103 | 96 | ||||||
| Proceeds from borrowings | 29,347 | 0 | ||||||
| Repayment of borrowings | (1,350 | ) | (600 | ) | ||||
| Repurchase and retirement of common stock | (150 | ) | 0 | |||||
| Cash dividends paid on common stock | (2,620 | ) | (2,505 | ) | ||||
| Net cash provided by (used in) financing activities | 25,330 | (3,009 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | 18,809 | (196 | ) | |||||
| Cash and cash equivalents at beginning of year | 1,203 | 1,399 | ||||||
| Cash and cash equivalents at end of year | $ | 20,012 | $ | 1,203 | ||||
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
Disclosure Controls and Procedures. The Company’s management, includingManagement evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2021the end of the period covered by this report to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Management’s Report on Internal Control over Financial Reporting. Management of the Company is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Because of its inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021.2023. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on our assessment, we believe that, as of December 31, 2021,2023, the Company’s internal control over financial reporting was effective based on those criteria.
The Company’s annual report does not include an attestation report of the Company’s independent registered public accounting firm, Yount, Hyde, & Barbour. P.C. (YHB), regarding internal control over financial reporting. Management’s report was not subject to attestation by YHB pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in its annual report.
Changes in Internal Controls. There were no changes in the Company’s internal control over financial reporting during the Company’s fourth quarter ended December 31, 20212023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| Item 9B. | Other Information |
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
Not Applicable.
Except as otherwise indicated, information called for by the following items under Part III is contained in the Proxy Statement for the Company’s 20222024 Annual Meeting of Stockholders (the 20222024 Proxy Statement) to be held on May 24, 2022.28, 2024.
| Item 10. | Directors, Executive Officers, and Corporate Governance |
The information required by this Item 10 with respect to the directors of the Company is set forth under the caption “Election“Proposal One – Election of Directors” in the 20222024 Proxy Statement and is incorporated herein by reference.
The information concerning the executive officers of the Company required by this itemItem 10 is included in Part I of this report on Form 10-K under the caption “Information about Our Executive Officers.”
The information concerning delinquent Section 16(a) reports required by this Item 10 is set forth under the caption “Delinquent Section 16(a) Reports” in the 2024 Proxy Statement and is incorporated herein by reference.
The information regarding the Company’s Audit Committee and its Audit Committee Financial Expert required by this Item 10 is set forth under the caption “Board Committees and Attendance”Attendance – Audit Committee” in the 20222024 Proxy Statement and is incorporated herein by reference.
The Company has a Code of Ethics which details principles and responsibilities governing ethical conduct for all Company directors, officers, employees, and principal stockholders.
A copy of the Code of Ethics will be provided free of charge, upon written request made to the Company’s secretary at 101 East Queen Street, Hampton, Virginia 23669 or by calling (757) 728-1200. The Code of Ethics is also posted on the Company’s website at www.oldpoint.com, in the “Community” section, under “Investor Relations” and then “Governance Documents." The Company intends to satisfy the disclosure requirements of Form 8-K with respect to waivers of or amendments to the Code of Ethics with respect to certain officers of the Company by posting such disclosures on its website under “Waivers of or amendments to the Code of Ethics.” The Company may, however, elect to disclose any such amendment or waiver in a report on Form 8-K filed with the SEC either in addition to or in lieu of the website disclosure.
| Item 11. | Executive Compensation |
The information required by this Item 11 set forth under the captionscaption “Executive Compensation”Compensation,” in the 20222024 Proxy Statement is incorporated herein by reference. The information required by this Item 11 regarding director compensation contained in the 20222024 Proxy Statement under the caption “Director Compensation” is incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item 12 set forth under the caption “Securities Authorized for Issuance Under Equity Compensation Plans” in the 20222024 Proxy Statement is incorporated herein by reference.
The information required by this Item 12 set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the 20222024 Proxy Statement is incorporated herein by reference.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item 13 set forth under the caption “Interest of Management in Certain Transactions” in the 20222024 Proxy Statement is incorporated herein by reference.
The information required by this Item 13 regarding director independence set forth under the caption “Board Committees and Attendance” in the 20222024 Proxy Statement is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services |
The information required by this Item 14 set forth under the captions “Principal Accountant Fees” and “Audit Committee Pre-Approval Policy” in the 20222024 Proxy Statement is incorporated herein by reference.
Part IV
The following Consolidated Financial Statements and reports are included in Part II, Item 8, of this report on Form 10-K.
Report of Independent Registered Public Accounting Firm (Yount, Hyde & Barbour, P.C.) (PCAOB ID Number 613)
Consolidated Balance Sheets – December 31, 20212023 and 20202022
Consolidated Statements of Income – Years Ended December 31, 20212023 and 20202022
Consolidated Statements of Comprehensive Income (Loss) – Years Ended December 31, 20212023 and 20202022
Consolidated Statements of Changes in Stockholders' Equity – Years Ended December 31, 20212023 and 20202022
Consolidated Statements of Cash Flows – Years Ended December 31, 20212023 and 20202022
Notes to Consolidated Financial Statements
(a)(2) Consolidated Financial Statement Schedules
All schedules are omitted since they are not required, are not applicable, or the required information is shown in the Consolidated Financial Statements or notes thereto.
The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index.
| Exhibit No. | Description | |
Articles of Incorporation of Old Point Financial Corporation, as amended June 22, 2000 (incorporated by reference to Exhibit 3.1 to Form 10-K filed on March 12, 2009) | ||
Articles of Amendment to Articles of Incorporation of Old Point Financial Corporation, effective May 26, 2016 (incorporated by reference to Exhibit 3.1.1 to Form 8-K filed May 31, 2016) | ||
Bylaws of Old Point Financial Corporation, as amended and restated August 9, 2016 (incorporated by reference to Exhibit 3.2 to Form 10-Q filed August 10, 2016) | ||
Description of the Company’s | ||
| 4.1 | Form of Subordinated Note (incorporated by reference to Exhibit 4.1 to Form 8-K filed July 16, 2021) | |
Form of Life Insurance Endorsement Method Split Dollar Plan Agreement with The Northwestern Mutual Life Insurance Company entered into with | ||
Directors' Compensation (incorporated by reference to Exhibit 10.5 to Form 10-K filed March 16, 2020) | ||
Summary of Old Point Financial Corporation Incentive Plan (incorporated by reference to Exhibit 10.7 to Form 10-K filed March 30, 2015) | ||
Form of 162 Insurance Plan (incorporated by reference to Exhibit 10.10 to Form 10-K filed March 12, 2009) | ||
Form of Life Insurance Endorsement Method Split Dollar Plan Agreement with Ohio National Life Assurance Corporation entered into with Joseph R. Witt (incorporated by reference to Exhibit 10.11 to Form 10-K filed March 12, 2010) | ||
Form of Life Insurance Endorsement Method Split Dollar Plan Agreement with New York Life Insurance and Annuity Corporation entered into with | ||
Settlement Agreement dated March 16, 2016 among Old Point Financial Corporation, Financial Edge Fund, L.P., Financial Edge-Strategic Fund, L.P., PL Capital/Focused Fund, L.P., PL Capital, LLC, PL Capital Advisors, LLC, Goodbody/PL Capital, L.P., Goodbody/PL Capital, LLC, Mr. John W. Palmer and Mr. Richard J. Lashley, as Managing Members of PL Capital, LLC, PL Capital Advisors, LLC and Goodbody/PL Capital, LLC and Mr. William F. Keefe (incorporated by reference to Exhibit 10.1 to Form 8-K filed March 17, 2016) | ||
Amendment No. 1 to Settlement Agreement, dated August 12, 2021, among Old Point Financial Corporation, Financial Edge Fund, L.P., Financial Edge-Strategic Fund, L.P., PL Capital/Focused Fund, L.P., PL Capital, LLC, PL Capital Advisors, LLC, Goodbody/PL Capital, L.P., Goodbody/PL Capital, LLC, Mr. John W. Palmer and Mr. Richard J. Lashley, as Managing Members of PL Capital, LLC, PL Capital Advisors, LLC and Goodbody/PL Capital, LLC and Mr. William F. Keefe (incorporated by reference to Exhibit 10.14 to Form 10-Q filed August 16, 2021) |
Old Point Financial Corporation 2016 Incentive Stock Plan (incorporated by reference to Exhibit 10.15 to Form 8-K filed May 31, 2016) | ||
Membership Interest Purchase Agreement dated January 13, 2017 between Tidewater Mortgage Services, Inc. and The Old Point National Bank of Phoebus (incorporated by reference to Exhibit 10.1 to Form 8-K filed January 20, 2017) | ||
Employment Agreement, dated as of February 22, 2018, by and between Old Point Financial Corporation and The Old Point National Bank of Phoebus and Robert F. Shuford, Jr. (incorporated by reference to Exhibit 10.22 to Form 8-K filed February 28, 2018) | ||
Amendment to the Employment Agreement, dated December 15, 2023, by and between Old Point Financial Corporation and The Old Point National Bank of Phoebus and Robert F. Shuford, Jr. (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 15, 2023) | ||
Employment Agreement, dated as of February 22, 2018, by and between Old Point Financial Corporation and The Old Point National Bank of Phoebus and Joseph R. Witt (incorporated by reference to Exhibit 10.24 to Form 8-K filed February 28, 2018) | ||
Amendment to the Employment Agreement, dated | ||
Change of Control Severance Agreement, dated as of February 22, 2018, by and between The Old Point National Bank of Phoebus and Donald S. Buckless (incorporated by reference to Exhibit 10.26 to Form 10-K filed March 16, 2018) | ||
Change of Control Severance Agreement, dated December 15, 2023, by and between The Old Point National Bank of Phoebus and Paul M. Pickett (incorporated by reference to Exhibit 10.3 to Form 8-K filed December 15, 2023) | ||
Form of Time-Based Restricted Stock Agreement (cliff vesting) (approved March 29, 2018) for awards to certain employees under the Old Point Financial Corporation 2016 Incentive Stock Plan (incorporated by reference to Exhibit 10.28 to Form 8-K filed April 3, 2018) | ||
Form of Time-Based Restricted Stock Agreement (cliff vesting) (approved March 29, 2018) for awards to certain non-employee directors under the Old Point Financial Corporation 2016 Incentive Stock Plan (incorporated by reference to Exhibit 10.29 to Form 8-K filed April 3, 2018) | ||
Change of Control Severance Agreement, dated as of October 30, 2019, by and between The Old Point National Bank of Phoebus and Thomas Hotchkiss | ||
Change of Control Severance Agreement, dated as of December 31, 2019, by and between The Old Point National Bank of Phoebus and Susan R. Ralston | ||
Form of Subordinated Note Purchase Agreement (incorporated by reference to Exhibit 10.1 to Form 8-K filed July 16, 2021) | ||
Form of Life Insurance Endorsement Method Split Dollar Plan Agreement with The Northwestern Mutual Life Insurance Company and Massachusetts Mutual Life Insurance Company entered into with Donald S. Buckless and A. Eric Kauders, Jr. | ||
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to Form 10-K filed March 30, 2005) | ||
Consent of Yount, Hyde & Barbour, P.C. | ||
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |