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Federal bank regulators issued a joint rule, effective in 2022, establishing computer-security incident notification requirements for banking organizations and their bank service providers. The rule requires a banking organization to notify its primary federal regulator of any significant computer-security incident as soon as possible and no later than 36 hours after the banking organization determines that a cyber incident has occurred. In addition, the final rule requires a bank service provider to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect banking organization customers for four or more hours. The rule defines computer-security incident as an occurrence that results in actual harm to the confidentiality, integrity, or availability of an information system or the information that the system processes, stores, or transmits.
Limitations on Incentive Compensation. The federal bank regulatory agencies have issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging excessive risk-taking. The Interagency Guidance on Sound Incentive Compensation Policies, which covers all employees that have the ability to materially affect the risk profile of financial institutions, either individually or as part of a group, is based upon the key principles that a financial institution’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the institution’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the financial institution’s board of directors.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of financial institutions, such as the Company and the Bank, that are not “large, complex banking organizations.” These reviews will be tailored to each financial institution based on the scope and complexity of the institution’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a financial institution if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the institution’s safety and soundness, and the financial institution is not taking prompt and effective measures to correct the deficiencies. As of December 31, 2022, the Company and the Bank have not been made aware of any instances of noncompliance with this guidance.
Other Laws.Banks and other depository institutions also are subject to other numerous consumer-oriented laws and regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Fair and Accurate Credit Transactions Act of 2003 and the Fair Housing Act, require compliance by depository institutions with various disclosure and consumer information handling requirements. These and other similar laws result in significant costs to financial institutions and create potential liability for financial institutions, including the imposition of regulatory penalties for inadequate compliance.
Future Regulatory Uncertainty.Because federal and state regulation of financial institutions changes regularly and is the subject of constant legislative debate, New Peoples cannot forecast how regulation of financial institutions may change in the future and impact its operations. New Peoples fully expects that the financial institution industry will remain heavily regulated notwithstanding the regulatory relief that has been recently adopted.
Subsequent Events
We have considered subsequent events through the date of the financial statements in this Form 10-K. Refer to Item 8 “Financial Statements and Supplementary Data” Note 25 of the consolidated financial statements.
| Item 1A. | Risk Factors |
Not required.
Item 1A. Risk Factors
Not applicable.
| Item 1B. | Unresolved Staff Comments |
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
AtAs of December 31, 2019,2022, the Company's net investment in premises and equipment in service was $21.2$19.3 million. Construction in progress related to our Bristol, Virginia location has accumulated to $1.0 million at December 31, 2019. Our main office and operations center are located in Honaker, Virginia. This location containsVirginia, which includes a full servicefull-service branch, and a separate administration and operations center.
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The Bank owns 1413 of its full service branches,17 full-service branch offices, including its headquarters office. In addition to the headquarters in Honaker, Virginia we own or lease branch offices located in Virginia, West Virginia, Tennessee, and a loan production office and its one limited service branch. The locations of these branches are described in Item 1. In 2017,North Carolina. Additionally, the Bank soldowns an operations building housing its Abingdon, Bristol, Gate Citynetwork and Castlewood, Virginia properties and in connection with the sale of these four properties, the Bank entered into commercial lease agreements for the properties, which allowed the Bank to continue to service customers from these locations. During the third quarter of 2019, the Bank sold its Lebanon, Virginia property. In connection with the sale, the Bank entered into a commercial lease agreement which allows the Bank to continue to service customers from this location. For additional discussion of these leases see Item 8 “Financial Statements and Supplementary Data” Note 17, Leasing Activities, in Notes to the Consolidated Financial Statements. Aside from the retailother support operations. The bank owns two former branch offices we own a buildingthat were closed in Bristol, Virginia2022, and the facility that serves as ourformerly housed ITM network and call center andoperations, that was closed in 2021. The former ITM network operations site.and call center facility was sold in March, 2023. We also own a locationwarehouse facility in Bristol, Virginia that is being renovated and will open as a full service branch in 2020.
The Bank leases office space in Kingsport, Tennessee for use as aHonaker, Virginia. Our loan production office which openedoperates from a building in January 2018. For additional discussion of thisBoone, North Carolina under a short-term lease see Note 17, Leasing Activities,renewed in Notes to the Consolidated Financial Statements.June 2022.
In May 2018, a siteA former branch office located in Princeton, West Virginia that had been used as an administrative office opened as a full service branch, as our second customer service location in this market.
During 2018, we limited activity at the Jonesborough, Tennessee loan production office and in 2019 it was closed and the ITM at this site was relocated. The property is currently being marketed for sale.
The Bank owns a location in Dungannon, Virginia that is now currently being leased, but was formerly used as a hub for meeting with prospective loan customers.
During 2022, two branch until its closure during 2010. Alocations were closed, office in Bland,Big Stone Gap, Virginia was sold in May 2018.and Chilhowie, Virginia, with customer accounts transferred to nearby offices. ITM services remain available at these two locations. Three other closed branches (Bluewell, West Virginia, Bristol, and Jonesville, Virginia) that are vacant may be used for future bankingoffices again. A fourth former branch office in Norton, Virginia wasoffices that were transferred to other real estate owned in 2019 and is being marketed for sale.2021, were sold in 2022.
We continue to assess our branch network as we look to improve the efficiency of our branch operations while seeking to increase market share.
We believe that all of our properties are maintained in good operating condition and are suitable and adequate for our operational needs.
Item 3. Legal Proceedings
In the normal course of operations, we may become a party to legal proceedings. As disclosedproceedings, as discussed in Note 20 Legal Contingencies to the consolidated financial statements contained in Item 8 “Financial Statements and Supplementary Data” Note 20, there are no pending or threatened legal proceedings to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition, operations or liquidity of the Company.this form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and IssuerP urchases Purchases of Equity Securities
(a) Market Information
Computershare Investor Services is the stock transfer agent for New Peoples Bankshares, Inc. The common stock of New Peoples is quoted on the Over the Counter Bulletin BoardOTC Market’s Pink Open Market under the symbol “NWPP”. The volume of trading of shares of common stock is very limited. Trades in our common stock occur sporadically on a local basis and typically in small volumes. Over-the-Counter market quotations reflect inter-dealer prices without retail mark up, mark down or commissions and may not necessarily represent actual transactions.
The most recent sales price of which management is aware was $1.53$2.25 per share on March 27, 2020.20, 2023.
(b) Holders
On March 27, 2020,22, 2023, there were approximately 4,3584,060 shareholders of record.
(c) Dividends
In order to preserve capital we have not paid cash dividends to our shareholders. Any declaration of dividends in the future will depend on our earnings, capital requirements, growth strategies, and compliance with regulatory mandates, principally at the Bank level, since the Company’s primary source of income is dividends which it would receive frompaid by the Bank. During the first quarter of 2022, the Company paid its first cash dividend of $0.05 per common share to our shareholders. On February 27, 2023, the Company declared a dividend of $0.06 per share, payable March 31, 2023 to shareholders of record as of March 15, 2023.
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We are subject to certain dividend restrictions and capital requirements imposed by the Federal Reserve Bank as well as Virginia banking statutes and regulations. We do not anticipate paying a dividend on our common stock in the foreseeable future as the Company continues to have a retained deficit. Earnings will continue to be retained to build capital and position the Company to pay a dividend to its shareholders as soon as practicable. See NotesNote 16, Dividend LimitationLimitations on Subsidiary Bank, and Note 21, Capital, to the consolidated financial statements contained in Item 8 “Financial Statementsof this Form 10-K.
The Company has an approved one-year stock repurchase program that authorizes the repurchase of up to 500,000 of the Company’s common shares through March 31, 2023. Repurchases may be made through open market purchases or in privately negotiated transactions. Shares repurchased will be returned to the status of authorized and Supplementary Data” for further discussionunissued shares of dividend limitationscommon stock. The actual means and capital requirements.timing of any purchases, number of shares and prices or range of prices will be determined by the Company.
Shares of the Company’s common stock were repurchased during the three months ended December 31, 2022, as detailed below. Under the terms of the stock repurchase program, the Company has the remaining authority to repurchase up to 426,405 shares of common stock. On February 27, 2023, the board of directors approved an extension of the repurchase program through March 31, 2024.
| Period Beginning on First Day of Month Ended | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May Yet Be Purchased Under Plans or Programs | |||||||
| October 31, 2022 | 5,290 | $ | 2.30 | 5,290 | 450,225 | ||||||
| November 30, 2022 | 7,436 | $ | 2.31 | 7,436 | 442,789 | ||||||
| December 31, 2022 | 16,384 | $ | 2.40 | 16,384 | 426,405 | ||||||
| Total | 29,110 | $ | 2.36 | 29,110 |
Item 6. Selected Financial Data[Reserved]
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations
Caution About Forward Looking Statements
We make forward looking statements in this annual report on Form 10-K that are subject to risks and uncertainties. These forward lookingforward-looking statements include statements regarding expectations, intentions, projections and beliefs concerning our profitability, liquidity, and allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. TheThese forward-looking information isstatements are based on various factors and waswere derived using numerous assumptions. assumptions as of the date of this Form 10-K, and are subject to significant risks.
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Important factors that may cause actual results to differ from projections include:
- the success or failure of our efforts to implement our business plan;
- any required increase in our regulatory capital ratios;
- satisfying other regulatory requirements that may arise from examinations, changes in the law and other similar factors;
- deterioration of asset quality;
- changes in the level of our nonperforming assets and charge-offs;
- fluctuations of real estate values in our markets;
- our ability to attract and retain talent;
- demographical changes in our markets which negatively impact the local economy;
- the uncertain outcome of current or future legislation or regulations or policies of state and federal regulators;
- the successful management of interest rate risk;
- the successful management of liquidity;
- changes in general economic and business conditions in our market area and the United States in general;
- credit risks inherent in making loans such as changes in a borrower’s ability to repay and our management of such risks;
- competition with other banks and financial institutions, and companies outside of the banking industry, including online lenders and those companies that have substantially greater access to capital and other resources;
- demand, development and acceptance of new products and services we have offered or may offer;
- deposit flows and competition for deposits;
- the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation, interest rate, market and monetary fluctuations;
- the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues (including the lingering impact of the novel coronavirus (COVID-19) outbreak and other catastrophic events;
- geopolitical conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad;
- technology utilized by us;
- our ability to successfully manage cyber security;
- our reliance on third-party vendors and correspondent banks;
- changes in generally accepted accounting principles;
- changes in the allowance for loan losses resulting from the adoption and implementation of the CECL methodology;
- the transition from the use of the LIBOR index;
- changes in governmental regulations, tax rates and similar matters; and,
- other risks, which may be described, from time to time, in our filings with the SEC.
Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward lookingforward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
General
General
The following commentary discusses major components of our business and presents an overview of our consolidated financial position atas of December 31, 20192022 and 20182021, as well as results of operations for the years ended December 31, 20192022 and 2018.2021. This discussion should be reviewed in conjunction with the consolidated financial statements and accompanying notes and other statistical information presented elsewhere in this Form 10-K.
New Peoples generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the volume of interest-earning assets outstanding during the period and the interest rates earned thereon. The Bank's interest expense is a function of the average amount of interest-bearing deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets further influences the amount of interest income lost on nonaccrualnonaccruing loans and the amount of additionsprovision expense added to the allowance for loan losses. The Bank also generates noninterest income from service charges and fees on deposit accounts, debit and credit card interchange income, and commissions on insurance and investment products sold.
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Critical Accounting Policies
Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting policiesestimates relate to our provision for loan losses and the calculation of our deferred tax asset and any related valuation allowance.
The provision for loan losses reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to further deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional provisions could be required. For further discussion of the estimates used in determining the allowance for loan losses, we refer you to the section on “Provision“Allowance for Loan Losses” in this discussion.
Deferred tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. In the past, the Company provided a valuation allowance on its net deferred tax assets where it was deemed more likely than not such assets would not be realized. At December 31, 2019 and 2018, the Company had no valuation allowance on its net deferred tax assets.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. For further discussion of the deferred tax asset and valuation allowance, we refer you to the section on “Income Taxes and Deferred Tax Assets” in this discussion.
The Company early adopted Accounting Standards Update (ASU) No. 2016-02 Leases (Topic 842). This ASU revised certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions.
For further discussion of our other critical accounting policies, see Note 2, Summary of Significant Accounting Policies, to our Consolidated Financial Statements, foundconsolidated financial statements, contained in Item 8 toof this annual report on Form 10-K.
Cyber Security
The Company, primarily through the Bank, depends on its ability to continuously process, record and monitor a large number of customer transactions, and customer, public and regulatory expectations regarding operational and information security have increased over time. Accordingly, the Company’s and its subsidiaries’ operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Although the Company has business continuity plans and other safeguards in place, disruptions or failures in the physical infrastructure or operating systems that support its businesses and customers, or cyber-attacks or security breaches of the networks, systems or devices on which customers’ personal information is stored and that customers use to access the Company’s and its subsidiaries’ products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect the Company’s results of operations or financial condition.
Although to date the Company has not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no assurance that it or its subsidiaries will not suffer such losses in the future. On June 15, 2022, we experienced a cybersecurity incident that temporarily interrupted the operability of our computer systems. Limited operations were restored June 17, 2022, and full operations were restored June 21, 2022. Since that date, restoration efforts have been completed and normal operations have resumed. The Company’s risk and exposure to these matters remains heightened because of, among other things, the evolvingnature of these threats, our plans to continue to implement our e-banking and mobile banking channel strategies and develop additional remote connectivity solutions to serve our customers when and how they want to be served. As a result, cyber security and the continued development and enhancement of the Company’s controls, processes and practices, designed to protect its and its subsidiaries’ systems, computers, software, data and networks from attack, damage or unauthorized access, remain a priority for the Company. As cyber threats continue to evolve, the Company has expended resources and may be required to expend significant additional resources to continue to modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities.
As discussed under the heading “Supervision and Regulation” in Item 1 of this Form 10-K, the federal banking agencies have issued a joint rule that requires banking organizations to notify their primary regulator as soon as possible and no later than 36 hours after any cyber-security incident has occurred.
Overview
The Company made significant progress during 2022 resulting in the highest annual consolidated net income in the history of the Company. For the year ended December 31, 2022, net income was $8.1 million, or basic and diluted net income per share of $0.34, compared to a net income of $7.0 million, or basic and diluted net income per share of $0.29, for the year ended December 31, 2021, an improvement of $1.1 million, or 15.3%. Retained earnings increased to $8.9 million as of December 31, 2022 from $2.0 million as of December 31, 2021, an increase of $6.9 million or 339.0%.
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In 2018, the SEC issued guidelines governing the manner in which public companies report cyber security breaches to investors. The federal bank regulatory agencies and state laws govern the manner in which banks report cyber security breaches to affected customers.
Recent Events
Since December 31, 2019 COVID-19 has adversely affected, and will continue to adversely affect economic activity globally, nationally and locally. Following the global COVID-19 outbreak in December 2019 and domestically in January 2020, marketNet interest rates have declined significantly. Since the beginning of March 2020, the Federal Open Market Committee reduced the target federal funds rate twice by a total of 150 basis points (“bps”). As a result of these actions the target federal funds rate now stands at 0.00% - .25% and the prime interest rate stands at 3.25%.
As the pandemic spread throughout the nation, state and local governments implemented recommendations or orders limiting travel outside the home to work or obtaining essential services, and mandating social distance when out in public. This has had, and will continue to have, a significant adverse impact on the economy as certain industries have been impaired or virtually brought to a standstill.
Financial services were designated as essential services, and we have continued to meet the needs of our customers. To lessen the risk to our employees and customers, we have limited access to our branch lobbies and are providing most essential services through our drive-thru facilities and ITM network. Additionally, we have made personal protective items available to our employees, implemented social distancing protocols and enhanced cleaning procedures at our branch and support sites. Several of our support departments have implemented spit staffing to allow personnel to rotate from working onsite and working from home.
In response to the economic and social impact of the pandemic, legislation has been passed providing economic support to citizens and businesses impacted by the resulting economic downturn. Financial institutions, including the Company, are participating in programs to provide short-term financing to businesses to support employee retention, and offering payment deferrals to borrowers impacted by business declines, permanent or temporary loss of employment or other factors.
At this time we cannot state how the economic downturn will affect the financial position, operations or liquidity of the Company. Throughout the following discussion, we have attempted to input additional commentary addressing the uncertainty of the current economic conditions.
Overview
At December 31, 2019, total assets were $706.4 million, total loans were $562.5 million, and total deposits were $621.5 million. The Company‘s consolidated net income for the year ended December 31, 20192022 was $2.1$28.3 million or basic income per share of $0.09 as compared to a net income of $919 thousand, or basic income per share of $0.04,$27.2 million for the year ended December 31, 2018. This is an increase2021. The improvement of $1.1 million or $0.05 per share. This increase was driven by an increase in net interest income was primarily attributable to a $33.8 million increase in average earning assets and rising market interest rates during the year, partially offset by a decrease in loan origination fees compared to 2021 as PPP loans were forgiven and an increase in costs of $769 thousand, increased non-interestour variable rate trust preferred securities in 2022. Net interest margin was 3.62% compared to 3.64% for the year ended December 31, 2022, and 2021, respectively.
Noninterest income was $9.2 million for the year ended December 31, 2022 compared to $10.0 million for the year ended December 31, 2021. The $740,000 decrease was attributable to $322,000 of $1.0gains on the sales of investment securities during the year ended December 31, 2021, $190,000 of gains on the sales of three former branch locations during the year December 31, 2021, as well as a write-down of bank owned life insurance (BOLI) of $158,000 during the year ended December 31, 2022, and a decrease in gains and commissions on mortgage loan originations and sales of approximately $162,000 due to the impact of rising interest rates on mortgage demand.
Noninterest expense was $26.5 million for the year ended December 31, 2022 compared to $27.9 million for the year ended December 31, 2021. The $1.3 million decrease was primarily due to valuation adjustments of other real estate owned during the year ended December 31, 2021, which consisted of $1.1 million related to former branch locations and decreased non-interest expenseapproximately $390,000 in net losses and write-downs on the sales of $1.5 million, but partiallyother real estate owned. This was offset by an increase of approximately $703,000 in provision for loan losses of $1.8 million. The $769 thousand increase in net interest income represents a 3.18% increase for 2019 over 2018,salaries and benefits during the year ended December 31, 2022, which is due primarilyattributed to higher bonus accruals based on the Company’s performance, annual wage adjustments, and adjustments to the $2.2minimum starting salaries of employees to reflect rising costs to attract and retain talent.
During the year ended December 31, 2022, total assets decreased $19.3 million, increase in interest and fees on loans, half ofor 2.4%, to $775.4 million. Loans receivable decreased $9.1 million, or 1.5%, during 2022, which is a result of growthpartly attributable to several large borrowers selling their businesses or collateral and paying off the related loans. Additionally, loan pricing remains very competitive in commercial loans secured by real estate during 2019. The $1.7the Company’s market and has impacted loan originations. Investment securities decreased $11.0 million increase in interest expense2022, which is primarily due to higher rates paid on time deposits. the decline in the market value of the investment portfolio due to rising interest rates.
Total deposits declined $14.8 million, or 2.1%, during 2022, with most of the decline occurring during the fourth quarter as competition for funding intensified.
New Peoples Bank remains well-capitalized. Leverage ratio improved to 10.40%.
The Company’s key performance indicators are as follows:
| December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Return on average assets | 0.29 | % | 0.14 | % | 0.47 | % | ||||||
| Return on average equity | 3.89 | % | 1.83 | % | 6.30 | % | ||||||
| Average equity to average assets ratio | 7.46 | % | 7.43 | % | 7.52 | % | ||||||
| Year ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Return on average assets | 0.99 | % | 0.88 | % | ||||
| Return on average shareholders’ equity | 13.89 | % | 11.52 | % | ||||
| Average shareholders’ equity to average assets ratio | 7.10 | % | 7.62 | % | ||||
Highlights from the year 2019 include:
Total assets increased $24.2 million in 2019, or 3.6%, from $682.1 million at December 31, 2018. Loans increased $15.4 million, or 2.8%, due to continued growth in the loan portfolio. We anticipate that total assets will continue to grow as our plan to conservatively and prudently grow the loan portfolio remains successful, as it was in 2018 and 2017. However, the effects of COVID-19 and its impact on the economy may cause traditional loan growth to decrease from prior years. Other Real Estate Owned (OREO) decreased $2.5 million, or 42.8%, in 2019 to $3.4 million at December 31, 2019 from $5.9 million at December 31, 2018. Bank owned life insurance grew $63 thousand during the year to $4.6 million at December 31, 2019.
On the liability side of the balance sheet, total deposits increased $25.5 million, or 4.3%, to $621.5 million, due mainly to growth in money market deposits of $18.8 million. We anticipate total deposits to increase as we continue to focus on future growth. Due to cash generated by the increase in deposits, we were able reduce Federal Home Loan Bank of Atlanta (FHLB) advances by $2.0 million to $5.0 million. Trust preferred securities remained unchanged at $16.5 million.
As a result of a sale and leaseback transaction in 2019, right-to-use assets – operating leases, along with similar corresponding lease liabilities totaled $5.8 million and $4.9 million, at year-end 2019 and 2018, respectively. Total equity was $54.6 million at December 31, 2019, an increase of $3.4 million, or 6.5%. The Bank’s capital ratios at December 31, 2019 as compared to December 31, 2018, respectively, were as follows: Tier 1 leverage ratio of 9.43% versus 9.59%; Tier 1 risk based capital ratio of 13.72% versus 13.29%; total risk based capital ratio of 14.83% versus 14.39%; and common equity Tier 1 capital ratio of 13.72% versus 13.29%. The Bank is considered well-capitalized under regulatory guidelines. As noted above, these capital measurements will no longer apply to the Bank if it elects to comply with the Community Bank Leverage Ratio discussed above.
Expenses related to OREO properties were $635 thousand in 2019 compared to $1.0 million in 2018. During 2019, we recorded writedowns on other real estate owned properties in the amount of $214 thousand compared to $542 thousand in 2018. During 2019, we had a net loss on the sale of OREO of $123 thousand compared to a net loss of $135 thousand in 2018.
Total loans increased $15.4 million in 2019, or 2.8%, to $562.5 million at December 31, 2019, as compared to $547.1 million at December 31, 2018. The main driver in this increase in total loans is our strategy to grow and diversify the loan portfolio. Over the past few years, we added several commercial lenders, mostly focused in the Tri-Cities market of Bristol, VA and TN, Kingsport, TN, and Johnson City, TN; and Princeton, WV. During 2019, we added another seasoned commercial lender to serve the Bristol and Abingdon markets. We continue to solicit loans from the loan production office in Kingsport, TN that opened in 2018. Prior to the recent economic events related to the COVID-19 pandemic, we expected the trend in total loan growth we have experienced in 2019 and 2018 to continue at least in the near term. However, loan growth in general is subject to economic conditions, customer demand, and competition in our markets.
Asset quality continued to improve during 2019, as OREO and nonaccrual loans both decreased. Nonperforming assets, which include nonaccrual loans, loans past due 90 days or greater still accruing interest and OREO decreased $3.8 million, or 30.5%, to $8.5 million at year-end 2019 from $12.3 million at year-end 2018. Total nonperforming assets represented 1.52% and 2.25% of total assets at December 31, 2019 and December 31, 2018, respectively. There were no loans past due 90 days or greater and still accruing interest at December 31, 2019 or 2018. The makeup of these assets is primarily related to residential real estate and commercial real estate. During the fourth quarter of 2019, the largest foreclosed property, with a recorded balance of $1.6 million, was sold. We continue undertaking extensive and aggressive measures to work out problem credits and liquidate foreclosed properties in an effort to accelerate a reduction of nonperforming assets. Our goal is to continue to reduce the nonperforming assets being mindful of the impact to earnings and capital; however, we may recognize some losses and reductions in the allowance for loan loss as we expedite the resolution of these problem assets.
Our allowance for loan losses at December 31, 2019 was $5.4 million, or 0.95%, of total loans, as compared to $5.3 million, or 0.98% of total loans at December 31, 2018. Impaired loans decreased $2.4 million, or 30.1%, to $5.6 million, with an estimated allowance of $323 thousand for potential losses, at December 31, 2019; as compared to $8.0 million in impaired loans, with an estimated allowance of $318 thousand, at the end of 2018. A provision for loan losses of $2.1 million was recorded in 2019, up from $252 thousand in 2018. Net loans charged off in 2019 were $2.0 million, or 0.36% of average loans, compared to $1.1 million, or 0.21% of average loans, in 2018. The losses recorded in 2019, were primarily related to several commercial loans extended to borrowers who ceased operations during the year. Two of these relationships accounted for $1.5 million of the losses recorded. The allowance for loan losses is being maintained at a level that management deems appropriate to absorb any potential future losses and known impairments within the loan portfolio whether or not the losses are actually ever realized. We continue to adjust the allowance for loan loss model to best reflect the risks in the portfolio and the improvements made in our internal policies and procedures; however, future provisions may be deemed necessary.
Net Interest Income and Net Interest Margin
The Company’s primary source of income is net interest income, which increased $769 thousand,$1.1 million, or 3.2% from 20183.95%, in 2022 compared to 2019. The increase in net interest income is2021 due primarily to the $2.2a $33.8 million increase in average earning assets and rising market interest rates during the year. This was offset by an increase in interest expense on borrowed funds of approximately $777,000, or 171.5%, related to the increase in variable rates on trust preferred securities as well as an increase in borrowings from the Federal Home Loan Bank (FHLB) during the year. The decrease in interest income on loans, including fees, was driven by a decrease in fees of $1.8 million resulting from PPP loan forgiveness in 2021 that did not reoccur during 2019, due2022.
The following table shows the rates paid on earning assets and deposit liabilities for the periods indicated.
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Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates
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| (Dollars in thousands) | |||||||||||||||||
| For the year ended | For the year ended | ||||||||||||||||
| December 31, 2022 | December 31, 2021 | ||||||||||||||||
| Average | Income/ | Yields/ | Average | Income/ | Yields/ | ||||||||||||
| Balance | Expense | Rates | Balance | Expense | Rates | ||||||||||||
| ASSETS | |||||||||||||||||
| Loans (1) (2) | $ | 591,179 | $ | 27,739 | 4.69% | $ | 586,963 | $ | 28,323 | 4.83% | |||||||
| Federal funds sold | 332 | 8 | 2.41% | 212 | - | 0.10% | |||||||||||
| Interest bearing deposits in other banks | 76,560 | 1,514 | 1.98% | 78,583 | 95 | 0.12% | |||||||||||
| Taxable investment securities | 113,141 | 2,129 | 1.88% | 81,635 | 1,494 | 1.83% | |||||||||||
| Total earning assets | 781,212 | 31,390 | 4.02% | 747,393 | 29,912 | 4.00% | |||||||||||
| Less: allowance for loans losses | (6,790) | (7,034) | |||||||||||||||
| Non-earning assets | 40,657 | 58,398 | |||||||||||||||
| Total assets | $ | 815,079 | $ | 798,757 | |||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||
| Interest-bearing demand deposits | $ | 74,786 | $ | 98 | 0.13% | $ | 59,154 | $ | 59 | 0.10% | |||||||
| Savings and money market deposits | 191,136 | 260 | 0.13% | 181,736 | 148 | 0.08% | |||||||||||
| Time deposits | 188,010 | 1,517 | 0.81% | 214,937 | 2,041 | 0.95% | |||||||||||
| Short-term borrowings | 20,370 | 501 | 2.46% | 2,474 | 33 | 1.33% | |||||||||||
| Trust preferred securities | 16,496 | 729 | 4.42% | 16,496 | 420 | 2.55% | |||||||||||
| Total interest-bearing liabilities | 490,798 | 3,105 | 0.63% | 474,797 | 2,701 | 0.57% | |||||||||||
| Non-interest-bearing deposits | 261,834 | - | -% | 254,911 | - | - % | |||||||||||
| Total deposit liabilities and cost of funds | 752,632 | 3,105 | 0.41% | 729,708 | 2,701 | 0.37% | |||||||||||
| Other liabilities | 4,248 | 8,178 | |||||||||||||||
| Total liabilities | 756,880 | 737,886 | |||||||||||||||
| Shareholders’ equity | 58,199 | 60,871 | |||||||||||||||
| Total liabilities and shareholders’ equity | $ | 815,079 | $ | 798,757 | |||||||||||||
| Net interest income | $ | 28,285 | $ | 27,211 | |||||||||||||
| Net interest margin | 3.62% | 3.64% | |||||||||||||||
| Net interest spread | 3.39% | 3.43% | |||||||||||||||
| (1) Nonaccrual loans have been included in average loan balances. | |||||||||||||||||
| (2) Tax exempt income is not significant and has been treated as fully taxable. | |||||||||||||||||
Net interest income is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing liabilities. The following tables set forth the amounts of the total changes in interest income and interest expense which can be attributed to both increased loanrates, volume and a combination of rates and volume, for the periods indicated.
20
| Volume and Rate Analysis | |||||||||
| Increase (decrease) | |||||||||
| Year 2022 Compared to 2021 | |||||||||
| (Dollars in thousands) | Volume Effect | Rate Effect | Rate and Volume Effect | Change in Interest Income/ Expense | |||||
| Interest Income: | |||||||||
| Loans | $ | 206 | $ | (784) | $ | (6) | $ | (584) | |
| Federal funds sold | - | 5 | 3 | 8 | |||||
| Interest bearing deposits in other banks | (2) | 1,459 | (38) | 1,419 | |||||
| Taxable investment securities | 577 | 42 | 16 | 635 | |||||
| Total Earning Assets | 781 | 722 | (25) | 1,478 | |||||
| Interest Expense: | |||||||||
| Interest-bearing demand deposits | 16 | 19 | 4 | 39 | |||||
| Savings and money market deposits | 8 | 99 | 5 | 112 | |||||
| Time deposits | (282) | (281) | 39 | (524) | |||||
| Short-term borrowings | 239 | 28 | 201 | 468 | |||||
| Trust preferred securities | - | 309 | - | 309 | |||||
| Total Interest-bearing Liabilities | (19) | 174 | 249 | 404 | |||||
| Change in Net Interest Income | $ | 800 | $ | 548 | $ | (274) | $ | 1,074 | |
| Volume and Rate Analysis | |||||||||
| Increase (decrease) | |||||||||
| Year 2021 Compared to 2020 | |||||||||
| (Dollars in thousands) | Volume Effect | Rate Effect | Rate and Volume Effect | Change in Interest Income/ Expense | |||||
| Interest Income: | |||||||||
| Loans | $ | 395 | $ | (700) | $ | (10) | $ | (315) | |
| Federal funds sold | - | (1) | - | (1) | |||||
| Interest bearing deposits in other banks | 59 | (134) | (38) | (113) | |||||
| Taxable investment securities | 830 | (309) | (216) | 305 | |||||
| Total Earning Assets | 1,284 | (1,144) | (264) | (124) | |||||
| Interest Expense: | |||||||||
| Interest-bearing demand deposits | 21 | (25) | (7) | (11) | |||||
| Savings and money market deposits | 81 | (239) | (54) | (212) | |||||
| Time deposits | (568) | (1,460) | 215 | (1,813) | |||||
| Short-term borrowings | (34) | (1) | - | (35) | |||||
| Trust preferred securities | - | (121) | - | (121) | |||||
| Total Interest-bearing Liabilities | (500) | (1,846) | 154 | (2,192) | |||||
| Change in Net Interest Income | $ | 1,784 | $ | 702 | $ | (418) | $ | 2.068 | |
21
The increases in interest income and interest expense during 2022 were driven mainly by increased interest rates, as short-term assets and liabilities tied to short-term rates adjusted to market rate increases throughout the year, new production at higher rates, during 2019. We have been successful overand asset yields outpacing increases in funding costs in the past two yearsrising interest rate environment. Overall, our net interest margin decreased 2 basis points to 3.62% in our strategy to grow the loan portfolio, and reduce reliance on residential mortgage loans by increasing the level of commercial and commercial real estate credits. We believe, going forward, new increased volume will outpace the monthly loan paydowns and maturities. Investment interest income decreased by $171 thousand, or 11.0%, in 20192022 compared to 2018, due to the decrease3.64% in the investment portfolio. However, higher deposit balances drove increases in cash, increasing interest income from other banks by $426 thousand, to $805 thousand in 2019 compared to 2018.2021.
The increase in interest income is primarily attributed to an increase in yields on overnight deposits with banks, which was partiallymainly driven by higher market rates, as noted above, combined with a reinvesting of funds in investment securities at higher rates. This increased income offset a decrease in loan interest Overall, loan interest income, including fees, decreased $584,000 during the year ended December 31, 2022 compared to December 31, 2021, due to the impact of PPP loan fees recognized in 2021, that was not repeated in 2022.
Interest expense increased $404,000, due primarily to an increase in the average balance of FHLB advances of $20.4 million during the year, combined with increased market rates on trust preferred securities. This was offset by a $1.7 million, or 52.7%, increase in interest expense, which included a $1.1 million increasedecrease in interest expense on time deposits generally due to competitive pressurea reduction in volume and the higher general rate environment for the first seven months of 2019. The cost ofrate. While rates on time deposits was also impacted by the carryover of two time deposit promotions from 2018. One relatedreset at lower rates during 2022, this trend is not expected to continue into 2023, due to the opening of a second branch in Princeton, WV, was offered in that local market, and another promotional CD offered across the entire footprint began in December 2018, and ran through the first quarter of 2019, in celebration of our 20thanniversary. Both of these efforts while mitigating the general decline in time deposits, also contributed to the overall increase in the cost of funds. Aside from the promotional time deposit products offered during the year, we also had occasion to match rates offered by competing financial institutions for various existing customers.
Another factor impacting the increase in interest expense and the cost of funds was a significant deposit by a related party to our tiered premium money market account. The funds were delivered during the first quarter of 2019 and intended as a temporary deposit, but remained throughout the year. Due to deposit volume and structure of the account, these funds contributed approximately 5bps to overall cost of funds during the year. During the first quarter of 2020, approximately half of the funds were withdrawn.
Due to the increased deposit balances, we were able to reduce borrowings from the FHLB, and hence the interest paid on those advances, by $68 thousand, or 46.6%, in 2019 compared to 2018. However, the general rise in interest rates impacted interest paid on trust preferred securities which increased $23 thousand, or 3.0%, year-over-year.
During the latter half of 2019, the prime interest rate dropped three times by 25bps each based on actions by the Federal Open Market Committee. During the year the prime interest rate fell from 5.50% to 4.75%. This was essentially full circle from the cycle in 2018 when the prime interest rate increased from 4.50% to 5.50%. In response to the economic impact resulting from the COVID-19 pandemic, the federal funds rate has been lowered twice during the first quarter of 2020 by a total of 150bps. As a result the prime interest rate now stands at 3.25%.
While the growth in earning assets, principally loans, was the primary driver in the increase in net interest income for 2019, the impact of increases in the general interest rate environment during 2018 also contributed to increased interest income. Hence, our return on earning assets increased 11bps to 4.74% during 2019, while our cost of interest bearing liabilities rose 32bps to 1.26%. Overall, this decreased our net interest margin to 3.82% in 2019 compared to 3.94% in 2018. Unless we are able to continue to increase the volume of our interest-earning assets going forward, while controlling our cost of funds, we may continue to experience compression on the net interest margin. New and renewed loans are often being repriced at lower interest rates while we anticipate nocontinuing increase in interest rates, incombined with the foreseeable future, duecompetitive pressures to the economic impact of the COVID-19 pandemic.acquire and retain deposits.
One other item that may impact ourOur future interest rate structure ishas been impacted by the pendingcommencement of the end of the use of LIBOR, as a benchmark interest ratewhich will completely phase-out in 2021.2023. We use LIBOR in pricing some of a limited number of our interest earning assets and liabilities, including our trust preferred securities. At this time it appears thatCertain loan and investment products ceased using LIBOR in 2021, for new contracts and commitments. Most of these contracts have been, or will be, replaced bywith the Secured Overnight Financing Ratesecured overnight funding rate (SOFR).
Loans
Our primary source of income is interest earned on loans. Total gross loans decreased $9.1 million during 2022, or 1.54%, which is a transparent measureto $584.6 million as of the cost of borrowing cash overnight collateralized by Treasury securities. Regardless of whether SOFR or some other benchmark rate replaces LIBOR, we do not anticipate that the change will have a material impact on our abilityDecember 31, 2022 as compared to negotiate and price earning assets and liabilities.
Nonaccruing loans totaled $5.2$593.7 million at December 31, 2019 compared2021. The primary drivers of this decrease in total loans were a reduction in commercial real estate loans, multifamily, and commercial loans of $9.1 million, $3.3 million, and $7.6 million, respectively. This was offset by an increase in construction and land development loans of $10.1 million in comparison to $6.4 million at December 31, 2018. This represents a2021. The decrease of $1.2 million,in commercial real estate and commercial loans was partly attributable to several large borrowers selling their businesses or 19.0%. In 2019, 94 nonperformingcollateral and under performing loans totaling $4.4 million were sold, resulting in a net recoverypaying off the related loans. For more detail on loan balances, refer to the allowance for loans losses of $56 thousand. In 2018, four nonperforming or underperforming loans totaling $1.9 million were sold after determining that it was more cost effective to disposeNote 6 of the accounts rather than continueconsolidated financial statements contained in Item 8 of this Form 10-K.
Nonaccrual loans increased approximately $472,000 during 2022 from $2.9 million as of December 31, 2021 to pursue collection efforts. Charge-offs$3.4 million as of $365 thousand were recorded against the allowance for loan losses
Although nonaccrual loan balances decreased during 2019, the remaining accountsDecember 31, 2022. Nonaccrual loans negatively affect interest income as these loans are nonearning assets. Interest income and cash receipts on impaired loans are handled differently depending on whether or not the loan is on nonaccrual status. If the impaired loan is not on nonaccrual status, the interest income on the loan is computed using the effective interest method. When doubt about the collectability of a loan exists, it is the Bank’s policy to stop accruing interest on that loan under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when conditions indicate that payment of principal and interest can no longer be expected, or (c) when any such loan becomes delinquent for 90 days and is not both well secured and in the process of collection. All interest accrued but not collected on loans that are placed on nonaccrual is charged off and reversed against interest income in the current period. In the case of a nonaccrual loan that is well secured and in the process of collection, the interest accrued but not collected is not reversed. Interest received on these loans is accounted for on the cash basis or cost-recovery method until qualifying for return to accrual. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, six consecutive timely payments are made, and prospects for future contractual payments are reasonably assured.
The following table shows the rates paid For more detail on earning assets and deposit liabilities for the periods indicated.
| Net Interest Margin Analysis | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Average Balances, Income and Expense, and Yields and Rates | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| For the Year Ended | For the Year Ended | For the Year Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Average | Income/ | Yields/ | Average | Income/ | Yields/ | Average | Income/ | Yields/ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance | Expense | Rates | Balance | Expense | Rates | Balance | Expense | Rates | ||||||||||||||||||||||||||||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans (1), (2), (3) | $ | 555,733 | $ | 28,601 | 5.15% | $ | 526,007 | $ | 26,375 | 5.01% | $ | 488,425 | $ | 24,163 | 4.95% | |||||||||||||||||||||||||||||||||||||||||
| Federal funds sold | 254 | 5 | 2.15% | 160 | 4 | 2.50% | 75 | 1 | 1.33% | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest bearing deposits | 38,994 | 805 | 2.06% | 19,644 | 379 | 1.93% | 15,735 | 192 | 1.22% | |||||||||||||||||||||||||||||||||||||||||||||||
| Other investments (3) | 58,726 | 1,544 | 2.63% | 68,706 | 1,714 | 2.49% | 75,069 | 1,637 | 2.18% | |||||||||||||||||||||||||||||||||||||||||||||||
| Total Earning Assets | 653,707 | 30,955 | 4.74% | 614,517 | 28,472 | 4.63% | 579,304 | 25,993 | 4.49% | |||||||||||||||||||||||||||||||||||||||||||||||
| Less: Allowance for loans losses | (5,309) | (5,551) | (6,136) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-earning assets | 60,673 | 66,648 | 79,107 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Assets | $ | 709,071 | 675,614 | 652,275 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deposits | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Demand – Interest bearing | $ | 35,364 | $ | 65 | 0.18% | $ | 37,896 | $ | 55 | 0.15% | $ | 35,235 | $ | 48 | 0.14% | |||||||||||||||||||||||||||||||||||||||||
| Savings and money market | 154,500 | 980 | 0.63% | 131,292 | 368 | 0.28% | 124,826 | 187 | 0.15% | |||||||||||||||||||||||||||||||||||||||||||||||
| Time deposits | 260,452 | 4,060 | 1.56% | 257,262 | 2,921 | 1.14% | 255,986 | 2,234 | 0.87% | |||||||||||||||||||||||||||||||||||||||||||||||
| Other Borrowings | 5,985 | 78 | 1.30% | 9,610 | 148 | 1.54% | 9,830 | 151 | 1.54% | |||||||||||||||||||||||||||||||||||||||||||||||
| Trust Preferred Securities | 16,496 | 796 | 4.83% | 16,496 | 773 | 4.69% | 16,496 | 593 | 3.59% | |||||||||||||||||||||||||||||||||||||||||||||||
| Total interest bearing liabilities | 472,797 | 5,979 | 1.26% | 452,556 | 4,265 | 0.94% | 442,373 | 3,213 | 0.73% | |||||||||||||||||||||||||||||||||||||||||||||||
| Non-interest bearing deposits | 174,944 | 164,923 | 154,356 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 8,470 | 7,906 | 6,468 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Liabilities | 656,211 | 625,385 | 603,197 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders’ Equity | 52,880 | 50,229 | 49,078 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Liabilities and Stockholders’ Equity | $ | 709,091 | 675,614 | 652,275 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Interest Income | $ | 24,976 | $ | 24,207 | $ | 22,780 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Interest Margin | 3.82% | 3.94% | 3.92% | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Interest Spread | 3.47% | 3.69% | 3.76% | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) Non-accrual loans have been included in the average balance of loans outstanding. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (2) Loan fees have been included in interest income on loans. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (3) Tax exempt income is not significant and has been treated as fully taxable. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income is affected by changes in both average interest rates and average volumes of interest-earning assets and interest-bearing liabilities. The following table sets forth the amountsnonaccrual loans, refer to Note 6 of the total changesconsolidated financial statements in interest income and expense which can be attributed to rate (change in rate multiplied by old volume) and volume (change in volume multiplied by old rate) for the periods indicated.Item 8 of this Form 10-K.
| |||||||||||||||||||
| Volume and Rate Analysis | |||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| 2019 Compared to 2018 | 2018 Compared to 2017 | ||||||||||||||||||
| Increase (Decrease) | Increase (Decrease) | ||||||||||||||||||
| Volume Effect | Rate Effect | Change in Interest Income/ Expense | Volume Effect | Rate Effect | Change in Interest Income/ Expense | ||||||||||||||
| Interest Income: | |||||||||||||||||||
| Loans | $ | 1,491 | $ | 734 | $ | 2,226 | $ | 1,859 | $ | 354 | $ | 2,213 | |||||||
| Federal funds sold | 2 | (1) | 1 | 1 | 2 | 3 | |||||||||||||
| Interest bearing deposits | 373 | 53 | 426 | 48 | 139 | 187 | |||||||||||||
| Other investments | (249) | 79 | (170) | (139) | 216 | 77 | |||||||||||||
| Total Earning Assets | 1,617 | 865 | 2,483 | 1,769 | 711 | 2,480 | |||||||||||||
| Interest Bearing Liabilities: | |||||||||||||||||||
| Demand | (4) | 14 | 10 | 4 | 3 | 7 | |||||||||||||
| Savings and money market | 65 | 547 | 612 | 10 | 171 | 181 | |||||||||||||
| Time deposits | 36 | 1,103 | 1,139 | 11 | 676 | 687 | |||||||||||||
| Other borrowings | (56) | (14) | (70) | (3) | - | (3) | |||||||||||||
| Trust Preferred Securities | - | 23 | 23 | - | 180 | 180 | |||||||||||||
| Total Interest Bearing Liabilities | 41 | 1,673 | 1,714 | 22 | 1,030 | 1,052 | |||||||||||||
| Change in Net Interest Income | $ | 1,576 | $ | (807) | $ | 769 | $ | 1,748 | $ | (320) | $ | 1,428 | |||||||
Loans
Our primary source of income comes from interest earned on loans. TotalImpaired loan balances increased $15.4decreased during 2022, to $2.7 million in 2019, or 2.8%, to $562.5 million at December 31, 2019 as compared to $547.1 million at December 31, 2018. The main driver in this increase in total loans is our strategy to grow and diversify the loan portfolio. Loans rated substandard or doubtful decreased $2.1 million, or 29.4%, to $5.1 million at December 31, 2019 from $7.3 million at December 31, 2018.
Loans receivable outstanding are summarized as follows:
| Loan Portfolio December 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Commercial, financial and agricultural | $ | 81,291 | $ | 83,135 | $ | 68,506 | $ | 55,073 | $ | 47,490 | ||||||||||
| Real estate – construction | 31,130 | 35,119 | 29,763 | 25,755 | 14,672 | |||||||||||||||
| Real estate – commercial | 170,436 | 140,862 | 127,688 | 103,331 | 98,569 | |||||||||||||||
| Real estate – residential | 256,560 | 263,442 | 264,640 | 262,282 | 255,870 | |||||||||||||||
| Installment loans to individuals | 23,127 | 24,538 | 22,411 | 22,188 | 24,568 | |||||||||||||||
| Total | $ | 562,544 | $ | 547,096 | $ | 513,008 | $ | 468,629 | $ | 441,169 | ||||||||||
Our loan maturities as of December 31, 20192022, from $2.8 million as of December 31, 2021. Interest income and cash receipts on impaired loans are handled differently depending on whether or not the loan is on nonaccrual status. If the impaired loan is not on nonaccrual status, the interest income on the loan is computed using the effective interest method. For more detail on impaired loan balances, refer to Note 6 of the consolidated financial statements in Item 8 of this Form 10-K.
22
The following table presents the dollar composition and percentage of our loan portfolio as of December 31:
| Loan Composition | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| (Dollars in thousands) | $ | % | $ | % | ||||||||||||
| Real estate secured: | ||||||||||||||||
| Commercial | $ | 197,069 | 33.7 | % | $ | 206,162 | 34.7 | % | ||||||||
| Construction and land development | 42,470 | 7.3 | % | 32,325 | 5.4 | % | ||||||||||
| Residential 1-4 family | 227,232 | 38.9 | % | 224,530 | 37.8 | % | ||||||||||
| Multifamily | 29,710 | 5.1 | % | 33,048 | 5.6 | % | ||||||||||
| Farmland | 17,744 | 3.0 | % | 18,735 | 3.2 | % | ||||||||||
| Total real estate loans | 514,225 | 88.0 | % | 514,800 | 86.7 | % | ||||||||||
| Commercial | 46,697 | 8.0 | % | 54,325 | 9.1 | % | ||||||||||
| Agriculture | 3,756 | 0.6 | % | 4,021 | 0.7 | % | ||||||||||
| Consumer installment loans | 19,309 | 3.3 | % | 18,756 | 3.2 | % | ||||||||||
| All other loans | 626 | 0.1 | % | 1,842 | 0.3 | % | ||||||||||
| Total loans | 584,613 | 100.0 | % | 593,744 | 100.0 | % | ||||||||||
| Less: allowance for loan losses | 6,727 | 6,735 | ||||||||||||||
| Total | $ | 577,886 | $ | 587,009 | ||||||||||||
Our loan maturities, and distribution between fixed and variable rate loans as of December 31, 2022 are shown in the following table:tables :
| Maturities of Loans | ||||||||||||||||||||
| (Dollars in thousands) | Less than One Year | One to Five Years | Five to Fifteen Years | After Fifteen Years | Total | |||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | $ | 11,285 | $ | 39,525 | $ | 73,958 | $ | 72,301 | $ | 197,069 | ||||||||||
| Construction and land development | 7,511 | 10,491 | 10,664 | 13,804 | 42,470 | |||||||||||||||
| Residential 1-4 family | 7,255 | 22,850 | 85,214 | 111,913 | 227,232 | |||||||||||||||
| Multifamily | 1,152 | 5,342 | 11,178 | 12,038 | 29,710 | |||||||||||||||
| Farmland | 1,995 | 2,843 | 8,400 | 4,506 | 17,744 | |||||||||||||||
| Total real estate loans | 29,198 | 81,051 | 189,414 | 214,562 | 514,225 | |||||||||||||||
| Commercial | 15,853 | 22,929 | 5,487 | 2,428 | 46,697 | |||||||||||||||
| Agriculture | 1,276 | 2,324 | — | 156 | 3,756 | |||||||||||||||
| Consumer installment loans | 3,192 | 14,804 | 1,293 | 20 | 19,309 | |||||||||||||||
| All other loans | 295 | 331 | — | — | 626 | |||||||||||||||
| Total | $ | 49,814 | $ | 121,439 | $ | 196,194 | $ | 217,166 | $ | 584,613 | ||||||||||
23
MaturitiesThe following table presents the dollar amount of Loans
| (Dollars in thousands) | Less than One Year | One to Five Years | After Five Years | Total | ||||||||||||
| Commercial, financial and agricultural | $ | 18,089 | $ | 38,914 | $ | 24,288 | $ | 81,291 | ||||||||
| Real estate – construction | 5,223 | 13,307 | 12,600 | 31,130 | ||||||||||||
| Real estate – commercial | 22,864 | 67,266 | 80,306 | 170,436 | ||||||||||||
| Real estate – residential | 14,376 | 39,340 | 202,844 | 256,560 | ||||||||||||
| Installment loans to individuals | 4,654 | 16,742 | 1,731 | 23,127 | ||||||||||||
| Total | $ | 65,206 | $ | 175,569 | $ | 321,769 | $ | 562,544 | ||||||||
| Loans with fixed rates | $ | 61,938 | $ | 158,197 | $ | 139,053 | $ | 359,188 | ||||||||
| Loans with variable rates | 3,268 | 17,372 | 182,716 | 203,356 | ||||||||||||
| Total | $ | 65,206 | $ | 175,569 | $ | 321,769 | $ | 562,544 | ||||||||
fixed rate and variable rate loans with maturities greater than one year as of December 31, 2022:
Provision
| (Dollars in thousands) | Fixed Rate | Variable Rate | ||||||
| Real estate secured: | ||||||||
| Commercial | $ | 75,192 | $ | 110,592 | ||||
| Construction and land development | 17,756 | 17,203 | ||||||
| Residential 1-4 family | 90,416 | 129,561 | ||||||
| Multifamily | 12,651 | 15,907 | ||||||
| Farmland | 3,069 | 12,680 | ||||||
| Total real estate loans | 199,084 | 285,943 | ||||||
| Commercial | 23,975 | 6,869 | ||||||
| Agriculture | 2,287 | 193 | ||||||
| Consumer installment loans | 15,032 | 1,085 | ||||||
| All other loans | 331 | — | ||||||
| Total | $ | 240,709 | $ | 294,090 | ||||
Contractual maturities of loans do not reflect the actual term of our loan portfolio. The average life of mortgage loans is substantially less than the contractual life due to prepayments and enforcement of due on sale clauses. Scheduled principal amortization also reduces the average life of the loan portfolio. The average life of mortgage loans tends to increase when current market mortgage rates are substantially above rates on existing loans while the average life decreases when rates on existing loans are substantially above current market rates.
Some variable rate loans may not reprice, or fully reprice, at their next reset date due to instances where the reset rate may not be above the rate floor, or may be more than the allowable rate increase under the terms of the loan. In these instances, it may take several reset periods before these loans are fully adjusted.
Allowance for Loan Losses
The methodology we use to calculate the allowance for loan losses is considered a critical accounting policy. The adequacy of the allowance for loan losses is based upon management’s judgment and analysis. The following factors are included in our evaluation of determining the adequacy of the allowance: risk characteristics of the loan portfolio, current and historical loss experience, concentrations, and internal and external factors such as general economic conditions. As a result of
During the severe economic downturn during the firstfourth quarter of 2020,2021, in response to rising price inflation, we will be assessing our methodologyadded inflation to the economic factors considered in the model. Throughout 2022, we continued to adjust external factors impacting the allowance for loan loss model to best reflect changes in the general and adjusting qualitative factors and assessinglocal economies, the potential future impact of these economic changes on our loan portfolioincreasing interest rate environment, and the relatedrisks in the portfolio.
The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Loans are charged against the allowance for loan losses which may result in additional provisionswhen management believes that collectability of all or part of the principal is unlikely. Subsequent to the allowance.charging off a loan, management makes best efforts to recover any charged-off balances.
The allowance for loan losses increased to $5.4remained at $6.7 million atas of December 31, 2019 as compared to $5.3 million at December 31, 2018.2022. The allowance for loan losses at the end of 20192022 was approximately 0.95%1.15% of total loans as compared to 0.98%1.13% at the end of 2018.2021. Provisions for loan losses of $2.1 millionapproximately $625,000 and $372,000 were recorded during 2019the years ended December 31, 2022 and $252 thousand in 2018.2021, respectively. Loans charged off, net of recoveries, were $2.0 million,totaled approximately $633,000, or 0.36%0.11% of average loans, for the year ended December 31, 2019,2022, compared to $1.1 million,approximately $828,000, or 0.21%0.14% of average loans, in 2018.2021. The allowance for loan losses is being maintained at a level that management deems appropriate to absorb any potential future losses and known impairments within the loan portfolio whether or not the losses are actually ever realized. We continue to adjust the allowance for loan loss model to best reflect the risks in the portfolio and the improvements made in our internal policies and procedures; however, future provisions may be deemed necessary.
NonaccruingNonaccrual loans present higher risks of default, butand we have experienced a decreasean increase in nonaccruingthe volume of these loans in 2019. Atduring 2022, while the number of nonaccrual loans decreased. As of December 31, 2019,2022, there were 74 nonaccruing41 nonaccrual loans totaling $5.2$3.4 million, or 0.92%0.58% of total loans. AtAs of December 31, 2018,2021, there were 100 nonaccruing65 nonaccrual loans totaling $6.4$2.9 million, or 1.16%0.50% of total loans. The amount of interest income that would have been recognized on these loans had they been accruing interest was $714 thousandapproximately $10,000 and $500 thousand$223,000 in the years 2019ended December 31, 2022 and 2018,2021, respectively. There were no loans past due 90 days or greater and still accruing interest at either December 31, 20192022 or 2018, respectively.2021. There are no commitments to lend additional funds to non-performing borrowers.
24
A majority of our loans are collateralized by real estate located in our market area. It is our policy to sufficiently collateralize loans to help minimize exposure to losses in cases of default. However, during the last economic downturn, theIncreasing real estate values in the Bank’s market materially declined which negatively impacted the Bank. Over the past few years, as the economy recovered, real estate valuesour area have somewhat stabilized. Whilereduced this exposure somewhat. However, while we consider our market area to be somewhat diverse, certain areas are more reliant upon agriculture, coal mining and natural gas. As a result, increased risk of loan impairments is possible due to the volatile nature of the coal mining and natural gas industries. While the coal industry has been impacted by the increase in natural gas supplies from “fracking”, recent changes in the regulatory environment have aided the coal industry. As a result of the lingering economic impact of the COVID-19 pandemic, a number of industries have been identified as posing increased risk. Specifically, residential and commercial rentals, hotels, restaurants and entertainment, and the coal and gas industries have been adversely impacted by the global and nationaldomestic economic slowing, combinedslowdown coupled with the recent significant decrease in the cost of oil.rising inflation. We are monitoring these industries and consider these factorssegments to be the primary higher risk characteristics ofrisks in the loan portfolio.
Commercial and commercial real estate loans are initially risk rated by the originating loan officer. If deterioration in the financial condition of the borrower and/or their capacity to repay the debt occurs, the loan may be downgraded by the loan officer.officer or our watch list committee. Guidance for the risk rate grading is established by the regulatory authorities who periodically review the Bank’s loan portfolio for compliance. Classifications used by the Bank are Pass, Special Mention, Substandard, Doubtful and Loss.
With regard to ourthe Bank’s consumer and consumer real estate loan portfolio, the Company useswe use the guidance found in the Uniform Retail Credit Classification and Account Management Policy which affects our estimate of the allowance for loan losses. Under this approach, a consumer or consumer real estate loan must initially have a credit risk grade of Pass or better. Subsequently, if the loan becomes contractually 90 days past due or the borrower files for bankruptcy protection, the loan is downgraded to Substandard and placed in nonaccrual status. If the loan is unsecured upon being deemed Substandard, the entire loan amount is charged-off.
For non 1-4non-1-4 family residential loans that are 90 days or more past due or greater or in bankruptcy, the collateral value less estimated liquidation costs isare compared to the loan balance to calculate any potential deficiency. If the collateral is sufficient, then no charge-off is necessary. If a deficiency exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged-off against the allowance for loan loss. In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, a current value is obtained and after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate any deficiency. Subsequently, any noted deficiency is then charged-off against the allowance for loan loss when the loan becomes contractually 180 days past due. If the customer has filed bankruptcy, then within 60 days of the bankruptcy notice, any calculated deficiency is charged-off against the allowance for loan loss. Collection efforts continue by means of repossessions or foreclosures, and upon bank ownership, liquidation ensues.
All loans of $250,000 or more, along with selected other credits, classified as substandard, doubtful or loss are individually reviewed for impairment in accordance with Accounting Standards Codification (ASC) 310-10-35. The increase in the threshold to $250,000 during 2022, did not significantly impact level of loans assessment for impairment. In evaluating impairment, a current appraisal is generally used to determine if the collateral is sufficient. Appraisals are typically less than a year old and have tomust be independently reviewed to be relied upon. If the appraisal is not current, we perform a useful life review of the appraisal to determine if it is reasonable. If this review determines that the appraisal is not reasonable, then a new appraisal is ordered. Loans considered impairedImpaired loan balances decreased during 2022, to $5.6$2.7 million, with $919 thousand requiring a valuationrelated allowance of $323 thousand atapproximately $86,000, as of December 31, 2019 as compared to $8.02022, from $2.8 million, with $1.3 million requiring a valuationrelated allowance of $318 thousand atapproximately $166,000, as of December 31, 2018.2021. Management is aggressively working to reduce the impaired credits at minimal loss.
In determining the component of our allowance in accordance with the Contingencies topic of the Accounting Standards Codification (ASC 450), we do not directly consider the potential for outdated appraisals since that portion of our allowance is based on the analysis of the performance of loans with similar characteristics, and external and internal risk factors. We consider the overall quality of our underwriting process in our internal risk factors, but the need to update appraisals is associated with loans identified as impaired under the Receivables topic of the Accounting Standards Codification (ASC 310). If an appraisal is older than one year, a new external certified appraisal may be obtained and used to determine impairment. If an exposure exists, a specific allowance is directly made forin the amount of the potential loss, in addition to estimated liquidation and disposal costs. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Following is a summary of non-accruing loans, loans past due longer than 90 days still accruing interest, and restructured loans:
Non-Accrual, Past Due, and Restructured Loans
(Dollars in thousands)
December 31,
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||
| Non-accruing loans | ||||||||||
| Commercial, financial and agricultural | $ | 943 | $ | 1,719 | $ | 1,868 | $ | 1,086 | $ | 1,244 |
| Real estate – construction | 45 | 157 | 470 | 319 | 436 | |||||
| Real estate – commercial | 1,601 | 784 | 2,035 | 3,403 | 4,358 | |||||
| Real estate – residential | 2,544 | 3,702 | 3,143 | 8,521 | 8,768 | |||||
| Installment loans to individuals | 23 | 7 | 48 | 76 | 41 | |||||
| Total Non-accruing loans | 5,156 | 6,369 | 7,564 | 13,405 | 14,847 | |||||
| Loans past due 90 days or more and still accruing | - | - | - | - | - | |||||
| Troubled debt restructurings (accruing) | 3,650 | 4,909 | 4,932 | 7,310 | 7,198 | |||||
| Total | $ | 8,806 | $ | 11,278 | $ | 12,496 | $ | 20,715 | $ | 22,045 |
| Percent of total loans | 1.57% | 2.06% | 2.44% | 4.42% | 5.00% |
The above table includes $570 thousand and $522 thousand in nonaccrual loans as of December 31, 2019 and 2018, respectively, which have been classified as troubled debt restructurings. No troubled debt restructurings were past due 90 days or more and still accruing as of December 31, 2019 and 2018. There were $4.3 million in loansclassified as troubled debt restructurings as of December 31, 2019, as compared to $5.4 million in loans classified as troubled debt restructurings as of December 31, 2018.
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In addition to impaired loans, the remaining loan portfolio is evaluated based on net charge-off history, economic conditions, and internal processes. To calculate the net charge-off history factor, we perform a 12-quarter look-back and use the average net charge offs as a percentage of the loan balances. To calculate the economic conditions factor, we use current economic data which includes national and local regional unemployment information, local housing price changes, gross domestic product growth, and interest rates. Lastly, we also evaluate our internal processes of underwriting and consider the inherent risks present in the portfolio due to past and present lending practices. As economic conditions, performance of our loans, and internal processes change, it is possible that future increases or decreases may be needed to the allowance for loan losses.
| Selected Credit Ratios | ||||||||
| December 31, | ||||||||
| (Dollars in thousands) | 2022 | 2021 | ||||||
| Allowance for loan losses | $ | 6,727 | $ | 6,735 | ||||
| Total loans | 584,613 | 593,744 | ||||||
| Allowance for loan losses to total loans | 1.15 | % | 1.13 | % | ||||
| Nonaccrual loans | $ | 3,413 | $ | 2,941 | ||||
| Nonaccrual loans to total loans | 0.58 | % | 0.50 | % | ||||
| Ratio of allowance for loan losses to nonaccrual loans | 1.97 | X | 2.29 | X | ||||
| Charge-offs net of recoveries | $ | 633 | $ | 828 | ||||
| Average loans | $ | 591,179 | $ | 586,963 | ||||
| Net charge-offs to average loans | 0.11 | % | 0.14 | % | ||||
The above table includes $823,000 and $1.1 million in nonaccrual loans as of December 31, 2022 and 2021, respectively, which have been classified as troubled debt restructurings. No troubled debt restructurings were past due 90 days or more and still accruing interest as of December 31, 2022 or 2021. There were $2.0 million in loans classified as troubled debt restructurings as of December 31, 2022, as compared to $2.5 million in loans classified as troubled debt restructurings as of December 31, 2021. For more detail on nonaccrual, impaired, past due and restructured loans, refer to Note 6 and Note 8 to the consolidated financial statements in Item 8 of this Form 10-K.
The following table provides a summaryshows the average balance, net charge-offs or recoveries and percentage of net charge-offs or recoveries by each major category of loans for the activity inyears ended December 31, 2022 and 2021:
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||
| (Dollars in thousands) | Average Balance | Net Charge-offs (Recoveries) | Net Charge-offs (Recoveries) as % of Average Loan Type | Average Balance | Net Charge-offs (Recoveries) | Net Charge-offs (Recoveries) as % of Average Loan Type | ||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||||||
| Commercial | $ | 202,435 | $ | (28 | ) | -0.01 | % | $ | 194,517 | $ | 913 | 0.47 | % | |||||||||||
| Construction and land development | 39,986 | 143 | 0.36 | % | 28,820 | (6 | ) | -0.02 | % | |||||||||||||||
| Residential 1-4 family | 225,334 | (36 | ) | -0.02 | % | 220,524 | (37 | ) | -0.02 | % | ||||||||||||||
| Multifamily | 32,768 | 109 | 0.33 | % | 23,840 | — | 0.00 | % | ||||||||||||||||
| Farmland | 18,022 | (13 | ) | -0.07 | % | 19,144 | (29 | ) | -0.15 | % | ||||||||||||||
| Total real estate loans | 518,545 | 175 | 0.03 | % | 486,845 | 841 | 0.17 | % | ||||||||||||||||
| Commercial | 48,093 | 14 | 0.03 | % | 74,711 | (45 | ) | -0.06 | % | |||||||||||||||
| Agriculture | 3,823 | — | 0.00 | % | 4,095 | (1 | ) | -0.02 | % | |||||||||||||||
| Consumer and all other loans | 19,235 | 444 | 2.31 | % | 19,441 | 33 | 0.17 | % | ||||||||||||||||
| Unallocated | 1,483 | — | 0.00 | % | 1,871 | — | 0.00 | % | ||||||||||||||||
| Total loans | $ | 591,179 | $ | 633 | 0.11 | % | $ | 586,963 | $ | 828 | 0.14 | % | ||||||||||||
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The following table shows the balance and percentage of our allowance for loan losses.losses allocated to each major category of loans.
AnalysisAllocation of the Allowance for Loan Losses
(Dollars in thousands)
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||
| (Dollars in thousands) | Amount | % of ALLL | % of Loans | Amount | % of ALLL | % of Loans | ||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||||||
| Commercial | $ | 2,364 | 35.1 | 33.7 | $ | 2,134 | 31.7 | 34.7 | ||||||||||||||||
| Construction and land development | 345 | 5.2 | 7.3 | 189 | 2.8 | 5.4 | ||||||||||||||||||
| Residential 1-4 family | 2,364 | 35.1 | 38.9 | 2,237 | 33.2 | 37.8 | ||||||||||||||||||
| Multifamily | 262 | 3.9 | 5.1 | 254 | 3.8 | 5.6 | ||||||||||||||||||
| Farmland | 153 | 2.3 | 3.0 | 149 | 2.2 | 3.2 | ||||||||||||||||||
| Total real estate loans | 5,488 | 81.6 | 88.00 | 4,963 | 73.7 | 86.7 | ||||||||||||||||||
| Commercial | 381 | 5.7 | 8.0 | 1,099 | 16.3 | 9.1 | ||||||||||||||||||
| Agriculture | 32 | 0.5 | 0.6 | 28 | 0.4 | 0.7 | ||||||||||||||||||
| Consumer and all other loans | 386 | 5.7 | 3.4 | 108 | 1.6 | 3.5 | ||||||||||||||||||
| Unallocated | 440 | 6.5 | — | 537 | 8.0 | — | ||||||||||||||||||
| Total | $ | 6,727 | 100.0 | 100.0 | $ | 6,735 | 100.0 | 100.0 | ||||||||||||||||
For the Years Ended December 31,
| Activity | 2019 | 2018 | 2017 | 2016 | 2015 | |||||
| Beginning Balance | $ | 5,336 | $ | 6,196 | $ | 6,072 | $ | 7,493 | $ | 9,922 |
| Provision charged to expense | 2,050 | 252 | 450 | (500) | (2,200) | |||||
Advances made on loans with off balance sheet provision |
- |
- |
- |
- |
- | |||||
| Loan Losses: | ||||||||||
| Commercial, financial and agricultural | (1,812) | (675) | (64) | (67) | (182) | |||||
| Real estate – construction | - | (96) | (1) | (5) | (226) | |||||
| Real estate – commercial | (192) | (334) | (179) | (557) | (724) | |||||
| Real estate – residential | (336) | (290) | (714) | (738) | (1,127) | |||||
| Installment loans to individuals | (114) | (75) | (147) | (83) | (101) | |||||
| Total loan losses | (2,454) | (1,470) | (1,105) | (1,450) | (2,360) | |||||
| Recoveries: | ||||||||||
| Commercial, financial and agricultural | 92 | 157 | 519 | 172 | 1,629 | |||||
| Real estate – construction | 34 | 11 | - | 26 | 215 | |||||
| Real estate – commercial | 16 | 73 | 193 | 220 | 147 | |||||
| Real estate – residential | 232 | 73 | 48 | 87 | 99 | |||||
| Installment loans to individuals | 62 | 44 | 19 | 24 | 41 | |||||
| Total recoveries | 436 | 358 | 779 | 529 | 2,131 | |||||
| Net charge offs | (2,018) | (1,112) | (326) | (921) | (229) | |||||
| Balance at End of Period | $ | 5,368 | $ | 5,336 | $ | 6,196 | $ | 6,072 | $ | 7,493 |
| Net charge offs as a % of average loans | 0.36% | 0.21% | 0.07% | 0.20% | 0.05% |
We have allocated the allowance according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within each of the categories of loans. The allocation of the allowance as shown in the following table above should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loan loss trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since the total allowance is a general allowance applicable to the entire portfolio.
The allocation of the allowance for loan losses is based on our judgment of the relative risk associated with each type of loan. We have allocated 23%35.1% of the allowance to commercial real estate loans, which constituted 30.30%33.7% of our loan portfolio at December 31, 2019.2022. This allocation decreased whenincreased slightly compared to the 26%31.7% in 20182021, due primarily to the $29.6 million increase in commercial real estate loans duringimpact of the year.external factors considered as part of the determination of the overall allowance for loan losses. We have allocated 36%5.7% of the allowance to commercial loans, which constituted 14.45%8.0% of our loan portfolio at December 31, 2019.2022. This allocation increased by $1.2 millionpercentage decreased compared to December 31, 2018,2021, due to losses realizeda lower loss rate on commercial loans for the historical period assessed in this segment of the portfolio during 2019, as discussed previously.loan loss model for 2022.
Both residential and commercial real estate loans are secured by real estate whose value tends to be easily ascertainable. These loans are made consistent with appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities.
We have allocated 3%5.2% of the allowance to real estate construction loans, which constituted 5.53%7.3% of our loan portfolio atas of December 31, 2019.2022. Construction loans are secured by real estate with values that are dependent upon market and economic conditions. Values may not always be easily ascertainable as evidenced by the current market conditions.Additionally, these credits are generally shorter-term projects, of eighteen months or less. These loans are made consistent with appraisal policies and real estate lending policies which detail maximum loan-to-value ratios and maturities.
We have allocated 34%35.1% of the allowance to residential real estate loans, which constituted 45.61%38.9% of our loan portfolio atas of December 31, 2019.2022.
We allocated 5.74% of the allowance to consumer and all other loans, which constituted 3.41% of our loan portfolio as of December 31, 2022. Our allocation decreasedincreased as a percentage of the allowance for loan losses due to the $6.9 million decreaseimpact of overdrawn deposit account losses resulting from the cybersecurity incident, combined with a change in residential real estate loansthe treatment of deposit account charge-offs during 2019.
We have allocated 4%2022. As of the allowance to consumer installment loans, which constituted 4.11% of our loan portfolio at December 31, 2019, which was comparable to the 3% allocation2022, we had in 2018.
The following table showsan unallocated portion of the balance and percentage of our allowance for loan losses (or ALLL) allocated to each major category of loans.
Allocationtotaling approximately $440,000. While our legacy loan loss model calculation did not fully allocate the entire allowance, we believe that the lingering impact of the Allowancepandemic, combined with the recent impact of inflation warrant the maintenance of the allowance for Loan Lossesloan losses.
December 31, 2015 through December 31, 2019
(Dollars in thousands)We implemented the Current Expected Credit Loss (CECL) model to replace our legacy loan loss model for the first quarter of 2023. The cumulative effects of this implementation were immaterial.
27
| ||||||||||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||||||||||
| Amount |
| % of ALLL | %of Loans | Amount | % of ALLL | %of Loans | Amount | % of ALLL | % of Loans | |||||||||
| Commercial | $ | 1,932 | 36% | 14.45% | $ | 775 | 15% | 15.20% | $ | 1,098 | 18% | 13.35% | ||||||
| R/E–const. | 158 | 3% | 5.53% | 202 | 4% | 6.42% | 191 | 3% | 5.80% | |||||||||
| R/E–comm. | 1,248 | 23% | 30.30% | 1,386 | 26% | 25.75% | 1,989 | 32% | 24.89% | |||||||||
| R/E-resid. | 1,840 | 34% | 45.61% | 2,526 | 47% | 48.15% | 2,506 | 41% | 51.59% | |||||||||
| Installment | 188 | 4% | 4.11% | 172 | 3% | 4.49% | 156 | 2% | 4.37% | |||||||||
| Unallocated | 2 | 0% | 275 | 5% | 256 | 4% | ||||||||||||
| Total | $ | 5,368 | 100% | 100.00% | $ | 5,336 | 100% | 100.00% | $ | 6,196 | 100% | 100.00% | ||||||
| December 31, 2016 | December 31, 2015 | |||||||||||||||||
Amount | % of ALLL | % of Loans |
Amount | % of ALLL | % of Loans | |||||||||||||
| Commercial | $ | 622 | 10% | 11.75% | $ | 1,066 | 14% | 10.76% | ||||||||||
| R/E-const. | 346 | 6% | 5.50% | 332 | 4% | 3.33% | ||||||||||||
| R/E-comm. | 1,625 | 27% | 22.05% | 2,384 | 36% | 22.34% | ||||||||||||
| R/E-resid. | 2,617 | 43% | 55.97% | 2,669 | 32% | 58.00% | ||||||||||||
| Installment | 123 | 2% | 4.73% | 128 | 2% | 5.57% | ||||||||||||
| Unallocated | 739 | 12% | 914 | 12% | ||||||||||||||
| Total | $ | 7,493 | 100% | 100.00% | $ | 7,493 | 100% | 100.00% | ||||||||||
Other Real Estate Owned
Other real estate owned decreased $2.5$1.1 million, or 42.8%80.82%, to $3.4 million atapproximately $261,000 as of December 31, 20192022 from $5.9$1.4 million atas of December 31, 2018.2021. All properties are available for sale, primarily, by commercial and residential realtors under the direction of our Special Assets division. Our aim is to reduce the level of OREO in order to reduce the level of nonperforming assets at the Bank, while keeping in mind the impact to earnings and capital. In 2019During 2022, three former branch locations transferred to OREO in 2021 were sold, which decreased OREO approximately $912,000.
While the levels of problem credits and 2018, pricing adjustments were made to make certainforeclosed properties more marketable, which, in some cases,have been reduced significantly over the price below the fair valuepast several years, we remain mindful of the property (which is basedimpact on an appraisal less estimated disposition costs). During 2019,earnings and capital as we recorded OREO writedowns of $214 thousand as comparedwork to $542 thousand in 2018.
During 2019, we added $811 thousand in OREO properties as a result of settlement of foreclosed loans, offset by sales of $1.3 million with net losses totaling $123 thousand. Additionally, a closed branch office facility was transferred from Bank Premises to OREO at a value of $683 thousand. During 2018, we added $1.7 million in OREO properties as a result of settlement of foreclosed loans, which was offset by sales of $1.4 million with net losses totaling $135 thousand. As previously discussed we continue to take an aggressive approach toward liquidating propertiesachieve our goal to reduce our level of foreclosed properties by making pricing adjustmentsnonperforming assets. However, we may recognize some losses and holding auctions on some of our older properties. We expect to continue these efforts in 2020, which could result in additional losses, while reducing future carrying costs.
Although the properties remain for sale and are actively marketed, we do have lease agreements on certain other real estate owned properties which are generating rental income at market rates. Rental income on OREO properties was $63 thousand in 2019, a decrease of $142 thousand, or 69.1%, when compared to the $205 thousand recognized in 2018. The decrease in rental revenue is a direct result from the decreasereductions in the volumeallowance for loan losses as we expedite the resolution of foreclosed properties.these problem assets.
Investment Securities
Total investment securities decreased $8.8$11.3 million, or 14.7%10.51%, to $50.6$96.1 million atas of December 31, 20192022 from $59.4$107.4 million atas of December 31, 2018.2021. All securities are classified as available-for-sale for liquidity purposes. No securitiesThere were sold during 2019 or 2018. However, paydowns on mortgage backed securities totaled $10.7 million. Purchasesno sales of securities during the year ended December 31, 2022. Sales of securities during 2021 totaled $790 thousand$7.7 million, with gains of approximately $322,000 realized. During the year ended December 31, 2022 and 2021, there were maturities, calls and paydowns of $14.0 million and $16.3 million, respectively. The Company purchased $19.8 million and $85.1 million in investment securities during 2019.the year ended December 31, 2022 and 2021, respectively. Investment securities with a carrying value of $6.9$27.3 and $12.1 million and $8.0 million atas of December 31, 20192022 and 2018,2021, respectively, were pledged to secure public deposits and for other purposes required, or permitted, by law.
Our strategy is to invest excess funds in investment securities, to increasewhich typically yield more interest income while providing for liquidity instead ofthan other short termshort-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond. Due to loan demand during 2019 and 2018, most funds resulting from securities maturities and repayments were used to fund the loan portfolio. We anticipate maintaining or slightly increasing the size of the portfolio during 2020. The portfolio is comprised of, what we believe to be, short to mid-term investments, as mortgage backed securities and collateralized mortgage obligations generally repay at a faster rate than their contractual maturities. The carrying values of investment securities and the different types of investments are shown in the following table:Richmond, but which still provide liquidity.
Investment Securities Portfolio
(Dollars in thousands)
| December 31, | 2019 | 2018 | 2017 | |||||||||||||||||||||
| Available for Sale | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
| U.S. Government Agencies | $ | 15,703 | $ | 15,633 | $ | 19,755 | $ | 19,389 | $ | 23,986 | $ | 23,844 | ||||||||||||
| Taxable municipals | 4,389 | 4,442 | 4,428 | 4,313 | 4,466 | 4,397 | ||||||||||||||||||
| Corporate bonds | 5,408 | 5,523 | 5,422 | 5,320 | 5,437 | 5,579 | ||||||||||||||||||
| Mortgage backed securities | 25,077 | 25,051 | 31,366 | 30,385 | 37,950 | 37,268 | ||||||||||||||||||
| Total Securities AFS | $ | 50,577 | $ | 50,649 | $ | 60,971 | $ | 59,407 | $ | 71,839 | $ | 71,088 | ||||||||||||
The fair value of our investment portfolio is substantially affected by changes in interest rates, whichrates. Losses could result inbe realized losses if we have to sellliquidity and/or business strategy necessitate the sale of securities and recognize the loss in a rising interest rate environmentloss position, due to Federal Reserve actions, U.S. fiscal policies or other factors affecting market interest rates. AtAs of December 31, 2019,2022, we had ana net unrealized gainloss in our investment portfolio totaling $72 thousand$17.6 million as compared to a $1.6$1.0 million unrealized loss atas of December 31, 2018.2021. As market interest rates increase the level of unrealized losses could change substantially. However, these changes would have no impact on earnings or regulatory capital, unless the securities were sold at a loss. We have reviewed our investment portfolio and no investment security is deemed to have an other than temporary impairment. We monitor our portfolio regularly and use it to maintain liquidity, manage interest rate risk and enhance earnings.
The amortized cost, fair value and weighted average yield of investment securities atas of December 31, 20192022 are shown in the following schedule by contractual maturity and do not reflect principal paydowns for amortizing securities in the following schedule.securities. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yields are calculated by dividing the contractual interest for each time period by the average amortized contractual cost.
Maturities of Securities
| Weighted | ||||||
| (Dollars are in thousands) | Amortized | Fair | Average | |||
| Securities Available for Sale | Cost | Value | Yield | |||
| Due in one year or less | $ | - | $ | - | -% | |
| Due after one year through five years | 4,710 | 4,752 | 2.53% | |||
| Due after five years through ten years | 13,211 | 13,295 | 3.39% | |||
| Due after ten years | 32,656 | 32,602 | 2.42% | |||
| Total | $ | 50,577 | $ | 50,649 | 2.68% | |
| Less than One Year | One to Five Years | Five to ten years | After ten years | Total | ||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Fair Value | Average Yield | Fair Value | Average Yield | Fair Value | Average Yield | Fair Value | Average Yield | Fair Value | Average Yield | ||||||||||||||||||||||||||||||
| U.S Treasuries | $ | 971 | 3.87 | % | $ | 9,281 | 1.39 | % | $ | 1,433 | 1.04 | % | $ | — | — | % | $ | 11,685 | 1.54 | % | ||||||||||||||||||||
| U.S. Government Agencies | 1 | 4.56 | % | 2,992 | 3.76 | % | 2,091 | 3.12 | % | 4,315 | 2.60 | % | 9,399 | 3.08 | % | |||||||||||||||||||||||||
| Taxable municipals | — | — | % | 504 | 2.95 | % | 3,476 | 2.30 | % | 12,835 | 2.33 | % | 16,815 | 2.33 | % | |||||||||||||||||||||||||
| Corporate bonds | 503 | 5.48 | % | 1,427 | 3.49 | % | 1,206 | 2.58 | % | — | — | % | 3,136 | 3.43 | % | |||||||||||||||||||||||||
| Mortgage backed securities | — | — | % | 1,470 | 1.92 | % | 5,203 | 1.77 | % | 48,368 | 1.66 | % | 55,041 | 1.68 | % | |||||||||||||||||||||||||
| $ | 1,475 | 4.51 | % | $ | 15,674 | 2.12 | % | $ | 13,409 | 2.11 | % | $ | 65,518 | 1.86 | % | $ | 96,076 | 1.97 | % | |||||||||||||||||||||
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Bank Owned Life Insurance
AtAs of December 31, 20192022 and 2018, we2021, the Bank had an aggregate total cash surrender value of $4.6$4.5 million and $4.5$4.7 million, respectively, on life insurance policies covering current and former key officers.
TotalThe Company recorded a loss of $136,000 due to a write-down of approximately $158,000, partially offset by earnings of $22,000, during the year ended December 31, 2022. The write-down was due to the impact of rising interest rates on the value of the underlying assets supporting the policies. The Company recognized income forof approximately $32,000 during the policies during 2019 and 2018 was $63 thousand and $57 thousand, respectively.year ended December 31, 2021.
Deposits
Total deposits were $621.5$692.7 million atas of December 31, 2019, an increase2022, a decrease of $25.5$14.8 million, or 4.3%2.1%, from $596.0$707.5 million atas of December 31, 2018.2021. Most of the increase has been indecrease was driven by savings and money market deposits, which decreased $20.6 million, or 10.7%, to $171.5 million as of December 31, 2022. The majority of the decline occurred during the fourth quarter of 2022 as competition for funds for lending and other needs intensified among banks and non-banks in the Company’s markets.
Information detailing average deposit accounts, which grew $18.8 million during 2019. Noninterest bearingbalances and average rates paid on deposits grew by $6.5 million, while interest-bearingis presented in the Net Interest Margin Analysis table contained in the “Net Interest Income and Net Interest Margin” section.
Core deposits are considered to include demand deposits increased $2.5 million.
Core deposits, which are mainlyand other types of transaction accounts, such as commercial relationships and savings products, increased as noninterest bearing deposits grew 3.9%, or $6.5 million, from $164.3 million at December 31, 2018 to $170.8 million at December 31, 2019. Interest-bearing demand deposit accounts grew 7.2%, or $2.5 million, to $37.1 million at December 31, 2019. Savings accountsall of which decreased by $182 thousand to $95.1 million and money market deposits increased $18.8 million, or 48.3%, to $57.8 million at December 31, 2019 as compared to $39.0 million at December 31, 2018.in 2022. Overall, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our customer base and communities.
Time deposits of $100,000$250,000 or more equaled approximately 19.5%3.87% of deposits at the end of 20192022 and 19.3%4.00% of deposits at the end of 2018.2021.
As of December 31, 2022 and 2021, uninsured deposits are estimated to be $87.5 million and $93.8 million, respectively. Included in estimated uninsured deposits are $14.4 million and $13.6 million of public funds, for such respective periods, considered secured via pledged securities or letters of credit we have with the FHLB.
The following table shows maturities of all time deposits considered uninsured by the FDIC or otherwise.
| Maturities of Uninsured Time Deposits | ||||
| (Dollars in thousands) | ||||
| December 31, 2022 | ||||
| Three months or less | $ | 2,339 | ||
| Over three months through six months | 3,078 | |||
| Over six months through twelve months | 10,374 | |||
| Over one year | 5,252 | |||
| Total | $ | 21,043 | ||
The $2.8As of December 31, 2022 and 2021, $27.3 million and $12.1 million of brokeredsecurities, respectively, were pledged to collateralize public deposits, including time deposits, held in our Tennessee offices, and as collateral for credit facilities available through FRB. Additionally, we held letters of credit from the FHLB for $7.0 million and $12.0 million at December 31, 2018 matured2022 and 2021, respectively, to secure public deposits, including time deposits, held in 2019. Theseour Virginia offices.
We held no brokered deposits were used to fund a particular 10 year balloon mortgage product.at December 31, 2022 or 2021. Internet accounts are limited to customers located in our primary market area and the surrounding geographical area. The average balance of and the average rate paid on deposits is shown in the net interest margin analysis table in the “Net Interest Income and Net Interest Margin” section above.section. Total Certificate of Deposit Registry Service (CDARS) time deposits were $11.2$1.4 million and $10.7$5.8 million at December 31, 20192022 and 2018,2021, respectively.
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Maturities of time deposits of $100,000 or more outstanding are summarized as follows:
| Maturities of Time Deposits of $100 Thousand and More | |||
| (Dollars in thousands) | |||
| December 31, 2019 | |||
| Three months or less | $ | 14,468 | |
| Over three months through six months | 23,115 | ||
| Over six months through twelve months | 32,393 | ||
| Over one year | 51,513 | ||
| Total | $ | 121,489 | |
Noninterest Income
For the year ended December 31, 2019,2022, noninterest income increaseddecreased approximately $740,000, or 7.4%, to $8.6$9.2 million, or 1.22%1.1% of average assets, from $7.6$10.0 million, or 1.13%1.3% of average assets, for the same period in 2018, an increase2021. The decrease was primarily attributable to non-recurring net gains on sales of $1.0investment securities of $322,000 in 2021 and net gains on sales of fixed assets of $190,000 in 2021. During the period immediately after the cybersecurity incident, in June 2022, we temporarily stopped assessing overdraft and certain other service charges. we estimate that additional normalized charges of approximately $125,000 would have been realized during this period. Additionally, the Company recognized a write-down on BOLI of $158,000 during the year ended December 31, 2022 due to declines in the market value of the underlying investments supporting the policy related to increased interest rates. Gains and commissions on mortgage loan originations decreased approximately $162,000 due to rising interest rates on mortgage loans.
Noninterest Expense
Noninterest expenses decreased $1.3 million, or 13.7%. This increase4.8%, to $26.5 million for the year ended December 31, 2022, compared to $27.9 million for the year ended December 31, 2021. Noninterest expense as a percent of total average assets decreased to 3.2% in 2022 from 3.5% in 2021. The decrease in noninterest expense was primarily due to the $803 thousand non-recurring gain recognized on the sale and leaseback of our Lebanon, Virginia office. Service charges decreased $98 thousand during 2019, primarily due to the reduced volume of overdraft activity. For 2019, card processing and interchange revenue totaled $3.0 million, an increase of $205 thousand or 7.3% compared to 2018, due to increased volume of card transactions. During the fourth quarter of 2019, we negotiated the renewal of the card servicing contact with our provider. This renewal should result in a modest increase in the interchange fee, along with a reduction in the processing costs, starting in 2020. Financial services fees for 2019 were $663 thousand, an increase of $60 thousand, or 9.9%, from the $603 thousand recognized in 2018. We continue to focus efforts on our financial services operations as we believe this segment continues to show potential for future growth. In addition, secondary market mortgage origination revenue, included in other noninterest income, increased approximately 105% to $247 thousand, based on increased volume and changes made to the program during the year. We continue to make efforts to increase the volume of loans originated for sale on the secondary market.
Noninterest Expense
Noninterest expenses decreased $1.5 million, or 4.9%, to $29.0 million in 2019. This overall decrease was due to a combination of events and efforts. These included a decrease in staffing, renegotiation of contracts for data circuit and telephone services, benefit of credits applied to deposit insurance premiums, reduced costs associated with the holding and disposal of OREO and the non-recurrence of expense items recorded in 2018.
Salaries and employee benefits decreased from $14.2 million in 2018 to $14.1 million in 2019. In 2019, we exited our legacy self-insured health benefits plan and created a new plan for our principal self-insured health care benefits. We retained a new plan administrator who assists us in monitoring claims and working with our employees in obtaining the best outcomes. We believe that over the next few years, this change will aid in improving employee care and moderating costs. Total full time equivalent employees have decreased to 229 at December 31, 2019 from 250 at December 31, 2018, a decrease of 21, or 8.4%. During$1.7 million in occupancy and equipment expense.
The decrease in occupancy and equipment expense was driven nearly entirely by $1.1 million in non-recurring losses on three former branch office locations, which were transferred into other real estate owned during the third quarter of 2019 we implemented a restructuring of our credit and loan operations functions and other administrative positions, resulting2021.
The decrease in the elimination of ten positions; with a net reduction of five employees, as some affected personnel filled other vacant positions. During 2019, we continued streamlining our processes to help us achieve greater efficiencies. We also continued our ongoing investment in training our employees as we continue to migrate to the universal banker model, where customer service personnel are trained in multiple job functions rather than specializing in a single function. We anticipate the number of full time equivalent employees to decrease through attrition in the future as a result of these improved processes and training.
Occupancyoccupancy and equipment expenses decreased $642 thousand to $4.5 million for the year 2019 compared to 2018. Depreciation expense decreased $315 thousand to $2.3 million in 2019 compared to 2018, due to aging out of some equipment. With the planned branch additions in Bristol, Virginia and Kingsport, Tennessee in 2020, it is expected that depreciation expense willwas partially offset by a $703,000 increase in 2020salaries and future periods. Equipment maintenancebenefits expense attributable to higher bonus accruals based on Company performance, annual performance raises, and adjustments to minimum starting salaries to reflect rising costs decreased $93 thousand due to the change in some service levelsattract and elimination of some agreements. Our reliance on ITMs, cash recyclers and coin counters to improve the customer experience and create operational efficiencies carries with it the costs related to recurring maintenance and repairs. We believe that the ITMs provide additional convenience by offering teller services from 7 AM to 7 PM Monday through Saturday. Facilities repairs and maintenance decreased $93 thousand due to renegotiating certain service contracts, along with a decline in individual repairs and maintenance events compared to 2018. Lease expense of $497 thousand for 2019 increased $18,000 as compared to $476 thousand in 2018, due to the leaseback of the Lebanon VA office.retain talent.
Expenses related to OREO and repossessed assets declined by $391 thousand, or 38.1%, from $1.0 million in 2018 to $635 thousand in 2019. Foreclosed properties decreased during 2019 to $3.4 million at December 31, 2019 from $5.9 million at December 31, 2018. During 2019, we recorded net OREO writedowns of $214 thousand compared to $542 thousand in 2018. These writedowns were primarily the result of price reductions that helped us in securing sales that reduced our foreclosed properties by $2.5 million during the year. During 2019, we had net losses on the sale of OREO of $123 thousand compared to $135 thousand in 2018. Based on the reduced level of other real estate owned, we expect that costs related to holding and disposing of these properties will continue to decrease in 2020 and future periods.
Other operating expenses decreased $550 thousand or 6.6% to $7.8 million for 2019 from $8.4 million in 2018. FDIC deposit insurance decreased by $158 thousand to $222 thousand in 2019, due to a $103 thousand credit received from the FDIC as a result of our ability to utilize Small Bank assessment credits. Printing and supplies decreased year-over-year by $143 thousand due to a non-recurring writedown in 2018 of obsolete or misapplied inventory items totaling $168 thousand. Data circuit and telecommunication costs decreased by $171 thousand, or 30.0%, to $399 thousand in 2019 compared to $571 thousand in 2018, due to renegotiated contacts for data circuits and telecom services that were phased in during the year. Over the next five years we anticipate annualized savings of $198 thousand per year. Other expenses decreased $464 thousand due to a non-recurring write-off in 2018 of advanced escrow and other costs determined to be unrecoverable totaling $220 thousand, and an adjustment to prepaid excise and franchise taxes of $244 thousand. Consulting expense increased $528 thousand in 2019 to $829 thousand. This increase was principally due to the retention of an outside consulting firm to review our products and procedures to identify areas where we can enhance revenue and better manage costs. During the fourth quarter of 2019, fees of $233 thousand were recorded. As this project moves forward, it is anticipated that an additional $243 thousand of fees will be incurred. Based on progress through year-end it is estimated that, when fully implemented, pre-tax annual benefits will exceed $1.5 million. In addition to the fees related to the efficiency assessment, we also recognized fees totaling $456 thousand related to the negotiation of the card services contract renewal, and facilitating the sale of nonperforming and underperforming loans.
Our efficiency ratio, a non-GAAP measure, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, improved to 86.23%70.6% in 20192022 compared to 95.85%75.6% in 2018.2021. The decrease in this ratio is a result of improvements in both noninterestnet interest income and noninterest expense, as discussed above.above and in the “Net Interest Income and Net Interest Margin” section earlier in this Item 7. We continue to seek opportunities to operate more efficiently through the use of technology, improving processes, reducing nonperforming assets and increasing productivity, and while we are optimistic about the potential impact of the efficiency assessment project, the recent economic impact of the COVID-19 pandemic has caused us to delay implementation of some of the recommendations, especially those related to service fee changes, to later in the year. As a result, the benefits of some of the planned changes will be delayed.productivity.
Income Taxes and Deferred Tax Assets
Income taxes were $522 thousand in 2019,$2.3 million for the year ended December 31, 2022, compared to $149 thousand$1.9 million for the same period in 2018.2021. The effective tax rates were 20.2%22.2%, and 14.0%21.7% for 20192022 and 2018,2021, respectively. The effective tax rate for the periods differed from the federal statutory rate of 21.0% principally as a resultdue to the impact of tax-exemptthe recapture of operating loss carryforwards and applicable credits, along with the effect of certain state income from loans as well as earnings from bank owned life insurance.taxes. The lowerhigher effective tax rate in 2018 when compared to 20192022 is the result of thean increase in pre-tax earnings in relation to the various tax preference items.
Deferred tax assets represent the future tax benefit of future deductible differences and, ifdifferences. If it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. The Company has evaluated positive and negative evidence to assess the realizability of its deferred taxes. Based on the evidence, including taxable income projections, the Company believes it is more likely than not that its deferred tax assets will be realizable. Accordingly, the Company did not include a valuation allowance against its deferred tax assets as of December 31, 20192022 or 2018.2021.
Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a position will be sustained upon examination. If a tax position meets the more likely than not recognition threshold, it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being recognized. The Company classifies interest and penalties as a component of income tax expense.
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As of December 31, 2019, the Company had Federal and state net operating loss carry forward amounts of approximately $16.9 million and $1.1 million, respectively. These amounts are not limited pursuant to Internal Revenue Code (IRC) Section 382.The Company is subject to examination in the United States and multiple state jurisdictions. Open tax years for examination are 2016 – 2019.
Capital Resources
Our total capitalshareholders’ equity at the end of 20192022 was $54.6$57.2 million compared to $51.3$63.6 million at the end of 2018.2021. The increasedecrease was $3.4$6.4 million, or 6.5%10.1%. Book value per common share was $2.28$2.40 at December 31, 20192022 compared to $2.14$2.66 at December 31, 2018.2021. As previously discussed, the year-over-year decline was primarily driven by the $13.1 million net increase in the accumulated other comprehensive loss related to the unrealized loss on investment securities available-for-sale. Excluding the impact of the unrealized loss, equity increased $6.7 million.
During 2022, the board of directors authorized the repurchase of up to 500,000 shares of common stock through March 31, 2023. Through December 31, 2022, 73,595 shares have been repurchased at an average price of $2.33 per share. On February 27, 2023, the board of directors approved an extension of the repurchase program through March 31, 2024.
The Company meets the eligibility criteria to be considered a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February 2015 and does not report consolidated regulatory capital. The Bank continues to be subject to various capital requirements administered by banking agencies.
The Bank is characterized as "well capitalized" under the “prompt corrective action” regulations pursuant to Section 38 of the FDIA. The capital adequacy ratios for the Bank, are set forth below along withincluding the minimum ratios to be considered “well capitalized” under such regulations:capitalized,” are set forth in Note 21, Capital, to the consolidated financial statements in Item 8 of this Form 10-K.
Capital Adequacy Ratios
| December 31, | ||||||||||||
| Well-Capitalized | ||||||||||||
| Regulatory | ||||||||||||
| Threshold | 2019 | 2018 | ||||||||||
| Tier 1 leverage | 5.00 | % | 9.43 | % | 9.59 | % | ||||||
| Common equity tier 1 | 6.50 | % | 13.72 | % | 13.30 | % | ||||||
| Tier 1 risk-based capital | 8.00 | % | 13.72 | % | 13.30 | % | ||||||
| Total risk-based capital | 10.00 | % | 14.83 | % | 14.39 | % | ||||||
The Bank is also subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Act. The final rules require the Bank to comply with the following minimum capital ratios: (i) a CET1Common Equity Tier 1 (CET1) ratio of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum CET1 ratio of 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The phase-in of the capital conservation buffer requirement began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a CET1 ratio above theminimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The CET1 ratio of the Bank was 13.72% asAs of December 31, 2019, exceeding the minimum requirement. The Tier 1 and total capital to risk-weighted asset ratios of2022, the Bank were 13.72% and 14.83%, respectively, as of December 31, 2019, exceeding the minimum requirements. The leverage ratio of the Bank was 9.43% as of December 31, 2019, also exceeding the minimum requirements. As noted above, if we electmeets all capital adequacy requirements to opt into the new CBLR framework, the above capital measurements would no longer apply to us.
Total assets increased in 2019 and we anticipate asset levels to increase in the future due to an emphasis on growing the loan portfolio and the core deposit base of the Bank. Under current economic conditions, we believewhich it is prudent to continue to increase capital to support planned asset growth while being able to absorb potential losses that may occur if asset quality deteriorates further.subject. Based upon projections, we believe our earnings will be sufficient to support the Bank’s planned asset growth.
NoThe Company paid its first cash dividend of $0.05 per share in 2022. On February 27, 2023, the board of directors declared a dividend of $0.06 per share, to be paid on March 31, 2023. Future payments of cash dividends have been paid historicallywill depend on a number of factors including but not limited to maintaining positive retained earnings, compliance with regulatory rules governing the payment of dividends, strategic plans, and we do not anticipate paying cashsufficient capital at the Bank to allow payment of dividends into the foreseeable future as long as the Company continues to have a retained deficit. Earnings will continue to be retained to build capital and position the Company to pay a dividend to its shareholders as soon as practicable.parent company.
Liquidity
Liquidity
We closely monitor our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold and unpledged available-for-sale investments. Collectively, those balances were $93.9$130.5 million atas of December 31, 2019,2022, down from $79.5$159.3 million atas of December 31, 2018.2021. As discussed previously in this Form 10-K, this change is a direct result of redeployment of excess cash into investment securities, which generally return higher yields, while still providing liquidity, as discussed below, and the decrease in deposits. A surplus of short-term assets areis maintained at levels management deems adequate to meet potential liquidity needs.
The Bank’s primary funding source is deposits from customers in the markets in which it provides banking services. As discussed previously, deposits declined during the fourth quarter of 2022 as competition for deposits intensified from both bank and non-bank institutions. The Company expects that pressure on the rates paid on deposits will continue and that it may be required to increase the rates paid on its deposit products, possibly faster and to a higher degree not currently projected, to retain existing customers and attract new deposit relationships to fund loans and other activities. As discussed below, the Company has other liquidity sources to manage its liquidity needs during 2019.as they arise.
At December 31, 2019,2022, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $43.7$68.8 million, which is net of the $6.9$27.3 million of securities pledged as collateral. This will serveGenerally, the investment portfolio serves as a source of liquidity while yielding a higher return at the purchase date when compared to other short termshort-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond. Total investment securities decreased $8.8$11.3 million, or 14.7%10.51%, to $50.6during 2022 from $107.4 million atas of December 31, 2019 from $59.42021 to $96.1 million atas of December 31, 2018.2022.
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Our loan to deposit ratio was 90.52% at84.4% as of December 31, 20192022 and 91.80% at year-end 2018.83.9% as of December 31, 2021.
Available third partythird-party sources of liquidity remain intact at December 31, 20192022 which includes the following: our line of credit with the FHLB totaling $176.4$200.1 million, the brokered certificates of deposit markets, internet certificates of deposit, and the discount window at the Federal Reserve Bank of Richmond. We also have $20.0$30.0 million in unsecured federal funds lines of credit available from three correspondent banks as of December 31, 2019, which gives us an additional source of liquidity.2022.
We have used our line of credit with FHLB to issue lettersa letter of credit totaling $17.0$7.0 million to the Treasury Board of Virginia for collateral on public funds. No draws on the lettersletter of credit have been issued. The lettersThis letter of credit areis considered drawsto be a draw on our FHLB line of credit. An additional $154.4$200.1 million was available on December 31, 20192022 on the $176.4$207.1 million line of credit, of which $142.3$113.7 million is secured by a blanket lien on our residential real estate loans.
While we have access to the brokered deposits market, we haveheld no brokered deposits atas of December 31, 2019, and we had $2.8 million in brokered deposits at December 31, 2018.2022 or 2021. As of December 31, 2019,2022, we do have $11.2had $1.4 million in reciprocal CDARS time deposits, compared to $10.7$5.8 million atas of December 31, 2018.2021.
We are a member of an internet certificate of deposit network whereby we may obtain funds from other financial institutions at auction. We may invest funds through this network as well. Currently, we only intend to use this source of liquidity in the event of a liquidity crisis.
The Bank has access to additional liquidity through the Federal Reserve Bank of Richmond’s Discount Window for overnight funding needs. We may collateralizehave collateralized this line with investment securities and loans at our discretion;securities; however, we do not anticipate using this funding source except as a last resort.
With the on-balance sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources to meet our requirements and needs for the foreseeable future. However, liquidity can be further affected by a number of factors such as, counterparty willingness or ability to extend credit, regulatory actions and customer preferences, some of which are beyond our control. With the current economic downturnuncertainty resulting from recovering from the lingering effects of the COVID-19 pandemic, inflation and the war in Ukraine, we continue monitoring our liquidity position, specifically cash on hand in order to meet customer demands. Additionally, our contingency funding plan is reviewed quarterly with our Asset Liability Committee.
On March 10, 2023, Silicon Valley Bank (SVB) a regional banking company headquartered in Santa Clara, California, with total assets in excess of $200 billion, was taken into receivership through FDIC, after the bank experienced a significant outflow of deposit funds fueled by concerns of large commercial and retail deposit customers holding funds far in excess of the FDIC insured limits at SVB. These concerns related to unrealized losses in SVB’s investment portfolio combined with the long-term maturities of the investments and other earning assets held by SVB. While we, or any other financial institution, can be impacted by sudden changes in market conditions or customer sentiment, we believe that our funding and liquidity management strategies and procedures are sound. In addition, our deposit customer base is diverse without significant exposure to uninsured deposit relationships. Prior to receivership of SVB our deposit fluctuations were largely tied to cyclical events and inflows and outflows related to customers seeking higher interest rates. Since the date of the receivership, we have heightened our monitoring of ournot experienced any significant or unusual deposit outflows and we have taken steps to successfully test certain liquidity position. Additionally, the Federal Reserve has taken actions to bolster liquidityfacilities in the markets.event of any future deposit outflows.
Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
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A summary of the contract amount of the Bank’s exposure to off-balance-sheet risk as of December 31, 20192022 and 20182021 is as follows:
| 2022 | 2021 | |||||||||||||||
| (Dollars in thousands) | 2019 | 2018 | ||||||||||||||
| Financial instruments whose contract amounts represent credit risk: | ||||||||||||||||
| Commitments to extend credit | $ | 59,552 | $ | 55,144 | $ | 84,149 | $ | 69,015 | ||||||||
| Standby letters of credit | 2,582 | 2,798 | 3,751 | 3,684 | ||||||||||||
Commitments to extend credit are agreements to lend to a customer as long asprovided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.
Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not actually be drawn upon to the total extent to which the Bank is committed. In response to two bank failures in March, 2023, and liquidity concerns for other super-regional banks, we have not experienced any significant unusual activity by borrowers drawing against their lines of credit, nor do we anticipate experiencing such demand that might cause us to limit customer access to these lines of credit.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.
Interest Sensitivity
AtAs of December 31, 2019,2022, we had a negative cumulative gap rate sensitivity ratio of 31.36%17.89% for the one yearone-year re-pricing period, compared to 31.40% at12.97% as of December 31, 2018.2021. A negative cumulative gap generally indicates that net interest income would improvedecline in a decliningrising interest rate environment as liabilities re-price more quickly than assets. Conversely, net interest income would likely decreaseincrease in periods during which interest rates are increasing. The below table is based on contractual maturities and next repricing date and does not take into consideration prepayment speeds of investment securities and loans, nor does it consider decay rates for non-maturity deposits. When considering these prepayment speed and decay rate assumptions, along with our ability to control the repricing of a significant portion of the deposit portfolio, we are in a position to increase interest income in a rising interest rate environment.environment; however, the ability to control the repricing of the deposit portfolio can be significantly impacted by competitive pressures, liquidity needs and access to and availability of other funding sources. With the recent decreases in market rates,FOMC initiating a series of rate increases, which are expected to continue into 2023, we believe our current interest risk profile is increasing, but remains acceptable. Furthermore, we are implementing strategies to maintain the current profile, or moderate theany potential adverse impact to our current interest rate risk profile, forfrom what could be a sustained medium- to long-term lowenvironment of rising interest rate environment.rates.
33
| Interest Sensitivity Analysis |
| (In thousands of dollars) |
| 1 - 90 Days | 91-365 Days | 1 - 3 Years | 4-5 Years | 6-10 Years | Over 10 years | Total | ||||||||||||||||||||||
| Uses of funds: | ||||||||||||||||||||||||||||
| Loans | $ | 104,724 | $ | 92,065 | $ | 170,703 | $ | 135,643 | $ | 60,156 | $ | 21,322 | $ | 584,613 | ||||||||||||||
| Federal funds sold | 960 | — | — | — | — | — | 960 | |||||||||||||||||||||
| Deposits with banks | 46,497 | — | 250 | — | — | 46,747 | ||||||||||||||||||||||
| Investments | 3,614 | 7,636 | 23,440 | 18,406 | 28,082 | 32,546 | 113,724 | |||||||||||||||||||||
| Bank owned life insurance | 4,549 | — | — | — | — | — | 4,549 | |||||||||||||||||||||
| Total earning assets | $ | 160,344 | $ | 99,701 | $ | 194,393 | $ | 154,049 | $ | 88,238 | $ | 53,868 | $ | 750,593 | ||||||||||||||
| Sources of funds: | ||||||||||||||||||||||||||||
| Int Bearing DDA | 80,299 | — | — | — | — | — | 80,299 | |||||||||||||||||||||
| Savings & MMDA | 174,251 | — | — | — | — | — | 174,251 | |||||||||||||||||||||
| Time Deposits | 28,982 | 94,288 | 50,670 | 14,293 | — | — | 188,233 | |||||||||||||||||||||
| Trust Preferred Securities | 16,496 | — | — | — | — | — | 16,496 | |||||||||||||||||||||
| Federal funds purchased | — | — | ||||||||||||||||||||||||||
| Other Borrowings | — | — | — | — | — | — | — | |||||||||||||||||||||
| Total interest bearing liabilities | $ | 300,028 | $ | 94,288 | $ | 50,670 | $ | 14,293 | $ | — | $ | — | $ | 459,279 | ||||||||||||||
| Discrete Gap | $ | (139,684 | ) | $ | 5,413 | $ | 143,723 | $ | 139,756 | $ | 88,238 | $ | 53,868 | $ | 291,314 | |||||||||||||
| Cumulative Gap | $ | (139,684 | ) | $ | (134,271 | ) | $ | 9,452 | $ | 149,208 | $ | 237,446 | $ | 291,314 | ||||||||||||||
| Cumulative Gap as % of Total Earning Assets | -18.61 | % | -17.89 | % | 1.26 | % | 19.88 | % | 31.63 | % | 38.81 | % | ||||||||||||||||
| Interest Sensitivity Analysis | ||||||||||||||
| December 31, 2019 | ||||||||||||||
| (In thousands of dollars) | ||||||||||||||
1 - 90 Days | 91-365 Days | 1- 3 Years | 4-5 Years | 6-15 Years | Over 15 Years | Total | ||||||||
| Uses of funds: | ||||||||||||||
| Loans | $ | 70,245 | $ | 41,896 | $ | 107,015 | $ | 170,564 | $ | 116,193 | $ | 56,633 | $ | 562,546 |
| Federal funds sold | 252 | - | - | - | - | - | 252 | |||||||
| Deposits with banks | 35,760 | - | - | - | - | 35,760 | ||||||||
| Investments | 5,751 | 2,936 | 4,958 | 1,846 | 20,367 | 14,791 | 50,649 | |||||||
| Bank owned life insurance | 4,576 | - | - | - | - | - | 4,576 | |||||||
| Total earning assets | $ | 116,584 | $ | 44,832 | $ | 111,973 | $ | 172,410 | $ | 136,560 | $ | 71,424 | $ | 653,783 |
| Sources of funds: | ||||||||||||||
| Int Bearing DDA | 37,433 | - | - | - | - | - | 37,433 | |||||||
| Savings & MMDA | 155,879 | - | - | - | - | - | 155,879 | |||||||
| Time Deposits | 37,909 | 118,731 | 70,006 | 30,760 | - | - | 257,406 | |||||||
| Trust Preferred Securities | 16,496 | - | - | - | - | - | 16,496 | |||||||
| Federal funds purchased | - | - | ||||||||||||
| Other Borrowings | - | - | 5,000 | - | - | - | 5,000 | |||||||
| Total interest bearing liabilities | $ | 247,717 | $ | 118,731 | $ | 75,006 | $ | 30,760 | $ | - | $ | - | $ | 472,214 |
| Discrete Gap | $ | (131,133) | $ | (73,899) | $ | 36,967 | $ | 141,650 | $ | 136,560 | $ | 71,424 | $ | 181,569 |
| Cumulative Gap | $ | (131,133) | $ | (205,032) | $ | (168,065) | $ | (26,415) | $ | 110,145 | $ | 181,569 | ||
| Cumulative Gap as % of Total Earning Assets | (20.06)% | (31.36)% | (25.71)% | (4.04)% | 16.85% | 27.77% | ||||||||
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
| Quantitative and Qualitative Disclosures About Market Risk |
Not required.
34
| Item 8. | Financial Statements and Supplementary Data |
Item 8.Financial Statements and Supplementary Data
FINANCIAL STATEMENTS
CONTENTS
Page | |||
Report of | 38 | ||
Consolidated Balance Sheets December 31, | 39 | ||
Consolidated Statements of Income – Years EndedDecember 31, | 40 | ||
Consolidated Statements of Comprehensive Income – Years Ended December 31, | 41 | ||
Consolidated Statements of Stockholders’ Equity – Years Ended December 31, | 42 | ||
Consolidated Statements of Cash Flows – Years Ended December 31, | 43 | ||
| Notes to Consolidated Financial Statements | 44 | ||
35
Report of Independent Registered Public Accounting Firm
To the StockholdersShareholders and the Board of Directors of New Peoples Bankshares, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetssheet of New Peoples Bankshares, Inc. and its subsidiaries (the Company) as of December 31, 2019 and 2018,2022, the related consolidated statements of income, comprehensive (loss) income, stockholders'shareholders’ equity and cash flows, for the yearsyear then ended, and the related notes to the consolidated financial statements (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018,2022, and the results of its operations and its cash flows for the yearsyear then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits.audit. 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 auditsaudit 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 auditsaudit 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 auditsaudit 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 auditsaudit 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 audit provides 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 critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses – Loans Collectively Evaluated for Impairment - Qualitative Factors
Description of the Matter
As described in Note 2 (Summary of significant accounting policies) and Note 7 (Allowance for Loan Losses) to the consolidated financial statements, the Company maintains an allowance for loan losses that represents management’s estimate of the probable losses inherent in the Company’s loan portfolio. The Company’s allowance for loan losses has two basic components: the general allowance and the specific allowance. At December 31, 2022, the general allowance represented $6,641,000 of the total allowance for loan losses of $6,727,000. The general allowance is applied to non-impaired loans and uses historical loss experience along with qualitative factors, including changes in lending policies and procedures, the nature and volume of the portfolio, experience of lending management, levels and trends in delinquencies, nonaccrual loans, charge-offs and adversely rated loans, the loan review system, portfolio concentrations, economic conditions, collateral values, and the competitive and legal environment. The qualitative adjustments to the historical loss rates are established by applying an additional loss factor to the loan segments identified by management based on their assessment of shared risk characteristics within similar groups of non-impaired loans. Qualitative factors are determined based on management’s continuing evaluation of inputs and assumptions underlying the quality of the loan portfolio and contribute significantly to the allowance for loan losses.
36
Management exercised significant judgment when assessing the qualitative factors in estimating the allowance for loan losses. We identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.
How We Addressed the Matter in Our Audit
The primary audit procedures we performed to address this critical audit matter included:
| · Substantively testing management’s process, including evaluating their judgments and assumptions for developing the qualitative factors, which included: |
| o | Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors. |
| o | Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors. |
| o | Evaluating the qualitative factors for directional consistency and for reasonableness. |
| o | Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors. |
/s/ Yount, Hyde & Barbour, P.C.
We have served as the Company’s auditor since 2022.
Roanoke, Virginia
March 31, 2023
37
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of New Peoples Bankshares, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of New Peoples Bankshares, Inc. and Subsidiaries (the Company) as of December 31, 2021, the related consolidated statement of income, comprehensive income, stockholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. 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 audit 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 audit 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 audit 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 audit 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.
/s/ Elliott Davis, LLC
Firm ID 149
We have served as the Company's auditor since 2011.from 2011 to 2021.
Greenville, South Carolina
April 14, 2020March 31, 2022
elliottdavis.com
elliottdavis.com
38
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 20192022 AND 20182021
(in thousands except share data)
| ASSETS | 2019 | 2018 | 2022 | 2021 | ||||||||||||
| Cash and due from banks | $ | 13,998 | $ | 12,245 | $ | 13,979 | $ | 14,952 | ||||||||
| Interest-bearing deposits with banks | 35,897 | 15,664 | 46,747 | 45,766 | ||||||||||||
| Federal funds sold | 252 | 264 | 960 | 228 | ||||||||||||
| Total Cash and Cash Equivalents | 50,147 | 28,173 | ||||||||||||||
| Total cash and cash equivalents | 61,686 | 60,946 | ||||||||||||||
| Investment securities available-for-sale | 50,649 | 59,407 | 96,076 | 107,358 | ||||||||||||
| Loans held for sale | 2 | — | ||||||||||||||
| Loans receivable | 562,544 | 547,096 | 584,613 | 593,744 | ||||||||||||
| Allowance for loan losses | (5,368 | ) | (5,336 | ) | (6,727 | ) | (6,735 | ) | ||||||||
| Net Loans | 557,176 | 541,760 | ||||||||||||||
| Net loans | 577,886 | 587,009 | ||||||||||||||
| Bank premises and equipment, net | 22,242 | 24,195 | 19,290 | 20,735 | ||||||||||||
| Other real estate owned | 3,393 | 5,937 | 261 | 1,361 | ||||||||||||
| Accrued interest receivable | 2,115 | 1,934 | 2,555 | 2,112 | ||||||||||||
| Deferred taxes, net | 4,576 | 5,476 | 4,623 | 1,673 | ||||||||||||
| Bank owned life insurance | 4,549 | 4,685 | ||||||||||||||
| Right-of-use assets – operating leases | 5,835 | 4,942 | 3,725 | 4,062 | ||||||||||||
| Other assets | 10,238 | 10,318 | 4,707 | 4,706 | ||||||||||||
| Total Assets | $ | 706,373 | $ | 682,142 | ||||||||||||
| Total assets | $ | 775,358 | $ | 794,647 | ||||||||||||
| LIABILITIES | ||||||||||||||||
| Deposits | ||||||||||||||||
| Noninterest bearing | $ | 170,782 | $ | 164,298 | $ | 249,924 | $ | 251,257 | ||||||||
| Interest-bearing | 450,695 | 431,694 | 442,783 | 456,256 | ||||||||||||
| Total Deposits | 621,477 | 595,992 | ||||||||||||||
| Total deposits | 692,707 | 707,513 | ||||||||||||||
| Borrowed funds | 21,496 | 27,126 | 16,496 | 16,496 | ||||||||||||
| Lease liabilities – operating leases | 5,835 | 4,942 | 3,725 | 4,062 | ||||||||||||
| Accrued interest payable | 694 | 587 | 526 | 272 | ||||||||||||
| Accrued expenses and other liabilities | 2,269 | 2,245 | 4,685 | 2,673 | ||||||||||||
| Total Liabilities | 651,771 | 630,892 | ||||||||||||||
| Total liabilities | 718,139 | 731,016 | ||||||||||||||
| Commitments and Contingent Liabilities (Notes 19 and 20) | ||||||||||||||||
| STOCKHOLDERS’ EQUITY | ||||||||||||||||
| SHAREHOLDERS’ EQUITY | ||||||||||||||||
| Common stock - $2.00 par value; 50,000,000 shares authorized; | ||||||||||||||||
| 23,922,086 and 23,922,086 shares issued and outstanding at | ||||||||||||||||
| December 31, 2019 and 2018, respectively | 47,844 | 47,844 | ||||||||||||||
| Common stock - $ par value; shares authorized; | ||||||||||||||||
| and shares issued and outstanding at | ||||||||||||||||
| December 31, 2022 and 2021, respectively | 47,697 | 47,844 | ||||||||||||||
| Additional paid-in capital | 14,570 | 14,570 | 14,546 | 14,570 | ||||||||||||
| Retained deficit | (7,869 | ) | (9,928 | ) | ||||||||||||
| Accumulated other comprehensive income (loss) | 57 | (1,236 | ) | |||||||||||||
| Total Stockholders’ Equity | 54,602 | 51,250 | ||||||||||||||
| Total Liabilities and Stockholders’ Equity | $ | 706,373 | $ | 682,142 | ||||||||||||
| Retained earnings | 8,917 | 2,031 | ||||||||||||||
| Accumulated other comprehensive loss | (13,941 | ) | (814 | ) | ||||||||||||
| Total shareholders’ equity | 57,219 | 63,631 | ||||||||||||||
| Total liabilities and shareholders’ equity | $ | 775,358 | $ | 794,647 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
39
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 20192022 AND 20182021
(in thousands except share and per share data)
| INTEREST AND DIVIDEND INCOME | 2019 | 2018 | ||||||
| Loans including fees | $ | 28,601 | $ | 26,375 | ||||
| Federal funds sold | 5 | 4 | ||||||
| Interest-earning deposits with banks | 805 | 379 | ||||||
| Investments | 1,388 | 1,559 | ||||||
| Dividends on equity securities (restricted) | 156 | 155 | ||||||
| Total Interest and Dividend Income | 30,955 | 28,472 | ||||||
| INTEREST EXPENSE | ||||||||
| Deposits | 5,105 | 3,344 | ||||||
| Borrowed funds | 874 | 921 | ||||||
| Total Interest Expense | 5,979 | 4,265 | ||||||
| NET INTEREST INCOME | 24,976 | 24,207 | ||||||
| PROVISION FOR LOAN LOSSES | 2,050 | 252 | ||||||
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 22,926 | 23,955 | ||||||
| NONINTEREST INCOME | ||||||||
| Service charges and fees | 3,605 | 3,703 | ||||||
| Card Processing and interchange income | 3,014 | 2,809 | ||||||
| Insurance and investment fees | 663 | 603 | ||||||
| Gain on sale and leaseback transaction | 803 | — | ||||||
| Other noninterest income | 567 | 492 | ||||||
| Total Noninterest Income | 8,652 | 7,607 | ||||||
| NONINTEREST EXPENSES | ||||||||
| Salaries and employee benefits | 14,106 | 14,203 | ||||||
| Occupancy and equipment expenses | 4,514 | 5,156 | ||||||
| Data processing and telecommunications | 2,541 | 2,749 | ||||||
| Other operating expenses | 7,836 | 8,386 | ||||||
| Total Noninterest Expenses | 28,997 | 30,494 | ||||||
| INCOME BEFORE INCOME TAXES | 2,581 | 1,068 | ||||||
| INCOME TAX EXPENSE | 522 | 149 | ||||||
| NET INCOME | $ | 2,059 | $ | 919 | ||||
| Income Per Share | ||||||||
| Basic and Diluted | $ | 0.09 | $ | 0.04 | ||||
| Average Weighted Shares of Common Stock | ||||||||
| Basic and Diluted | 23,922,086 | 23,922,086 | ||||||
| INTEREST AND DIVIDEND INCOME | 2022 | 2021 | ||||||
| Loans including fees | $ | 27,739 | $ | 28,323 | ||||
| Federal funds sold | 8 | — | ||||||
| Interest-earning deposits with banks | 1,514 | 95 | ||||||
| Investments | 1,983 | 1,377 | ||||||
| Dividends on equity securities (restricted) | 146 | 117 | ||||||
| Total interest and dividend income | 31,390 | 29,912 | ||||||
| INTEREST EXPENSE | ||||||||
| Deposits | 1,875 | 2,248 | ||||||
| Borrowed funds | 1,230 | 453 | ||||||
| Total interest expense | 3,105 | 2,701 | ||||||
| NET INTEREST INCOME | 28,285 | 27,211 | ||||||
| PROVISION FOR LOAN LOSSES | 625 | 372 | ||||||
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 27,660 | 26,839 | ||||||
| NONINTEREST INCOME | ||||||||
| Service charges and fees | 3,969 | 3,724 | ||||||
| Card processing and interchange income | 3,769 | 3,871 | ||||||
| Insurance and investment fees | 954 | 1,029 | ||||||
| Net gain on sales of available-for-sale securities | — | 322 | ||||||
| Other noninterest income | 548 | 1,034 | ||||||
| Total noninterest income | 9,240 | 9,980 | ||||||
| NONINTEREST EXPENSES | ||||||||
| Salaries and employee benefits | 13,365 | 12,662 | ||||||
| Occupancy and equipment expenses | 4,135 | 5,785 | ||||||
| Data processing and telecommunications | 2,369 | 2,444 | ||||||
| Other operating expenses | 6,650 | 6,976 | ||||||
| Total noninterest expenses | 26,519 | 27,867 | ||||||
| INCOME BEFORE INCOME TAXES | 10,381 | 8,952 | ||||||
| INCOME TAX EXPENSE | 2,299 | 1,942 | ||||||
| NET INCOME | $ | 8,082 | $ | 7,010 | ||||
| Income Per Share | ||||||||
| Basic and Diluted | $ | 0.34 | $ | 0.29 | ||||
| Average Weighted Shares of Common Stock | ||||||||
| Basic and Diluted | 23,898,185 | 23,922,086 | ||||||
The accompanying notes are an integral part of these financial statements.
40
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 20192022 AND 20182021
(Dollars in thousands)
| 2019 | 2018 | |||||||
| NET INCOME | $ | 2,059 | $ | 919 | ||||
| Other comprehensive income (loss): | ||||||||
| Investment securities activity: | ||||||||
| Unrealized gains (losses) arising during the year | 1,636 | (813 | ) | |||||
| Tax related to unrealized (gains) losses | (343 | ) | 171 | |||||
| TOTAL OTHER COMPREHENSIVE INCOME (LOSS) | 1,293 | (642 | ) | |||||
| TOTAL COMPREHENSIVE INCOME | $ | 3,352 | $ | 277 | ||||
| 2022 | 2021 | |||||||
| NET INCOME | $ | 8,082 | $ | 7,010 | ||||
| Other comprehensive loss: | ||||||||
| Investment securities activity: | ||||||||
| Unrealized losses arising during the year | (16,617 | ) | (1,647 | ) | ||||
| Reclassification adjustment for net gains included in net income | — | (322 | ) | |||||
| Other comprehensive losses on investment securities | (16,617 | ) | (1,969 | ) | ||||
| Related tax benefit | 3,490 | 413 | ||||||
| TOTAL OTHER COMPREHENSIVE LOSS | (13,127 | ) | (1,556 | ) | ||||
| TOTAL COMPREHENSIVE (LOSS) INCOME | $ | (5,045 | ) | $ | 5,454 | |||
The accompanying notes are an integral part of these financial statements.
41
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 20192022 AND 20182021
(in thousands including share data)
| Shares of Common Stock | Common Stock | Additional Paid-in Capital | Retained Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||
| Balance, December 31, 2017 | 23,922 | $ | 47,844 | $ | 14,570 | $ | (10,847 | ) | $ | (594 | ) | $ | 50,973 | |||||||||||
| Net income | — | — | — | 919 | — | 919 | ||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (642 | ) | (642 | ) | ||||||||||||||||
| Balance, December 31, 2018 | 23,922 | $ | 47,844 | $ | 14,570 | $ | (9,928 | ) | $ | (1,236 | ) | $ | 51,250 | |||||||||||
| Net income | — | — | — | 2,059 | — | 2,059 | ||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 1,293 | 1,293 | ||||||||||||||||||
| Balance, December 31, 2019 | 23,922 | $ | 47,844 | $ | 14,570 | $ | (7,869 | ) | $ | 57 | $ | 54,602 | ||||||||||||
| Shares of Common Stock | Common Stock | Additional Paid-in- Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||
| Balance, December 31, 2020 | 23,922 | $ | 47,844 | $ | 14,570 | $ | (4,979 | ) | $ | 742 | $ | 58,177 | ||||||||||||
| Net income | — | — | — | 7,010 | — | 7,010 | ||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (1,556 | ) | (1,556 | ) | ||||||||||||||||
| Balance, December 31, 2021 | 23,922 | $ | 47,844 | $ | 14,570 | $ | 2,031 | $ | (814 | ) | $ | 63,631 | ||||||||||||
| Net income | — | $ | — | $ | — | $ | 8,082 | $ | — | $ | 8,082 | |||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (13,127 | ) | (13,127 | ) | ||||||||||||||||
| Cash dividend declared ($0.05 per share) | — | — | — | (1,196 | ) | — | (1,196 | ) | ||||||||||||||||
| Repurchase of common stock | (74 | ) | (147 | ) | (24 | ) | — | — | (171 | ) | ||||||||||||||
| Balance, December 31, 2022 | 23,848 | $ | 47,697 | $ | 14,546 | $ | 8,917 | $ | (13,941 | ) | $ | 57,219 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
42
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 20192022 AND 20182021
(Dollars are in thousands)
| 2019 | 2018 | 2022 | 2021 | |||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||
| Net income | $ | 2,059 | $ | 919 | $ | 8,082 | $ | 7,010 | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
| Depreciation | 2,311 | 2,626 | 1,741 | 2,097 | ||||||||||||
| Provision for loan losses | 2,050 | 252 | 625 | 372 | ||||||||||||
| Income on bank owned life insurance | (63 | ) | (57 | ) | ||||||||||||
| Loss (income) on bank owned life insurance | 136 | (32 | ) | |||||||||||||
| Gain on sale of securities available-for-sale | — | (322 | ) | |||||||||||||
| Gain on sale of mortgage loans | (138 | ) | — | (29 | ) | (104 | ) | |||||||||
| Gain on sale and leaseback transactions | (803 | ) | — | |||||||||||||
| Loss on sale of premises and equipment | 1 | 46 | ||||||||||||||
| Loss on sale of foreclosed real estate | 123 | 135 | ||||||||||||||
| Loss on sale or disposal of premises and equipment | 201 | 1,098 | ||||||||||||||
| Gain on sale of foreclosed real estate and repossessed assets | (70 | ) | (126 | ) | ||||||||||||
| Loans originated for sale | (7,937 | ) | — | (1,577 | ) | (5,814 | ) | |||||||||
| Proceeds from sales of loans originated for sale | 12,432 | — | 1,606 | 6,307 | ||||||||||||
| Adjustment of carrying value of foreclosed real estate | 214 | 542 | ||||||||||||||
| Amortization/accretion of bond premiums/discounts | 528 | 644 | ||||||||||||||
| Deferred tax expense (benefit) | 556 | 195 | ||||||||||||||
| Adjustment of carrying value of foreclosed real estate and repossessed assets | 197 | 466 | ||||||||||||||
| Net amortization/accretion of bond premiums/discounts | 474 | 482 | ||||||||||||||
| Deferred tax expense | 540 | 1,866 | ||||||||||||||
| Net change in: | ||||||||||||||||
| Interest receivable | (181 | ) | 102 | (443 | ) | 280 | ||||||||||
| Other assets | 265 | 51 | 26 | 403 | ||||||||||||
| Accrued interest payable | 107 | 161 | 254 | (164 | ) | |||||||||||
| Accrued expenses and other liabilities | 24 | (1,215 | ) | 2,068 | (19 | ) | ||||||||||
| Net Cash Provided by Operating Activities | 11,548 | 4,401 | 13,831 | 13,800 | ||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||
| Net increase in loans | (19,632 | ) | (37,893 | ) | ||||||||||||
| Proceeds from the sale of loans | — | 1,543 | ||||||||||||||
| Net decrease (increase) in loans | 9,209 | (18,987 | ) | |||||||||||||
| Purchase of securities available-for-sale | (790 | ) | (967 | ) | (19,790 | ) | (85,082 | ) | ||||||||
| Proceeds from sale of investment securities available-for-sale | — | 7,686 | ||||||||||||||
| Proceeds from repayments and maturities of securities available-for-sale | 10,657 | 11,190 | 13,980 | 16,315 | ||||||||||||
| Net (purchase) sale of equity securities (restricted) | (14 | ) | 21 | (27 | ) | 555 | ||||||||||
| Payments for the purchase of premises and equipment | (1,550 | ) | (1,647 | ) | (548 | ) | (4,094 | ) | ||||||||
| Proceeds from sale and leaseback transactions | 550 | — | ||||||||||||||
| Proceeds from sale of premises and equipment | 9 | 895 | — | 1,203 | ||||||||||||
| Proceeds from insurance claims on other real estate owned | 19 | — | ||||||||||||||
| Proceeds from insurance claims on other real estate owned or premises | 51 | 54 | ||||||||||||||
| Proceeds from sales of other real estate owned | 1,322 | 1,405 | 207 | 2,645 | ||||||||||||
| Net Cash Used in Investing Activities | (9,429 | ) | (25,453 | ) | ||||||||||||
| Net Cash Provided by (Used in) Investing Activities | 3,082 | (79,705 | ) | |||||||||||||
| CASH FLOWS FROM FINANCING ACTIVIES | ||||||||||||||||
| Net change in short term borrowings | (5,630 | ) | 3,072 | — | (5,000 | ) | ||||||||||
| Net change in non-interest bearing deposits | 6,484 | 9,667 | ||||||||||||||
| Net change in noninterest bearing deposits | (1,333 | ) | 27,532 | |||||||||||||
| Net change in interest bearing deposits | 19,001 | 3,781 | (13,473 | ) | 11,969 | |||||||||||
| Net Cash Provided by Financing Activities | 19,855 | 16,520 | ||||||||||||||
| Dividends paid | (1,196 | ) | — | |||||||||||||
| Repurchase of common stock | (171 | ) | — | |||||||||||||
| Net Cash (Used in) Provided by Financing Activities | (16,173 | ) | 34,501 | |||||||||||||
| Net increase (decrease) in cash and cash equivalents | 21,974 | (4,532 | ) | 740 | (31,404 | ) | ||||||||||
| Cash and Cash Equivalents, Beginning of the Year | 28,173 | 32,705 | 60,946 | 92,350 | ||||||||||||
| Cash and Cash Equivalents, End of the Year | $ | 50,147 | $ | 28,173 | $ | 61,686 | $ | 60,946 | ||||||||
| Supplemental Disclosure of Cash Paid During the Year for: | ||||||||||||||||
| Interest | $ | 5,872 | $ | 4,104 | $ | 2,851 | $ | 2,865 | ||||||||
| Taxes | $ | (34 | ) | $ | 320 | 650 | — | |||||||||
| Supplemental Disclosure of Non Cash Transactions: | ||||||||||||||||
| Supplemental Disclosure of Non-Cash Transactions: | ||||||||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 1,232 | $ | — | — | 86 | ||||||||||
| Transfer of loans to loans held for sale | $ | 4,359 | $ | — | ||||||||||||
| Loan made to finance sale of premises and equipment | $ | 752 | $ | — | — | 185 | ||||||||||
| Other real estate acquired in settlement of foreclosed loans | $ | 811 | $ | 1,719 | — | 566 | ||||||||||
| Loans made to finance sale of foreclosed real estate | $ | 2,360 | $ | 569 | 711 | 400 | ||||||||||
| Transfer of premises and equipment to other real estate | $ | 683 | $ | — | — | 950 | ||||||||||
| Change in unrealized gains (losses) on securities available for sale | $ | 1,637 | $ | (813 | ) | |||||||||||
| Change in unrealized losses on securities available for sale | (16,617 | ) | (1,969 | ) | ||||||||||||
The accompanying notes are an integral part of these financial statements.
43
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 NATURE OF OPERATIONS
Nature of Operations –New Peoples Bankshares, Inc. (New Peoples) is a financial holding company whose principal activity is the ownership and management of a community bank, New Peoples Bank, Inc. (the Bank). TheNew Peoples and the Bank isare each organized and incorporated under the laws of the Commonwealth of Virginia. As a state charteredstate-chartered member bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System. The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwest Virginia, southern West Virginia, northeastern Tennessee and northeastern Tennessee.western North Carolina. These services include commercial and consumer loans along with traditional deposit products such as checking and savings accounts.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation- The consolidated financial statements include the New Peoples, the Bank, NPB Insurance Services, Inc., and NPB Web Services, Inc. (Hereinafter, collectively referred to as the Company, we, us, or our). All significant intercompany balances and transactions have been eliminated. In accordance with Accounting Standards Codification (ASC) 942, Financial Services – Depository and Lending, NPB Capital Trust I and 2 are not included in the consolidated financial statements.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles of the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy of the allowance for loan losses and the determination of the deferred tax asset and related valuation allowance are based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.
Cash and Cash Equivalents– Cash and cash equivalents as used in the cash flow statements include cash and due from banks, interest-bearing deposits with banks, and federal funds sold.sold and investment securities maturing within three months.
Investment Securities – Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity and carried at amortized historical cost. Securities not intended to be held to maturity are classified as available-for-sale and carried at fair value. Securities available-for-sale are intended to be used as part of the Company’s asset and liability management strategy and may be sold in response to changes in interest rates, prepayment risk or other similar factors.
The amortization of premiums and accretion of discounts are recognized in interest income using the effective interest method over the period to maturity for discounts and the earlier of call date or maturity for premiums. Realized gains and losses on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method. Realized gains (losses) on securities available-for-sale are included in noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income.loss. Unrealized gains and losses on investment securities available for sale are based on the difference between book value and fair value of each security. These gains and losses are credited or charged to other comprehensive income,loss, net of tax, whereas realized gains and losses flow through the statements of income.
Loans held for sale–Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance through earnings. Mortgage loans held for sale are generally sold with servicing released. Gains and losses on sales of mortgages are based on the difference between the selling price and the carrying value of the related loan sold.
Loans – Loans are carried on the balance sheet at unpaid principal balance, net of any unearned interest and the allowance for loan losses. Interest income on loans is computed using the effective interest method, except where serious doubt exists as to the collectability of the loan, in which case accrual of the income is discontinued.
44
It is the Company’s policy to stop accruing interest on a loan, and classify that loan as non-accrual under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when our best judgment indicates that payment in full of principal and interest can no longer be expected, or (c) when any such loan or obligation becomes delinquent for 90 days unless it is both well secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income, except in the case of a nonaccrual loan that is well secured and in theprocess of collection, in which case, the interest accrued but not collected is not reversed. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual.accrual status. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, six consecutive timely payments are made, and prospects for future contractual payments are reasonably assured.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Significant Group Concentrations of Credit Risk –The Company identifies a concentration as any obligation, direct or indirect, of the same or affiliated interests which represent 25% or more of the Company’s capital structure, or $13.6$14.3 million as of December 31, 2019.2022. Most of the Company’s activities are with customers located within the southwest Virginia, southern West Virginia, and northeastern Tennessee region.region and western North Carolina. Certain concentrations may pose credit risk. The Company does not have any significant concentrations to any one industry or customer.
Allowance for Loan Losses –The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The loan portfolio is analyzed periodically and loans are assigned a risk rating. Allowances for impaired loans are generally determined based on collateral values or the present value of expected cash flows. A general allowance is made for all other loans not considered impaired as deemed appropriate by management. In determining the adequacy of the allowance, management considers the following factors: the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, the estimated value of any underlying collateral, prevailing environmental factors and economic conditions, and other inherent risks. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in collateral values and changes in estimates of cash flows on impaired loans. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Loans are charged against the allowance for loan losses when management believes that collectability of all or part of the principal is unlikely. Past due status is determined based on contractual terms.
In regard to our consumer and consumer real estate loan portfolio, the Company uses the guidance found in the Uniform Retail Credit Classification and Account Management Policy which affects our estimate of the allowance for loan losses. Under this approach, a consumer or consumer real estate loan must initially have a credit risk grade of Pass or better. Subsequently, if the loan becomes contractually 90 days past due or the borrower files for bankruptcy protection, the loan is downgraded to Substandard and placed in nonaccrual status. If the loan is unsecured, upon being deemed Substandard, the entire loan amount is charged off. For non 1-4non-1-4 family residential loans that are 90 days past due or greater, or in bankruptcy, the collateral value less estimated liquidation costs is compared to the loan balance to calculate any potential deficiency. If the collateral is sufficient then no charge-off is necessary. If a deficiency exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged-off against the allowance for loan loss. In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, a current value is obtained and after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate any deficiency. Subsequently, any noted deficiency is then charged-off against the allowance for loan loss when the loan becomes contractually 180 days past due. If the customer has filed bankruptcy, then within 60 days of the bankruptcy notice, any calculated deficiency is charged-off against the allowance for loan loss. Collection efforts continue by means of repossessions or foreclosures, and upon bank ownership, liquidation ensues.
45
Bank Premises and Equipment– Land, buildings and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the following estimated useful lives:
| Schedule of estimated useful lives | ||
| Type | Estimated useful life | |
| Buildings | 39 years | |
| Paving and landscaping | 15 years | |
| Computer equipment and software | 3 to 5 years | |
| Vehicles | 5 years | |
| Furniture and other equipment | 5 to 10 years |
Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Repairs and maintenance costs are recorded as a component of noninterest expense as incurred.
Other Real Estate Owned– Other real estate owned represents properties acquired through foreclosure or deeddeeds taken in lieu of foreclosure.foreclosure and former branch sites that have been closed and for which there are no intentions to re-open or otherwise use the location. At the time of acquisition, these properties are recorded at fair value less estimated costs to sell. Expenses incurred in connection with operating these properties and subsequent write-downs, if any, are charged to operations. Subsequent to foreclosure, management periodically considers the adequacy of the reserve for losses on the property. Gains and losses on the sales of these properties are credited or charged to income in the year of the sale.
Bank PremisesOwned Life Insurance (BOLI) – The Bank purchased life insurance policies on certain, now-former, key officers and Equipment– Land, buildings and equipmentemployees. Changes in the cash surrender value are recorded in noninterest income.
Leases– A right-of-use asset and related lease liability is recognized for operating leases the Bank has entered into for certain office facilities. Most leases include one or more options to renew. The exercise of lease renewal options is typically at cost less accumulated depreciation. Depreciationthe sole discretion of management. If it is computed usingdetermined that it is reasonably certain that the straight-line method overBank will exercise renewal options, the following estimated useful lives:
Leasehold improvements are amortized overadditional term is included in the termscalculation of the respectivelease liability. As most of our leases ordo not provide an implicit rate, we use the estimated useful livesfully collateralized Federal Home Loan Bank borrowing rate, commensurate with the lease terms at the lease commencement date, in determining the present value of the improvements, whichever is shorter. Repairs and maintenance costs are recorded as a component of noninterest expense as incurred.lease payments.
Income Taxes – Deferred tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. The Company has provides a valuation allowance on its net deferred tax assets where it is more likely than not such assets will not be realized. AtAs of December 31, 20192022 and 2018,2021, the Company had no valuation allowance on its net deferred tax assets.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. See Note 10, Income Taxes, for additional information. The Company records any penalties and interest attributed to uncertain tax positions as a component of income tax expenses.
Financial Instruments – Off-balance-sheet instruments - In the ordinary course of business, the Company has entered into commitments to extend credit. Such financial instruments are recorded in the financial statements when they are funded.
Financial Instruments – Fair Value - In January 2016, the Financial Accounting Standards Board (the FASB) amended the Financial Instruments topic of the ASC, to address certain aspects of recognition, measurement, presentation, and disclosure– Fair values of financial instruments. The amendments became effective on January 1, 2018instruments are estimated using relevant market information and did not have a material effect on the financial statements. Asother assumptions, as more fully discussed in Note 22,22. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risks, prepayments and other factors, especially in the Company measures the fair valueabsence of its loan portfolio using an exit price notion.broad markets for particular items. Changes in assumptions or market conditions could significantly affect these estimates.
46
Comprehensive (Loss) Income (Loss)– GAAP require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive (loss) income. The change in unrealized gains and losses on available-for-sale securities is ourthe Company’s only component of other comprehensive income.loss.
Revenue from Contracts with Customers - “Revenue from Contracts with Customers”. Accounting Standards Update (ASU) 2014-9 provides guidance that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance does not apply to revenue associated with financial instruments, including loans and securities. The Company generally fully satisfies its performance obligations fully on its contracts with customers as services are renderedrendered; and the transaction prices are typically fixed;fixed, charged either on a periodic basis or based on activity. The Company has evaluated revenue streams within noninterest income to assess the applicability of this guidance and determined that service charges on deposits, card processing and interchange income and financial service fees are within the scope of this ASU. Because performance obligations are satisfied as services are rendered and the fees are fixed, there is little judgment involved in applying the guidance that significantly affects the determination of the amount and timing of revenue from contracts with customers. Adoption of this standard did not change the timing or pattern of the recognition of revenue for the services covered by this ASU.
Advertising Cost– Advertising costs are expensed in the period incurred. For 2019Those costs, which are included in Advertising, sponsorships and 2018, those costsdonations in Note 24 totaled $208 thousand$162,000 and $286 thousand,$252,000, for the years ended December 31, 2022 and 2021, respectively.
Reclassification– Certain reclassifications have been made to the prior years’ financial statements to place them on a comparable basis with the current year. Net income and stockholders’shareholders’ equity previously reported were not affected by these reclassifications.
Subsequent Events – The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued. See Note 25 Subsequent Events for additional information.
NOTE 3 INCOME PER SHARE
Basic income per share computations are based on the weighted average number of shares outstanding during each year. Dilutive earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate to outstanding common stock warrants and are determined by the Treasury Method. For the years ended December 31, 20192022 and 2018,2021, there were no dilutive potential common shares. Basic and diluted net income per common share calculations follows:
| Schedule of basic and diluted net loss per common share calculations | ||||||||||||||||
| (Amounts in thousands, except | For the years ended | For the year ended | ||||||||||||||
| share and per share data) | December 31, | December 31, | ||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||
| Net income | $ | 2,059 | $ | 919 | $ | 8,082 | $ | 7,010 | ||||||||
| Weighted average shares outstanding | 23,922,086 | 23,922,086 | 23,898,185 | 23,922,086 | ||||||||||||
| Weighted average dilutive shares outstanding | 23,992,086 | 23,992,086 | 23,898,185 | 23,992,086 | ||||||||||||
| Basic and diluted income per share | $ | 0.09 | $ | 0.04 | $ | 0.34 | $ | 0.29 | ||||||||
NOTE 4 DEPOSITS IN AND FEDERAL FUNDS SOLD TO BANKS
The Bank had federal funds sold and interest-bearing cash on deposit with the Federal Reserve Bank of Richmond (the Federal Reserve Bank) and other commercial banks amounting to $36.1$47.7 million and $15.9$46.0 million atas of December 31, 20192022 and 2018,2021, respectively. Deposit amounts at other commercial banks may, at times, exceed federally insured limits.
TheEffective March 26, 2020, the Board of Governors of the Federal Reserve System set reserve requirements to zero. Therefore, the Bank is no longer required to maintain averageminimum reserve balances computed by applying prescribed percentages to its various types of deposits, either at the Bank or on deposit with the Federal Reserve Bank of Richmond (the Federal Reserve Bank). At December 31, 2019 and 2018, all required reserves were met by the Bank’s vault cash.Bank.
The Bank has a total of $20.0$30.0 million in unsecured fed funds lines of credit facilities from three correspondent banks that were available at both December 31, 20192022 and 2018.2021, respectively. Of these total commitments, all were available at December 31, 20192022 and $16.37 million was available at December 31, 2018. A2021. As a condition for $5.0 million of one of the unsecured fed funds line of credit, is that the Bank agreed to maintainmaintains a minimum deposit balance of $250,000 with this correspondent bank of $200 thousand.bank. As of December 31, 20192022 and 2018,2021, the Bank was in compliance with this requirement.
47
NOTE 5 INVESTMENT SECURITIES
The amortized cost and estimated fair value of securities (all available-for-sale) as of December 31, 20192022 and December 31, 20182021 are as follows:
| Schedule of securities amortized cost and estimated fair value | ||||||||||||||||
| Gross | Gross | Approximate | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| (Dollars are in thousands) | Cost | Gains | Losses | Value | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| U.S. Treasuries | $ | 12,642 | $ | — | $ | 957 | $ | 11,685 | ||||||||
| U.S. Government Agencies | 10,129 | 4 | 734 | 9,399 | ||||||||||||
| Taxable municipals | 23,022 | — | 6,207 | 16,815 | ||||||||||||
| Corporate bonds | 3,512 | — | 376 | 3,136 | ||||||||||||
| Mortgage backed securities | 64,419 | — | 9,378 | 55,041 | ||||||||||||
| Total Securities available for sale | $ | 113,724 | $ | 4 | $ | 17,652 | $ | 96,076 | ||||||||
| December 31, 2021 | ||||||||||||||||
| U.S. Treasuries | $ | 7,791 | $ | 2 | $ | 122 | $ | 7,671 | ||||||||
| U.S. Government Agencies | 9,098 | 77 | 86 | 9,089 | ||||||||||||
| Taxable municipals | 23,075 | 159 | 254 | 22,980 | ||||||||||||
| Corporate bonds | 2,014 | 23 | 18 | 2,019 | ||||||||||||
| Mortgage backed securities | 66,410 | 143 | 954 | 65,599 | ||||||||||||
| Total Securities available for sale | $ | 108,388 | $ | 404 | $ | 1,434 | $ | 107,358 | ||||||||
| Gross | Gross | Approximate | |||||||||
| Amortized | Unrealized | Unrealized | Fair | ||||||||
| (Dollars are in thousands) | Cost | Gains | Losses | Value | |||||||
| December 31, 2019 | |||||||||||
| U.S. Government Agencies | $ | 15,703 | $ | 57 | $ | 127 | $ | 15,633 | |||
| Taxable municipals | 4,389 | 54 | 1 | 4,442 | |||||||
| Corporate bonds | 5,408 | 115 | - | 5,523 | |||||||
| Mortgage backed securities | 25,077 | 111 | 137 | 25,051 | |||||||
| Total Securities available for sale | $ | 50,577 | $ | 337 | $ | 265 | $ | 50,649 | |||
| |||||||||||
| December 31, 2018 | |||||||||||
| U.S. Government Agencies | $ | 19,755 | $ | 26 | $ | 392 | $ | 19,389 | |||
| Taxable municipals | 4,428 | - | 115 | 4,313 | |||||||
| Corporate bonds | 5,422 | 47 | 149 | 5,320 | |||||||
| Mortgage backed securities | 31,366 | 11 | 992 | 30,385 | |||||||
| Total Securities available for sale | $ | 60,971 | $ | 84 | $ | 1,648 | $ | 59,407 | |||
The following table details unrealized losses and related fair values in the available-for-sale portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 20192022 and December 31, 2018.2021.
| Schedule of fair value and gross unrealized losses on investment securities | ||||||||||||||||||||||||||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars are in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasuries | $ | 4,761 | $ | 145 | $ | 6,922 | $ | 812 | $ | 11,683 | $ | 957 | ||||||||||||||||||||||||||||||||||||
| U.S. Government Agencies | $ | 6,788 | $ | 46 | $ | 4,516 | $ | 81 | $ | 11,304 | $ | 127 | 5,925 | 348 | 3,295 | 386 | 9,220 | 734 | ||||||||||||||||||||||||||||||
| Taxable municipals | 1,049 | 1 | - | - | 1,049 | 1 | 3,689 | 1,113 | 13,127 | 5,094 | 16,816 | 6,207 | ||||||||||||||||||||||||||||||||||||
| Corporate bonds | - | - | - | - | - | - | 2,375 | 136 | 761 | 240 | 3,136 | 376 | ||||||||||||||||||||||||||||||||||||
| Mtg. backed securities | 1,586 | 4 | 12,002 | 133 | 13,588 | 137 | ||||||||||||||||||||||||||||||||||||||||||
| Total Securities AFS | $ | 9,423 | $ | 51 | $ | 16,518 | $ | 214 | $ | 25,941 | $ | 265 | ||||||||||||||||||||||||||||||||||||
| Mortgage backed securities | 11,338 | 861 | 43,612 | 8,517 | 54,950 | 9,378 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 28,088 | $ | 2,603 | $ | 67,717 | $ | 15,049 | $ | 95,805 | $ | 17,652 | ||||||||||||||||||||||||||||||||||||
| December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasuries | $ | 6,200 | $ | 122 | $ | — | $ | — | $ | 6,200 | $ | 122 | ||||||||||||||||||||||||||||||||||||
| U.S. Government Agencies | $ | 5,013 | $ | 68 | $ | 11,585 | $ | 324 | $ | 16,598 | $ | 392 | 977 | 10 | 3,434 | 76 | 4,411 | 86 | ||||||||||||||||||||||||||||||
| Taxable municipals | - | - | 4,049 | 115 | 4,049 | 115 | 13,040 | 237 | 387 | 17 | 13,427 | 254 | ||||||||||||||||||||||||||||||||||||
| Corporate bonds | 1,713 | 43 | 1,423 | 106 | 3,136 | 149 | 1,482 | 18 | — | — | 1,482 | 18 | ||||||||||||||||||||||||||||||||||||
| Mtg. backed securities | 165 | 2 | 29,245 | 990 | 29,410 | 992 | ||||||||||||||||||||||||||||||||||||||||||
| Total Securities AFS | $ | 6,891 | $ | 113 | $ | 46,302 | $ | 1,535 | $ | 53,193 | $ | 1,648 | ||||||||||||||||||||||||||||||||||||
| Mortgage backed securities | 52,180 | 758 | 6,282 | 196 | 58,462 | 954 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 73,879 | $ | 1,145 | $ | 10,103 | $ | 289 | $ | 83,982 | $ | 1,434 | ||||||||||||||||||||||||||||||||||||
At
As of December 31, 2019,2022, the available-for-sale portfolio included 100221 investments for which the fair market value was less than amortized cost. AtAs of December 31, 2018,2021, the available-for-sale portfolio included 137113 investments for which the fair market value was less than amortized cost. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial conditions and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based on the Company’s analysis, the Company concluded that no securities had an other-than-temporary impairment at December 31, 20192022 or December 31, 2018.2021.
Investment securities with a carrying value of $6.9$27.3 million and $8.0$12.1 million atas of December 31, 20192022 and 2018,2021, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
No investmentThere were no securities sold during the year ended December 31, 2022. During the year ended December 31, 2021, $7.7 million of securities were sold, during 2019 or 2018. realizing $322,000 in gains.
48
The amortized cost and fair value of investment securities atas of December 31, 2019,2022, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Also, actual maturities may differ from scheduled maturities on amortizing securities, such as mortgage-backmortgage-backed securities and collateralized mortgage obligations, because the underlying collateral on these types of securities may be repaid prior to the scheduled maturity date.
| Schedule of amortized cost and fair value of investment securities contractual maturity | ||||||||||||
| Weighted | Weighted | |||||||||||
| (Dollars are in thousands) | (Dollars are in thousands) | Amortized | Fair | Average | (Dollars are in thousands) | Amortized | Fair | Average | ||||
| Securities Available for Sale | Securities Available for Sale | Cost | Value | Yield | Securities Available for Sale | Cost | Value | Yield | ||||
| Due in one year or less | $ | - | $ | - | -% | $ | 1,482 | $ | 1,475 | 4.51% | ||
| Due after one year through five years | 4,710 | 4,752 | 2.53% | 16,696 | 15,674 | 2.12% | ||||||
| Due after five years through ten years | 13,211 | 13,295 | 3.39% | 15,315 | 13,409 | 2.11% | ||||||
| Due after ten years | 32,656 | 32,602 | 2.42% | 80,231 | 65,518 | 1.86% | ||||||
| Total | $ | 50,577 | $ | 50,649 | 2.68% | $ | 113,724 | $ | 96,076 | 1.97% | ||
The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank of Atlanta (FHLB), is required to hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities, which are included in other assets on the consolidated balance sheet, are restricted from trading and are recorded at a cost of $2.6$2.1 million and $2.5$2.0 million as of December 31, 20192022 and 2018,2021, respectively. The stock has no quoted market value and no ready market exists.
NOTE 6 LOANS
Loans receivable outstanding atas of December 31, 2022 and 2021, are summarized as follows:
| (Dollars are in thousands) | 2019 | 2018 | ||||||
| Real estate secured: | ||||||||
| Commercial | $ | 170,436 | $ | 140,862 | ||||
| Construction and land development | 31,130 | 35,119 | ||||||
| Residential 1-4 family | 242,922 | 249,946 | ||||||
| Multifamily | 13,638 | 13,496 | ||||||
| Farmland | 20,790 | 22,114 | ||||||
| Total real estate loans | 478,916 | 461,537 | ||||||
| Commercial | 53,994 | 55,157 | ||||||
| Agriculture | 4,797 | 5,266 | ||||||
| Consumer installment loans | 23,127 | 24,538 | ||||||
| All other loans | 1,710 | 598 | ||||||
| Total loans | $ | 562,544 | $ | 547,096 | ||||
| Summary of loans receivable outstanding | ||||||||
| December 31, | ||||||||
| (Dollars are in thousands) | 2022 | 2021 | ||||||
| Real estate secured: | ||||||||
| Commercial | $ | 197,069 | $ | 206,162 | ||||
| Construction and land development | 42,470 | 32,325 | ||||||
| Residential 1-4 family | 227,232 | 224,530 | ||||||
| Multifamily | 29,710 | 33,048 | ||||||
| Farmland | 17,744 | 18,735 | ||||||
| Total real estate loans | 514,225 | 514,800 | ||||||
| Commercial | 46,697 | 54,325 | ||||||
| Agriculture | 3,756 | 4,021 | ||||||
| Consumer installment loans | 19,309 | 18,756 | ||||||
| All other loans | 626 | 1,842 | ||||||
| Total loans | $ | 584,613 | $ | 593,744 | ||||
Included in commercial loans as of December 31, 2022 and 2021, were approximately $273,000 and $6.4 million of PPP loans that are guaranteed by the SBA.
Also included in total loans above are deferred loan fees of $1.6 million and $1.8 million, as of December 31, 2022 and 2021, respectively, which include net deferred PPP loan fees. Total deferred loan costs were $1.9 million and $2.0 million, as of December 31, 2022 and 2021, respectively. Income or expense from net deferred fees and costs is recognized as income or expense over the lives of the respective loans as a yield adjustment. If loans repay prior to scheduled maturities any unamortized fee or cost is recognized at that time.
As a result of PPP originations, net deferred fees totaling $3.2 million were received. The Company recognized approximately $211,000 and $2.0 million, respectively, during the years ended December 31, 2022 and 2021.
49
Loans receivable on nonaccrual status atas of December 31, 2022 and 2021 are summarized as follows:
| Summary of loans receivable on nonaccrual status | ||||||||||||||||
| (Dollars are in thousands) | 2019 | 2018 | 2022 | 2021 | ||||||||||||
| Real estate secured: | ||||||||||||||||
| Commercial | $ | 1,601 | $ | 784 | $ | — | $ | 415 | ||||||||
| Construction and land development | 45 | 157 | 471 | 37 | ||||||||||||
| Residential 1-4 family | 2,544 | 3,626 | 2,597 | 2,314 | ||||||||||||
| Multifamily | - | 76 | ||||||||||||||
| Multi-family | 268 | 111 | ||||||||||||||
| Farmland | 531 | 1,657 | 41 | 48 | ||||||||||||
| Total real estate loans | 4,721 | 6,300 | 3,377 | 2,925 | ||||||||||||
| Commercial | 390 | 61 | — | 9 | ||||||||||||
| Consumer installment and other loans | 45 | 8 | 36 | 7 | ||||||||||||
| Total loans receivable on nonaccrual status | $ | 5,156 | $ | 6,369 | $ | 3,413 | $ | 2,941 | ||||||||
Total interest income not recognized on nonaccrual loans for 20192022 and 20182021 was $714 thousandapproximately $10,000 and $500 thousand,$223,000, respectively. In 2019, $4.4 million of non-performing and under-performing real estate loans were sold resulting in $113 thousand of charge-offs and $57 thousand of recoveries processed through the allowance for loanlosses. In 2018, four nonperforming or under performing loans totaling $1.9 million were sold to further reduce the level of nonaccrual loans with proceeds of $1.5 million received. Charge offs of $365 thousand associated with these accounts were realized and fully absorbed by the allowance for loan losses during 2018.
The following table presents information concerning the Company’s investment in loans considered impaired as of December 31, 20192022 and December 31, 2018:2021:
As of December 31, 2019 (Dollars are in thousands) | Average Recorded Investment | Interest Income Recognized | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | $ | 2,017 | $ | 100 | $ | 2,416 | $ | 2,478 | $ | - | ||||||||||
| Construction and land development | 91 | 7 | 70 | 346 | - | |||||||||||||||
| Residential 1-4 family | 1,944 | 55 | 1,263 | 1,460 | - | |||||||||||||||
| Multifamily | 29 | 1 | - | - | - | |||||||||||||||
| Farmland | 1,143 | 47 | 778 | 970 | - | |||||||||||||||
| Commercial | 578 | 11 | 128 | 178 | - | |||||||||||||||
| Agriculture | - | - | - | 1 | - | |||||||||||||||
| Consumer installment loans | 2 | - | - | - | - | |||||||||||||||
| All other loans | - | - | - | - | - | |||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | 470 | 1 | 363 | 379 | 70 | |||||||||||||||
| Construction and land development | - | - | - | - | - | |||||||||||||||
| Residential 1-4 family | 302 | - | 55 | 60 | 44 | |||||||||||||||
| Multifamily | - | - | - | - | - | |||||||||||||||
| Farmland | 221 | 11 | 216 | 228 | 9 | |||||||||||||||
| Commercial | 507 | 7 | 286 | 886 | 200 | |||||||||||||||
| Agriculture | - | - | - | - | - | |||||||||||||||
| Consumer installment loans | 3 | - | - | - | - | |||||||||||||||
| All other loans | - | - | - | - | - | |||||||||||||||
| Total | $ | 7,307 | $ | 240 | $ | 5,575 | $ | 6,986 | $ | 323 | ||||||||||
As of December 31, 2018 (Dollars are in thousands) | Average Recorded Investment | Interest Income Recognized | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||||||||||||||||||||||||||||
| Summary of impaired loans | ||||||||||||||||||||||||||||||||||||||||
As of December 31, 2022 (Dollars are in thousands) |
| Average Recorded Investment |
| Interest Income Recognized |
| Recorded Investment | Unpaid Principal Balance |
| Related Allowance | |||||||||||||||||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||||||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||||||||||||||||||||||
| Commercial | $ | 2,556 | $ | 95 | $ | 1,887 | $ | 1,941 | $ | - | $ | 124 | $ | 6 | $ | 90 | $ | 131 | $ | — | ||||||||||||||||||||
| Construction and land development | 199 | 1 | 114 | 379 | - | 114 | 17 | 471 | 491 | — | ||||||||||||||||||||||||||||||
| Residential 1-4 family | 3,159 | 175 | 2,880 | 3,168 | - | 1,585 | 48 | 1,617 | 1,972 | — | ||||||||||||||||||||||||||||||
| Multifamily | 146 | 6 | 75 | 117 | - | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Farmland | 1,551 | 54 | 1,693 | 1,880 | - | 307 | 24 | 248 | 417 | — | ||||||||||||||||||||||||||||||
| Commercial | 132 | 1 | - | - | - | 14 | 1 | 23 | 31 | — | ||||||||||||||||||||||||||||||
| Agriculture | 3 | - | - | - | - | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Consumer installment loans | 2 | - | - | - | - | 1 | — | — | — | |||||||||||||||||||||||||||||||
| All other loans | - | - | - | - | - | — | — | — | — | — | ||||||||||||||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||||||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||||||||||||||||||||||
| Commercial | 1,214 | 16 | 435 | 539 | 40 | 407 | 2 | 268 | 338 | 63 | ||||||||||||||||||||||||||||||
| Construction and land development | - | - | - | - | - | 291 | — | — | — | — | ||||||||||||||||||||||||||||||
| Residential 1-4 family | 399 | 16 | 431 | 454 | 132 | 201 | 6 | 32 | 48 | 23 | ||||||||||||||||||||||||||||||
| Multifamily | - | - | - | - | - | 20 | — | — | — | — | ||||||||||||||||||||||||||||||
| Farmland | 361 | - | 345 | 358 | 132 | 63 | — | — | — | — | ||||||||||||||||||||||||||||||
| Commercial | 256 | 3 | 109 | 109 | 13 | 27 | 1 | — | — | — | ||||||||||||||||||||||||||||||
| Agriculture | - | - | - | - | - | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Consumer installment loans | 6 | 1 | 7 | 7 | 1 | — | — | — | — | — | ||||||||||||||||||||||||||||||
| All other loans | - | - | - | - | - | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Total | $ | 9,984 | $ | 368 | $ | 7,976 | $ | 8,952 | $ | 318 | $ | 3,154 | $ | 105 | $ | 2,749 | $ | 3,428 | $ | 86 | ||||||||||||||||||||
50
As of December 31, 2021 (Dollars are in thousands) |
Average Recorded Investment |
Interest Income Recognized |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance | |||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | $ | 245 | $ | — | $ | 99 | $ | 140 | $ | — | ||||||||||
| Construction and land development | 64 | 18 | 24 | 298 | — | |||||||||||||||
| Residential 1-4 family | 1,720 | 24 | 1,508 | 1,791 | — | |||||||||||||||
| Multifamily | — | — | — | — | — | |||||||||||||||
| Farmland | 438 | 14 | 320 | 490 | — | |||||||||||||||
| Commercial | — | — | — | — | — | |||||||||||||||
| Agriculture | — | — | — | — | — | |||||||||||||||
| Consumer installment loans | 3 | — | 2 | 2 | — | |||||||||||||||
| All other loans | — | — | — | — | — | |||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | 871 | 3 | 315 | 372 | 94 | |||||||||||||||
| Construction and land development | — | — | — | — | — | |||||||||||||||
| Residential 1-4 family | 338 | 6 | 340 | 372 | 53 | |||||||||||||||
| Multifamily | — | — | — | — | — | |||||||||||||||
| Farmland | 121 | 4 | 197 | 209 | 17 | |||||||||||||||
| Commercial | 109 | 1 | 28 | 35 | 2 | |||||||||||||||
| Agriculture | — | — | — | — | — | |||||||||||||||
| Consumer installment loans | — | — | — | — | — | |||||||||||||||
| All other loans | — | — | — | — | — | |||||||||||||||
| Total | $ | 3,909 | $ | 70 | $ | 2,833 | $ | 3,709 | $ | 166 | ||||||||||
An age analysis of past due loans receivable is below. AtAs of December 31, 20192022 and 2018,2021, there were no loans over 90 days past due that were accruing.
As of December 31, 2019 (Dollars are in thousands) | Loans 30-59 Days Past Due | Loans 60-89 Days Past Due | Loans 90 or More Days Past Due | Total Past Due Loans | Current Loans | Total Loans | ||||||||||||||||||||||||||||||||||||||||||
| Summary of age analysis of past due loans receivable | ||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2022 (Dollars are in thousands) |
Loans 30-59 Days Past Due |
Loans 60-89 Days Past Due | Loans 90 or More Days Past Due |
Total Past Due Loans |
Current Loans |
Total Loans | ||||||||||||||||||||||||||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | $ | 502 | $ | 125 | $ | 262 | $ | 889 | $ | 169,547 | $ | 170,436 | $ | 268 | $ | — | $ | — | $ | 268 | $ | 196,801 | $ | 197,069 | ||||||||||||||||||||||||
| Construction and land development | 50 | 18 | 18 | 86 | 31,044 | 31,130 | 89 | — | — | 89 | 42,381 | 42,470 | ||||||||||||||||||||||||||||||||||||
| Residential 1-4 family | 3,700 | 1,096 | 710 | 5,506 | 237,416 | 242,922 | 3,521 | 543 | 341 | 4,405 | 222,827 | 227,232 | ||||||||||||||||||||||||||||||||||||
| Multifamily | 262 | - | - | 262 | 13,376 | 13,638 | 229 | — | — | 229 | 29,481 | 29,710 | ||||||||||||||||||||||||||||||||||||
| Farmland | 111 | 47 | 152 | 310 | 20,480 | 20,790 | 285 | — | — | 285 | 17,459 | 17,744 | ||||||||||||||||||||||||||||||||||||
| Total real estate loans | 4,625 | 1,286 | 1,142 | 7,053 | 471,863 | 485,916 | 4,392 | 543 | 341 | 5,276 | 508,949 | 514,225 | ||||||||||||||||||||||||||||||||||||
| Commercial | 406 | - | 323 | 729 | 53,265 | 53,994 | 56 | — | — | 56 | 46,641 | 46,697 | ||||||||||||||||||||||||||||||||||||
| Agriculture | 244 | - | 21 | 265 | 4,532 | 4,797 | — | — | — | — | 3,756 | 3,756 | ||||||||||||||||||||||||||||||||||||
| Consumer installment Loans | 98 | 24 | 23 | 145 | 22,982 | 23,127 | ||||||||||||||||||||||||||||||||||||||||||
Consumer installment loans | 73 | 17 | 17 | 107 | 19,202 | 19,309 | ||||||||||||||||||||||||||||||||||||||||||
| All other loans | - | - | - | - | 1,710 | 1,710 | 59 | — | — | 59 | 567 | 626 | ||||||||||||||||||||||||||||||||||||
| Total loans | $ | 5,373 | $ | 1,310 | $ | 1,509 | $ | 8,192 | $ | 554,352 | $ | 562,544 | $ | 4,580 | $ | 560 | $ | 358 | $ | 5,498 | $ | 579,115 | $ | 584,613 | ||||||||||||||||||||||||
51
As of December 31, 2018 (Dollars are in thousands) | Loans 30-59 Days Past Due | Loans 60-89 Days Past Due | Loans 90 or More Days Past Due | Total Past Due Loans | Current Loans | Total Loans | ||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||||||
| Commercial | $ | 80 | $ | 31 | $ | 137 | $ | 248 | $ | 140,614 | $ | 140,862 | ||||||||||||
| Construction and land development | 70 | - | 27 | 97 | 35,022 | 35,119 | ||||||||||||||||||
| Residential 1-4 family | 3,468 | 564 | 525 | 4,557 | 245,389 | 249,946 | ||||||||||||||||||
| Multifamily | - | 273 | — | 273 | 13,223 | 13,496 | ||||||||||||||||||
| Farmland | 316 | — | 1090 | 1,406 | 20,708 | 22,114 | ||||||||||||||||||
| Total real estate loans | 3,934 | 868 | 1,779 | 6,581 | 454,956 | 461,537 | ||||||||||||||||||
| Commercial | 68 | - | 61 | 129 | 55,028 | 55,157 | ||||||||||||||||||
| Agriculture | 22 | - | - | 22 | 5,244 | 5,266 | ||||||||||||||||||
| Consumer installment Loans | 74 | 15 | - | 89 | 24,449 | 24,538 | ||||||||||||||||||
| All other loans | - | — | - | - | 598 | 598 | ||||||||||||||||||
| Total loans | $ | 4,098 | $ | 883 | $ | 1,840 | $ | 6,821 | $ | 540,275 | $ | 547,096 | ||||||||||||
As of December 31, 2021 (Dollars are in thousands) |
Loans 30-59 Days Past Due |
Loans 60-89 Days Past Due | Loans 90 or More Days Past Due |
Total Past Due Loans |
Current Loans |
Total Loans | ||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||||||
| Commercial | $ | — | $ | — | $ | — | $ | — | $ | 206,162 | $ | 206,162 | ||||||||||||
Construction and land development | 7 | — | 7 | 14 | 32,311 | 32,325 | ||||||||||||||||||
| Residential 1-4 family | 2,473 | 240 | 486 | 3,199 | 221,331 | 224,530 | ||||||||||||||||||
| Multifamily | — | — | 111 | 111 | 32,937 | 33,048 | ||||||||||||||||||
| Farmland | — | — | — | — | 18,735 | 18,735 | ||||||||||||||||||
| Total real estate loans | 2,480 | 240 | 604 | 3,324 | 511,476 | 514,800 | ||||||||||||||||||
| Commercial | 5 | — | — | 5 | 54,320 | 54,325 | ||||||||||||||||||
| Agriculture | — | — | — | — | 4,021 | 4,021 | ||||||||||||||||||
Consumer installment loans | 56 | 5 | — | 61 | 18,695 | 18,756 | ||||||||||||||||||
| All other loans | — | — | — | — | 1,842 | 1,842 | ||||||||||||||||||
| Total loans | $ | 2,541 | $ | 245 | $ | 604 | $ | 3,390 | $ | 590,354 | $ | 593,744 | ||||||||||||
The Company categorizes loans receivable into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans receivable as to credit risk. The Company uses the following definitions for risk ratings:
Pass- Loans in this category are considered to have a low likelihood of loss based on analysis of relevant information analyzed about the ability of the borrowers to service their debt and other factors.
Special Mention - Loans in this category are currently protected but are potentially weak, including adverse trends in borrower’s operations, credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances. Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s credit position at some future date.
Substandard-A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful-Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. There was one loan categorizedwere no loans classified as doubtful at either December 31, 2019 and none at December 31, 2018.2022 or 2021.
52
Based on the most recent analysis performed, the risk category of loans receivable was as follows:
As of December 31, 2019 (Dollars are in thousands) | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||||||||||||||||||||||
| Summary of risk category of loans receivable | ||||||||||||||||||||||||||||||||||||||||
As of December 31, 2022 (Dollars are in thousands) |
Pass |
Special Mention |
Substandard |
Doubtful |
Total | |||||||||||||||||||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||||||||||||||||||||||
| Commercial | $ | 165,570 | $ | 3,265 | $ | 1,601 | $ | - | $ | 170,436 | $ | 195,376 | $ | 1,425 | $ | 268 | $ | — | $ | 197,069 | ||||||||||||||||||||
| Construction and land development | 30,747 | 360 | 23 | - | 31,130 | 41,882 | 117 | 471 | — | 42,470 | ||||||||||||||||||||||||||||||
| Residential 1-4 family | 239,210 | 1,207 | 2,505 | - | 242,922 | 224,228 | 406 | 2,598 | — | 227,232 | ||||||||||||||||||||||||||||||
| Multifamily | 13,638 | - | - | - | 13,638 | 29,503 | 207 | — | — | 29,710 | ||||||||||||||||||||||||||||||
| Farmland | 18,779 | 1,480 | 531 | - | 20,790 | 16,848 | 855 | 41 | — | 17,744 | ||||||||||||||||||||||||||||||
| Total real estate loans | 467,944 | 6,312 | 4,660 | - | 478,916 | 507,837 | 3,010 | 3,378 | — | 514,225 | ||||||||||||||||||||||||||||||
| Commercial | 51,086 | 2,504 | 118 | 286 | 53,994 | 46,471 | 226 | — | — | 46,697 | ||||||||||||||||||||||||||||||
| Agriculture | 4,753 | 4 | 40 | - | 4,797 | 3,756 | — | — | — | 3,756 | ||||||||||||||||||||||||||||||
| Consumer installment loans | 23,087 | 12 | 28 | - | 23,127 | 19,272 | 2 | 35 | — | 19,309 | ||||||||||||||||||||||||||||||
| All other loans | 1,710 | - | - | - | 1,710 | 626 | — | — | — | 626 | ||||||||||||||||||||||||||||||
| Total | $ | 548,580 | $ | 8,832 | $ | 4,846 | $ | 286 | $ | 562,544 | $ | 577,962 | $ | 3,238 | $ | 3,413 | $ | — | $ | 584,613 | ||||||||||||||||||||
As of December 31, 2018 (Dollars are in thousands) | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | $ | 137,146 | $ | 2,890 | $ | 826 | $ | - | $ | 140,862 | ||||||||||
| Construction and land development | 34,231 | 718 | 170 | - | 35,119 | |||||||||||||||
| Residential 1-4 family | 243,950 | 1,523 | 4,473 | - | 249,946 | |||||||||||||||
| Multifamily | 13,357 | 63 | 76 | - | 13,496 | |||||||||||||||
| Farmland | 18,126 | 2,331 | 1,657 | - | 22,114 | |||||||||||||||
| Total real estate loans | 446,810 | 7,525 | 7,202 | - | 461,537 | |||||||||||||||
| Commercial | 52,156 | 2,940 | 61 | - | 55,157 | |||||||||||||||
| Agriculture | 5,255 | 10 | 1 | - | 5,266 | |||||||||||||||
| Consumer installment loans | 24,493 | 35 | 10 | - | 24,538 | |||||||||||||||
| All other loans | 598 | - | - | - | 598 | |||||||||||||||
| Total | $ | 529,312 | $ | 10,510 | $ | 7,274 | $ | - | $ | 547,096 | ||||||||||
As of December 31, 2021 (Dollars are in thousands) |
Pass |
Special Mention |
Substandard |
Doubtful |
Total | |||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | $ | 198,022 | $ | 7,725 | $ | 415 | $ | — | $ | 206,162 | ||||||||||
| Construction and land development | 31,366 | 922 | 37 | — | 32,325 | |||||||||||||||
| Residential 1-4 family | 221,342 | 915 | 2,273 | — | 224,530 | |||||||||||||||
| Multifamily | 32,499 | 438 | 111 | — | 33,048 | |||||||||||||||
| Farmland | 18,137 | 550 | 48 | — | 18,735 | |||||||||||||||
| Total real estate loans | 501,366 | 10,550 | 2,884 | — | 514,800 | |||||||||||||||
| Commercial | 53,162 | 1,154 | 9 | — | 54,325 | |||||||||||||||
| Agriculture | 4,021 | — | — | — | 4,021 | |||||||||||||||
| Consumer installment loans | 18,746 | 2 | 8 | — | 18,756 | |||||||||||||||
| All other loans | 1,842 | — | — | — | 1,842 | |||||||||||||||
| Total | $ | 579,137 | $ | 11,706 | $ | 2,901 | $ | — | $ | 593,744 | ||||||||||
NOTE 7 ALLOWANCE FOR LOAN LOSSES
The following table detailstables present activity in the allowance for loan losses by portfolio segment for the periodyears ended December 31, 2019.2022 and 2021. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. Additionally, the allocation of the allowance by recorded portfolio segment and impairment method is presented as of December 31, 2022 and 2021.
As of December 31, 2019 (Dollars are in thousands) | Beginning Balance | Charge Offs | Recoveries | Provisions | Ending Balance | |||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | $ | 1,386 | $ | (192 | ) | $ | 16 | $ | 38 | $ | 1,248 | |||||||||
| Construction and land development | 202 | - | 34 | (78 | ) | 158 | ||||||||||||||
| Residential 1-4 family | 2,437 | (336 | ) | 202 | (567 | ) | 1,736 | |||||||||||||
| Multifamily | 89 | - | 30 | (15 | ) | 104 | ||||||||||||||
| Farmland | 287 | (33 | ) | 29 | (174 | ) | 109 | |||||||||||||
| Total real estate loans | 4,401 | (561 | ) | 311 | (796 | ) | 3,355 | |||||||||||||
| Commercial | 448 | (1,762 | ) | 61 | 3,042 | 1,789 | ||||||||||||||
| Agriculture | 37 | (17 | ) | 2 | 5 | 27 | ||||||||||||||
| Consumer installment loans | 172 | (114 | ) | 62 | 68 | 188 | ||||||||||||||
| All other loans | 3 | - | - | 4 | 7 | |||||||||||||||
| Unallocated | 275 | - | - | (273 | ) | 2 | ||||||||||||||
| Total | $ | 5,336 | $ | (2,454 | ) | $ | 436 | $ | 2,050 | $ | 5,368 | |||||||||
| Allowance for Loan Losses | Recorded Investment in Loans | |||||||||||
As of December 31, 2019 (Dollars are in thousands) | Individually Evaluated for Impairment | Collectively Evaluated for Impairment |
Total | Individually Evaluated for Impairment | Collectively Evaluated for Impairment |
Total | ||||||
| Real estate secured: | ||||||||||||
| Commercial | $ | 70 | $ | 1,178 | $ | 1,248 | $ | 2,779 | $ | 167,657 | $ | 170,436 |
Construction and land development | - | 158 | 158 | 70 | 31,060 | 31,130 | ||||||
| Residential 1-4 family | 44 | 1,692 | 1,736 | 1,318 | 241,604 | 242,922 | ||||||
| Multifamily | - | 104 | 104 | - | 13,638 | 13,638 | ||||||
| Farmland | 9 | 100 | 109 | 994 | 19,796 | 20,790 | ||||||
| Total real estate loans | 123 | 3,232 |
3,355 | 5,161 | 473,755 | 478,916 | ||||||
| Commercial | 200 | 1,589 | 1,789 | 414 | 53,580 | 53,994 | ||||||
| Agriculture | - | 27 | 27 | - | 4,797 | 4,797 | ||||||
| Consumer installment loans | - | 188 | 188 | - | 23,127 | 23,127 | ||||||
| All other loans | - | 7 | 7 | - | 1,710 | 1,710 | ||||||
| Unallocated | - | 2 | 2 | - | - | - | ||||||
| Total | $ | 323 | $ | 5,045 | 5,368 | $ | 5,575 | $ | 556,969 | $ | 562,544 | |
| Schedule of allocation of portion of allowance | |||||||||||||||||||||
| Real estate secured | |||||||||||||||||||||
| (Dollars are in thousands) | Commercial | Construction and Land Development | Residential 1-4 family | Multifamily | Farmland | Commercial | Agriculture | Consumer and All Other | Unallocated | Total | |||||||||||
| Year ended December 31, 2022 | |||||||||||||||||||||
| Beginning balance | $ | 2,134 | $ | 189 | $ | 2,237 | $ | 254 | $ | 149 | $ | 1,099 | $ | 28 | $ | 108 | $ | 537 | $ | 6,735 | |
| Charge-offs | (5) | (149) | (64) | (111) | (1) | (45) | (1) | (559) | - | (935) | |||||||||||
| Recoveries | 33 | 6 | 100 | 2 | 14 | 31 | 1 | 115 | - | 302 | |||||||||||
| Provision | 202 | 299 | 91 | 117 | (9) | (704) | 4 | 722 | (97) | 625 | |||||||||||
| Ending balance | $ | 2,364 | $ | 345 | $ | 2,364 | $ | 262 | $ | 153 | $ | 381 | $ | 32 | $ | 386 | $ | 440 | $ | 6,727 | |
| Allowance for loan losses at December 31, 2022 | |||||||||||||||||||||
| Individually evluated for impairment | $ | 63 | $ | - | $ | 23 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 86 | |
| Collectively evaluated for impairment | 2,301 | 345 | 2,341 | 262 | 153 | 381 | 32 | 386 | 440 | 6,641 | |||||||||||
| $ | 2,364 | $ | 345 | $ | 2,364 | $ | 262 | $ | 153 | $ | 381 | $ | 32 | $ | 386 | $ | 440 | $ | 6,727 | ||
| Loans at December 31, 2022 | |||||||||||||||||||||
| Individually evluated for impairment | $ | 358 | $ | 471 | $ | 1,649 | $ | - | $ | 248 | $ | 23 | $ | - | $ | - | $ | - | $ | 2,749 | |
| Collectively evaluated for impairment | 196,711 | 41,999 | 225,583 | 29,710 | 17,496 | 46,965 | 3,756 | 19,644 | - | 581,864 | |||||||||||
| $ | 197,069 | $ | 42,470 | $ | 227,232 | $ | 29,710 | $ | 17,744 | $ | 46,988 | $ | 3,756 | $ | 19,644 | $ | - | $ | 584,613 | ||
53
The following table details activity in the allowance for loan losses by portfolio segment for the period ended December 31, 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
| Real estate secured | |||||||||||||||||||||
| (Dollars are in thousands) | Commercial | Construction and Land Development | Residential 1-4 family | Multifamily | Farmland | Commercial | Agriculture | Consumer and All Other | Unallocated | Total | |||||||||||
| Year ended December 31, 2021 | |||||||||||||||||||||
| Beginning balance | $ | 2,281 | $ | 233 | $ | 1,951 | $ | 151 | $ | 97 | $ | 2,275 | $ | 40 | $ | 163 | $ | - | $ | 7,191 | |
| Charge-offs | (915) | - | (48) | - | - | (92) | - | (78) | - | (1,133) | |||||||||||
| Recoveries | 2 | 6 | 85 | - | 29 | 137 | 1 | 45 | - | 305 | |||||||||||
| Provision | 766 | (50) | 249 | 103 | 23 | (1,221) | (13) | (22) | 537 | 372 | |||||||||||
| Ending balance | $ | 2,134 | $ | 189 | $ | 2,237 | $ | 254 | $ | 149 | $ | 1,099 | $ | 28 | $ | 108 | $ | 537 | $ | 6,735 | |
| Allowance for loan losses at December 31, 2021 | |||||||||||||||||||||
| Individually evluated for impairment | $ | 94 | $ | - | $ | 53 | $ | - | $ | 17 | $ | 2 | $ | - | $ | - | $ | - | $ | 166 | |
| Collectively evaluated for impairment | 2,040 | 189 | 2,184 | 254 | 132 | 1,097 | 28 | 108 | 537 | 6,569 | |||||||||||
| $ | 2,134 | $ | 189 | $ | 2,237 | $ | 254 | $ | 149 | $ | 1,099 | $ | 28 | $ | 108 | $ | 537 | $ | 6,735 | ||
| Loans at December 31, 2021 | |||||||||||||||||||||
| Individually evluated for impairment | $ | 414 | $ | 24 | $ | 1,848 | $ | - | $ | 517 | $ | 28 | $ | - | $ | 2 | $ | - | $ | 2,833 | |
| Collectively evaluated for impairment | 205,748 | 32,301 | 222,682 | 33,048 | 18,218 | 54,297 | 4,021 | 20,596 | - | 590,911 | |||||||||||
| $ | 206,162 | $ | 32,325 | $ | 224,530 | $ | 33,048 | $ | 18,735 | $ | 54,325 | $ | 4,021 | $ | 20,598 | $ | - | $ | 593,744 | ||
As of December 31, 2018 (Dollars are in thousands) | Beginning Balance | Charge Offs | Recoveries | Provisions | Ending Balance | |||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | $ | 1,989 | $ | (334 | ) | $ | 73 | $ | (342 | ) | $ | 1,386 | ||||||||
| Construction and land development | 191 | (96 | ) | 11 | 96 | 202 | ||||||||||||||
| Residential 1-4 family | 2,400 | (290 | ) | 73 | 254 | 2,437 | ||||||||||||||
| Multifamily | 106 | - | - | (17 | ) | 89 | ||||||||||||||
| Farmland | 415 | (58 | ) | 72 | (142 | ) | 287 | |||||||||||||
| Total real estate loans | 5,101 | (778 | ) | 229 | (151 | ) | 4,401 | |||||||||||||
| Commercial | 660 | (617 | ) | 84 | 321 | 448 | ||||||||||||||
| Agriculture | 20 | - | 1 | 16 | 37 | |||||||||||||||
| Consumer installment loans | 156 | (75 | ) | 44 | 47 | 172 | ||||||||||||||
| All other loans | 3 | - | - | - | 3 | |||||||||||||||
| Unallocated | 256 | - | - | 19 | 275 | |||||||||||||||
| Total | $ | 6,196 | $ | (1,470 | ) | $ | 358 | $ | 252 | $ | 5,336 | |||||||||
| Allowance for Loan Losses | Recorded Investment in Loans | |||||||||||
As of December 31, 2018 (Dollars are in thousands) | Individually Evaluated for Impairment | Collectively Evaluated for Impairment |
Total | Individually Evaluated for Impairment | Collectively Evaluated for Impairment |
Total | ||||||
| Real estate secured: | ||||||||||||
| Commercial | $ | 40 | $ | 1,346 | $ | 1,386 | $ | 2,322 | $ | 138,540 | $ | 140,862 |
| Construction and land development | - | 202 | 202 | 114 | 35,005 | 35,119 | ||||||
| Residential 1-4 family | 132 | 2,305 | 2,437 | 3,311 | 246,635 | 249,946 | ||||||
| Multifamily | - | 89 | 89 | 75 | 13,421 | 13,496 | ||||||
| Farmland | 132 | 155 | 287 | 2,038 | 20,076 | 22,114 | ||||||
| Total real estate loans | 304 | 4,097 | 4,401 | 7,860 | 453,677 | 461,537 | ||||||
| Commercial | 13 | 435 | 448 | 109 | 55,048 | 55,157 | ||||||
| Agriculture | - | 37 | 37 | - | 5,266 | 5,266 | ||||||
| Consumer installment loans | 1 | 171 | 172 | 7 | 24,531 | 24,538 | ||||||
| All other loans | - | 3 | 3 | - | 598 | 598 | ||||||
| Unallocated | - | 275 | 275 | - | - | - | ||||||
| Total | $ | 318 | $ | 5,018 | 5,336 | $ | 7,976 | $ | 539,120 | $ | 547,096 | |
In determining the amount of our allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision. Due to the underlying SBA guarantee provided for PPP loans, these accounts were not included in the portfolio segment or impairment calculations. Additionally, due to uncertainties presented by the lingering impact of the pandemic and the resulting economic uncertainty, internal and external qualitative factors were revised accordingly. In 2022 and 2021, external qualitative factors were adjusted to consider the impact of inflation.
NOTE 8 TROUBLED DEBT RESTRUCTURINGS
AtAs of December 31, 2019,2022, loans classified as troubled debt restructurings (TDRs) totaled $4.3$2.0 million compared to $5.4$2.5 million atas of December 31, 2018.2021. The following table presents information related to loans modified as troubled debt restructurings during the years ended December 31, 20192022 and 2018.2021.
| Schedule of loans modified as troubled debt restructurings | |||||||||||||||||||||||||||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||
| (Dollars are in thousands) |
# of Loans | Pre-Mod. Recorded Investment | Post-Mod. Recorded Investment |
# of Loans | Pre-Mod. Recorded Investment | Post-Mod. Recorded Investment |
# of Loans | Pre-Mod. Recorded Investment | Post-Mod. Recorded Investment |
# of Loans | Pre-Mod. Recorded Investment | Post-Mod. Recorded Investment | |||||||||||||||||||||||
| Real estate secured: | |||||||||||||||||||||||||||||||||||
| Commercial | 1 | $ | 150 | $ | 150 | - | $ | - | $ | - | — | $ | — | $ | — | — | $ | — | $ | — | |||||||||||||||
Construction and land Development | - | - | - | - | - | - | — | — | — | — | — | — | |||||||||||||||||||||||
| Residential 1-4 family | - | - | - | - | - | - | — | — | — | 1 | 35 | 35 | |||||||||||||||||||||||
| Multifamily | - | - | - | - | - | - | — | — | — | — | — | — | |||||||||||||||||||||||
| Farmland | 1 | 305 | 305 | - | - | - | — | — | — | — | — | — | |||||||||||||||||||||||
| Total real estate loans | 2 | 455 | 455 | - | - | - | — | — | — | 1 | 35 | 35 | |||||||||||||||||||||||
| Commercial | - | - | - | - | - | - | — | — | — | — | — | — | |||||||||||||||||||||||
| Agriculture | - | - | - | - | - | - | — | — | — | — | — | — | |||||||||||||||||||||||
| Consumer installment loans | - | - | - | - | - | - | — | — | — | — | — | — | |||||||||||||||||||||||
| All other loans | - | - | - | - | - | - | — | — | — | — | — | — | |||||||||||||||||||||||
| Total | 2 | $ | 455 | $ | 455 | - | $ | - | $ | - | — | $ | — | $ | — | 1 | $ | 35 | $ | 35 | |||||||||||||||
There were no loans modified that resulted in a troubled debt restructuring during the year ended December 31, 2022. During the year ended December 31, 2019, the Company2021, one loan was modified the terms of two loans for which the modification was considered to be a troubled debt restructuring. The interest rate was not modified on these loans; however, the payment terms and maturity date were changed. During
54
For the year ended December 31, 2018,2022 there were no TDRs that subsequently defaulted within twelve months of the Company did not modify any loans that were considered to be troubled debt restructurings.
Two loans modified as troubled debt restructurings defaulted duringloan modification. For the year ended December 31, 2019. No loans2021, there were two TDRs with a modified as troubled debt restructuringsbalance of $56,000 that subsequently defaulted duringwithin twelve months of the year ended December 31, 2018.loan modification. Generally, a troubled debt restructuringTDR is considered to be in default once it becomes 90 days or more past due following a modification.
When determining the level of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings in its estimate. The Company evaluates all troubled debt restructurings for possible further impairment. As a result, the allowance may be increased, adjustments may be made in the allocation of the allowance, or charge-offs may be taken to further write down the carrying value of the loan.these loans.
NOTE 9 BANK PREMISES AND EQUIPMENT
Depreciation expense for 20192022 and 20182021 was $2.3$1.7 million and $2.6$2.1 million, respectively. Bank premises and equipment atas of December 31, 20192022 and 20182021 are summarized as follows:
| Schedule of bank premises and equipment | ||||||||||||||||
| (Dollars are in thousands) | 2019 | 2018 | 2022 | 2021 | ||||||||||||
| Land | $ | 7,485 | $ | 7,904 | $ | 7,371 | $ | 7,424 | ||||||||
| Buildings and improvements | 16,227 | 17,642 | 15,972 | 16,252 | ||||||||||||
| Furniture and equipment | 16,253 | 16,418 | 13,965 | 14,139 | ||||||||||||
| Construction in progress | 1,003 | — | ||||||||||||||
| 40,968 | 41,964 | 37,308 | 37,815 | |||||||||||||
| Less accumulated depreciation | (18,726 | ) | (17,769 | ) | (18,018 | ) | (17,080 | ) | ||||||||
| Bank Premises and Equipment | $ | 22,242 | $ | 24,195 | $ | 19,290 | $ | 20,735 | ||||||||
As presented in Note 14 Other Real Estate Owned, the bank sold three former branch locations during 2022. These properties with a combined carrying value of $2.0 million, were transferred to other real estate owned during 2021, resulting in an increase to OREO of $950,000, and disposal and valuation costs of approximately $1.1 million. Equipment with a combined net book value of $188,000 was written off in 2021.
During the year ended December 31, 2021, the Bank sold four other former branch locations, with net book values of approximately $1.1 million, resulting in approximately $173 thousand of net gains on sales.
During 2021, we opened one new branch office, in Bristol, Virginia, resulting in a net increase of $1.7 million in premises and equipment.
As presented in Note 17 Leasing Activities, in September 2019,during 2021, the Bank entered into a sale and leaseback transaction for itsrepurchased the branch office located in Lebanon, Virginia.Virginia, which had previously been sold and leased back.
In December 2019, the former branch office located in Norton, Virginia, with a recorded balance of $683 thousand, was transferred to Other Real Estate Owned.
NOTE 10 INCOME TAXES
The Company files a consolidated federal income tax return. The following summarizes the provision for income taxes and the related deferred tax components for the years ended December 31, 20192022 and 2018.2021.
The source of pre-tax book income is summarized as follows for the years ended December 31:
| (Dollars are in thousands) | 2019 | 2018 | ||||||
| Pre-tax book income | ||||||||
| Domestic | $ | 2,581 | $ | 1,068 | ||||
| Total pre-tax book income | $ | 2,581 | $ | 1,068 | ||||
Income tax expense is summarized as follows for the years ended December 31:31, 2022 and 2021:
| Schedule of pre-tax book income | ||||||||
| (Dollars are in thousands) | 2022 | 2021 | ||||||
Current income tax expense (benefit) | ||||||||
| Federal | $ | 1,759 | $ | (172 | ) | |||
| State | — | — | ||||||
| Total current income tax expense (benefit) | 1,759 | (172 | ) | |||||
| Deferred income tax expense | ||||||||
| Federal | 500 | 2,067 | ||||||
| State | 40 | 47 | ||||||
| Total deferred income tax expense | 540 | 2,114 | ||||||
| Income tax expense | $ | 2,299 | $ | 1,942 | ||||
55
| (Dollars are in thousands) | 2019 | 2018 | ||
Current income tax expense (benefit) | ||||
| Federal | $ | (35) | $ | (45) |
| State | - | - | ||
| Total current income tax expense (benefit) | (35) | (45) | ||
| Deferred income tax expense | ||||
| Federal | 557 | 194 | ||
| State | - | - | ||
| Total deferred income tax expense | 557 | 194 | ||
| Income tax expense | $ | 522 | $ | 149 |
The following table summarizes the differences between the actual income tax expense and the amounts computed using the federal statutory tax rate of 21% for years endingended December 31, 20192022 and 2018,2021, respectively:
| Schedule of reconciliation of income tax expense | ||||||||||||||||
| (Dollars are in thousands) | 2019 | 2018 | 2022 | 2021 | ||||||||||||
| Income tax expense (benefit) at the applicable federal rate | $ | 542 | $ | 224 | $ | 2,180 | $ | 1,879 | ||||||||
| Permanent differences resulting from: | ||||||||||||||||
| Nondeductible expenses | 10 | 5 | 9 | 7 | ||||||||||||
| Tax exempt interest income | (11 | ) | (17 | ) | (3 | ) | (4 | ) | ||||||||
| Bank owned life insurance | (13 | ) | (12 | ) | 29 | (7 | ) | |||||||||
| Other adjustments | (6 | ) | (51 | ) | 84 | 67 | ||||||||||
| Income tax expense | $ | 522 | $ | 149 | $ | 2,299 | $ | 1,942 | ||||||||
The net deferred tax assets and liabilities resulting from temporary differences as of December 31, 2022 and 2021, are summarized as follows:
| Schedule of net deferred tax assets and liabilities | |||||||||||||
| (Dollars are in thousands) | 2019 | 2018 | 2022 | 2021 | |||||||||
| Deferred Tax Assets | |||||||||||||
| Deferred tax assets | |||||||||||||
| Allowance for loan losses | $ | 1,127 | $ | 1,121 | $ | 1,498 | $ | 1,500 | |||||
| Deferred compensation | 90 | 90 | 80 | 85 | |||||||||
| Nonaccrual loan interest | 439 | 464 | 543 | 532 | |||||||||
| Unrealized loss on securities available for sale | 3,706 | 216 | |||||||||||
| Other real estate owned | 127 | 340 | 48 | 305 | |||||||||
| Amortization of core deposits | 28 | 40 | — | 6 | |||||||||
| Amortization of goodwill | 144 | 202 | — | 31 | |||||||||
| Capitalized interest and repair expense | 23 | 24 | 22 | 23 | |||||||||
| Net operating loss carryforward | 3,631 | 3,730 | — | 460 | |||||||||
| AMT carryforward | 320 | 339 | |||||||||||
| Unrealized loss on securities available for sale | - | 328 | |||||||||||
| Total Assets, gross | 5,929 | 6,678 | |||||||||||
| Valuation allowance | - | - | |||||||||||
| Total Assets, net | 5,929 | 6,678 | |||||||||||
| Deferred Tax Liabilities | |||||||||||||
| Other | 57 | 98 | |||||||||||
| Total assets, gross | 5,954 | 3,256 | |||||||||||
| Deferred tax liabilities | |||||||||||||
| Accelerated depreciation | 937 | 878 | 896 | 1,105 | |||||||||
| Accrued employee benefits | 11 | (6) | |||||||||||
| Unrealized gain on securities available for sale | 15 | - | |||||||||||
| Prepaid expenses | 59 | 15 | 17 | 27 | |||||||||
| Deferred loan costs | 331 | 315 | 418 | 451 | |||||||||
| Total Liabilities, gross | 1,353 | 1,202 | |||||||||||
| Net Deferred Tax Asset | $ | 4,576 | $ | 5,476 | |||||||||
| Total liabilities, gross | 1,331 | 1,583 | |||||||||||
| Net deferred tax asset | $ | 4,623 | $ | 1,673 | |||||||||
In accordance with applicable accounting guidance, the Company determined that it was not required to establish a valuation allowance for deferred tax assets as it is more likely than not that the deferred tax asset will be realized through future taxable income, future reversals of existing taxable temporary differences and tax strategies. The Company’s net deferred tax asset is recorded in the consolidated financial statements separately.
AtAs of December 31, 20192022 and 2018,2021, the Company had no unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to increase significantly over the next twelve months. The company recognizes interest and penalties as a component of income tax expense.
The Company and Bank are subject to U. S. federal income tax, a capital basedcapital-based franchise tax in the Commonwealth of Virginia; and income and excise taxes in West Virginia, Tennessee and Tennessee,North Carolina, respectively, based on earnings realized from business activities within each state. Years prior to 20162019 are no longer subject to examination by taxing authorities.
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NOTE 11 TIME DEPOSITS
The aggregate amount of time deposits that meet or exceed the Federal Deposit Insurance Corporation (FDIC) Insurance limit of $250,000 was $36.2$26.8 million and $31.2$28.6 million atas of December 31, 20192022 and 2018,2021, respectively. We had no brokered time deposits at either December 31, 2019 and $2.8 million as2022 or 2021. As of December 31, 2018.At December 31, 2019,2022, the scheduled maturities of time deposits are as follows (dollars are in thousands):
| 2020 | $ | 156,640 |
| 2021 | 49,058 | |
| 2022 | 20,948 | |
| 2023 | 19,611 | |
| 2024 | 11,149 | |
| After five years | - | |
| Total | $ | 257,406 |
| Schedule of maturities | ||
| 2023 | $ | 123,270 |
| 2024 | 20,683 | |
| 2025 | 29,987 | |
| 2026 | 8,185 | |
| 2027 | 6,108 | |
| After five years | - | |
| Total | $ | 188,233 |
NOTE 12 RELATED PARTY TRANSACTIONS
Officers, directors (and companies controlled by them), principal shareholders, and associates were customers of and had loan transactions with the Bank in the normal course of business. The following table summarizes these transactions, which were made on substantially the same terms as those prevailing for other customers and did not involve any abnormal risk.
| Schedule of related party | ||||||||||||||||
| For the years ended December 31, | For the year ended December 31, | |||||||||||||||
| (Dollars in thousands) | 2019 | 2018 | 2022 | 2021 | ||||||||||||
| Beginning balance | $ | 2,553 | $ | 6,568 | $ | 3,419 | $ | 4,187 | ||||||||
| New loans and advances on lines | 1,925 | 2,048 | 2,636 | 2,620 | ||||||||||||
| Payments and other reductions | (2,021 | ) | (6,063 | ) | (4,496 | ) | (3,388 | ) | ||||||||
| Ending balance | $ | 2,457 | $ | 2,553 | $ | 1,559 | $ | 3,419 | ||||||||
Total related party deposits held at the Bank were $42.8$29.0 million and $23.4$24.8 million at the endas of years 2019December 31, 2022 and 2018,2021, respectively.
NPB Insurance Services, Inc. holds a 39% membership interest in Lonesome Pine Title Agency, LLC, which provides title insurance. Another member of the agency is a related party to the Company.
In August 2021, the Bank sold a parcel of land, adjacent to the Grundy, Virginia office to a director for $150 thousand, which approximated the fair value of the property. A gain of approximately $17,000 was recorded from this transaction.
NOTE 13 RETIREMENT PLANS
The Company has established a qualified defined contribution plan that covers all full timefull-time employees. The Company matches employee contributions up to a maximum of 3% of their salary. The Company contributed $299 thousandapproximately $235,000 and $318 thousand$246,000 to the defined contribution plan for 2019during the years ended December 31, 2022 and 2018,2021, respectively.
The Bank maintains a salary continuation plan for key executives which was established in 2002 and is funded by single premium life insurance policies. Expenses related to the plan were $4 thousandapproximately $27,000 and $4 thousand$29,000 for the years ended December 31, 20192022 and 2018,2021, respectively.
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NOTE 14 OTHER REAL ESTATE OWNED
The following table summarizes the activity in other real estate owned for the years ended December 31, 20192022 and 2018:2021:
| Schedule of other real estate owned | ||||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||
| (Dollars are in thousands) | ||||||||||||||||
| Balance, beginning of year | $ | 5,937 | $ | 6,859 | $ | 1,361 | $ | 3,334 | ||||||||
| Additions | 811 | 1,719 | — | 566 | ||||||||||||
| Transfers from premises and equipment | 683 | — | — | 950 | ||||||||||||
| Proceeds from sales | (1,322 | ) | (1,405 | ) | (207 | ) | (2,645 | ) | ||||||||
| Proceeds from insurance claims | (19 | ) | — | — | (54 | ) | ||||||||||
| Loans made to finance sales | (2,360 | ) | (569 | ) | (711 | ) | (400 | ) | ||||||||
| Adjustment of carrying value | (214 | ) | (542 | ) | (197 | ) | (466 | ) | ||||||||
| Deferred gain from sales | — | 10 | ||||||||||||||
| Losses from sales | (123 | ) | (135 | ) | ||||||||||||
| Gains (losses) from sales | 15 | 76 | ||||||||||||||
| Balance, end of year | $ | 3,393 | $ | 5,937 | $ | 261 | $ | 1,361 | ||||||||
During 2022, three former branch offices that were transferred from premises to other real estate owned during 2021, were sold, resulting in valuation adjustments of $137,000 and net losses totaling $5,000, respectively.
NOTE 15 BANK OWNED LIFE INSURANCE
AtAs of December 31, 20192022 and 2018, we2021, the Bank had an aggregate total cash surrender value of $4.6$4.5 million and $4.5$4.7 million, respectively, on life insurance policies covering current and former key officersofficers.
TotalThe Company recorded a net write-down of approximately $136,000 during the year ended December 31, 2022. The Company recognized income forof approximately $32,000 during the policies during 2019 and 2018 was $63 thousand and $57 thousand, respectively.year ended December 31, 2021.
NOTE 16 DIVIDEND LIMITATIONS ON SUBSIDIARY BANK
A principal source of funds offor the Company is dividends paid by the Bank. The Federal Reserve Act restricts the amount of dividends the Bank may pay. Approval by the Board of Governors of the Federal Reserve System is required if the dividends declared by a state member bank, in any year, exceed the sum of (1) net income of the current year and (2) income net of dividends for the preceding two years.
Virginia law restricts the amount of dividends a Virginia corporation may pay. Generally, a Virginia corporation may not authorize and make distributions if, after giving effect to the distribution, it would be unable to meet its debts as they become due in the usual course of business or if the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if it were dissolved at that time, to satisfy the preferential rights of shareholders whose rights are superior to the rights of those receiving the distribution. In addition, the payment of distributions to shareholders is subject to any prior rights of outstanding preferred stock.
NOTE 17 LEASING ACTIVITIES
The Company adopted ASU 2016-02 (Topic 842) effective May 31, 2017, as the Bank entered into sale leaseback transactions for four branch office sites.
In September 2019, the Bank entered into a sale leaseback transaction, with a non-affiliated third party, for its branch office located in Lebanon, Virginia for a total purchase price of $1.34 million. Net proceeds, after sales expenses of $42 thousand totaled $1.30 million and a gain of $803 thousand was recorded. The Bank provided financing to the purchaser, in the amount of $752 thousand, for a term of 5 years. In connection with this sale, the Bank entered into a lease agreement with the purchaser with an initial term of 15 years, with five 5 year renewal options.
As of December 31, 2019,2022, the Bank leases fivefour branch offices and sublets a loan productionlot adjacent to another branch office. The lease agreements have maturity dates ranging from November 2020May 2032 to September 2034.December 2041. It is assumed that there are currently no circumstances in which the leases would be terminated prior to expiration. The weighted average remaining life of the lease terms atas of December 31, 2019,2022, was 12.84 9.60 years.
The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded to the lease term for each transaction. This methodology is expected to be used for any other subsequent lease agreements. The weighted average discount rate for the leases atas of December 31, 20192022 was 3.16%3.28%.
The Company’s operating lease costs for the years ended December 31, 20192022 and 2018,2021, as a result of the transactions discussed above, was $505 thousand$456,000 and $476 thousand,$528,000, respectively.
During 2021, the Bank repurchased its branch office located in Lebanon, Virginia, for $1.3 million. This branch had previously been sold and leased back in September 2019. As a result of the repurchase, the lease with a remaining term of 12.9 years was cancelled.
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The Company’s other operating leases were evaluated and determined to be immaterial to the financial statements.AtAs of December 31, 2019,2022, future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands):
| 2020 | $ | 534 | ||
| 2021 | 511 | |||
| 2022 | 530 | |||
| Schedule of future minimum rental commitments under the non-cancellable operating leases | ||||
| 2023 | 544 | $ | 456 | |
| 2024 | 546 | 456 | ||
| 2025 | 456 | |||
| 2026 | 456 | |||
| 2027 | 477 | |||
| Thereafter | 4,528 | 2,226 | ||
| Total lease payments | 7,193 | 4,527 | ||
| Less imputed interest | 1,358 | 802 | ||
| Total | $ | 5,835 | $ | 3,725 |
NOTE 18 BORROWED FUNDS
The following table presents the breakdown of borrowed funds as of December 31, 20192022 and 2018 (Dollars2021 (dollars in thousands):
| FHLB Revolving Advances (a) | Federal Funds Lines (b) | FHLB Term Loans Short-Term (c) | FHLB Term Loans Long-Term (d) | NPB Capital Trust I (e) | NPB Capital Trust 2 (e) | Total | ||||||||||||||||||||||
| Balance December 31, 2019 | $ | - | $ | - | - | $ | 5,000 | 11,341 | 5,155 | $ | 21,496 | |||||||||||||||||
| Highest balance at any month-end | - | - | 2,000 | 5,000 | 11,341 | 5,155 | ||||||||||||||||||||||
| Average weighted balance | - | 10 | 975 | 5,000 | 11,341 | 5,155 | 22,481 | |||||||||||||||||||||
| Average interest rate: | ||||||||||||||||||||||||||||
| Paid during the year | - | % | 3.32 | % | 1.26 | % | 1.36 | % | 5.09 | % | 4.25 | % | 3.89 | % | ||||||||||||||
| At year-end | - | % | - | % | - | % | 1.34 | % | 4.59 | % | 3.76 | % | 3.64 | % | ||||||||||||||
| Schedule of breakdown of borrowed funds | |||||||||||||||
FHLB Revolving Advances (a) | Federal Funds Lines (b) | FHLB Term Loans Short-Term (c) | FHLB Term Loans Long-Term (d) | NPB Capital Trust I (e) | NPB Capital Trust 2 (e) | Total | |||||||||
| Balance December 31, 2022 | $ | - | $ | - | $ | - | $ | - | $ | 11,341 | $ | 5,155 | $ | 16,496 | |
| Highest balance at any month-end | - | - | 60,000 | - | 11,341 | 5,155 | |||||||||
| Average weighted balance | 863 | - | 19,507 | - | 11,341 | 5,155 | 36,866 | ||||||||
| Average interest rate: | |||||||||||||||
| Paid during the year | 1.68% | -% | 2.48% | -% | 4.63% | 3.79% | 3.31% | ||||||||
| At year-end | -% | -% | -% | -% | 6.68% | 5.85% | 6.42% | ||||||||
| Balance December 31, 2021 | $ | - | $ | - | $ | - | $ | - | $ | 11,341 | $ | 5,155 | $ | 16,496 | |
| Highest balance at any month-end | - | 1,020 | 5,000 | - | 11,341 | 5,155 | |||||||||
| Average weighted balance | - | 8 | 2,466 | - | 11,341 | 5,155 | 18,970 | ||||||||
| Average interest rate: | |||||||||||||||
| Paid during the year | - % | 2.51% | 1.36% | -% | 2.81% | 1.97% | 2.39% | ||||||||
| At year-end | -% | -% | -% | -% | 2.72% | 1.89% | 2.46% | ||||||||
| Balance December 31, 2018 | $ | - | $ | 3,630 | 2,000 | $ | 5,000 | 11,341 | 5,155 | $ | 27,126 | |||||||||||||||||
| Highest balance at any month-end | 12,000 | 3,630 | 2,000 | 7,000 | 11,341 | 5,155 | ||||||||||||||||||||||
| Average weighted balance | 2,367 | 109 | 1,159 | 5,975 | 11,341 | 5,155 | 26,106 | |||||||||||||||||||||
| Average interest rate: | ||||||||||||||||||||||||||||
| Paid during the year | 2.19 | % | 2.80 | % | 1.43 | % | 1.28 | % | 4.96 | % | 4.08 | % | 3.53 | % | ||||||||||||||
| At year-end | -% | 3.28 | % | 0.99 | % | 1.34 | % | 5.04 | % | 4.21 | % | 3.67 | % | |||||||||||||||
(a) - The Bank has the ability to borrow up to an additional $154.4$113.7 million from the FHLB under a line of credit which is secured by a blanket lien on residential real estate loans. With additional collateral, the Bank’s total credit availability would be $200.1 million. The Bank had no overnight borrowings subject to daily rate changes from the FHLB at December 31, 20192022 or 2018.2021.
We have used our line of credit with FHLB to issue letters of credit totaling $17.0$7.0 million to the Treasury Board of Virginia for collateral on public funds deposited in the Bank. No draws on the letters of credit have been issued. The letters of credit are considered draws on our FHLB line of credit.
(b) - Federal funds lines consist of $20.0$30.0 million in unsecured federal funds line of credit facilities with correspondent banks as of both December 31, 20192022 and 2018,2021, respectively exclusive of any outstanding balance. The Company did not borrow from the lines other than to test the ability to access the lines.
(c) - At– As of December 31, 2019,2022, there are no short term FHLB advances outstanding.
(d) – As of December 31, 2022 and 2021, there were no short-term FHLB advance borrowings outstanding. Short-term FHLB advances at December 31, 2018 consisted of $2.0 million at a fixed rate of 0.99% due in 2019.
(d) - At December 31, 2019 and 2018, long term FHLB advances consisted of $5.0 million at a fixed rate of 1.34% due in 2021.advances.
(e) - TPS I - On July 7, 2004, the Company completed the issuance of $11.3 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust I (TPS I). The rate is determined quarterly and floats based on the 3 month3-month LIBOR plus 260 basis points.
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TPS 2 - On September 27, 2006, the Company completed the issuance of $5.2 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust 2 (TPS 2). The rate is determined quarterly and floats based on the 3 month3-month LIBOR plus 177 basis points.
Under the terms of the subordinated debt transactions, the securities have 30-year maturities and are redeemable, in whole or in part, without penalty, at the option of the Company after five years offrom the issuance date, and on a quarterly basis thereafter.
Following are maturities of borrowed funds atas of December 31, 20192022 (dollars in thousands):
| 2020 | - | ||||
| 2021 | 5,000 | ||||
| 2022 | - | ||||
| 2023 | - | ||||
| 2024 | - | ||||
| 2025 and thereafter | 16,496 | ||||
| $ | 21,496 |
| Schedule of maturities of borrowed funds | |||||
| 2023 | $ | - | |||
| 2024 | - | ||||
| 2025 | - | ||||
| 2026 | - | ||||
| 2027 | - | ||||
| 2028 and thereafter | 16,496 | ||||
| $ | 16,496 |
NOTE 19 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Bank has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheet.
Financial instruments whose contract amount represents credit risk atas of December 31, 2022 and 2021 were as follows:
| Schedule of financial instruments with credit risk | ||||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Commitments to extend credit | $ | 59,552 | $ | 55,144 | $ | 84,149 | $ | 69,015 | ||||||||
| Standby letters of credit | 2,582 | 2,798 | 3,731 | 3,684 | ||||||||||||
Commitments to extend credit are agreements to lend to a customer at either a fixed or variable interest rate as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.
NOTE 20 LEGAL CONTINGENCIES
In the course of operations, we may become a party to legal proceedings. There are noproceedings in the normal course of business. At December 31, 2022, we do not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened legal proceedings to whichagainst the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject, that, in the opinion of management, may materially impact the financial condition of the Company. Items presented in prior periods have either been resolved in favor of the Company or have progressed to a point that any impact would be immaterial to the financial condition, operations or liquidity of the Company.
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NOTE 21 CAPITAL
Capital Requirements and Ratios
The Company meets eligibility criteria of a small bank holding company in accordance with the Board of Governors of the Federal Reserve Board’sSystem’s Small Bank Holding Company Policy Statement issued in February of 2015, and is no longer obligated to report consolidated regulatory capital.
The Bank is subject to various capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets, Tier 1 capital to average assets, and Common Equity Tier 1 capital to risk-weighted assets. As of December 31, 2019,2022, the Bank meets all capital adequacy requirements to which it is subject.
The Bank’s actual capital amounts and ratios are presented in the following table as of December 31, 20192022 and 2018,2021, respectively.
| Schedule of capital requirements | ||||||||
| Actual | Minimum Capital Requirement | Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||
| (Dollars are in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||
| December 31, 2022: | ||||||||
| Total Capital to Risk Weighted Assets | $ | 93,028 | 16.50% | $45,106 | 8.0% | $ | 56,382 | 10.0% |
| Tier 1 Capital to Risk Weighted Assets | 86,301 | 15.31% | 33,829 | 6.0% | 45,106 | 8.0% | ||
| Tier 1 Capital to Average Assets | 86,301 | 10.40% | 33,206 | 4.0% | 41,508 | 5.0% | ||
| Common Equity Tier 1 Capital | ||||||||
| to Risk Weighted Assets | 86,301 | 15.31% | 25,372 | 4.5% | 36,648 | 6.5% | ||
December 31, 2021: | ||||||||
| Total Capital to Risk Weighted Assets | $ | 85,890 | 16.23% | $ 42,332 | 8.0% | $ | 52,915 | 10.0% |
| Tier 1 Capital to Risk Weighted Assets | 79,274 | 14.98% | 31,749 | 6.0% | 42,332 | 8.0% | ||
| Tier 1 Capital to Average Assets | 79,274 | 9.86% | 32,145 | 4.0% | 40,181 | 5.0% | ||
| Common Equity Tier 1 Capital | ||||||||
| to Risk Weighted Assets | 79,274 | 14.98% | 23,812 | 4.5% | 34,395 | 6.5% | ||
| Actual | Minimum Capital Requirement | Minimum to Be Well Capitalized Under Prompt CorrectiveAction Provisions | ||||||||||||||||||||||
| (Dollars are in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
| December 31, 2019: | ||||||||||||||||||||||||
| Total Capital to Risk Weighted Assets | 72,109 | 14.83 | % | $ | 38,910 | 8.0 | % | 48,637 | 10.0 | % | ||||||||||||||
| Tier 1 Capital to Risk Weighted Assets | 66,741 | 13.72 | % | 29,182 | 6.0 | % | 38,910 | 8.0 | % | |||||||||||||||
| Tier 1 Capital to Average Assets | 66,741 | 9.43 | % | 28,313 | 4.0 | % | 35,391 | 5.0 | % | |||||||||||||||
| Common Equity Tier 1 Capital | ||||||||||||||||||||||||
| to Risk Weighted Assets | 66,741 | 13.72 | % | 21,887 | 4.5 | % | 31,614 | 6.5 | % | |||||||||||||||
December 31, 2018: | ||||||||||||||||||||||||
| Total Capital to Risk Weighted Assets | 70,002 | 14.39 | % | $ | 38,912 | 8.0 | % | 48,640 | 10.0 | % | ||||||||||||||
| Tier 1 Capital to Risk Weighted Assets | 64,666 | 13.29 | % | 29,184 | 6.0 | % | 38,912 | 8.0 | % | |||||||||||||||
| Tier 1 Capital to Average Assets | 64,666 | 9.59 | % | 26,960 | 4.0 | % | 33,700 | 5.0 | % | |||||||||||||||
| Common Equity Tier 1 Capital | ||||||||||||||||||||||||
| to Risk Weighted Assets | 64,666 | 13.29 | % | 21,888 | 4.5 | % | 31,616 | 6.5 | % | |||||||||||||||
Accordingly, as of December 31, 20192022 and 2018,2021, the Bank was well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since such dates that management believes have changed the Bank’s category.
The Bank is also subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The final rules require the Bank to comply with the following minimum capital ratios: (i) a Common Equity Tier 1 capital to risk-weighted assets ratio of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum Common Equity Tier 1 capital to risk-weighted assets ratio of 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The phase-in of theBank’s capital conservation buffer requirement began on January 1, 2016,was 8.50% at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019.December 31, 2022. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a Common Equity Tier 1 capital to risk-weighted assets ratio above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. TheAs of both December 31, 2022 and 2021, the Common Equity Tier 1 capitalCapital to risk-weighted assetsRisk-weighted Assets ratio, the Tier 1 Capital to Risk-weighted Assets ratio, the Total Capital to Risk-weighted Assets ratio, and the Tier 1 Capital to Average Assets ratio of the Bank, was 13.72% as of December 31, 2019, exceedingall exceeded the minimum requirement. The Tier 1 and total capital to risk-weighted asset ratios of the Bank were 13.72% and 14.83%, respectively, as of December 31, 2019, exceeding the minimum requirements. The leverage ratio of the Bank was 9.43% as of December 31, 2019, also exceeding the minimum requirements.
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NOTE 22 FAIR VALUES
Fair value is defined asThe Company established a hierarchal disclosure framework associated with the exchange price that would be received for an asset or paid to transfer a liability (an exit price)level of pricing observability utilized in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair Value Measurementsmeasuring assets and Disclosures also establish fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuringliabilities at fair value. The standard describes three broad levels of inputs that may be used to measure fair value:defined by this hierarchy are:
Level 1: Quoted prices are available in active markets for identical assets or liabilities. liabilities as of the reported date.
Level 12: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include debt and equity securities and derivative contracts that are traded in an exchange market, as well as U. S. Treasury, other U. S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2: Significant observable inputs other than Level 1 prices such asitems for which quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that areavailable but traded less frequently, than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputsitems that are observable invalued using other financial instruments, the market orparameters of which can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.
directly observed.
Level 3: Significant unobservable inputsAssets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are supported by little or no market activity and that are significant to themeasured using management’s best estimate of fair value, ofwhere the assets and liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for whichinputs into the determination of fair value requiresrequire significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy are as follows:
Investment Securities Available for Sale- Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices. The Company’s available for sale securities, totaling $50.6$96.1 million and $59.4$107.4 million atas of December 31, 20192022 and 2018,2021, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service.
Loans -The Company does not record loans at fair value on a recurring basis. Real estate serves as collateral on a substantial majority of the Company’s loans. From time to timeWhen a loan is considered impaired, and an allowance for loan losses isa specific reserve may be established. Loans, which are deemed to be impaired and require a reserve, are primarily valued on a non-recurring basis at the fair valuesvalue of the underlying real estate collateral. SuchWhere there is no observable market price, such fair values are obtained using independent appraisals, which management evaluates and determinesto determine whether or not the fair value of the collateral is further impaired below the appraised value and there is no observable market price, or an appraised value does not includeadjusts for estimated costs of disposition and management must make an estimate, thedisposition. The Company records the impaired loanloans as nonrecurring Level 3.3 assets. The aggregate carrying amount of impaired loans carried at fair value was $5.3 million$213,000 and $7.7 million at$714,000 as of December 31, 20192022 and 2018,2021, respectively.
Foreclosed AssetsOther Real Estate Owned –Foreclosed assets areOther real estate owned is adjusted to fair value upon transfer of the loans, or former bank premises, to foreclosed assets. Foreclosedother real estate owned. These assets are carried at the lower of thetheir carrying value or fair value. Fair value is based upon independent observable market prices, or appraised values of the collateral with a third party estimate ofwhen available, reduced by estimated disposition costs, which the Company considers to be nonrecurring Level 2 inputs. When the appraised value isobservable market prices are not available, management determines the fair value of the collateralforeclosed asset using independent third-party appraisals, evaluated to determine whether or not the property is further impaired below the appraised value, and there is no observable market price, or an appraised value does not includeadjusts for estimated costs of disposition and management must make an estimate, thedisposition. The Company records the foreclosed assetassets as nonrecurring Level 3. The aggregate carrying amounts of foreclosed assets were $3.4approximately $261,000 and $1.4 million and $5.9 million atas of December 31, 20192022 and 2018,2021, respectively.
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Assets and liabilities measured at fair value are as follows as of December 31, 20192022 (for purpose of this table the impaired loans are shown net of the related allowance):
| Schedule of summary of assets and liabilities measured at fair value | ||||||||||||||||||
(Dollars are in thousands) |
Quoted market price in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
Quoted market price in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) | ||||||||||||
(On a recurring basis) Available for sale investments | ||||||||||||||||||
| U.S. Treasuries | $ | — | $ | 11,685 | $ | |||||||||||||
| U.S. Government Agencies | $ | - | $ | 15,633 | $ | - | — | 9,399 | — | |||||||||
| Taxable municipals | - | 4,442 | - | — | 16,815 | — | ||||||||||||
| Corporate bonds | - | 5,523 | - | — | 3,136 | — | ||||||||||||
| Mortgage backed securities | - | 25,051 | - | — | 55,041 | — | ||||||||||||
(On a non-recurring basis) Other real estate owned | - | - | 3,393 | — | — | 261 | ||||||||||||
| Impaired loans: | ||||||||||||||||||
| Real estate secured: | ||||||||||||||||||
| Commercial | - | - | 2,709 | — | — | 205 | ||||||||||||
| Construction and land development | - | - | 70 | — | — | — | ||||||||||||
| Residential 1-4 family | - | - | 1,274 | — | — | 8 | ||||||||||||
| Multifamily | - | - | - | — | — | — | ||||||||||||
| Farmland | - | - | 985 | — | — | — | ||||||||||||
| Commercial | - | - | 214 | — | — | — | ||||||||||||
| Agriculture | - | - | - | — | — | — | ||||||||||||
| Consumer installment loans | - | - | - | — | — | — | ||||||||||||
| All other loans | - | - | - | — | — | — | ||||||||||||
| Total | $ | - | $ | 50,649 | $ | 8,645 | $ | — | $ | 96,076 | $ | 474 | ||||||
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Assets and liabilities measured at fair value are as follows as of December 31, 20182021 (for purpose of this table the impaired loans are shown net of the related allowance):
(Dollars are in thousands) |
Quoted market price in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
Quoted market price in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) | ||||||||||||
(On a recurring basis) Available for sale investments | ||||||||||||||||||
| U.S. Treasuries | $ | — | $ | 7,671 | $ | — | ||||||||||||
| U.S. Government Agencies | $ | - | $ | 19,389 | $ | - | — | 9,089 | — | |||||||||
| Taxable municipals | - | 4,313 | - | — | 22,980 | — | ||||||||||||
| Corporate bonds | - | 5,320 | - | — | 2,019 | — | ||||||||||||
| Mortgage backed securities | - | 30,385 | - | — | 65,599 | — | ||||||||||||
(On a non-recurring basis) Other real estate owned | - | - | 5,937 | — | — | 1,361 | ||||||||||||
| Impaired loans: | ||||||||||||||||||
| Real estate secured: | ||||||||||||||||||
| Commercial | - | - | 2,282 | — | — | 221 | ||||||||||||
| Construction and land development | - | - | 114 | — | — | — | ||||||||||||
| Residential 1-4 family | - | - | 3,179 | — | — | 287 | ||||||||||||
| Multifamily | - | - | 75 | — | — | — | ||||||||||||
| Farmland | - | - | 1,906 | — | — | 180 | ||||||||||||
| Commercial | - | - | 96 | — | — | 26 | ||||||||||||
| Agriculture | - | - | - | — | — | — | ||||||||||||
| Consumer installment loans | - | - | 6 | — | — | — | ||||||||||||
| All other loans | - | - | - | — | — | — | ||||||||||||
| Total | $ | - | $ | 59,407 | $ | 13,595 | $ | — | $ | 107,358 | $ | 2,075 | ||||||
For Level 3 assets measured at fair value on a recurring or non-recurring basis as of December 31, 20192022 and 2018,2021, the significant unobservable inputs used in the fair value measurements were as follows:
| Schedule of significant unobservable inputs In level 3 assets | ||||||||||||||||||||
(Dollars in thousands) |
Fair Value at December 31, 2019 |
Fair Value at December 31, 2018 |
Valuation Technique |
Significant Unobservable Inputs |
General Range of Significant Unobservable Input Values |
Fair Value at December 31, 2022 |
Fair Value at December 31, 2021 |
Valuation Technique |
Significant Unobservable Inputs |
General Range of Significant Unobservable Input Values | ||||||||||
| Impaired Loans | $ | 5,252 | $ | 7,658 | Appraised Value/Discounted Cash Flows/Market Value of Note | Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell | 0 – 18% | $ | 213 | $ | 714 | Appraised Value | Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell | 0 – 18% | ||||||
| Other Real Estate Owned | $ | 3,393 | $ | 5,937 | Appraised Value/Comparable Sales/Other Estimates from Independent Sources | Discounts to reflect current market conditions and estimated costs to sell | 0 – 18% | $ | 261 | $ | 1,361 | Appraised Value/Comparable Sales/Other Estimates from Independent Sources | Discounts to reflect current market conditions and estimated costs to sell | 0 – 18% | ||||||
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Fair Value of Financial Instruments
The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a recurring basis are as follows:
| Schedule of estimated fair value of financial instruments | ||||||||||||||||||||
| Fair Value Measurements | ||||||||||||||||||||
(Dollars are in thousands) |
Carrying Amount |
Fair Value | Quoted market price in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) | |||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Financial instruments – assets | ||||||||||||||||||||
| Net loans | $ | 577,886 | $ | 552,675 | $ | — | $ | 552,462 | $ | 213 | ||||||||||
| Financial instruments – liabilities | ||||||||||||||||||||
| Time deposits | 188,233 | 187,179 | — | 187,179 | — | |||||||||||||||
| Borrowed funds | 16,496 | 14,825 | — | 14,825 | — | |||||||||||||||
| December 31, 2021 | ||||||||||||||||||||
| Financial instruments – assets | ||||||||||||||||||||
| Net loans | $ | 587,009 | $ | 580,024 | $ | — | $ | 579,310 | $ | 714 | ||||||||||
| Financial instruments – liabilities | ||||||||||||||||||||
| Time deposits | 196,285 | 198,353 | — | 198,353 | — | |||||||||||||||
| Borrowed funds | 16,496 | 15,649 | — | 15,649 | — | |||||||||||||||
| Fair Value Measurements | ||||||||||
(Dollars are in thousands) |
Carrying Amount |
Fair Value | Quoted market price in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) | |||||
| December 31, 2019 | ||||||||||
| Financial Instruments – Assets | ||||||||||
| Net Loans | $ | 557,176 | $ | 550,495 | $ | - | $ | 545,243 | $ | 5,252 |
| Financial Instruments – Liabilities | ||||||||||
| Time Deposits | 257,406 | 259,325 | - | 259,325 | - | |||||
| FHLB Advances | 5,000 | 5,054 | - | 5,054 | - | |||||
| December 31, 2018 | ||||||||||
| Financial Instruments – Assets | ||||||||||
| Net Loans | $ | 541,760 | $ | 534,425 | $ | - | $ | 526,767 | $ | 7,658 |
| Financial Instruments – Liabilities | ||||||||||
| Time Deposits | 258,850 | 258,671 | - | 258,671 | - | |||||
| FHLB Advances | 7,000 | 7,215 | - | 7,215 | - | |||||
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates.
Estimated fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Company’s fair value estimates, methods and assumptions are set forth below for the Company’s other financial instruments.
The carrying value of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities trust preferred securities and accrued interest approximates fair value and areis excluded from the table above.
In accordance with our adoption of ASU 2016-01 in 2018, theThe methods utilized to measure the fair value of financial instruments represent an approximation of exit price; however, an actual exit price may differ.
NOTE 23 REVENUE FROM CONTRACTS WITH CUSTOMERS
All of our revenue from contracts with customers as defined in ASC 606 is recognized within Noninterest Income.noninterest income. The following table presents Noninterest Income by revenue stream for the years ended December 31, 20192022 and 2018.2021.
| Schedule of revenue from contracts with customers | ||||||||||||||||
| (Dollars are in thousands) | 2019 | 2018 | 2022 | 2021 | ||||||||||||
| Service charges and fees | $ | 3,605 | $ | 3,703 | $ | 3,969 | $ | 3,724 | ||||||||
| Card Processing and interchange income | 3,014 | 2,809 | ||||||||||||||
| Gain on sale and leaseback transactions (1) | 803 | - | ||||||||||||||
| Card processing and interchange income | 3,769 | 3,871 | ||||||||||||||
| Insurance and investment fees | 663 | 603 | 954 | 1,029 | ||||||||||||
| Gains on sales of available-for-sale securities (1) | — | 322 | ||||||||||||||
| Other noninterest income | 567 | 492 | 548 | 1,034 | ||||||||||||
| Total Noninterest Income | $ | 8,652 | $ | 7,607 | ||||||||||||
| Total noninterest income | $ | 9,240 | $ | 9,980 | ||||||||||||
(1) – Not within the scope of ASU 2014-9
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Certain revenues are earned from contracts with customers. These revenues are recognized when the promised services are rendered to the customer and reflects the entitled consideration received in exchange for those services.
Service charges and fees – revenue is recognized on deposit services based on published fees for the services provided. These fees may be collected on a transaction basis, at the time the service is rendered or periodically based on the period over which the service is provided. Transaction based fees include services such as stop payment requests, paper statement rendering and ITM usage fees. Periodic fees include such charges as monthly account maintenance fees. Overdraft fees are realized at the time the overdraft occurs.
Card processing and interchange fees – Card-related interchange revenue is primarily comprised of debit and credit card income. Debit and credit card income is earned when customers’ debit or credit cards are processed through a card payment network. Card-related interchange income is recognized at the time the customer transactions settle.
Insurance and investment fees - Insurance and investment fee income consists of commissions received on annuity and investment product sales through a third-party service provider. Performance is generally satisfied at the time an annuity policy is issued, or at the execution of an investment transaction.
NOTE 24 NONINTEREST EXPENSES
Other operating expenses, included as part of noninterest expenses, consisted of the following for the years ended December 31, 20192022 and 2018:2021:
| Schedule of noninterest expenses | ||||||||||||||||
| (Dollars are in thousands) | 2019 | 2018 | 2022 | 2021 | ||||||||||||
| Advertising | $ | 315 | $ | 437 | ||||||||||||
| Advertising, sponsorships and donations | $ | 162 | $ | 252 | ||||||||||||
| ATM network expense | 1,832 | 1,731 | 1,471 | 1,473 | ||||||||||||
| Legal and professional fees | 1,842 | 1,353 | 1,120 | 922 | ||||||||||||
| Consulting fees | 272 | 269 | ||||||||||||||
| Loan related expenses | 581 | 573 | 416 | 599 | ||||||||||||
| Printing and supplies | 146 | 289 | 160 | 133 | ||||||||||||
| FDIC insurance premiums | 222 | 381 | 217 | 266 | ||||||||||||
| Other real estate owned expenses, net | 635 | 1,026 | 176 | 506 | ||||||||||||
| Other operating expenses | 2,263 | 2,596 | 2,656 | 2,556 | ||||||||||||
| Total | $ | 7,836 | $ | 8,386 | $ | 6,650 | $ | 6,976 | ||||||||
NOTE 25 SUBSEQUENT EVENTS
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were available to be issued and has identified the following as a non-recognized subsequent event.
The 2019 novel coronavirus (COVID-19) has adversely affected, and may continue to adversely affect, economic activity globally, nationally and locally. FollowingOn February 27, 2023, the COVID-19 outbreak in December 2019 and January 2020, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00%board of directors declared a dividend of $0.06 per share payable on March 3, 202031, 2023 to shareholders of record as of March 15, 2023.
On February 27, 2023, the board of directors authorized the continuation of the Company’s repurchase of up to 500,000 shares of its common stock through March 31, 2024. This is a continuation of the repurchase program originally announced April 28, 2022, which was set to expire March 31, 2023. To the date of this announced continuation, 82,352 shares have been repurchased at an average price of $2.32 per share, leaving 417,648 shares available for repurchase. Repurchases made through this program will be made through open market purchases or in privately negotiated transactions.
On February 27, 2023 the first time. Such events also may adversely affect businessboard of directors approved and consumer confidence, generally, andadopted the New Peoples Bankshares, Inc. Long-Term Cash Incentive Plan (the Plan). The Plan, which became effective on February 27, 2023, provides for cash incentive awards to Plan participants based on the Company’s quarterly earnings per share of common stock over the period specified in the Plan. Certain members of management or highly compensated employees of the Company or the Bank are eligible to participate in the Plan. On February 28, 2023, the executive committee of the board of directors awarded a combined 500,000 notional shares to five members of management. Individual awards are settled solely in cash, determined by multiplying quarterly earnings per share by the number of notional shares covered by a Plan award. The Plan does not grant participants equity in the Company and its customers, and their respective suppliers, vendors and processors may be adversely impacted. On March 3 and March 16, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 and 100 basis points, respectively. As are result of these reductions the target rate is 0.00% - .25%. These reductions in interest rates and other effects of the COVID-19 pandemic may adversely impact the Company’s financial condition and results of operations.does not create any shareholders rights.
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As a result of the severe economic downturn during the first quarter of 2020, we will be assessing our methodology and adjusting qualitative factors and assessing the potential future impact of these economic changes on our loan portfolio and the related allowance for loan losses, which may result in additional provisions to the allowance.
At this time we cannot state how the economic downturn will affect the financial position, operations or liquidity of the Company. Throughout the following discussion, we have attempted to input additional commentary addressing the uncertainty of the current economic conditions.
NOTE 26 RECENT ACCOUNTING DEVELOPMENTS
The following is a summary of recent authoritative announcements:
In February 2016, the FASB amended the Leases topic of the ASC to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments were effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. As discussed in Note 17, the Company early adopted ASU No. 2016-02 Leases (Topic 842) in the second quarter of 2017.
In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The guidance became effective January 1, 2018. The Company completed an assessment of revenue streams and a review of related contracts potentially affected by the ASU and concluded that the ASU did not materially change the method in which the Companyrecognizes revenue for these revenue streams. As such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.
In June 2016, per ASU No.the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, ‘Financial“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,’Instruments.” The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the FASB issued guidanceASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration. The Company adopted ASU 2016-13 as of January 1, 2023 in accordance with the required implementation date and recorded the impact of adoption to changeretained earnings, net of deferred income taxes, as required by the accountingstandard. The adjustment recorded at adoption, was not significant to the overall allowance for credit losses or shareholders’ equity as compared to December 31, 2022 and consisted of adjustments to the allowance for credit losses on loans, as well as an adjustment to the Company’s reserve for unfunded loan commitments. Subsequent to adoption, the Company will record adjustments to its allowance(s) for credit losses and modifyreserves for unfunded commitments through the impairment modelprovision for certain debt securities. Subsequently, per ASU No. 2019-10, implementation forcredit losses in the Company is delayed until reporting periods beginning after December 15, 2022. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. consolidated statements of income.
The Company is currently evaluatingutilizing a third-party model to tabulate its estimate of current expected credit losses, using a loan-level probability of default / loss given default cash flow method with an exposure at default model methodology. In accordance with ASC 326, the effect that implementationCompany has segmented its loan portfolio based on similar risk characteristics which included call report classification and risk rating. The Company primarily utilizes the cohort and the probability of default/loss given default methodologies for its reasonable and supportable forecasting of current expected credit losses. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the new standard will have on its financial position, resultscalculation, the Company may consider the following qualitative adjustment factors: changes to: lending policies and procedures, national and local economic conditions, the experience and ability of operations,management and cash flows.
In December 2016,staff; the FASB issued technical correctionsvolume and improvements toseverity of past due, rated and nonaccrual assets, loan review system, collateral value, concentrations of credit, and legal or regulatory requirements and competition. The Company’s CECL implementation process was overseen by the Revenue from Contracts with Customers Topic. These corrections make a limited number of revisions to several piecesAudit and Risk Committee of the revenue recognition standard issued in 2014. The amendment became effective on January 1, 2018board of directors, and did not have a material effect on the financial statements.
In January 2017, the FASB updated the Accounting Changesmanaged by credit, finance and Error Correctionsrisk management personnel, to include an assessment of data availability and the Investments—Equity Methodgap analysis, data collection, consideration and Joint Ventures Topicsanalysis of the ASC. The ASU incorporates into the ASC recent Securities Exchange Commission (SEC) guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statementsmultiple loss estimation methodologies, an assessment of adopting the revenue, leases,relevant qualitative factors and credit losses standards. The ASU was effective upon issuance. The Company has assessed thecorrelation analysis of multiple potential loss drivers and their impact on additional disclosure requirements for each of the standards and determined them to not have a material effect on its financial position, results of operations or cash flows.
In February 2017, the FASB amended the Other Income Topic of the ASC to clarify the scope of the guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. The amendment became effective on January 1, 2018 and did not have a material effect on the financial statements.
In September 2017, the FASB updated the Revenue from Contracts with Customers and the Leases Topics of the ASC. The amendments incorporate into the ASC recent SEC guidance about certain public business entities (PBEs) electing to use the non-PBE effective dates solely to adopt the FASB’s new standards on revenue and leases. The amendments were effective upon issuance. The Company has assessed the impact of adoption of this guidance and determined it does not have a material effect on its financial statements.
In November 2017, the FASB updated the Income Statement and Revenue from Contracts with Customers Topics of the ASC. The amendments incorporate into the ASC recent SEC guidance related to revenue recognition. The amendments were effective upon issuance and did not have a material effect on the financial statements.
In February 2018, the FASB Issued (ASU 2018-02), Income Statement (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which required Companies to reclassify the stranded effects in other comprehensive income to retained earnings as a result of the change in the tax rates under the Tax Cuts and Jobs Act. The Company early-adopted this pronouncement by retrospective application to the period ended December 31, 2017, when the effect of the change in the tax rate under the Tax Cuts and Jobs Act was recognized. The impact of the reclassification from other comprehensive income to retained earnings was $98 thousand as of December 31, 2017.
In February 2018, the FASB amended the Financial Instruments Topic of the ASC. The amendments clarify certain aspects of the guidance issued in ASU 2016-01. The amendments were effective for the third quarter of 2018 subsequent to adopting the amendments in ASU 2016-01. All entities were permitted to early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they had adopted ASU 2016-01. These amendments did not have a material effect on the Company’s financial statements.
In March 2018,historical loss experience. During 2022, the FASB updated the Debt Securities and the Regulated Operations Topics of the ASC. The amendments incorporate into the ASC recent SEC guidance which was issuedCompany calculated its current expected credit losses model in parallel to its incurred loss model in order to makefurther refine the relevant interpretivemethodology and model. In addition, the Company engaged a third-party to perform a comprehensive model validation.
Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance consistentto align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current authoritative accountingexpected credit losses; (2) development, governance, and auditing guidancedocumentation of a systematic methodology; (3) documenting the results of a systematic methodology; and SEC rules and regulations. The amendments were effective upon issuance.(4) validating a systematic methodology.
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments didprovide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.The Company has adopted an alternative reference rate for loans based on LIBOR and is assessing alternatives for financial instruments referencing LIBOR that do not have a material effectallow for the substitution of an alternative reference rate. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial statements.
In March 2018, the FASB updated the Income Taxes Topic of the ASC. The amendments incorporate into the ASC recent SEC guidance relatedinstruments that have not already been transitioned to the income tax accounting implications of the Tax Cuts and Jobs Act. The amendments were effective upon issuance. These amendments did not have a material effect on the Company’s financial statements.an alternative reference rate.
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In May 2018,June 2022, the FASB amended the Financial Services—Depository and Lending Topic of the ASC to remove outdated guidance related to Circular 202. The amendments were effective upon issuance and did not have a material effect on the financial statements.
In July 2018, the FASB amended the Leases Topic of the ASC to make narrow amendments to clarify how to apply certain aspects of the new standard. The amendments are effective for reporting periods beginning after December 15, 2018. These amendments did not have a material effect on the Company’s financial statements. As discussed in Note 17, the Company early adoptedissued ASU No. 2016-02 Leases2022-03, “Fair Value Measurement (Topic 842).
In August 2018, the FASB amended the820): Fair Value Measurement Topicof Equity Securities Subject to Contractual Sale Restrictions”. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the ASC.unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments areASU is effective for all entities for fiscal years, andincluding interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its financial statements.
In August 2018, the FASB amended the Intangibles—Goodwill and Other Topic of the ASC to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019.2023. Early adoption is permitted. The Company does not expect these amendmentsthe adoption of ASU 2022-03 to have a material effectimpact on its consolidated financial statements.
In October 2018,March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB amended the Derivatives and Hedging Topicas part of its post-implementation review of the ASCcredit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to expand the listdisclose current-period gross write-offs for financing receivables and net investment in leases by year of U.S. benchmark interest rates permittedorigination in the application of hedge accounting.vintage disclosures. The amendments werein this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2018. Early adoption was permitted. These amendments did not have a material effect on the Company’s financial statements.
In October 2018, the FASB amended the Consolidation topic of the ASC for determining whether a decision-making fee is a variable interest. The amendments require organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company will apply a full retrospective approach in which financial statements for each individual prior period presented and the opening balances of the earliest period presented are adjusted to reflect the period-specific effects of applying the amendments. The Company does not expect these amendments to have a material effect on its financial statements.
In November 2018, the FASB amended the Collaborative Arrangements Topic of the ASC to clarify the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019, and2022, including interim periods within those fiscal years. Early adoption is permitted. The Company doesFor entities that have not expect these amendments to have a material effect on its financial statements.
In November 2018,yet adopted ASU 2016-13, the FASB issued guidance to amendeffective dates for ASU 2022-02 are the Financial Instruments—Credit Losses topic ofsame as the ASC. The guidance aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted foreffective dates in accordance with the leases topic. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019.ASU 2016-13. Early adoption is permitted for all organizations for periods beginning after December 15, 2018.if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently in the process of evaluatingassessing the impact of adoption of this guidancethat ASU 2022-02 will have on theits consolidated financial statements.
In December 2018,2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”. ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance providing narrow-scope improvements for lessors, that providesin Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.
To ensure the relief in Topic 848 covers the accounting for sales, use and similar taxes,period of time during which a significant number of modifications may take place, the accounting for other costs paid by a lessee that may benefit a lessor, and variable payments when contracts have lease and non-lease components.ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The amendments wereASU is effective for theall entities upon issuance. The Company for reporting periods beginning after December 15, 2018. Early adoption was permitted. These amendments did not have a material effectis assessing ASU 2022-06 and its impact on the Company’s financial statements.
In March 2019, as part of the FASB’s ongoing annual improvements project, it amended the Leases Topic of the ASC to clarify the Codification more generally and/or to correct unintended application of guidance. The amendments relate to determining the fair value of the underlying asset by lessors that are not manufacturers or dealers, presentation on the statement of cash flows – sales-typetransition away from LIBOR for its loan and direct financing leases, and transition disclosures related to the Accounting Changes and Error Corrections Topic. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In April 2019, as part of the FASB’s ongoing annual improvements project, it amended various Topics of the ASC related toother financial instruments that have not already been transitioned to clarify the Codification more generally and/or to correct unintended application of guidance. The amendments relate to Recognition and Measurement of Financial Assets and Financial Liabilities, Measurement of Credit Losses on Financial Instruments, and Targeted Improvements to Accounting for Hedging Activities. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.an alternative reference rate.
In May 2019, the FASB issued targeted transition relief for entities which irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the amendments to the transition guidance for ASU 2016-13 will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of adoption of this guidance on its financial statements.
In November, 2019, the FASB released ASU 2019-10, ‘Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),’ in which the FASB shared a new philosophy to extend and simplify how effective dates for certain major Updates would be staggered between larger public companies (bucket one) and all other entities (bucket two). A major Update would first be effective for bucket-one entities. For bucket-two entities, including the Company, it is anticipated that the FASB will consider requiring an effective date staggered at least two years after bucket one for major Updates. Generally, it is expected that early application would continue to be allowed for all entities. The Company is considered a bucket-two entity due to its eligibility to be a smaller reporting company, per the SEC. This Update applies to ASU 2016-13, as discussed above, ASU 2017-12, which does not apply to the Company, and ASU 2016-02, which the Company has already early-adopted, as discussed above.
In December, 2019, the FASB released ASU 2019-12, ‘Income Taxes (Topic 740),’ which simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, improve consistent application, and simplify GAAP for other areas of Topic 740. The amendments in this Update are effective the Company for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company does not expect these amendments to have a material effect on its financial statements.
In January, 2020, the FASB released ASU 2020-01, ‘Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815),’ which clarify certain interactions between the guidance to account for certain equity securities under Topic 321, 323 and 815, and improve current GAAP by reducing diversity in practice and increasing comparability of accounting. The Company does not expect these amendments to have a material effect on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
68
NOTE 27PARENT CORPORATION ONLY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 20192022 AND 20182021
(Dollars in Thousands)
| Schedule of parent corporation only condensed balance sheets | ||||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||
| ASSETS | ||||||||||||||||
| Due from banks | $ | 209 | $ | 361 | $ | 521 | $ | 187 | ||||||||
| Investment in subsidiaries | 69,463 | 66,095 | 72,360 | 78,460 | ||||||||||||
| Other assets | 1,737 | 1,563 | 1,150 | 1,645 | ||||||||||||
| Total Assets | $ | 71,409 | $ | 68,019 | ||||||||||||
| Total assets | $ | 74,031 | $ | 80,292 | ||||||||||||
| LIABILITIES | ||||||||||||||||
| Accrued interest payable | $ | 182 | $ | 197 | $ | 277 | $ | 104 | ||||||||
| Accrued expenses and other liabilities | 129 | 76 | 39 | 61 | ||||||||||||
| Trust preferred securities | 16,496 | 16,496 | 16,496 | 16,496 | ||||||||||||
| Total Liabilities | 16,807 | 16,769 | ||||||||||||||
| Total liabilities | 16,812 | 16,661 | ||||||||||||||
| STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Common stock - $2.00 par value, 50,000,000 shares authorized; 23,922,086 shares issued and outstanding at both December 31, 2019 and 2018 | 47,844 | 47,844 | ||||||||||||||
| SHAREHOLDERS’ EQUITY | ||||||||||||||||
Common stock - $2.00 par value, 50,000,000 shares authorized; 23,848,491 and 23,922,086 shares issued and outstanding at December 31, 2022 and 2021, respectively | 47,697 | 47,844 | ||||||||||||||
| Additional paid capital | 14,570 | 14,570 | 14,546 | 14,570 | ||||||||||||
| Retained deficit | (7,869 | ) | (9,928 | ) | ||||||||||||
| Accumulated other comprehensive income (loss) | 57 | (1,236 | ) | |||||||||||||
| Total Stockholders’ Equity | 54,602 | 51,250 | ||||||||||||||
| Total Liabilities and Stockholders’ Equity | $ | 71,409 | $ | 68,019 | ||||||||||||
| Retained earnings | 8,917 | 2,031 | ||||||||||||||
| Accumulated other comprehensive loss | (13,941 | ) | (814 | ) | ||||||||||||
| Total shareholders’ equity | 57,219 | 63,631 | ||||||||||||||
| Total liabilities and shareholders’ equity | $ | 74,031 | $ | 80,292 | ||||||||||||
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 20192022 AND 20182021
(Dollars in thousands)
| Schedule of parent corporation only condensed statements of income | ||||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||
| Income | ||||||||||||||||
| Miscellaneous income | $ | 26 | $ | 23 | $ | 22 | $ | 13 | ||||||||
| Dividends from subsidiaries | 760 | — | 1,749 | 430 | ||||||||||||
| Undistributed income of subsidiaries | 2,076 | 1,681 | 7,027 | 7,026 | ||||||||||||
| Total income | 2,862 | 1,704 | 8,798 | 7,469 | ||||||||||||
| Expenses | ||||||||||||||||
| Trust preferred securities interest expense | 796 | 773 | 729 | 420 | ||||||||||||
| Professional fees | 154 | 147 | 116 | 99 | ||||||||||||
| Other operating expenses | 60 | 66 | 57 | 58 | ||||||||||||
| Total Expenses | 1,010 | 986 | ||||||||||||||
| Total expenses | 902 | 577 | ||||||||||||||
| Income before Income Taxes | 1,852 | 717 | ||||||||||||||
| Income Tax Benefit | (207 | ) | (202 | ) | ||||||||||||
| Net Income | $ | 2,059 | $ | 919 | ||||||||||||
| Income before income taxes | 7,896 | 6,892 | ||||||||||||||
| Income tax benefit | (186 | ) | (118 | ) | ||||||||||||
| Net income | $ | 8,082 | $ | 7,010 | ||||||||||||
69
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 20192022 AND 20182021
(Dollars in thousands)
| 2019 | 2018 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net income | $ | 2,059 | $ | 919 | ||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Equity in undistributed earnings of subsidiaries | (2,075 | ) | (1,680 | ) | ||||
| Net decrease (increase) in other assets | (174 | ) | (203 | ) | ||||
| Net increase in other liabilities | 38 | 105 | ||||||
| Net Cash Used in Operating Activities | (152 | ) | (859 | ) | ||||
| Net decrease in Cash and Cash Equivalents | (152 | ) | (859 | ) | ||||
| Cash and Cash Equivalents, Beginning of year | 361 | 1,220 | ||||||
| Cash and Cash Equivalents, End of Year | $ | 209 | $ | 361 | ||||
| Supplemental Disclosure of Cash Paid During the Year for: | ||||||||
| Interest | $ | 811 | $ | 715 | ||||
| Taxes | $ | (34 | ) | $ | 320 | |||
| Schedule of parent corporation only condensed statements of cash flows | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 8,082 | $ | 7,010 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
| Equity in undistributed earnings of subsidiaries | (7,027 | ) | (7,026 | ) | ||||
| Net decrease in other assets | 495 | 24 | ||||||
| Net increase in other liabilities | 151 | (36 | ) | |||||
| Net cash provided by (used in) operating activities | 1,701 | (28 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Repurchase of common stock | (171 | ) | — | |||||
| Cash dividends paid | (1,196 | ) | — | |||||
| Net cash used in financing activities | (1,367 | ) | — | |||||
| Net increase (decrease) in cash and cash equivalents | 334 | (28 | ) | |||||
| Cash and cash equivalents, beginning of year | 187 | 215 | ||||||
| Cash and cash equivalents, end of year | $ | 521 | $ | 187 | ||||
NOTE 28 SELECTED QUARTERLY INFORMATION (UNAUDITED)
| 2019 QUARTERS | ||||||||||||||||||
| (Dollars in thousands except per share data) | Fourth | Third | Second | First | ||||||||||||||
| Income statement | ||||||||||||||||||
| Net interest income | $ | 6,252 | $ | 6,347 | $ | 6,282 | $ | 6,095 | ||||||||||
| Provision for loan losses | 760 | 1,020 | 135 | 135 | ||||||||||||||
| Noninterest income | 2,051 | 2,855 | 1,969 | 1,777 | ||||||||||||||
| Noninterest expense | 7,006 | 7,079 | 7,684 | 7,228 | ||||||||||||||
| Net income | 432 | 876 | 345 | 406 | ||||||||||||||
| Earnings per share, basic and diluted | 0.02 | 0.04 | 0.01 | 0.02 | ||||||||||||||
| Period end balance sheet | ||||||||||||||||||
| Total loans receivable | $ | 562,544 | $ | 558,174 | $ | 551,131 | $ | 553,585 | ||||||||||
| Total assets | 706,373 | 706,939 | 701,952 | 721,868 | ||||||||||||||
| Total deposits | 621,477 | 621,603 | 619,313 | 638,409 | ||||||||||||||
| Total stockholders’ equity | 54,602 | 54,206 | 53,179 | 52,026 | ||||||||||||||
| 2018 QUARTERS | ||||||||||||||||||
| (Dollars in thousands except per share data) | Fourth | Third | Second | First | ||||||||||||||
| Income statement | ||||||||||||||||||
| Net interest income | $ | 6,123 | $ | 6,027 | $ | 5,979 | $ | 6,078 | ||||||||||
| Noninterest income | 63 | 63 | 63 | 63 | ||||||||||||||
| Provision for loan losses | 2,069 | 1,917 | 1,870 | 1,750 | ||||||||||||||
| Noninterest expense | 7,381 | 7,579 | 7,895 | 7,639 | ||||||||||||||
| Net income (loss) | 680 | 208 | (49) | 80 | ||||||||||||||
| Earnings (loss) per share, basic and diluted | 0.03 | 0.01 | (0.00) | 0.00 | ||||||||||||||
| Period end balance sheet | ||||||||||||||||||
| Total loans receivable | $ | 547,096 | $ | 531,969 | $ | 527,379 | $ | 516,363 | ||||||||||
| Total assets | 682,142 | 679,517 | 685,123 | 671,570 | ||||||||||||||
| Total deposits | 595,991 | 598,212 | 591,551 | 589,947 | ||||||||||||||
| Total stockholders’ equity | 51,250 | 49,905 | 50,019 | 50,231 | ||||||||||||||
70
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.None
Item 9A.Controls and Procedures
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting of New Peoples Bankshares, Inc. New Peoples’ internal control system was designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting practices.
All internal control systems, no matter how well designed, have inherent limitations. Because of these inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation, and may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of New Peoples’ internal control over financial reporting as of December 31, 2019.2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control - Integrated Framework” issued in 2013. Based on this assessment, management concluded that the internal control over financial reporting was effective as of December 31, 2019.2022.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that is designed to ensure that material information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of December 31, 2019.2022.
Item 9B.Other Information
None.
| Other Information |
None.
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
Not applicable.
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
Item 10. Directors, Executive Officers and Corporate Governance
Directors
C. Todd Asbury, age 49, has served asThe information contained under the Company’s and the Bank’s President and Chief Executive Officer since December 17, 2014, and was elected to the Board in 2018. He previously served as Executive Vice President, Chief Financial Officer, and Treasurer of both the Company and the Bank from May 2009 to December 2014. Mr. Asbury served as Secretary of the Company and the Bank from May 2010 to December 2014. He served as Senior Vice President, Chief Financial Officer, and Treasurer of the Company and the Bank starting in December 2003. Prior to joining the Company, he worked for several community financial institutions and in public accounting. He is a certified public accountant. Mr. Asbury serves as Vice Chairman of the Board of Trustees of Bluefield College, as a member of the Board of Trustees of the Virginia Bankers’ Association School of Bank Management, as a member of Boardcaptions “Election of Directors, of the United Way of Southwest Virginia, a member of the Board of” “Incumbent Directors, of the Virginia Early Childhood Development Foundation, and as a member of the Southwest Virginia Workforce Development Board of Directors. Based on his background and extensive understanding of the operations of the Company, Mr. Asbury is well qualified to serve as a director.
Tim W. Ball, age 60, has been President, Owner and Operator of Ball Coal Company and owner of Tim Ball Trucking Company since 1985, and President of Tim Ball Farming Corporation since 1987. He is active in various community services. He has been a director of the Company since 1999. Mr. Ball’s experience in the coal industry and farming serve well for the Board of Directors because many of the Company’s customers are involved in these lines of business.
Gina D. Boggess, age 49, is the Coordinator of Religious Education for Sacred Heart Catholic Church in Princeton, West Virginia. A position she has held since 2018. Previously, she was involved in Met Resources, a family owned coal mining business, for ten years. Prior to that, she worked for a community bank for seven years in various positions, including branch management and as a financial services representative and marketing director. She is active in her community serving on various boards including the Princeton Rescue Squad, Community Foundation of the Virginias and as a state and local board member for Catholic Charities. Ms. Boggess’ experience in both the banking and coal industries as well as her community involvement in the Princeton, West Virginia market provides experience that is relevant to serving customers in this market.
J. Robert Buchanan, age 68 is a retired veteran Virginia banker with more than 40 years of industry experience. He served most recently as President, Chief Executive Officer and Director of First Region Bancshares and First Sentinel Bank from 2008 through 2015. He also held positions as Chief Financial Officer with National Bankshares, Inc., National Bank of Blacksburg, and Premier Bankshares Corporation; as Controller and Internal Auditor with Dominion Bank of Middle Tennessee; and internal auditor with Virginia Polytechnic Institute. He began his career as an assistant bank examiner in the Fifth National Bank Region of the OCC. Based on his extensive banking background, Mr. Buchanan was appointed to the Boards of the Bank and the Company on January 22, 2018. Based on his extensive banking experience, Mr. Buchanan is well qualified to serve as a director.
Joe M. Carter, age 82, is a retired general manager of Daugherty Chevrolet in Gate City, Virginia, where he served 43 years in this role until 2008. He served as an advisory Board member of the former Peoples Bank, Inc. and its successors, Premier Bank – Central, N.A. and First Virginia Bank Southwest. He has been a director of the Company since 1998. Mr. Carter’s experience in the automotive industry and consumer finance assists the Board of Directors in understanding these businesses which are important in the Company’s markets.
John D. Cox, age 63, is the owner of Cox Tractor Company, a farm equipment business that he has owned and operated since 1978 located in Kingsport, Tennessee. Mr. Cox is also a local farmer and entrepreneur. Mr. Cox has served as a director of the Company since 1998 and served as Chairman of the Board of Directors for the Company and the Bank for two years 2012 through 2014. Mr. Cox’s experience in agriculture and agriculturally-related small businesses support the Company’s significant customer base in these markets.
Charles H. Gent, Jr., age 60, is self-employed in the logging and farming industries in Honaker, Virginia and served as Vice Chairman of the Board of Directors of the Company and the Bank from 2012 to 2019. He is President of C & R Gent Logging. Mr. Gent is also involved in farming and various real estate ventures with his family. Previously, he was vice president and owner of Genwal Coal Company in Utah. He is actively involved in several community activities. He has been a director since 1998. Mr. Gent’s experience in logging and mining, as well as real estate and farming, provides experience to the Board relevant to understanding these businesses in the Company’s rural markets.
Eugene S. Hearl, age 88, is a retired banker who has over 44 years of banking experience serving in capacities as President and CEO for two community banks, TruPoint Bank and the former Cumberland Bank, and as the Regional President for the former Dominion Bank in the Southwest Virginia market. Mr. Hearl was appointed as a director of the Company on November 29, 2010. Mr. Hearl’s vast wealth of knowledge in community banking and the various industries in our local markets provide additional financial institution management skills and perspective to the Board.
Harold Lynn Keene, age 65, has been President of Keene Carpet, Inc. since 1976 and was President of Harold Keene Coal Co., Inc. until its sale in January 2011. He served as a bank director for Peoples Bank, Inc. and its successor Premier Bank-Central, N.A. He also served as an advisory board member with First Virginia Bank Southwest. He has been a director of the Company since 1998. He has been the Chairman of the Board of Directors of the Company and the Bank since May 2014. Mr. Keene’s experience in banking provides an important resource to the Board of Directors in dealing with bank and finance-related matters. His experience in the coal industry provides for a resource in the coal industry which is an important market for the Company.
Michael G. McGlothlin, age 68, is an attorney and President of the Appalachian College of Pharmacy (2005 to 2006 and 2008 to present). He also serves as President of Watkins Branch Development, LTD and The Inn on Garden Creek, LTD, as Secretary and Director of MGM Methane Corporation, as Trustee and Treasurer of the Appalachian School of Law, and as a Trustee and as Secretary of the McGlothlin Foundation. He has been the owner of Michael G. McGlothlin, Attorney-at-Law in Grundy, Virginia since 2002. He previously served as Commonwealth Attorney for Buchanan County, Virginia and as County Attorney for Buchanan County, Virginia. Mr. McGlothlin is past President of the Buchanan County Bar Association. Mr. McGlothlin has been a Director of the Company and the Bank since 1998. Mr. McGlothlin’s experience as an attorney, administrator, and organization and community leader provide the Board with a broad range of professional experience and his community involvement assists the Board in understanding the communities it serves and developing relationships within those communities.
Fred W. Meade, age 86, is the retired President of Big M Stores, Inc., a retail department store and flooring business, which he owned from 1973 to 2017. He also has been involved in real estate development and rental properties since 1980. He served as a Board member of Southwest Bank of Virginia and as an advisory board member for the former Bank of Virginia and Signet Bank. Mr. Meade served as a member of the Russell County Economic Development board for the past twenty-five years. In addition, he has served as a member of the Board of Directors of the Russell County Chamber of Commerce. He has been a director of the Company since 1998. Mr. Meade’s experience in the retail business, real estate, economic development, and bank board experience are very important to the Board of Directors.
B. Scott White, age 74, is a retired cattle rancher in Castlewood, Virginia, as well as a private investor and has served as Vice Chairman of the Board of Directors of the Company and the Bank since 2019. He was the President and CEO of White Stone Company in Castlewood, Virginia and White’s Pelletizing Company in Paradise, Pennsylvania until the companies were sold in 1997. Mr. White also previously served as General Manager of Sky Blue Tower Company, LLC, a cell phone tower rental company in southwest Virginia. Currently, he serves on the Board of Rockydale Quarries in Roanoke, Virginia. He has been a director since 1998. Mr. White’s experience as a small business owner and rancher provides experience to the Board relevant to its small business and agricultural customer base.
Executive” “Executive Officers Who Are Not Directors,
The following biographical information discloses the age” “Corporate Governance” and business experience“Delinquent Section 16(a) Reports” in the past five years for each of our executive officers who are not directors.2023 Proxy Statement that is required to be disclosed in this Item 10 is incorporated herein by reference.
John W. Beard, Jr., age 67, has served as Executive Vice President and Chief Credit Officer of the Bank since January 25, 2016. He had served as Senior Vice President and Senior Credit Officer of Hometrust Bank, from June 2014 to January 2016. Prior to that, he served as the Chief Credit Officer and Executive Vice President of Jefferson Federal Bank from March 2012 to May 2014. Prior to that, he served as the President and CEO of Citizens Bank; and Senior Credit Officer for Northeast Tennessee for First Tennessee Bank.
John J. Boczar, age 61, has served as Executive Vice President and Chief Financial Officer of both the Company and the Bank and Secretary and Treasurer the Company since January 2, 2018. With more than 35 years of community banking experience, he joined the company from Bank of North Carolina, where he served in various positions from 2012 through 2017; most recently as Senior Vice President and Director of Tax Reporting and Compliance. Prior to this role, Mr. Boczar was the Vice President and Corporate Accountant. Previous roles include Executive Vice President and Chief Financial Officer of Carolina Federal Savings Bank from 2006 to 2012. He also held financial and executive positions with two Pennsylvania community banks, and has an extensive background in public accounting.
Bryan T. Booher, age 49, has served as Executive Vice President and Chief Risk Officer of the Bank since January 27, 2020. He was previously employed by Highlands Union Bank from January 2004 until January 2020 in multiple roles including Interim President and Chief Executive Officer, Chief Risk Officer, Executive Vice President of Operations and Information Technology, and Senior Lending Officer. Prior to that, he was employed by BB&T from 1992 to 2004.
Frank Sexton, Jr., age 70, has served as Executive Vice President and Chief Operating Officer of both the Company and the Bank since December 2003. He had previously served as Interim Chief Financial Officer, Secretary, and Treasurer of the Company and Bank from December 17, 2014 to April 26, 2015, and again from June 30, 2017 to December 31, 2017. He had previously served as the Company’s Executive Vice President, Chief Financial Officer and Secretary from 2001 to 2003 and the Bank’s Executive Vice President and Cashier from 1998 to 2001.
71
CORPORATE GOVERNANCE
General
Our business and affairs are managed under the direction of the Board of Directors in accordance with the Virginia Stock Corporation Act and our Articles of Incorporation and Bylaws. Members of the Board are kept informed of our business through discussions with our executive officers and other officers, by reviewing materials provided to them and by participating in meetings of the Board and its committees.
Except for Mr. Asbury, the Board of Directors has determined that all members are independent as defined by the listing standards of the Nasdaq Stock Market (Nasdaq). In reaching this conclusion, the Board of Directors considered that the Company and its subsidiary bank may conduct business with companies of which certain members of the Board of Directors or members of their immediate families are or were directors or officers; however, in 2019, no transactions occurred with such companies.
Code of Ethics
The Board of Directors has adopted a Code of Ethics for our directors, executive officers, and senior officers who have financial responsibilities. The Code of Ethics is designed to promote, among other things, honest and ethical conduct, proper disclosure of financial information in our periodic reports, and compliance with applicable laws, rules and regulations by our senior officers who have financial responsibilities.
A copy of the Code of Ethics may be obtained on our website atwww.npbankshares.com/code-of-ethics.aspx.
The entire executive management team attends all Board meetings and remains for the duration of the meeting except when the Board goes into Executive Session. The schedule below lists all board committees and their members:
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(1)Company Committee
(2)Bank Committee
(3)Committee of both Company and Bank
(4)The Risk and Compliance Committee was combined with the Audit Committee in December 2019
* Committee Chair
A Alternate Member
Board Committees & Committee Meeting Attendance
The Boards of the Company and the Bank are identical in membership. The Boards have standing executive, nominating, audit and compensation committees (or committees performing similar functions) as listed below. The Board of Directors has adopted charters for its Audit Committee, Compensation Committee, ALCO Committee, and Nominating Committee to define the duties and responsibilities of those committees. These charters are available on our website atwww.npbankshares.com. The Board had established a Risk and Compliance Committee in conjunction with its formal written agreement with the Federal Reserve Bank of Richmond and the Virginia State Corporation Commission Bureau of Financial Institutions terminated effective January 20, 2016; however, the Risk and Compliance Committee was combined with the Audit Committee in December 2019. The Board may, from time to time, establish committees for specific, designated purposes.
There were twelve meetings of the Company’s Board of Directors in 2019. We encourage, but do not require, members of the Board of Directors to attend the annual meeting of shareholders. All of the directors attended the 2019 annual meeting of shareholders.
Executive Committee - The Company and the Bank each also have an Executive Committee that when necessary, is empowered to act on behalf of the full Board, on routine matters, between scheduled Board meetings. The Executive Committee did not meet in 2019.
Nominating Committee-The Nominating Committee was created in May 2006 to propose prospective members for nomination to the Board of Directors. All decisions by the Nominating Committee relating to the nominations of prospective Board members are reported to the full Board of Directors. All of the members of the Committee are independent as defined in the Nasdaq listing standards. The Nominating Committee met one time in 2019 at which time the recommendations for nominees in the 2019 proxy were discussed for the Board of Directors’ approval.
Compensation Committee-The Compensation Committee of the Company reviews management’s performance and compensation, and reviews and sets guidelines for compensation of all employees, including the Company’s executive officers. Currently, the individuals serving as Chief Executive Officer and as executive officers of the Company also serve in the same capacities, respectively, for the Bank, except for Messrs. Beard and Booher, who only serve as executive officers of the Bank and not the Company. These executive officers are presently compensated for services rendered by them to the Bank, but not for services rendered by them to the Company. All decisions by the Compensation Committees relating to the compensation of our executive officers are reported to the full Board of Directors. Except for his own compensation, Mr. Asbury provides information and advice to the Compensation Committee regarding the form and amount of compensation of executive officers. No other executive officer participates in this process with the Committee. The Compensation Committee may not delegate their authority and have not utilized a consultant.
The Chief Executive Officer does not set his own salary or bonus. The CEO sets the salary and bonuses of the other named executive officers, and provides input to the Committees regarding his own but does not participate in the Compensation Committee’s discussions or approval of his own compensation. Compensation recommendations are made by the Committee and the final decisions reside with the Board of Directors.
The Compensation Committee and Board attempt to align performance and compensation based upon strategic goals that are incorporated in the Company’s budget as approved by the Board of Directors. We believe that our conservative but competitive compensation policies and practices are unlikely to create risks that are reasonably likely to have a materially adverse effect on the Company or the Bank. As discussed in Item 11 of this Annual Report on Form 10-K, most of the compensation that we pay consists of annually-determined salaries and bonuses. This permits the Board of Directors to review annually the budget versus actual performance, internal policy limits for various key performance ratios, asset quality ratios, interest rate sensitivity shocks, liquidity management, and capital levels before compensation is set. All of these components together with continuation of employment are assessed each year. It is at the discretion of the Board of Directors to pay cash bonuses or any other incentives if goals are met or exceeded. We believe that this substantially contemporaneous approach to determining compensation is not likely to encourage excessive risk taking and in fact allows the Board to align compensation with business factors such as acceptable versus unacceptable risk taking.
The members of the Compensation Committee all of whom the Board in its business judgment has determined are independent as defined by the Nasdaq listing standards. The Compensation Committee held four meetings in 2019. For additional information regarding executive compensation and the Compensation Committees, see Item 11 of this Annual Report on Form 10-K.
Audit Committee -As stated above the Audit Committee is a separately designated committee of the Board. The Audit Committee assists the Board of Directors in fulfilling the Board’s oversight responsibility to the shareholders relating to the integrity of our financial statements, our compliance with legal and regulatory requirements for our accounting and reporting practices, the qualifications, independence and performance of our independent public accountants and the performance of the internal audit function. The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the work of the our independent public accountants engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attestation services for us. The Board of Directors and the Audit Committee have adopted a written charter for the Audit Committee.
The Board in its business judgment has determined that all of the members of the Audit Committee are independent as defined by Nasdaq listing standards for audit committee members and applicable SEC regulations. The Board of Directors also has determined that all of the members of the Audit Committee have sufficient knowledge in financial and auditing matters to serve on the Audit Committee and that Mr. Buchanan qualifies as an audit committee financial expert as defined by SEC regulations.
The Audit Committee held eight meetings in 2019.
Risk and Compliance Committee–The Risk and Compliance Committee provides risk and regulatory oversight for the Company and Bank. This committee oversees the Bank’s risk management’s practices to ensure that management has a process in place to identify, monitor, and manage key risks. Other areas the committee will assist the board in complying with are as follows:
The Risk & Compliance Committee met three times in 2019 and reviewed the Company’s and Bank’s risk management progress, processes, and practices
| Item 11. | Executive Compensation |
Item 11. Executive Compensation
EXECUTIVE COMPENSATION AND RELATED PARTY TRANSACTIONS
The following table is a summary of compensation that we paid for the fiscal years ended December 31, 2019 and 2018 to the named executive officers in all capacities in which they served:
Summary Compensation Table
Fiscal Years 2019 and 2018
| Name and Principal Position | Year | Salary ($) | Bonus ($)(1) | Non-Equity Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($)(2) | Total ($) | |||||||||||||||||||||
| C. Todd Asbury | 2019 | 277,970 | 500 | - | 17,031 | 295,501 | ||||||||||||||||||||||
| President and Chief Executive Officer | 2018 | 269,571 | 500 | - | 16,691 | 286,792 | ||||||||||||||||||||||
| Frank Sexton, Jr. | 2019 | 194,178 | 500 | - | - | 13,352 | 208,030 | |||||||||||||||||||||
| Executive Vice President and | 2018 | 189,264 | 500 | - | - | 13,581 | 203,345 | |||||||||||||||||||||
| Chief Operating Officer | ||||||||||||||||||||||||||||
| John J. Boczar | 2019 | 156,750 | 500 | - | 12,902 | 170,152 | ||||||||||||||||||||||
| Executive Vice President and | 2018 | 149,423 | 1,500 | - | 18,751 | 169,674 | ||||||||||||||||||||||
| Chief Financial Officer | ||||||||||||||||||||||||||||
(1)All employees received a Christmas bonus at the discretion of the Board of Directors of $500 for 2019 and 2018. Mr. Boczar received a $1,000 discretionary bonus in 2018, paid in 2019.
(2)All perquisites and other personal benefits did not exceed $10,000.
All other compensation includes matching contributionsinformation contained under the Bank’s 401(k) Plan, flexible spending amounts contributions for cafeteria plan benefits, group term life insurance premiumscaptions “Director Compensation” and long-term disability insurance premiums for all persons listed, for both years“Executive Compensation and a relocation assistance payment for Mr. Boczar in 2018.
Narrative Disclosure to Summary Compensation Table
Base Salary and Bonus
Our performance, in general, is considered in determining the amount of annual salary increases. The Compensation Committee sets base salaries at levels competitive with senior executives with comparable qualifications, experience and responsibilities, of similarly sized banks. The Virginia Bankers Association Salary Survey was used for comparison of salaries paid for similar positions and responsibilities. The Compensation Committee also takes into consideration our strategic plans and Company performance, including but not limited to, branch performance, asset quality, capital management, core deposit growth, efficiency, regulatory compliance, and earnings.
The named executive officers’ annual salary is based on the above criteria as well as an assessment of their past performance and expected future contributions. In addition to the internal measures above, the Board of Directors also reviews our financial performance in relation to peer group averagesRelated Party Transactions” in the Virginia Bankers’ Association Salary Survey. A subjective approach2023 Proxy Statement that is used in its evaluation of these factors, and therefore the Compensation Committee does not rely on a formula or weights of specific factors.
Other Elements of Compensation
Each named executive officer, with the exception of Mr. Boczar, is provided with the use of a company vehicle.
The Bank has established a 401(k) plan that covers all full time employees including the named executive officers. Matching contributions paid by the Bank to the named executive officers is detailed in the Summary Compensation Table above.
On December 18, 2002, the Bank entered into a salary continuation agreement with Frank Sexton, Jr. If Mr. Sexton were to terminate his employment after his 65th birthday, his benefit would be $40,500 annuallyrequired to be paiddisclosed in 180 monthly installments for 15 years; total actuarial present valuethis Item 11 is $366,348 (as of November 1, 2019).incorporated herein by reference.
Employment Agreements
On December 1, 2016, the Company and the Bank entered into an Employment Agreement (the Agreement) with Mr. Asbury. The Agreement is effective as of December 1, 2016. The initial term of the Agreement ended on December 1, 2019, after which the Agreement automatically renews for successive two year terms (unless terminated prior to the commencement of the renewal term).
Under Mr. Asbury’s Agreement, he is entitled to an annual base salary of $277,970 and an annual performance bonus, if any, in an amount approved by New Peoples’ Board of Directors. Mr. Asbury is also eligible to participate in any equity and/or other long-termcompensation programs established by the Company as well as employee benefits, executive benefits, or perquisites approved by the Board and reimbursement of expenses and vacation as set forth in his Agreement.
The Agreement provides Mr. Asbury with severance benefits in the event of termination of his employment under certain circumstances and contains certain confidentiality and noncompetition provisions.
The Agreement provides that the executive’s employment may be terminated by the Company “With Cause” (as defined in the Agreement) or without Cause, or by the executive for “Good Reason” (as defined in the Agreement) or without Good Reason. The executive’s employment may be terminated upon a determination that the executive is disabled or automatically upon the executive’s death. If an executive’s employment is terminated by the Company for Cause or by the executive for Other than Good Reason, then under his Agreement, the executive will be entitled to receive any accrued but unpaid salary, bonus or other benefits or awards, and expense reimbursement. The foregoing amounts are referred to collectively as the “Accrued Obligations.” If an executive’s employment is terminated by the Company without Cause or by the executive for Good Reason, then, in addition to the Accrued Obligations, the executive will be entitled under his Agreement to receive the following: (i) if not connected to a Change in Control (as defined in the Agreement), a severance payment equal to two times the executive’s base salary and bonus; or (ii) if within 24 months after a Change in Control, a severance payment equal to three times the executive’s base salary and bonus unless the Change in Control is a Sale of the Company (as defined in the Agreement) in which case the severance payment is based on certain percentages of the Company’s book value received by the Company’s shareholders in the transaction.
Neither the Company nor the Bank has entered into an employment agreement with any of the other named executive officers, except as discussed above.
Employee Incentive Plans
In December of 2015, the Board of Directors approved two employee incentive plans that were in effect for 2019: a Short-Term Bonus Plan and Company-Wide Profit Sharing Plan.
The Short-Term Bonus Plan is designed to reward and recognize individual employees “on-the-spot” for extraordinary performance/accomplishments. These bonuses are to individual employees in amounts ranging from $100 to $1,000 (with an aggregate annual amount for all short-term bonuses not to exceed $25,000) and are awarded on recommendation of senior officers with the approval of the President and Chief Executive Officer. During 2019 and 2018 total bonuses of $7,300 and $15,700, respectively, were paid out under the Short-Term Bonus Plan.
The second plan is a Company-wide Profit Sharing Plan which allows all eligible employees of New Peoples Bank to share in the profits of the Bank when strategic goals are met. The Plan is designed to reward employees a percentage of his or her annual salary or a flat dollar amount for commissioned or lower-wage employees, when the Bank meets the budgeted net income for the year. If the Bank does not make its budgeted net income for the year, the bonus pool is reduced by the shortfall which is added back into net income until it equals the budgeted amount or the bonus pool is exhausted. The Board of Directors of the Bank has established an award schedule that allocates the bonus pool by percentage based on the employee’s position with the Bank. No bonuses were awarded under this plan for 2019 and 2018.
For 2020, both the Short-Term Bonus Plan and the Company-Wide Profit Sharing Plan are still in effect. Under the Short-Term Bonus Plan the aggregate annual amount for all short term bonuses in 2020 is to be determined. For 2020 the Board of Directors will budget a total amount for the Company-Wide Profit Sharing Plan.
DIRECTOR COMPENSATION
The following table sets forth, as of December 31, 2019, certain information with respect to director compensation for each of the members of the Board of Directors. The directors did not receive any other compensation during 2019 for their services as directors on the Board.
| Director Compensation for 2019 | ||||||||
| Name | Fees Earned or Paid in Cash ($) Total(s) | |||||||
| C. Todd Asbury | - | - | ||||||
| Tim W. Ball | 9,000 | 9,000 | ||||||
| Gina D. Boggess | 5,300 | 5,300 | ||||||
| J. Robert Buchanan | 11,400 | 11,400 | ||||||
| Joe M. Carter | 14,000 | 14,000 | ||||||
| John D. Cox | 13,600 | 13,600 | ||||||
| Charles H. Gent, Jr. | 10,600 | 10,600 | ||||||
| Eugene Hearl | 15,000 | 15,000 | ||||||
| Harold Lynn Keene | 17,400 | 17,400 | ||||||
| Michael G. McGlothlin | 9,200 | 9,200 | ||||||
| Fred W. Meade | 12,200 | 12,200 | ||||||
| B. Scott White | 15,200 | 15,200 | ||||||
In 2019, each director was paid $700 per month, except for Mr. Keene, chairman who received $1,000 per month, for service on the Board of Directors and $200 per committee meeting for each committee of which a director attended as a member.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Item 12. SecurityThe information contained under the captions “Security Ownership of Management” and “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersOwners” in the 2023 Proxy Statement that is required to be disclosed in this Item 12 is incorporated herein by reference.
Security Ownership of Management
The following table sets forth, as of March 27, 2020, certain information with respect to beneficial ownership of shares of Common Stock by each of the members of the Board of Directors, by each of the executive officers named in the “Summary Compensation Table” above and by all directors and executive officers as a group. Beneficial ownership includes shares, if any, held in the name of the individual’s spouse, minor children or other relatives of the individual living in such person’s home, as well as shares, if any, held in the name of another person under an arrangement whereby the director or executive officer can vest title in himself at once or at some future time.
| Name of Beneficial Owner | Common Stock Beneficially Owned(1) | Percent of Class(2) | ||||||
| C. Todd Asbury | 3,700 | * | ||||||
| Tim W. Ball | 3,432 | * | ||||||
| John J. Boczar | 10,075 | * | ||||||
| Gina D. Boggess | 2,476 | * | ||||||
| J. Robert Buchanan | 3,100 | * | ||||||
| Joe M. Carter | 29,955 | (3) | * | |||||
| John D. Cox | 490,528 | (4) | 2.05 | % | ||||
| Charles H. Gent, Jr. | 31,970 | (5) | * | |||||
| Eugene Hearl | 3,297 | * | ||||||
| Harold Lynn Keene | 4,416,116 | (6) | 18.46 | % | ||||
| Michael G. McGlothlin | 458,267 | 1.92 | % | |||||
| Fred W. Meade | 44,609 | (7) | * | |||||
| Frank Sexton, Jr. | 54,035 | (8) | * | |||||
| B. Scott White | 4,945,417 | (9) | 20.67 | % | ||||
| All Directors and Executive Officers as a Group (16 persons) | 10,496,977 | 43.88 | % | |||||
* Percentage of ownership is less than one percent of the outstanding shares of Common Stock.
(1)Except as otherwise indicated, each director, director nominee or executive officer has sole voting power and investment power with respect to the shares shown.
(2) Based on 23,922,086 shares of Common Stock issued and outstanding on March 27, 2019.
(3) Includes 8,201 shares held by Mr. Carter's wife.
(4) Includes 58,914 shares held by Mr. Cox's wife, and 41,967 shares owned jointly by Mr. Cox and his wife.
(5) Includes 2,860 shares held by Mr. Gent's wife, 2,860 shares Mr. Gent holds as custodian for his child, and 4,800 held jointly with his wife.
(6) Includes 1,000,000 shares held by H.L. Keene, L.L.C. in which Mr. Keene is the sole manager and 500 shares held by The Harold Lynn Keene Trust.
(7) Includes 36,036 shares Mr. Meade holds jointly with his wife.
(8) Includes 440 shares Mr. Sexton holds jointly with his child.
(9) Includes 2,061,666 shares held by SBTB, L.P. in which Mr. White is a general partner, 874,842 shares held by Sky Investments, LLC in whichMr. White is the manager, 172,160 shares held by Mr. White's wife and 9,056 shares Mr. White holds as trustee.
(8)
(9)
Security Ownership of Certain Beneficial Owners
As of March 25, 2020, the following persons are known to us that beneficially own five percent or more of the Company’s stock. Other than as disclosed below, the Company is not aware of any person or group, as those terms are defined in the Securities Exchange Act of 1934, who beneficially owned more than 5% of the outstanding Common Stock as of March 25, 2020.
| Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class | ||||||
| B. Scott White Post Office Box 520 Castlewood, Virginia 24224 | 4,945,417 | 20.67 | % | |||||
| Harold Lynn Keene Post Office Box 1320 Lebanon, Virginia 24260 | 4,416,116 | 18.46 | % | |||||
| Richard G. Preservati, Sr. Post Office Box 1003 Princeton, West Virginia 24740 | 3,039,999 | 12.71 | % | |||||
Delinquent Section 16(a) Reports
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and certain officers to file reports with the Securities and Exchange Commission (SEC) indicating their holdings of, or transactions in, our equity securities. Based on a review of these reports and written representations furnished to us, we believe that our directors and officers timely complied with all Section 16(a) filing requirements with respect to 2019, other than one report reporting two late transactions by Mr. White.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Item 13.Certain RelationshipsThe information contained under the caption “Executive Compensation and Related Transactions,Party Transactions” and Director Independence“Corporate Governance” in the 2023 Proxy Statement that is required to be disclosed in this Item 13 is incorporated herein by reference.
Certain of our directors, executive officers, and shareholders known to us who own beneficially 5% or more of our stock (and their immediate family members) have had, and expect to have in the future, lending transactions with us. Any extensions of credit to our directors, executive officers, and such shareholders are made in the ordinary course of business, are on substantially the same terms, including interest rates and collateral, as comparable transactions to non-related parties at the time of the extension of credit, and did not involve more than the normal risk of collectability or present other unfavorable features.
We have not adopted a formal policy that covers the review and approval of related person transactions by our Board of Directors. The Board, however, does review all related party transactions that are proposed to it for approval. During such a review, the Board will consider, among other things, the related person’s relationship to us, the facts and the circumstances of the proposed transaction, the aggregate dollar amount of the transaction, the related person’s relationship to the transaction and any other material information. Our Audit Committee has the responsibility to review significant conflicts of interest involving directors or executive officers.
For information regarding independence of the Company’s directors, see Item 10 of this Annual Report on Form 10-K.
| Item 14. | Principal Accountant Fees and Services |
The information contained under the caption “Audit Information” in the 2023 Proxy Statement that is required to be disclosed in this Item 14 is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
AUDIT INFORMATION
The Audit Committee operates under a written charter adopted by the Board of Directors. A copy of the Audit Committee charter can be found on our websitewww.npbankshares.com.
2019 and 2018 Fees of Independent Registered Public Accountants – Elliott Davis, LLC.
The following table sets forth the aggregate fees paid to Elliott DavisAccounting Firm for professional services rendered in connection with the audit of the Company’s consolidated financial statements for 2019 and 2018, as well as fees paid for audit-related services, tax services and all other services in 2019 and 2018.
| 2019 | 2018 | |||||||
| Audit fees (1) | $ | 87,625 | $ | 86,890 | ||||
| Audit-related fees (2) | 15,750 | 7,500 | ||||||
| Tax fees | 12,350 | 12,500 | ||||||
| Total | $ | 115,725 | $ | 106,890 | ||||
(1) – Audit fees include aggregate fees incurred for professional services rendered for the audit of our annual financial statements and for the review of the financial statements includedas of December 31, 2022 and the year then ended was Yount, Hyde & Barbour, P.C., (U.S. PCAOB Auditor Firm I.D.: 613, located in the Company’s Quarterly Reports on Forms 10-Q for the fiscal years 2019 and 2018.
(2) – The audit-related fees include audits of employee benefit plans for both years. These audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under the heading of “Audit fees”.Roanoke, Virginia.
All audit related services, tax services and other services were pre-approved by the Audit Committee, which concluded that the provision of such services by Elliott Davis was compatible with the maintenance of that firm’s independence in the conduct of their auditing functions. The Audit Committee has a policy that provides for the pre-approval of all services to be provided by its independent registered public accounting firm. The Audit Committee does not delegate to management its responsibility to pre-approve services performed by the independent registered public accounting firm. All of the services mentioned above were pre-approved by the Audit Committee.
| Item 15. |
(a)(1) The response to this portion of Item 15 is included in Item 8 above.
(a)(2) The response to this portion of Item 15 is included in Item 8 above.
(a)(3) The following exhibits are filed as part of this Form 10-K and this list includes the exhibit index:10-K:
Exhibit Number |
____________________________________
* Denotes management contract.
(b) See Item 15(a)(3) above.
(c) See Items 15(a)(1) and (2) above.
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Item 16.Form 10-K Summary
None
| Form 10-K Summary |
None.
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SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEW PEOPLES BANKSHARES, INC.
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By: /s/ C. TODD ASBURY
C. Todd Asbury
Director, President and Chief Executive Officer
Date: March 31, 2023
By: /s/ CHRISTOPHER G. SPEAKS
Christopher G. Speaks
Executive Vice President, Chief Financial Officer and Treasurer
Date: March 31, 2023
By: /s/ JOHN J. BOCZAR
John J. Boczar
Chief Accounting Officer and Secretary
Date: March 31, 2023
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POWER OF ATTORNEY
Each of the undersigned hereby appoints C. Todd Asbury and John J. Boczar,Christopher G. Speaks, and each of them, as attorneys and agents for the undersigned, with full power of substitution, in his name and on his behalf as a director of New Peoples Bankshares, Inc. (the “Registrant”)Registrant), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Registrant to comply with the Securities Exchange Act of 1934, and any rules, regulations, policies or requirements of the Securities and Exchange Commission (the “Commission”)Commission) in respect thereof, in connection with the preparation and filing with the Commission of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 20192022 (the “Report”)Report), and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature | Capacity | Date | ||
/s/ C. TODD ASBURY | Director, President and | March 31, 2023 | ||
C. Todd Asbury | Chief Executive Officer | |||
(Principal Executive Officer) |
/s/ CHRISTOPHER G. SPEAKS | Executive Vice President and | March 31, 2023 | ||
Christopher G. Speaks | Chief Financial Officer | |||
| (Principal Financial Officer) |
/s/ JOHN J. BOCZAR | March 31, 2023 | |||
John J. Boczar | (Principal Accounting Officer) |
/s/ TIM BALL | Director | March 31, 2023 | ||
Tim Ball |
/s/ GINA D. BOGGESS | Director | March 31, 2023 | ||
Gina D. Boggess |
/s/ J. ROBERT BUCHANAN | Director | March 31, 2023 | ||
J. Robert Buchanan |
/s/ JOE CARTER | Director | March 31, 2023 | ||
Joe Carter |
/s/ JOHN D. COX | Director | March 31, 2023 | ||
John D. Cox |
/s/ HAROLD LYNN KEENE | Chairman, Director | March 31, 2023 | ||
Harold Lynn Keene |
| /s/ MICHAEL G. MCGLOTHLIN | Director | March 31, 2023 | ||
Michael G. McGlothlin |
/s/ B. SCOTT WHITE | Vice Chairman, Director | March 31, 2023 | ||
B. Scott White | ||||
75