UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2021

 

or

 

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

 

For the transition period from ____________ to _____________

 

Commission file number: 000-33411

 

NEW PEOPLES BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

Virginia  (State or other jurisdiction of incorporation or organization)	31-1804543 (I.R.S. Employer Identification No.)
67 Commerce Drive, Honaker, Virginia (Address of principal executive offices)	24260 (Zip Code)

(276) 873-7000

(Registrant’s telephone number, including area code)

 

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

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
	None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

þ

No

☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes

þ

No

☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer þ		Smaller reporting company þ
		Emerging growth company ☐

 

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

 

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

 

Yes

☐

No

þ

 

The number of shares outstanding of the registrant’s common stock was 23,922,086 as of May 12, 2021.

 

 

NEW PEOPLES BANKSHARES, INC.

 

INDEX

 

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Income – Three months ended March 31, 2021 and 2020 (Unaudited)	3
	Consolidated Statements of Comprehensive Income – Three months ended March 31, 2021 and 2020 (Unaudited)	4
	Consolidated Balance Sheets – March 31, 2021 (Unaudited) and December 31, 2020	5
	Consolidated Statements of Changes in Stockholders’ Equity – Three months ended March 31, 2021 and 2020 (Unaudited)	6
	Consolidated Statements of Cash Flows – Three months ended March 31, 2021 and 2020 (Unaudited)	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4.	Controls and Procedures	32
PART II	OTHER INFORMATION	32
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	33
SIGNATURES		34

 

 

	Part I	Financial Information
	Item 1	Financial Statements

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) 

(UNAUDITED)

 

INTEREST AND DIVIDEND INCOME		2021				2020
Loans including fees		$	6,921			$	7,098
Federal funds sold			—				1
Interest-earning deposits with banks			19				162
Investments			247				297
Dividends on equity securities (restricted)			32				37
Total Interest and Dividend Income			7,219				7,595
INTEREST EXPENSE
Deposits			683				1,262
Borrowed funds			123				191
Total Interest Expense			806				1,453
NET INTEREST INCOME			6,413				6,142
PROVISION FOR LOAN LOSSES			186				1,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES			6,227				5,142
NONINTEREST INCOME
Service charges and fees			832				851
Card processing and interchange			864				753
Insurance and investment fees			226				132
Net gain on sales of available-for-sale securities			—				4
Other noninterest income			207				425
Total Noninterest Income			2,129				2,165
NONINTEREST EXPENSES
Salaries and employee benefits			3,079				3,501
Occupancy and equipment expense			1,176				1,113
Data processing and telecommunications			573				620
Other operating expenses			1,521				2,017
Total Noninterest Expenses			6,349				7,251
INCOME BEFORE INCOME TAXES			2,007				56
INCOME TAX EXPENSE			422				10
NET INCOME		$	1,585			$	46
Income Per Share
Basic and diluted		$	0.07			$	0.00
Average Weighted Shares of Common Stock
Basic and diluted			23,922,086				23,922,086

 

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

 

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(IN THOUSANDS)

(UNAUDITED)

 

		For the three months ended March 31,
		2021				2020
NET INCOME		$	1,585			$	46
Other comprehensive income:
Investment Securities Activity
Unrealized (losses) gains arising during the period			(525	)			767
Reclassification adjustment for net gains included in net income			—				(4	)
Other comprehensive (losses) gains on investment securities			(525	)			763
Related tax (benefit) expense			(110	)			160
TOTAL OTHER COMPREHENSIVE INCOME			(415	)			603
TOTAL COMPREHENSIVE INCOME		$	1,170			$	649

 

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

 

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS  

(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)

(UNAUDITED)

 

		March 31,				December 31,
		2021				2020
ASSETS
Cash and due from banks		$	17,460			$	16,023
Interest-bearing deposits with banks			113,510				76,105
Federal funds sold			234				222
Total Cash and Cash Equivalents			131,204				92,350
Investment securities available-for-sale			46,292				48,406
Loans held for sale			—				389
Loans receivable			594,454				575,566
Allowance for loan losses			(7,293	)			(7,191	)
Net loans			587,161				568,375
Bank premises and equipment, net			22,560				22,174
Other real estate owned			3,342				3,334
Accrued interest receivable			2,223				2,392
Deferred taxes, net			2,813				3,126
Right-of-use assets – operating leases			5,344				5,439
Other assets			9,327				10,317
Total Assets		$	810,266			$	756,302
LIABILITIES
Deposits:
Noninterest bearing		$	259,305			$	223,725
Interest-bearing			461,649				444,287
Total Deposits			720,954				668,012
Borrowed funds			21,496				21,496
Lease liabilities – operating leases			5,344				5,439
Accrued interest payable			359				436
Accrued expenses and other liabilities			2,766				2,742
Total Liabilities			750,919				698,125
STOCKHOLDERS’ EQUITY
Common stock - $2.00 par value; 50,000,000 shares authorized; 23,922,086 shares issued and outstanding at March 31, 2021 and December 31, 2020			47,844				47,844
Additional paid-in-capital			14,570				14,570
Retained deficit			(3,394	)			(4,979	)
Accumulated other comprehensive income			327				742
Total Stockholders’ Equity			59,347				58,177
Total Liabilities and Stockholders’ Equity		$	810,266			$	756,302

 

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

 

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY 

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(IN THOUSANDS INCLUDING SHARE DATA)

(UNAUDITED)

 

		Shares of Common Stock				Common Stock				Additional Paid-in- Capital				Retained Deficit				Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity
Balance, December 31, 2019			23,922			$	47,844			$	14,570			$	(7,869	)		$	57			$	54,602
Net income			—				—				—				46				—				46
Other comprehensive income, net of tax			—				—				—				—				603				603
Balance, March 31, 2020			23,922			$	47,844			$	14,570			$	(7,823	)		$	660			$	55,251
Balance, December 31, 2020			23,922			$	47,844			$	14,570			$	(4,979	)		$	742			$	58,177
Net income			—				—				—				1,585				—				1,585
Other comprehensive loss, net of tax			—				—				—				—				(415	)			(415	)
Balance, March 31, 2021			23,922			$	47,844			$	14,570			$	(3,394	)		$	327			$	59,347

 

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

 

 

NEW PEOPLES BANKSHARES, INC. 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(IN THOUSANDS)

(UNAUDITED)

 

		2021				2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	1,585			$	46
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			563				549
Provision for loan losses			186				1,000
Income on bank owned life insurance			(12	)			(18	)
Gain on sale of securities available-for-sale			—				(4	)
Gain on sale of mortgage loans			(56	)			(39	)
Loss (gain) on sale of premises and equipment			3				(1	)
Loss (gain) on sale of other real estate owned			17				(58	)
Loans originated for sale			(3,459	)			(2,702	)
Proceeds from sales of loans originated for sale			3,904				2,254
Adjustment of carrying value of other real estate owned			28				87
Amortization of bond premiums			93				117
Deferred tax benefit			423				10
Net change in:
Accrued interest receivable			169				70
Other assets			1,002				(777	)
Accrued interest payable			(77	)			12
Accrued expenses and other liabilities			24				160
Net Cash Provided by Operating Activities			4,393				706
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans			(19,090	)			2,221
Purchase of securities available-for-sale			(1,481	)			—
Proceeds from sale of investment securities available-for-sale			—				1,025
Proceeds from repayments and maturities of securities available-for-sale			2,977				2,533
Net purchase of equity securities (restricted)			—				(22	)
Payments for the purchase of premises and equipment			(952	)			(1,108	)
Proceeds from sale of premises and equipment			—				1
Proceeds from sales of other real estate owned			65				118
Net Cash (Used in) Provided by Investing Activities			(18,481	)			4,768
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in noninterest bearing deposits			35,580				6,624
Net change in interest bearing deposits			17,362				1,424
Net Cash Provided by Financing Activities			52,942				8,048
Net increase in cash and cash equivalents			38,854				13,522
Cash and Cash Equivalents, Beginning of the Period			92,350				50,147
Cash and Cash Equivalents, End of the Period		$	131,204			$	63,669
Supplemental Disclosure of Cash Paid During the Period for:
Interest		$	883			$	1,441
Taxes		$	—			$	—
Supplemental Disclosure of Non-cash Transactions:
Other real estate acquired in settlement of foreclosed loans		$	118			$	252
Loans made to finance sale of other real estate owned		$	—			$	428
Change in unrealized (losses) gains on securities available for sale		$	(525	)		$	763

 

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

 

 

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 

NOTE 1 NATURE OF OPERATIONS

 

Nature of Operations – New Peoples Bankshares, Inc. (New Peoples) is a financial holding company whose principal activity is the ownership and management of a community bank, New Peoples Bank, Inc. (the Bank). New Peoples and the Bank are organized and incorporated under the laws of the Commonwealth of Virginia. As a state chartered member bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System (the Federal Reserve). The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwest Virginia, southern West Virginia, western North Carolina and northeastern Tennessee. These services include commercial and consumer loans along with traditional deposit products such as checking and savings accounts. 

 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements conform to U. S. generally accepted accounting principles (GAAP) and to general industry practices. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position at March 31, 2021 and December 31, 2020, and the results of operations for the three month periods ended March 31, 2021 and 2020. The notes included herein should be read in conjunction with the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.

 

The consolidated financial statements include New Peoples, the Bank, NPB Insurance Services, Inc., and NPB Web Services, Inc. (hereinafter, collectively referred to as the Company, we, us or our). All significant intercompany balances and transactions have been eliminated. In accordance with Accounting Standards Codification (ASC) 942, Financial Services – Depository and Lending, NPB Capital Trust I and 2 are not included in the consolidated financial statements.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy of the allowance for loan losses and the determination of the deferred tax asset and related valuation allowance are based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. 

 

 

NOTE 3 INCOME PER SHARE

 

Basic income per share computations are based on the weighted average number of shares outstanding during each period. Dilutive earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. For the three month periods ended March 31, 2021 and 2020, there were no potential common shares. Basic and diluted net income per common share calculations follows: 

 

(Dollars in Thousands, Except Share and Per Share Data)		For the three months ended March 31,
		2021			2020
Net income	$	1,585		$	46
Weighted average shares outstanding		23,922,086			23,922,086
Weighted average dilutive shares outstanding		23,922,086			23,922,086
Basic and diluted income per share	$	0.07		$	0.00

 

 

 

NOTE 4 CAPITAL

 

Capital Requirements and Ratios

 

The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February 2015 and, therefore, is not obligated to report consolidated regulatory capital.

 

The Bank is subject to various capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets, Tier 1 capital to average assets, and Common Equity Tier 1 capital to risk-weighted assets. As of March 31, 2021, the Bank meets all capital adequacy requirements to which it is subject.

 

The Bank’s actual capital amounts and ratios are presented in the following table as of March 31, 2021 and December 31, 2020, respectively.

 

	Actual						Minimum Capital Requirement						Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars are in thousands)		Amount		Ratio				Amount		Ratio				Amount		Ratio
March 31, 2021:
Total Capital to Risk Weighted Assets	$	78,934		16.16	%		$	39,066		8.0	%		$	48,833		10.0	%
Tier 1 Capital to Risk Weighted Assets		72,815		14.91	%			29,300		6.0	%			39,066		8.0	%
Tier 1 Capital to Average Assets		72,815		9.41	%			30,967		4.0	%			38,709		5.0	%
Common Equity Tier 1 Capital to Risk Weighted Assets		72,815		14.91	%			21,975		4.5	%			31,741		6.5	%
December 31, 2020:
Total Capital to Risk Weighted Assets	$	77,133		16.41	%		$	37,603		8.0	%		$	47,028		10.0	%
Tier 1 Capital to Risk Weighted Assets		71,241		15.16	%			28,202		6.0	%			37,603		8.0	%
Tier 1 Capital to Average Assets		71,241		9.49	%			29,989		4.0	%			37,545		5.0	%
Common Equity Tier 1 Capital to Risk Weighted Assets		71,241		15.16	%			20,036		4.5	%			30,552		6.5	%

 

Accordingly, as of March 31, 2021 and December 31, 2020, the Bank was well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since such dates that management believes have changed the Bank’s category.

 

The Bank is also subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The final rules require the Bank to comply with the following minimum capital ratios: (i) a Common Equity Tier 1 capital to risk-weighted assets ratio of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum Common Equity Tier 1 capital to risk-weighted assets ratio of 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The phase-in of the capital conservation buffer requirement began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a Common Equity Tier 1 capital to risk-weighted assets ratio above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. All ratios shown in the table above exceed the minimum requirements. The Bank’s capital conservation buffer as of March 31, 2021 was 8.16%.

 

 

NOTE 5 INVESTMENT SECURITIES

 

The amortized cost and estimated fair value of available-for-sale (AFS) securities as March 31, 2021 and December 31, 2020 is as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized  Losses				Approximate Fair Value
March 31, 2021
U.S. Government Agencies		$	13,177			$	215			$	76			$	13,316
Taxable municipals			5,654				138				59				5,733
Corporate bonds			5,790				137				—				5,927
Mortgage backed securities			21,257				326				267				21,316
Total Securities AFS		$	45,878			$	816			$	402			$	46,292
December 31, 2020
U.S. Government Agencies		$	13,852			$	322			$	67			$	14,107
Taxable municipals			5,157				188				—				5,345
Corporate bonds			5,893				186				31				6,048
Mortgage backed securities			22,565				388				47				22,906
Total Securities AFS		$	47,467			$	1,084			$	145			$	48,406

 

The following table details unrealized losses and related fair values in the AFS portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2021 and December 31, 2020.

 

	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
March 31, 2021
U.S. Government Agencies	$	1,048		$	27		$	3,970		$	49		$	5,018		$	76
Taxable municipals		1,502			59			—			—			1,502			59
Mortgage backed securities		8,385			263			263			4			8,648			267
Total Securities AFS	$	10,935		$	349		$	4,233		$	53		$	15,168		$	402
December 31, 2020
U.S. Government Agencies	$	1,479		$	12		$	3,829		$	55		$	5,308		$	67
Taxable municipals		—			—			—			—			—			—
Corporate bonds		1,219			31			—			—			1,219			31
Mortgage backed securities		7,517			44			218			3			7,735			47
Total Securities AFS	$	10,215		$	87		$	4,047		$	58		$	14,262		$	145

 

At March 31, 2021, there were 44 securities in a loss position, of which 27 have been in a loss position for twelve months or more. Management believes that all unrealized losses have resulted from temporary changes in the interest rates and current market conditions and not as a result of credit deterioration. Management does not intend to sell, and it is not likely that the Bank will be required to sell any of the securities referenced in the table above before recovery of their amortized cost.

 

Investment securities with a carrying value of $6.3 million and $6.8 million at March 31, 2021 and December 31, 2020, respectively, were pledged as collateral to secure public deposits and for other purposes required by law.

 

 

The following table summarizes sales of AFS debt securities for the three months ended March 31,

 

(Dollars are in thousands)		2021				2020
Proceeds		$	—			$	1,025
Gains			—				7
Losses			—				(3	)
Tax benefit			—				(1	)

 

The amortized cost and fair value of investment securities at March 31, 2021, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars are in thousands)  Securities Available-for-Sale		Amortized Cost				Fair Value				Weighted Average Yield
Due in one year or less		$	1,029			$	1,042				1.96	%
Due after one year through five years			6,433				6,560				3.45	%
Due after five years through ten years			8,905				9,118				2.78	%
Due after ten years			29,511				29,572				1.77	%
Total		$	45,878			$	46,292				2.20	%

 

The Bank, as a member of the Federal Reserve Bank of Richmond (the Reserve Bank) and the Federal Home Loan Bank (the FHLB) of Atlanta, is required to hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities are restricted from trading and are recorded at a cost of $2.22 million and $2.58 million at March 31, 2021 and December 31, 2020, respectively.

 

 

NOTE 6 LOANS

 

No loans were held for sale at March 31, 2021. At December 31, 2020, $389 thousand of loans were held for sale, which represent mortgage loans originated for sale. These originations and sales are executed on a best efforts basis.

 

Loans receivable outstanding as of March 31, 2021 and December 31, 2020 are summarized as follows:

 

(Dollars are in thousands)		March 31, 2021				December 31, 2020
Real estate secured:
Commercial		$	191,156			$	179,381
Construction and land development			28,798				25,031
Residential 1-4 family			218,256				222,980
Multifamily			20,488				16,569
Farmland			19,609				18,368
Total real estate loans			478,307				462,329
Commercial			90,732				86,010
Agriculture			4,216				4,450
Consumer installment loans			19,521				20,632
All other loans			1,678				2,145
Total loans		$	594,454			$	575,566

 

Included in commercial loans at March 31, 2021 and December 31, 2020 were $37.6 million and $34.8 million of Paycheck Protection Program (PPP) loans, respectively, that are guaranteed by the Small Business Administration (SBA). Fees paid by SBA for round 1 PPP loans ranged from 1% to 5% of the amount borrowed, with 5% paid on loans up to $350 thousand, 3% on loans between $350 thousand and $2 million, and 1% on loans over $2 million. For round 2 PPP loans the fee structure was modified to the lesser of 50%, or $2.5 thousand for loans up to $50 thousand, 5% on loans ranging from $50 thousand to $350 thousand; 3% on loans between $350 thousand and $2 million and 1% on loans over $2 million. Included in total loans above, are net deferred fees, including unearned PPP loans fees, of $860 thousand and $456 thousand at March 31, 2021 and December 31, 2020, respectively. Income from net deferred fees is recognized as income over the lives of the respective loans as a yield adjustment. If loans repay prior to scheduled maturities any unamortized fee or cost is recognized at that time.

 

 

Loans receivable on nonaccrual status as of March 31, 2021 and December 31, 2020 are summarized as follows:

 

(Dollars are in thousands)		March 31, 2021				December 31, 2020
Real estate secured:
Commercial		$	2,125			$	2,225
Construction and land development			54				57
Residential 1-4 family			3,027				2,700
Farmland			87				101
Total real estate loans			5,293				5,083
Commercial			50				453
Consumer installment loans and other loans			12				12
Total loans receivable on nonaccrual status		$	5,355			$	5,548

 

Total interest income not recognized on nonaccrual loans for the three months ended March 31, 2021 and March 31, 2020 was $135 thousand and $189 thousand, respectively.

 

Under the provisions of the CARES Act, or related guidance issued by banking regulators, modifications, mainly in the form of short-term payment deferrals, were granted on 786 loans, during 2020. At March 31, 2021, 646 loans totaling $103.2 million had completed their forbearance period and resumed a normal payment schedule and two loans totaling $206 thousand remained in forbearance. The remaining 138 loans have repaid in full or been refinanced at market terms and conditions.

 

The following table presents information concerning the Company’s investment in loans considered impaired as of March 31, 2021 and December 31, 2020:

 

As of March 31, 2021 (Dollars are in thousands)	Recorded Investment			Unpaid Principal Balance			Related Allowance
With no related allowance recorded:
Real estate secured:
Commercial	$	496		$	532		$	—
Construction and land development		88			366			—
Residential 1-4 family		1,900			2,178			—
Multifamily		—			—			—
Farmland		574			755			—
Commercial		—			—			—
Agriculture		—			—			—
Consumer installment loans		3			4			—
All other loans		—			—			—
With an allowance recorded:
Real estate secured:
Commercial		1,436			1,527			558
Construction and land development		—			—			—
Residential 1-4 family		301			331			45
Multifamily		—			—			—
Farmland		—			—			—
Commercial		30			38			5
Agriculture		—			—			—
Consumer installment loans		—			—			—
All other loans		—			—			—
Total	$	4,828		$	5,731		$	608

 

 

 

As of December 31, 2020 (Dollars are in thousands)			Recorded Investment				Unpaid Principal Balance				Related Allowance
With no related allowance recorded:
Real estate secured:
Commercial		$	385			$	386			$	—
Construction and land development			99				376				—
Residential 1-4 family			1,662				1,898				—
Multifamily			—				—				—
Farmland			391				560				—
Commercial			—				—				—
Agriculture			—				—				—
Consumer installment loans			5				6				—
All other loans			—				—				—
With an allowance recorded:
Real estate secured:
Commercial			1,566				1,678				574
Construction and land development			—				—				—
Residential 1-4 family			337				365				72
Multifamily			—				—				—
Farmland			208				220				2
Commercial			429				437				404
Agriculture			—				—				—
Consumer installment loans			—				—				—
All other loans			—				—				—
Total		$	5,082			$	5,926			$	1,052

 

The following tables present information concerning the Company’s average impaired loans and interest recognized on those impaired loans, for the periods indicated:

 

		Three Months Ended
		March 31, 2021								March 31, 2020
(Dollars are in thousands)		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
With no allowance recorded:
Real estate secured:
Commercial		$	441			$	—			$	2,335			$	9
Construction and land development			94				4				67				4
Residential 1-4 family			1,781				14				1,304				13
Multifamily			—				—				—				—
Farmland			483				9				761				10
Commercial			—				—				115				1
Agriculture			—				—				—				—
Consumer installment loans			4				—				—				—
All other loans			—				—				—				—
With an allowance recorded:
Real estate secured:
Commercial			1,501				3				433				—
Construction and land development			—				—				—				—
Residential 1-4 family			319				—				54				—
Multifamily			—				—				—				—
Farmland			104				—				216				2
Commercial			230				1				286				—
Agriculture			—				—				—				—
Consumer installment loans			—				—				—				—
All other loans			—				—				—				—
Total		$	4,957			$	31			$	5,571			$	39

 

 

An age analysis of past due loans receivable as of March 31, 2021 and December 31, 2020 is below. At March 31, 2021 and December 31, 2020, there were no loans over 90 days past due that were accruing.

 

As of March 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		$	1,509			$	166			$	351			$	2,026			$	189,130			$	191,156
Construction and land development			9				—				—				9				28,789				28,798
Residential 1-4 family			2,355				531				356				3,242				215,014				218,256
Multifamily			—				—				—				—				20,488				20,488
Farmland			—				—				—				—				19,609				19,609
Total real estate loans			3,873				697				707				5,277				473,030				478,307
Commercial			216				4				—				220				90,512				90,732
Agriculture			—				—				—				—				4,216				4,216
Consumer installment loans			76				42				1				119				19,402				19,521
All other loans			—				—				—				—				1,678				1,678
Total loans		$	4,165			$	743			$	708			$	5,616			$	588,838			$	594,454

 

As of December 31, 2020 (Dollars are in thousands)		Loans 30-59 Days Past Due				Loans 60-89 Days Past Due				Loans 90 or More Days Past Due				Total Past Due Loans				Current Loans				Total Loans
Real estate secured:
Commercial		$	969			$	—			$	—			$	969			$	178,412			$	179,381
Construction and land development			64				—				—				64				24,967				25,031
Residential 1-4 family			5,717				615				690				7,022				215,958				222,980
Multifamily			—				—				—				—				16,569				16,569
Farmland			57				—				—				57				18,311				18,368
Total real estate loans			6,807				615				690				8,112				454,217				462,329
Commercial			214				—				—				214				85,796				86,010
Agriculture			7				1				—				8				4,442				4,450
Consumer installment loans			214				22				—				236				20,396				20,632
All other loans			—				—				—				—				2,145				2,145
Total loans		$	7,242			$	638			$	690			$	8,570			$	566,996			$	575,566

 

The Company categorizes loans receivable into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans receivable as to credit risk. The Company uses the following definitions for risk ratings:

 

Pass - Loans in this category are considered to have a low likelihood of loss based on relevant information analyzed about the ability of the borrowers to service their debt and other factors.

 

Special Mention - Loans in this category are currently protected but are potentially weak, including adverse trends in borrower’s operations, credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances.  Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s credit position at some future date.

 

Substandard - A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

 

Doubtful - Loans classified doubtful have all the weaknesses inherent in loans classified as substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.

 

Based on the most recent analysis performed, the risk categories of loans receivable as of March 31, 2021 and December 31, 2020 was as follows:

 

As of March 31, 2021 (Dollars are in thousands)		Pass				Special Mention				Substandard				Doubtful				Total
Real estate secured:
Commercial		$	182,141			$	6,889			$	1,988			$	138			$	191,156
Construction and land development			26,986				1,758				54				—				28,798
Residential 1-4 family			214,306				987				2,963				—				218,256
Multifamily			20,256				232				—				—				20,488
Farmland			17,901				1,621				87				—				19,609
Total real estate loans			461,590				11,487				5,092				138				478,307
Commercial			87,043				3,639				50				—				90,732
Agriculture			4,024				192				—				—				4,216
Consumer installment loans			19,500				9				12				—				19,521
All other loans			1,678				—				—				—				1,678
Total		$	573,835			$	15,327			$	5,154			$	138			$	594,454

 

As of December 31, 2020 (Dollars are in thousands)		Pass				Special Mention				Substandard				Doubtful				Total
Real estate secured:
Commercial		$	171,212			$	6,112			$	2,057			$	—			$	179,381
Construction and land development			23,168				1,806				57				—				25,031
Residential 1-4 family			218,947				1,304				2,729				—				222,980
Multifamily			16,337				232				—				—				16,569
Farmland			17,019				1,249				100				—				18,368
Total real estate loans			446,683				10,703				4,943				—				462,329
Commercial			81,846				3,711				453				—				86,010
Agriculture			4,255				195				—				—				4,450
Consumer installment loans			20,615				5				12				—				20,632
All other loans			2,145				—				—				—				2,145
Total		$	555,544			$	14,614			$	5,408			$	—			$	575,566

 

 

 

NOTE 7 ALLOWANCE FOR LOAN LOSSES

 

In determining the amount of our allowance for loan losses, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision. Due to the underlying SBA guarantee provided for PPP loans, these accounts were not included in either the portfolio segment or impairment calculations at March 31, 2021 and December 31, 2020. Additionally, due to uncertainties presented by the ongoing pandemic and the resulting economic uncertainty, internal and external qualitative factors were revised accordingly. This revision included reviewing our internal scoring related to loan modifications and extensions, and external factors, specifically, unemployment and other economic factors.

 

The following tables present activity in the allowance for loan losses by portfolio segment for the three month periods ended March 31, 2021 and 2020, respectively. Additionally, the allocation of the allowance by recorded portfolio segment and impairment method is presented as of March 31, 2021, and December 31, 2020, respectively.

 

 

 

		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
Three months ended March 31, 2021
Beginning balance		$	2,281			$	233			$	1,951			$	151			$	97			$	2,275			$	40			$	163			$	—			$	7,191
Charge-offs			—				—				(6	)			—				—				(92	)			—				(13	)			—				(111	)
Recoveries			2				—				8				—				—				—				—				17				—				27
Provision			178				(47	)			330				14				59				(298	)			(7	)			(43	)			—				186
Ending balance		$	2,461			$	186			$	2,283			$	165			$	156			$	1,885			$	33			$	124			$	—			$	7,293
Allowance for loan losses at March 31, 2021
Individually evaluated for impairment		$	558			$	—			$	45			$	—			$	—			$	5			$	—			$	—			$	—			$	608
Collectively evaluated for impairment			1,903				186				2,238				165				156				1,880				33				124				—				6,685
		$	2,461			$	186			$	2,283			$	165			$	156			$	1,885			$	33			$	124			$	—			$	7,293
Loans at March 31, 2021
Individually evaluated for impairment		$	1,932			$	88			$	2,201			$	—			$	574			$	30			$	—			$	3			$	—			$	4,828
Collectively evaluated for impairment			189,224				28,710				216,055				20,488				19,035				90,702				4,216				21,196				—				589,626
		$	191,156			$	28,798			$	218,256			$	20,488			$	19,609			$	90,732			$	4,216			$	21,199			$	—			$	594,454

 

		Real estate secured
(Dollars are in thousands)		Commercial				Construction and Land Development				Residential 1-4 family				Multifamily				Farmland				Commercial				Agriculture				Consumer and All Other				Unallocated				Total
Allowance for loan losses at December 31, 2020
Individually evaluated for impairment		$	574			$	—			$	72			$	—			$	2			$	404			$	—			$	—			$	—			$	1,052
Collectively evaluated for impairment			1,707				233				1,879				151				95				1,871				40				163				—				6,139
		$	2,281			$	233			$	1,951			$	151			$	97			$	2,275			$	40			$	163			$	—			$	7,191
Loans at December 31, 2020
Individually evaluated for impairment		$	1,951			$	99			$	1,999			$	—			$	599			$	429			$	—			$	5			$	—			$	5,082
Collectively evaluated for impairment			177,430				24,932				220,981				16,569				17,769				85,581				4,450				22,772				—				570,484
		$	179,381			$	25,031			$	222,980			$	16,569			$	18,368			$	86,010			$	4,450			$	22,777			$	—			$	575,566

 

		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
Three months ended March 31, 2020
Beginning balance		$	1,248			$	158			$	1,736			$	104			$	109			$	1,789			$	27			$	195			$	2			$	5,368
Charge-offs			(22	)			—				—				—				(42	)			(13	)			—				(33	)			—				(110	)
Recoveries			2				—				8				—				33				29				1				6				—				79
Provision			452				56				333				28				46				51				11				25				(2	)			1,000
Ending balance		$	1,680			$	214			$	2,077			$	132			$	146			$	1,856			$	39			$	193			$	—			$	6,337

 

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

 

NOTE 8 TROUBLED DEBT RESTRUCTURINGS:

 

There were $4.0 million in loans that were classified as troubled debt restructurings at both March 31, 2021 and December 31, 2020. All loans considered to be troubled debt restructurings are individually evaluated for impairment as part of the allowance for loan losses calculation. No loans modified during the three months ended March 31, 2021 or March 31, 2020, were considered to be troubled debt restructurings.

 

No loans previously modified as troubled debt restructurings defaulted during the three months ended March 31, 2021. One loan previously modified as troubled debt restructuring, with a balance of $663 thousand, defaulted during the three months ended March 31, 2020. Generally, a troubled debt restructuring is considered to be in default once it becomes 90 days or more past due following a modification.

 

 

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

 

NOTE 9 OTHER REAL ESTATE OWNED

 

The following table summarizes the activity in other real estate owned for the three months ended March 31, 2021 and the year ended December 31, 2020:

 

(Dollars are in thousands)		March 31, 2021				December 31, 2020
Balance, beginning of period		$	3,334			$	3,393
Additions			118				1,128
Transfers from premises and equipment			—				—
Proceeds from sales			(65	)			(687	)
Proceeds from insurance claims			—				—
Loans made to finance sales			—				(428	)
Adjustment of carrying value			(28	)			(132	)
(Losses) gains from sales			(17	)			60
Balance, end of period		$	3,342			$	3,334

 

NOTE 10 FAIR VALUES:

 

The financial reporting standard, “Fair Value Measurements and Disclosures” provides a framework for measuring fair value under generally accepted accounting principles and requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans and other real estate acquired through foreclosure).

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair Value Measurements and Disclosures also establish fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

 

Level 1: Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an exchange market, as well as U. S. Treasury, other U. S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

 

Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.

 

Level 3: Significant unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.

 

 

Investment Securities Available for Sale – Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, or by dealers or brokers in active over-the counter markets. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

 

Loans - The Company does not record loans at fair value on a recurring basis. Real estate serves as collateral on a substantial majority of the Company’s loans. When a loan is considered impaired, a specific reserve may be established. Loans, which are deemed to be impaired and require a reserve, are primarily valued on a non-recurring basis at the fair values of the underlying real estate collateral. Where there is no observable market price, such fair values are obtained using independent appraisals, which management evaluates to determine whether or not the fair value of the collateral is further impaired below the appraised value and adjusts for estimated costs of disposition. The Company records impaired loans as nonrecurring Level 3 assets.

 

Foreclosed Assets – Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets.  Foreclosed assets are carried at the lower of the carrying value or fair value.  Fair value is based upon observable market prices, when available, reduced by estimated disposition costs, which the Company considers to be nonrecurring Level 2 inputs. When observable market prices are not available, management determines the fair value of the foreclosed asset using independent appraisals, evaluated to determine whether or not the property is further impaired below the appraised value and adjusts for estimated costs of disposition. The Company records foreclosed assets as nonrecurring Level 3.

 

Assets and liabilities measured at fair value are as follows as of March 31, 2021 (for purpose of this table the impaired loans are shown net of the related allowance):

 

March 31, 2021 (Dollars are in thousands)		Quoted market price in active markets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)
(On a recurring basis)
Available for sale investments
U.S. Government Agencies		$	—			$	13,316			$	—
Taxable municipals			—				5,733				—
Corporate bonds			—				5,927				—
Mortgage backed securities			—				21,316				—
(On a non-recurring basis)			—				—				3,342
Other real estate owned
Impaired loans			—				—				4,220
Total		$	—			$	46,292			$	7,562

 

 

Assets and liabilities measured at fair value are as follows as of December 31, 2020 (for purpose of this table the impaired loans are shown net of the related allowance):

 

December 31, 2020 (Dollars are in thousands)		Quoted market price in active markets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)
(On a recurring basis)
Available for sale investments
U.S. Government Agencies		$	—			$	14,107			$	—
Taxable municipals			—				5,345				—
Corporate bonds			—				6,048				—
Mortgage backed securities			—				22,906				—
(On a non-recurring basis)
Other real estate owned			—				—				3,334
Impaired loans											4,030
Total		$	—			$	48,406				7,364

 

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of March 31, 2021 and December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:

 

(Dollars in thousands)

Fair Value at March 31, 2021

Fair Value at December 31, 2020

Valuation Technique

Significant Unobservable Inputs

General Range of Significant Unobservable Input Values

Impaired Loans

$

4,220

$

4,030

Appraised Value/Discounted Cash Flows/Market Value of Note

Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell

0 – 18%

Other Real Estate Owned

$

3,342

$

3,334

Appraised Value/Comparable Sales/Other Estimates from Independent Sources

Discounts to reflect current market conditions and estimated costs to sell

0 – 18%

 

Fair Value of Financial Instruments

 

Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument.

 

The following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.

 

 

The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a recurring basis as of March 31, 2021 and December 31, 2020 are as follows:

 

										Fair Value Measurements
(Dollars are in thousands)		Carrying Amount				Fair Value				Quoted market price in active markets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)
March 31, 2021
Financial Instruments – Assets
Net Loans		$	587,161			$	583,803			$	—			$	578,975			$	4,828
Financial Instruments – Liabilities
Time Deposits			226,566				229,513				—				229,513				—
Borrowed funds			21,496				17,893				—				17,893				—
December 31, 2020
Financial Instruments – Assets
Net Loans		$	568,375			$	564,664			$	—			$	560,634			$	4,030
Financial Instruments – Liabilities
Time Deposits			234,449				237,768				—				237,768				—
Borrowed funds			21,496				16,788				—				16,788				—

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates.

 

Estimated fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Company’s fair value estimates, methods and assumptions are set forth below for the Company’s other financial instruments.

 

The carrying values of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities, trust preferred securities and accrued interest approximates fair value and are excluded from the table above.

 

In accordance with our adoption of Accounting Standards Update (ASU) 2016-01 in 2018, the methods utilized to measure the fair value of financial instruments at March 31, 2021 and December 31, 2020, represent an approximation of exit price; however, an actual exit price may differ.

 

NOTE 11 LEASING ACTIVITIES

 

As of March 31, 2021, the Bank leases five branch office sites resulting from sale leaseback transactions entered into in 2017 and 2019. The lease agreements have maturity dates ranging from May 2032 to September 2034. It is assumed that there are currently no circumstances in which the leases would be terminated prior to expiration. The weighted average remaining life of the lease terms at March 31, 2021 was 11.65 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 at March 31, 2021 was 3.16%.

 

For the three months ended March 31, 2021 and 2020, operating lease expenses were $138 thousand and $144 thousand, respectively.

 

 

The Company’s other operating leases were evaluated and determined to be immaterial to the financial statements. At March 31, 2021, future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands):

 

2021		$	406
2022			530
2023			544
2024			546
2025			550
Thereafter			3,978
Total lease payments			6,554
Less imputed interest			1,210
Total		$	5,344

 

NOTE 12 REVENUE FROM CONTRACTS WITH CUSTOMERS

 

All our revenue from contracts with customers as defined in ASC 606 is recognized within Noninterest income. The following table presents Noninterest income by revenue stream for the three months ended March 31, 2021 and 2020.

 

		For the three months ended
		March 31,
(Dollars in thousands)		2021				2020
Service charges and fees		$	832			$	851
Card processing and interchange income			864				753
Net gain on sale of securities available-for-sale(1)			—				4
Insurance and investment fees			226				132
Other noninterest income			207				425
Total Noninterest Income		$	2,129			$	2,165

 

(1)

Not within the scope of ASU 2014-09

 

NOTE 13 NONINTEREST EXPENSES

 

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

 

		For the three months ended March 31,
(Dollars are in thousands)		2021				2020
Advertising		$	35			$	65
ATM network expense			342				392
Legal, accounting and professional fees			285				234
Consulting fees			55				323
Loan related expenses			107				107
Printing and supplies			36				37
FDIC insurance premiums			70				93
Other real estate owned, net			97				63
Other			494				703
Total other operatinsg expenses		$	1,521			$	2,017

 

 

 

NOTE 14 SUBSEQUENT EVENTS:

 

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. No subsequent events have occurred since March 31, 2021.

 

NOTE 15 RECENT ACCOUNTING DEVELOPMENTS:

 

The following is a summary of recent authoritative announcements:

 

In June 2016, per ASU No. 2016-13, ‘Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,’ the Financial Accounting Standards Board (the FASB) issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. Subsequently, per ASU No. 2019-10, implementation for the Company is delayed until reporting periods beginning after December 15, 2022. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

 

In May 2019, the FASB issued targeted transition relief for entities which irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the amendments to the transition guidance for ASU 2016-13 will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Subsequently, per ASU No. 2019-10, implementation for the Company is delayed until reporting periods beginning after December 15, 2021. The Company is currently in the process of evaluating the impact of adoption of this guidance on its financial statements.

 

In November 2019, the FASB released ASU 2019-10, ‘Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),’ in which the FASB shared a new philosophy to extend and simplify how effective dates for certain major Updates would be staggered between larger public companies (bucket one) and all other entities (bucket two). A major Update would first be effective for bucket-one entities. For bucket-two entities, including the Company, it is anticipated that the FASB will consider requiring an effective date staggered at least two years after bucket one for major Updates. Generally, it is expected that early application would continue to be allowed for all entities. The Company is considered a bucket-two entity due to its eligibility to be a smaller reporting company, per the Securities and Exchange Commission (the SEC). This Update applies to ASU 2016-13, as discussed above, ASU 2017-12, which does not apply to the Company, and ASU 2016-02, which the Company has already early-adopted.

 

In December 2019, the FASB released ASU 2019-12, ‘Income Taxes (Topic 740),’ which simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, improve consistent application, and simplify GAAP for other areas of Topic 740. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company does not expect these amendments to have a material effect on its financial statements.

 

In January 2020, the FASB released ASU 2020-01, ‘Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815),’ which clarify certain interactions between the guidance to account for certain equity securities under Topic 321, 323 and 815, and improve current GAAP by reducing diversity in practice and increasing comparability of accounting. The amendments in this Update are effective for the Company for fiscal years beginning after December 31, 2021, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

 

In March 2020, the FASB released ASU 2020-03, ‘Codification Improvements to Financial Instruments,’ as part of its ongoing project for improving the Codification or correcting its unintended application. This Update is being issued to increase stakeholder awareness of these amendments. These amendments affect Fair Value Option Disclosures, Applicability of Portfolio Exception in Topic 820 to Nonfinancial Items, Disclosures for Depository and Lending Institutions, Cross-Reference to Line-of-Credit or Revolving-Debt Arrangements Guidance in Subtopic 470-50, Cross-Reference to Net Asset Value Practical Expedient in Subtopic 820-10, Interaction of Topic 842 and Topic 326, and Interaction of Topic 326 and Subtopic 860-20. The amendments in this update are effective immediately. The Company does not expect these amendments to have a material effect on its financial statements.

 

 

In March 2020, the FASB released ASU 2020-04, ‘Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting,’ which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. The amendments in this Update are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in the Update are effective for the Company as of March 12, 2020 through December 31, 2022. The Company is currently in the process of evaluating the impact of adoption of this guidance, but does not expect this amendment to have a material impact on its financial statements.

 

In August 2020, the FASB released ASU 2020-06, ‘Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,’ which reduces the number of accounting models for convertible debt instruments and convertible preferred stock. The Board concluded that eliminating certain accounting models simplifies the accounting for convertible instruments, reduces complexity for preparers and practitioners, and improves the decision usefulness and relevance of the information provided to financial statement users. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.

 

In January 2021, the FASB released ASU 2021-01, ‘Reference Rate Reform (Topic 848),’ which clarifies that certain optional expedients and exceptions in topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition related to reference rate reform. The amendments in this Update are effective immediately for all entities. An entity may elect to apply the amendments in the Update on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. The Company does not expect this amendment to have a material effect on its financial statements.

 

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.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Caution About Forward Looking Statements

 

We make forward looking statements in this quarterly report on Form 10-Q that are subject to risks and uncertainties. These forward looking statements include statements regarding expectations, intentions, projections and beliefs concerning our profitability, liquidity, and allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Important factors that may cause actual results to differ from projections include:

 

●

the success or failure of our efforts to implement our business plan;

 

●

any required increase in our regulatory capital ratios;

 

●

satisfying other regulatory requirements that may arise from examinations, changes in the law and other similar factors;

 

●

deterioration of asset quality;

 

●

changes in the level of our nonperforming assets and charge-offs;

 

●

fluctuations of real estate values in our markets;

 

 

●

our ability to attract and retain talent;

 

●

demographical changes in our markets which negatively impact the local economy;

 

●

the uncertain outcome of current or future legislation or regulations or policies of state and federal regulators;

 

●

the successful management of interest rate risk;

 

●

the successful management of liquidity;

 

●

changes in general economic and business conditions in our market area and the United States in general;

 

●

credit risks inherent in making loans such as changes in a borrower’s ability to repay and our management of such risks;

 

●

competition with other banks and financial institutions, and companies outside of the banking industry, including online lenders and those companies that have substantially greater access to capital and other resources;

 

●

demand, development and acceptance of new products and services we have offered or may offer;

 

●

the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation, interest rate, market and monetary fluctuations;

 

●

the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues (including the ongoing novel coronavirus (COVID-19) outbreak and the associated efforts to limit the spread of the disease), and other catastrophic events;

 

●

technology utilized by us;

 

●

our ability to successfully manage cyber security;

 

●

our reliance on third-party vendors and correspondent banks;

 

●

changes in generally accepted accounting principles;

 

●

changes in governmental regulations, tax rates and similar matters; and,

 

●

other risks, which may be described, from time to time, in our filings with the SEC.

 

Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward looking statements. In addition, our past results of operations do not necessarily indicate our future results. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

Critical Accounting Policies

 

For discussion of our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2020 (the 2020 10-K). Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting policies relate to our provision for loan losses and the calculation of our deferred tax asset and related valuation allowance.

 

The provision for loan losses reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to further deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional provisions could be required.

 

Deferred tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. In the past, the Company provided a valuation allowance on its net deferred tax assets where it was deemed more likely than not such assets would not be realized. At March 31, 2021 and December 31, 2020, the Company had no valuation allowance on its net deferred tax assets.

 

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.

 

 

For further discussion of the deferred tax asset and valuation allowance, we refer you to the section on “Deferred Tax Asset and Income Taxes” below.

 

COVID-19 Pandemic

 

Since December 31, 2019, COVID-19 has adversely affected, and will continue to adversely affect, economic activity globally, nationally and locally. Market interest rates have declined significantly. In early 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% - 0.25% and the prime interest rate stands at 3.25%.

 

State and local governments have issued executive orders and businesses have implemented rules as simple as wearing a mask in public and social distancing to limiting attendance at public and household gatherings. This has had, and will continue to have, a significant adverse impact on the economy as certain industries have been seriously impaired or have been forced to close.

 

Financial services are considered essential services, and we have continued to meet the needs of our customers. We supplemented our existing procedures for the adoption of workplace safety standards outlined by the Virginia Department of Labor and Industry. Since the first quarter of 2020, we have maintained a committee dedicated to managing our response to the pandemic. This has included marshalling supplies and personal protective equipment, coordinating employee and customer communications, evaluating staffing and maintaining compliance with various mandates and regulations. Through the first quarter of 2021, we continued to provide services at our branch offices via drive-thru facilities and ITMs. However, as the ongoing national vaccination program is mitigating the risk of infection, we began re-opening our branches in April, and all branch lobbies are now open as of April 19, 2021. We continue to maintain diligence, including the practices of daily self-assessments and temperature monitoring for all employees prior to entering their worksite.

 

Last year, as part of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), the Small Business Administration (SBA) was authorized to guarantee Paycheck Protection Program (PPP) loans used by borrowers for payroll and other permitted purposes. The SBA provided a 100% guarantee and paid originators a processing fee ranging from 1% to 5%, based on the loan amount. We funded a total of $44.5 million of these loans for our customers through August 2020, when the funding period closed, and received $1.6 million in net fees from the SBA, which is being recognized as income over the terms of these loans. Through March 31, 2021, 407 loans have received forgiveness payments from the SBA totaling $24.7 million.

 

In December 2020, the Consolidated Appropriations Act, 2021 was enacted providing additional economic relief related to the COVID-19 pandemic. This legislation included a second round (Round 2) of PPP loans. We are participating in this program and have funded 321 Round 2 loans totaling $18.8 million through March 31, 2021.

 

In response to the economic impact brought on by the COVID-19 pandemic, banking and financial regulators provided guidance to financial institutions regarding borrower requests for forbearance. In general, short-term deferrals or other minor modifications extended to borrowers who were current in their loan obligations at December 31, 2019, were not considered troubled debt restructurings (TDRs) or impairments. These accommodations have been provided in the form of payment deferrals or conversion to interest only for a period of time, generally, three to six months. As of March 31, 2021, of the 648 loans, totaling $103.4 million, which received some form of forbearance in accordance with the applicable legislative and regulatory guidelines, only two accounts totaling $206 thousand remain in forbearance at quarter-end.

 

The majority of the loans which obtained forbearance are within our general market area. Of such loans with a remaining balance at March 31, 2021, 64.9%, 14.5% and 20.2% of the outstanding principal is in Virginia, Tennessee and West Virginia, respectively. At March 31, 2021, these loans cover a number of industries, such as residential property rental, commercial and other real estate rental, hotels and motels; coal mining and natural gas extraction and amusement and entertainment venues. While we believe that the majority of these borrowers will be able to repay their obligations, we cannot reasonably estimate the risk of loss should the adverse economic impact of the pandemic continue for an extended period of time.

 

In summary, the adverse economic impact of the COVID-19 pandemic has been extensive and wide ranging, resulting in a steep decline in interest rates, an increase in unemployment and a resulting decline in economic output. At this time, we cannot reasonably estimate the term or intensity of any possible adverse impact on our financial position, operations or liquidity. However, we are encouraged by the recent vaccination programs and therapeutic treatments that have been developed and are becoming more available to the mass population.

 

 

Overview and Highlights

 

The Company had net income for the three months ended March 31, 2021 of $1.58 million, or basic net income per share of $0.07, as compared to the three months ended March 31, 2020 when the Company had net income of $46 thousand, or $0.00 basic net income per share. The primary drivers for the increase were increases in net interest income of $204 thousand, a reduction in the provision for loan losses of $814 thousand, and a reduction in total noninterest expense of $910 thousand.

 

Net interest income increased $271 thousand due to a $647 thousand decrease in interest expense, which more than offset a $376 thousand decrease in interest income. An increased volume of earning assets, due largely to loan growth, including PPP loans, and interest earning deposits resulting from stimulus payments and PPP loan forgiveness resulted in a volume related increase in interest income of $725 thousand, which was offset by $1.1 million decrease due to lower interest rates, resulting in a net decrease in interest income of $376 thousand. The reduction in interest expense was driven by the reduction in market rates throughout 2020 and into 2021, as our overall cost of funds fell 44 basis points year-over-year to 0.46% for the first quarter of 2021.

 

The reduction in the provision for loan losses is due to a combination of factors, including the limited risk associated with PPP loans, improving economic trends during the first quarter, including improving employment statistics, combined with the liquidity provided to customers through stimulus payments and the funding and forgiveness of PPP loans.

 

Total noninterest income decreased $36 thousand during the first quarter of 2021 compared to the first quarter of 2020 as the $220 thousand resigning fee received from a service provider in 2020, for renewing and extending the service agreement, was not repeated in 2021. As part of the project to improve earnings, fee schedule changes were implemented in August of 2020, and this contributed to more than $144 thousand of increases in service charges and other fee income during the first quarter of 2021 compared to the first quarter of 2020. However, increases in deposit balances from federal COVID relief stimulus payments to customers and PPP loan funds (which are generally deposited into customer accounts) reduced our fee income from overdrafts by approximately $169 thousand for that same year-over-year quarterly comparison. Card processing revenue increased $111 thousand due to increased volume and the incremental increase in related interchange income received. In addition, efforts to increase noninterest income revenues from financial services drove an increase of $94 thousand for the same period comparison.

 

Total noninterest expense decreased $902 thousand, as salaries and benefits expense decreased $422 thousand due to the impact of the restructuring implemented in May and June of 2020, and other operating expenses decreased $496 thousand. Effective April 16, 2021, our Pound and Weber City offices in Virginia, were permanently closed and the customer accounts were transferred to nearby offices. For the time being, ITMs remain at these locations.

 

Total assets increased $54.0 million, or 7.1%, to $810.3 million at March 31, 2021 from $756.3 million at December 31, 2020, due largely to stimulus payments received by our deposit customers and ongoing PPP activity. Total loans increased $18.9 million, or 3.3%, to $594.4 million at March 31, 2021 from $575.6 million at December 31, 2020. Loan growth has resulted in an increase in commercial real estate loans of $11.8 million, which was positively impacted by our new Boone, North Carolina, loan production office. Total deposits have increased $52.9 million, or 7.9%, to $721.0 million at March 31, 2021 from $668.0 million at December 31, 2020, again, due to stimulus payments and ongoing PPP activity.

 

Renovations to the building we purchased in Bristol, Virginia in 2019 have resumed. We have received regulatory approval to operate it as a full service branch, and we plan to open this office in the third quarter of 2021. We believe this expansion, along with the Kingsport, Tennessee office, which opened in the third quarter of 2020, fits in with our stated objective of expanding our presence in the Tri-Cities market area. The Bristol location is within the business district and will allow us to provide retail consumer, commercial banking and financial services within Bristol and the surrounding area.

 

Highlights as of and for the three month period ended March 31, 2021 include:

 

●

Net income for the first quarter of 2021 was $1.58 million, compared to $46 thousand for the first quarter of 2020;

 

 

 

●

Net interest margin was 3.59% for the quarter, a decrease of 16 basis points compared to 3.75% for the quarter ended March 31, 2020;

●

Provision for loans losses was $186 thousand for the quarter, a reduction of $814 thousand compared to the first quarter of 2020;

●

Salaries and employee benefits expense decreased $422 thousand, or 12.1%, to $3.1 million for the first quarter of 2021 compared to the same quarter in 2020;

●

Total assets grew $54.0 million to $810.3 million;

●

Deposit balances grew $52.9 million;

●

Loan balances grew $18.9 million; and

●

Nonperforming assets, which include nonaccrual loans and other real estate owned, totaled $8.7 million at March 31, 2021, a decline of $184 thousand, or 2.1%, during the quarter.

 

Comparison of the Three Months ended March 31, 2021 to March 31, 2020

 

The Company’s primary source of income is net interest income, which increased by $271 thousand, or 4.4%, to $6.4 million for the first quarter of 2021 compared to $6.1 million for the first quarter of 2020. While we had increases in average loan balances and balances held at other banks, those were impacted by the effect of decreases in interest rates, causing interest income to decrease by $376 thousand. However, total interest expense decreased $647 thousand, which more than mitigated the decrease in interest income. The decrease in interest expense was driven primarily by a $579 thousand decrease in interest on deposits, a result of growth in noninterest bearing deposits and a 44 basis-point decrease in the cost of funds to 46 bps. Overall, the net interest margin decreased 16 bps to 3.59%. This reduction in interest rates was a direct result of actions taken by the Federal Reserve’s Federal Open Market Committee, in response to the economic impact of the spread of the pandemic. It is expected that the lower interest rate environment will continue to put a drag on the net interest margin for the foreseeable future.

 

Our future interest rate structure also may be impacted by the pending end of the use of LIBOR as a benchmark interest rate in 2021. We use LIBOR in pricing some of our interest earning assets and liabilities, including our trust preferred securities. At this time it appears that LIBOR will be replaced by the Secured Overnight Financing Rate (SOFR), which is a transparent measure of the cost of borrowing cash overnight collateralized by Treasury securities. The United Kingdom’s Financial Conduct Authority (FCA), who is the regulator of LIBOR, announced on March 5, 2021 that they will no longer require any panel bank to continue to submit LIBOR after December 31, 2021. As it pertains to U.S. dollar LIBOR, the FCA will consider the case to require continued publication, on a synthetic basis, of 1-month, 3-month and 6-month LIBOR settings through June 30, 2023. After such date, the LIBOR settings will no longer be representative and representativeness will no longer be restored. It should be noted, however, that bank regulators, in a joint statement have urged banks to stop using LIBOR altogether on new transactions by the end of 2021 to avoid the creation of safety and soundness risk. The Federal Reserve Bank of New York has created a working group called the Alternative Reference Rate Committee (ARRC) to assist U.S. institutions in transitioning away from LIBOR as a benchmark interest rate. The ARRC has recommended the use of the Secured Overnight Financing Rate (SOFR) as a replacement index for LIBOR. Because there is not yet a consensus as to what rate or rates may become acceptable alternatives to LIBOR, however, we cannot predict the effect of any such alternatives on the value of LIBOR-based variable-rate loans, as well as LIBOR-based securities, trust preferred securities, or other securities or financial arrangements. Regardless of whether SOFR or some other benchmark rate replaces LIBOR, we do not anticipate that the change will have a material impact on our ability to negotiate and price earning assets and liabilities. However, the transition to alternative reference rate for new contracts, or the implementation of a substitute index or indices for the calculation of interest rates under the Company’s existing loan agreements with borrowers or other financial arrangements, could change the Company’s market risk profile, interest margin, interest spread and pricing models, may cause the Company to incur significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept a substitute index or indices, and may result in disputes or litigation with customers or other counter-parties over the appropriateness or comparability to LIBOR of the substitute index or indices.

 

As we prepared for potential asset quality challenges during 2020, a provision to the allowance for loan losses of $1.0 million was made for the first quarter of 2020. Based on our current assessment of the loan portfolio, a lower provision of $186 thousand was made in the first quarter of 2021. For a discussion of the factors affecting the allowance for loan losses, including provision expense, refer to Note 7, Allowance for Loan Losses, in Item 1 of this Form 10-Q. Depending on the length of the economic downturn and the nature and speed of any future recovery, it is possible that additional provisions may be needed beyond those necessary to support organic growth of the loan portfolio.

 

 

 

Noninterest income for the first quarter of 2021 was $2.1 million, a decrease of $36 thousand, or 1.7%, when compared to the same period in 2020. This decrease was driven primarily by a $220 thousand bonus received in the first quarter of 2020 from a service provider for renewing and extending our agreement, and is recognized in other noninterest income. Card processing and interchange fees increased $111 thousand, for the quarterly year-over-year comparison, as customer card usage increased. Revenue from financial services activities increased $94 thousand, or 71.2%.

 

Noninterest expense decreased $902 thousand to $6.3 million in the first quarter 2021 compared to the first quarter of 2020. This decrease was primarily due to the $422 thousand decrease in salaries and benefits expense, a result of the restructuring implemented last May and June. Other operating expenses decreased $496 thousand primarily due to decreases in consulting, data processing, ATM network costs, and travel, which decreased $268 thousand, $46 thousand, $49 thousand and $66 thousand, respectively. The conclusion of the earnings improvement project drove the reductions in consulting fees and travel expenses, and data processing expense decreased due to restructuring and renewal of software agreements. Occupancy expense increased $63 thousand due largely to costs associated with the new Kingsport, Tennessee, office. The closings of our Pound and Weber City offices in Virginia are expected to create some modest expense reductions. Personnel assigned to these locations were reassigned, and the Pound office will function as a regional training site.

 

The efficiency ratio, a non-GAAP measure, improved to 74.3% for the first quarter of 2021 from 87.3% for the first quarter of 2020, as we continue to implement changes to increase income and further control operating expenses. Beginning in the second quarter of 2021, we have re-engaged the firm that assisted in the operational assessment in 2019 and 2020, to review our efforts to date and work toward enhancing our revenue and cost control structure.

 

Balance Sheet

 

Total assets increased $54.0 million, or 7.1%, to $810.3 million at March 31, 2021 from $756.3 million at December 31, 2020. This growth was primarily driven by the $52.9 million increase in deposits, which has increased interest-bearing deposits in other banks and has helped fund loan growth of $18.9 million.

 

Total investments decreased $2.1 million, or 4.4%, to $46.3 million at March 31, 2021 due primarily to principal paydowns of $2.9 million and a decrease of $525 thousand in net unrealized gains, which was offset by purchases of $1.5 million. Through April 30, 2021, approximately $11.9 million has been placed in the investment portfolio since March 31, 2021, with an expectation that additional overnight funds will be invested in the second quarter, as we seek to manage liquidity and increase the return on earning assets.

 

There were no loans held for sale at March 31, 2021 versus $389 thousand at December 31, 2020. These loans are originated for sale into the secondary market on a best efforts basis.

 

Loans receivable increased $18.9 million, or 3.3%, to $594.5 million at March 31, 2021 as compared to $575.6 million at December 31, 2020, due mainly to increases in commercial loans secured by real estate and commercial & industrial loans (not secured by real estate), which grew $11.8 million and $4.7 million, respectively. During the first quarter of 2021, 323 loans totaling $18.8 million were funded in Round 2 of the PPP program. At the same time, $15.4 million of PPP loans originated in Round 1 were repaid through SBA forgiveness during the first three months of 2021. As of April 30, 2021, an additional 78 loans PPP loans totaling $3.7 million were funded, bringing the total round 2 loans to $22.5 million.

 

Total deposits increased $52.9 million, or 7.9%, to $721.0 million at March 31, 2021 from $668.0 million at December 31, 2020, due primarily to approximately $48 million in stimulus payments received by customers in March, plus PPP loan funds, which are generally deposited into customers’ deposit accounts. During those three months, noninterest-bearing demand deposits increased $35.6 million, or 15.9%. During this same period, interest-bearing deposits increased $17.4 million, or 3.9%, driven mainly by an increase in interest-bearing demand deposits of $7.3 million and an increase in savings accounts of $13.4 million, offset by a decrease in time deposits of $7.9 million. Although we have lowered deposit rates, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our customer base and communities.

 

Trust preferred securities of $16.5 million at March 31, 2021 were unchanged compared to December 31, 2020.

 

 

Borrowed funds from the FHLB were $5.0 million at both March 31, 2021 and December 31, 2020.

The following table presents the FHLB advances:

 

(Dollars in thousands)		Maturity Date		Rate		March 31, 2021			December 31, 2020
Fixed Rate Hybrid		6/30/2021		1.34%		$	5,000		$	5,000

 

We anticipate that this FHLB borrowing will be repaid in full during the second quarter of 2021.

 

Total equity at March 31, 2021 was $59.3 million, an increase of $1.2 million, or 2.0%, compared to $58.2 million at December 31, 2020. Net income of $1.58 million offset by comprehensive loss of $415 thousand drove this increase.

 

Asset Quality

 

Non-performing assets decreased $185 thousand, or 2.1%, during the first three months of 2021, driven by a decrease in nonaccruing loan balances of $192 thousand that was partially offset by an increase in other real estate owned (OREO) of $8 thousand. As a result, the ratio of nonperforming assets to total assets decreased to 1.07% at March 31, 2021 compared to 1.17% at December 31, 2020.

 

Nonperforming assets include nonaccrual loans, OREO and loans past due more than 90 days which are still accruing interest. Our policy is to place loans on nonaccruing status once they reach 90 days past due. The makeup of the nonaccruing loans is primarily those secured by residential mortgages, and commercial real estate.

 

OREO is primarily made up of commercial and single-family residential properties. We continue extensive and aggressive measures to work through problem credits and liquidate foreclosed properties in an effort to reduce nonperforming assets. We are mindful of the impact on earnings and capital as we work to achieve our goal to reduce nonperforming assets. However, we may recognize some losses and reductions in the allowance for loan loss as we expedite the resolution of these problem assets.

 

Nonperforming assets consisted of the following as of March 31, 2021 and December 31, 2020:

 

			March 31,2021				December 31, 2020
Nonaccrual loans		$	5,355			$	5,548
Loans past due more than 90 days, still accruing			-				-
Nonperforming loans			5,355				5,548
Other real estate owned			3,342				3,334
Nonperforming assets		$	8,697			$	8,882
Nonperforming loans/Total loans at period end			0.90	%			0.96	%
Nonperforming assets/Total assets at period end			1.07	%			1.17	%

 

All OREO properties are available for sale by commercial and residential realtors under the direction of our Special Assets division. During the first three months of 2021, $118 thousand of OREO was acquired as a result of settlement of foreclosed loans. Foreclosed real estate sales for the first three months of 2021 totaled $65 thousand, resulting in a net loss of $17 thousand. In an effort to reduce our level of foreclosed properties, we maintain an aggressive approach toward liquidating properties, exhibited over the past, by making pricing adjustments to expedite sales. This includes valuation adjustments of $28 thousand recorded thus far in 2021. As we continue these efforts, additional losses could occur, while reducing future carrying costs. We do have lease agreements on certain OREO properties which are generating rental income at market rates. Rental income on OREO properties was $18 thousand for the first three months of 2021 compared to $25 thousand for the first three months of 2020.

 

Loans rated substandard or below totaled $5.3 million at March 31, 2021, a decrease of $116 thousand from $5.4 million at December 31, 2020. Total past due loans decreased to $5.6 million at March 31, 2021 from $8.6 million at December 31, 2020.

 

Our allowance for loan losses at March 31, 2021 was $7.3 million, or 1.23% of total loans as compared to $7.2 million, or 1.25%, of total loans at December 31, 2020. Impaired loans totaled $4.8 million with an estimated related specific allowance of $608 thousand for potential losses at March 31, 2021 as compared to $5.1 million of impaired loans with an estimated related allowance of $1.1 million at the end of 2020. A provision of $186 thousand was recorded for the first quarter of 2021 compared to $1.0 million for the first three months of 2020. In the first three months of 2020, net charge-offs were $83 thousand, or 0.06% of average loans, annualized, as compared to $31 thousand, or 0.02%, of average loans for the same period of 2020. 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 changes made in our internal policies and procedures; however, future provisions may be deemed necessary. During 2020 and continuing through the first quarter of 2021, due to uncertainties presented by the ongoing pandemic and the resulting economic uncertainty, internal and external qualitative factors were revised accordingly. This revision included reviewing our internal scoring related to loan modifications and extensions, and external factors, specifically, unemployment and other economic factors.

 

 

The following table summarizes components of the allowance for loan losses and the related loans as of March 31, 2021 and December 31, 2020:

 

(Dollars in thousands)		March 31,2021				December 31, 2020
Specific allowance		$	608			$	1,052
General allowance			6,685				6,139
Total allowance		$	7,293			$	7,191
Impaired loans		$	4,828			$	5,082
Other loans			589,626				570,484
Total loans		$	594,454			$	575,566
Total allowance/Total loans			1.23	%			1.25	%
General allowance/Other loans			1.13	%			1.08	%

 

Deferred Tax Asset and Income Taxes

 

Due to timing differences between book and tax treatment of several income and expense items, a net deferred tax asset of $2.8 million and $3.1 million existed at March 31, 2021 and December 31, 2020, respectively. Our income tax expense was computed at the corporate income tax rate of 21% of taxable income. We have no significant nontaxable income or nondeductible expenses.

 

Capital Resources

 

Total stockholders’ equity at March 31, 2021 was $59.3 million compared to $58.2 million at December 31, 2020, an increase of $1.2 million. The increase includes net unrealized losses of $415 thousand related to the available-for-sale investment portfolio, net of tax, plus net income of $1.58 million for the three month period.

 

The Company meets the eligibility criteria to be classified as a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February 2015 and is therefore not obligated to report consolidated regulatory capital. The Bank continues to be subject to various capital requirements administered by banking agencies.

 

The Bank’s capital ratios along with the minimum regulatory thresholds to be considered well-capitalized are presented in the following table.

 

		Well-Capitalized
		Regulatory				March 31,				December 31,
		Threshold				2021				2020
Tier 1 leverage			5.00	%			9.41	%			9.49	%
Common equity Tier 1			6.50	%			14.91	%			15.16	%
Tier 1 risk-based capital			8.00	%			14.91	%			15.16	%
Total risk-based capital			10.00	%			16.16	%			16.41	%

 

 

 

At March 31, 2021, the Bank remains well capitalized under the regulatory framework for prompt corrective action. The ratios mentioned above for the Bank comply with the Federal Reserve rules to align with the Basel III Capital requirements.

 

Tangible book value, which is total stockholders’ equity net of accumulated other comprehensive income, was $2.47 per common share at March 31, 2021 and $2.40 per common share at December 31, 2020. Other key performance indicators are as follows:

 

		Three months ended March 31,
		2021				2020
Return on average assets1			0.83	%			0.03	%
Return on average equity1			10.96	%			0.34	%
Average equity to average assets			7.55	%			7.70	%
1 - Annualized

 

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

 

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

 

Liquidity

 

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 $171.2 million at March 31, 2021, an increase from $134.0 million at December 31, 2020. A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs during 2021.

 

At March 31, 2021, all of our investment securities were classified as available-for-sale. These investments provide a source of liquidity in the amount of $40.0 million, which is net of the $6.3 million of securities pledged as collateral. Investment securities available for sale serve as a source of liquidity while yielding a higher return versus other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank.

 

Our loan to deposit ratio was 82.5% at March 31, 2021 and 86.2% at December 31, 2020. We anticipate this ratio to remain at or below 90% for the foreseeable future.

 

Available third-party sources of liquidity at March 31, 2021 include the following: a line of credit with the FHLB, access to brokered certificates of deposit markets and the discount window at the Federal Reserve Bank. We also have the ability to borrow $20.0 million in unsecured federal funds through credit facilities extended by correspondent banks.

 

The Bank’s total line of credit with the FHLB is $188.8 million, with unused availability at March 31, 2021 of $171.8 million. One advance for $5.0 million was outstanding at March 31, 2021 and the credit line also secures letters of credit totaling $17.0 million. The advance and letters of credit are secured by a blanket lien on our residential real estate loans which amounted to $126.4 million at March 31, 2021.

 

The Bank also has access to the brokered deposits market and the Certificate of Deposit Registry Service (CDARS). At March 31, 2021, we held no brokered deposits and $9.8 million in CDARS reciprocal time deposits.

 

Additional liquidity is available through the Federal Reserve Bank discount window for overnight funding needs. We may collateralize this line with investment securities and loans at our discretion; however, we do not anticipate using this funding source except as a last resort. Aside from the conventional discount window facility, the Federal Reserve Bank is also offering funding for specifically for financial institutions providing PPP loans. As we continue to assess our overall liquidity, we may consider taking advantage of this program or some similar credit facilities being offered by other correspondent banks related to matching PPP loans.

 

With the on-balance sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources to meet our requirements and needs for the foreseeable future. However, liquidity can be further affected by a number of factors such as counterparty willingness or ability to extend credit, regulatory actions and customer preferences, etc., some of which are beyond our control.

 

 

The bank holding company has approximately $204 thousand in cash on deposit at the Bank at March 31, 2021. The holding company receives quarterly dividend payments from the Bank which are used to pay operating expenses, trust preferred interest payments, and provide additional capital injections to the Bank, if needed. The Company is making quarterly interest payments on the trust preferred securities.

 

Off Balance Sheet Items and Contractual Obligations

 

There have been no material changes during the quarter ended March 31, 2021 to the off-balance sheet items and the contractual obligations disclosed in our 2020 Form 10-K.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not Applicable.

 

Item 4. Controls and Procedures

 

We have carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer (our CEO) and our Executive Vice President and Chief Financial Officer (our CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were operating effectively in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2021 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

Part II Other Information

 

Item 1. Legal Proceedings

 

In the course of operations, we may become a party to legal proceedings in the normal course of business. At March 31, 2021, we do not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or any of its subsidiaries or to which the property of the Company or any of its subsidiaries is subject, in the opinion of management, will materially impact the financial condition or liquidity of the Company.

 

The Bank was named as a defendant in an action filed in the United States District Court for the Western District of Virginia on December 22, 2020. The plaintiff alleges that the Bank breached a contractual arrangement in the assessment of overdraft fees for the re-presentment of items previously returned due to lack of sufficient funds. The plaintiff is seeking class action status in its pursuit of this complaint. The Bank denies the allegation and intends to vigorously defend against this claim. As no formal or specific financial demand has been made, and due to the preliminary status of this case, any possible loss cannot be estimated at this time.

 

The Bank is a defendant in a complaint filed by a former employee in the United States District Court for the Western District of Virginia on January 1, 2021. The complaint alleges wrongful termination based on gender, religion and age. The Bank denies the allegations and intends to vigorously defend against these claims. As no formal or specific financial demand has been made, and due to the preliminary status of this case, any possible loss cannot be estimated at this time.

 

 

Item 1A. Risk Factors

 

Not Applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

The following exhibits are filed as part of this report or are incorporated by reference:

 

No.	Description
3.1	Amended Articles of Incorporation of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarterly period ended June 30, 2008 filed on August 11, 2008).
3.2	Bylaws of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 3.2 to Form 8-K filed on August 26, 2020).
4.1	Specimen Common Stock Certificate of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 4.1 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012).
31.1	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
31.2	Certification by Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
32	Certification by Chief Executive Officer and Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials for the Company’s 10-Q Report for the quarterly period ended March 31, 2021, formatted in XBRL:  (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated  Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements, tagged as blocks of text.

 

  

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		NEW PEOPLES BANKSHARES, INC.
		(Registrant)
	By:	/s/ C. TODD ASBURY
		C. Todd Asbury
		President and Chief Executive Officer
	Date:	May, 17 2021
	By:	/s/ JOHN J. BOCZAR
		John J. Boczar
		Executive Vice President and Chief Financial Officer
	Date:	May, 17 2021