Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion compares the Company’s financial condition at December 31, 2020 to its financial condition at December 31, 2019 and the results of operations for the years ended December 31, 2020 and 2019. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing in Item 8 of Part II of this annual report.
PERFORMANCE OVERVIEW
The Company recorded net income of $15.73 million for 2020 and net income of $16.20 million for 2019. The basic and diluted income per share was $1.27 and $1.28 from continuing operations for fiscal year 2020 and 2019, respectively. When comparing net income from continuing operations for 2020 to 2019, earnings decreased due to a higher provision for credit losses and higher noninterest expenses, almost entirely offset by an increase in net interest income and noninterest income.
Total assets were $1.933 billion at December 31, 2020, a $374.1 million, or 24.0%, increase when compared to the $1.559 billion at December 31, 2019. The primary factors contributing to the increase were increases in gross loans of $205.6 million, which included PPP loans of $122.9 million, interest-bearing deposits with other banks of $93.7 million and $73.2 million in securities.
Total deposits increased $359.4 million, or 26.8%, to $1.701 billion at December 31, 2020. The overall increase in deposits can be attributed to a combination of factors which include, direct stimulus payments to customers, customers improving their liquidity position by participating in our deferred loan program and the result of new business and municipal relationships developed during 2020. Total stockholders’ equity increased $2.2 million, or 1.1%, to $195.0 million, or 10.09% of total assets at December 31, 2020. The increase in total stockholders’ equity was primarily due to current year earnings and other comprehensive income, partially offset by repurchases of the Company’s common stock throughout the year totaling $9.1 million.
COVID-19 Pandemic
The outbreak of COVID-19 has led to adverse impacts on economic conditions and created uncertainty in financial markets. Correspondingly, in early March 2020, the Company began preparing for potential disruptions and government limitations of activity in the markets in which we serve. Our team activated our Business Continuity Program and was able to quickly execute on multiple initiatives to adjust our operations to protect the health and safety of our employees and clients. Since the beginning of the crisis, we have been in close contact with our clients, assessing the level of impact on their businesses, and providing relief programs according to each client’s specific situation and qualifications. We have also enhanced awareness of digital banking offerings, expanded services at our drive through locations, and allowed customers to make appointments in the branch for critical services. The Company’s branches remain open and have taken steps to comply with various government directives regarding “social distancing,” as well as, enhanced cleaning and disinfecting of all surface areas to protect its clients and employees.
Small Business Administration’s Paycheck Protection Program
We established our process for participating in the Small Business Administration’s Paycheck Protection Program (“PPP”) that enabled our clients to utilize this valuable resource beginning in April 2020. Loans under the PPP are designed to provide assistance for small businesses during the COVID-19 pandemic to help meet the costs associated with payroll, mortgage interest, rent and utilities. These loans are guaranteed by the SBA and forgiveness of the loans, by the SBA, is granted to the borrower if the borrower uses at least 60% of the funds to cover payroll costs and benefits. Forgiveness is also based on the small business maintaining or quickly rehiring their employees and maintaining salary levels for their employees. Loans under the PPP do not require any collateral or personal guarantees, as such, these loans are included in the Company’s commercial loans segment. Through August 8, 2020, our team was able to process 1,488 PPP loans for approximately $126.7 million in the first and second rounds of the program, which has allowed us to further strengthen and deepen our client relationships, while positively impacting thousands of individuals. We are also closely monitoring
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the credit quality of the loan portfolio and monitor lines of credit draws for deviation from normal activity to improve loan performance and reduce credit risk.
Short-term Modifications for Borrowers
In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Company is providing modifications where appropriate, including interest only payments or payment deferrals for clients that could be adversely affected by the COVID-19 pandemic. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs. In accordance with interagency guidance issued in April 2020, these short-term modifications made to a borrower affected by the COVID-19 pandemic and governmental shutdown orders, such as payment deferrals, fee waivers and extensions of repayment terms, do not need to be identified as TDRs if the loans were current at the time a modification plan was implemented. For the year ended December 31, 2020, the Company had executed principal and/or interest deferrals on outstanding loan balances of $221.1 million, of which only $34.9 million, or 2.40% of the total portfolio remained on deferral as of December 31, 2020.
Loans
Loans Modified
Modified to
Total Loan
Total Loans
to Interest
Payment
Percentage
Balance as of
Modified as of
Only Payments
Deferral
of Loans
(Dollars in thousands)
December 31, 2020
December 31, 2020
(6 months or less)
(3 months)
Modified
Hospitality Industry
$
114,592
$
32,260
$
32,260
$
-
28.15
%
Non-owner occupied Retail Stores
133,992
-
-
-
—
Non-owner occupied Restaurants
11,644
-
-
-
—
Owner-occupied Retail Stores
14,376
-
-
-
—
Owner-occupied Restaurants
9,226
-
-
-
—
Oil & Gas Industry
-
-
-
-
—
Other Commercial Loans
774,867
2,269
2,269
-
0.29
Total Commercial Loans
1,058,697
34,529
34,529
-
3.26
Residential 1-4 family Personal
228,752
-
-
-
—
Residential 1-4 family Rentals
90,982
300
300
-
0.33
Home Equity Loans
45,488
-
-
-
—
Total Residential Real Estate Loans
365,222
300
300
-
0.08
Consumer Loans
30,282
79
-
79
0.26
Mortgage Warehouse Loans
-
-
-
-
—
Credit Card, Overdrafts and Other
55
-
-
-
—
TOTAL LOANS
$
1,454,256
$
34,908
$
34,829
$
79
2.40
%
CRITICAL ACCOUNTING POLICIES
The Company’s consolidated financial statements are prepared in accordance with GAAP and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.
The most significant accounting policies that the Company follows are presented in Note 1 to the Consolidated Financial Statements. These policies, along with the disclosures presented in the notes to the financial statements and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies with respect to the allowance for credit losses and goodwill are critical accounting policies. These policies are considered critical because they relate to accounting areas that require the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.
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The allowance for credit losses represents management’s estimate of credit losses inherent in the loan portfolio as of the balance sheet date. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of similar loans based on historical loss experience, and consideration of current economic trends and conditions and other factors impacting the loan portfolio, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheets. Note 1 to the Consolidated Financial Statements describes the methodology used to determine the allowance for credit losses. A discussion of the allowance determination and factors driving changes in the amount of the allowance for credit losses is included in the Asset Quality - Provision for Credit Losses and Risk Management section below.
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment. Goodwill is tested at least annually for impairment, usually during the fourth quarter, or on an interim basis if circumstances dictate. Impairment testing requires a qualitative assessment or that the fair value of each of the Company’s reporting units be compared to the carrying amount of its net assets, including goodwill. If the fair value of a reporting unit is less than book value, an expense may be required to write down the related goodwill to record an impairment loss. As of December 31, 2020, the Company had only one banking reporting unit.
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
The Notes to the Consolidated Financial Statements discuss new accounting policies that the Company adopted during 2020 and the expected impact of accounting policies recently issued or proposed but not yet required to be adopted. To the extent the adoption of new accounting standards materially affects our financial condition, results of operations or liquidity, the impacts are discussed in the applicable section(s) of this discussion and Notes to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
Net interest income remains the most significant factor affecting our results of operations. Net interest income represents the excess of interest and fees earned on total average earning assets (loans, investment securities, federal funds sold and interest-bearing deposits with other banks) over interest owed on average interest-bearing liabilities (deposits and borrowings). Tax-equivalent net interest income is net interest income adjusted for the tax-favored status of income from certain loans and investments. As shown in the table below, tax-equivalent net interest income for 2020 was $52.7 million. This represented a $2.4 million, or 4.9%, increase from 2019. The increase in net interest income when comparing 2020 to 2019 was primarily the result of higher average balances on loans and lower average rates paid on interest-bearing deposits, partially offset by lower average yields on taxable investment securities and interest-bearing deposits with other banks. In addition, the issuance of subordinated debt in the third quarter of 2020, contributed to the offset in the increase in net interest income when comparing the periods.
Our net interest margin (i.e., tax-equivalent net interest income divided by average earning assets) represents the net yield on earning assets minus the cost of average interest liabilities. The net interest margin is managed through loan and deposit pricing and asset/liability strategies. The net interest margin was 3.27% for 2020 and 3.54% for 2019. The net interest margin decreased when comparing 2020 to 2019 primarily due to a decline in the average yields on total earning assets of 50bps, which was compounded by the significant increase in deposits, resulting in excess liquidity being invested in lower yielding assets. Partially offsetting the decrease in average yields on earnings assets was a decline in the average rates paid on interest-bearing deposits of 34bps and the decrease in the average balance on long-term advances from the FHLB. The net interest spread, which is the difference between the average yield on earning assets and the average rate paid for interest-bearing liabilities was 3.05% for 2020 and 3.20% for 2019.
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The following table sets forth the major components of net interest income, on a tax-equivalent basis, for the years ended December 31, 2020 and 2019.
2020
2019
Average
Interest
Yield/
Average
Interest
Yield/
(Dollars in thousands)
Balance
(1)
Rate
Balance
(1)
Rate
Earning assets
Loans (2), (3)
$
1,368,887
$
56,561
4.13
%
$
1,226,361
$
55,553
4.53
%
Investment securities:
Taxable
138,391
2,997
2.16
156,383
3,582
2.29
Interest-bearing deposits
103,726
260
0.25
39,944
794
1.99
Total earning assets
1,611,004
59,818
3.71
%
1,422,688
59,929
4.21
%
Cash and due from banks
18,042
18,241
Other assets
92,575
68,399
Allowance for credit losses
(11,624)
(10,425)
Total assets
$
1,709,997
$
1,498,903
Interest-bearing liabilities
Demand deposits
$
343,848
903
0.26
%
$
252,907
1,735
0.69
%
Money market and savings deposits
434,781
1,172
0.27
389,000
2,782
0.72
Brokered Deposits
—
—
—
16,369
388
2.37
Certificates of deposit $100,000 or more
129,150
2,191
1.70
113,017
1,839
1.63
Other time deposits
148,823
2,174
1.46
146,344
1,982
1.35
Interest-bearing deposits
1,056,602
6,440
0.61
917,637
8,726
0.95
Securities sold under retail repurchase agreements and short-term FHLB advances
1,484
5
0.34
18,453
481
2.61
Advances from FHLB - long-term
3,934
113
2.87
15,000
429
2.86
Subordinated debt
8,617
522
6.06
—
—
—
Total interest-bearing liabilities
1,070,637
7,080
0.66
%
951,090
9,636
1.01
%
Noninterest-bearing deposits
431,319
348,665
Other liabilities
10,072
9,009
Stockholders’ equity
197,969
190,139
Total liabilities and stockholders’ equity
$
1,709,997
$
1,498,903
Net interest spread
$
52,738
3.05
%
$
50,293
3.20
%
Net interest margin
3.27
%
3.54
%
Tax-equivalent adjustment
Loans
Total
(1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 21% for 2020 and 2019, exclusive of nondeductible interest expense. The tax-equivalent adjustment amounts used in the above table to compute yields aggregated $141 thousand in 2020 and $162 thousand in 2019.
(2) Average loan balances include nonaccrual loans.
(3) Interest income on loans includes amortized loan fees, net of costs, and all are included in the yield calculations.
On a tax-equivalent basis, total interest income was $59.8 million for 2020 compared to $59.9 million for 2019. The decrease in interest income for 2020 compared to 2019 was primarily due to the decrease in the average yields of loans, offset by the increase in the average balance on loans and the addition of fees, net of costs, on PPP loans during 2020. The average balance of loans in 2020 increased $142.5 million and the yield earned on these loans declined to 4.13% from 4.53%. This was primarily the result of the origination of PPP loans which had an average balance at the end of 2020 of $58.6 million and an average yield of 2.18%, well below the average yield on the Bank’s traditional loans. The decrease in interest income on interest-bearing deposits and taxable investment securities was impacted by Federal Reserve rate cuts during the first quarter of 2020, as seen in the Rate/Volume Variance Analysis below. As a percentage of total average earning assets, loans, investment securities, and interest-bearing deposits were 85.0%, 8.6%, and 6.4%, respectively, for 2020. The comparable percentages for 2019 were 86.2%, 11.0%, and 2.8%, respectively.
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Interest expense was $7.1 million for 2020 compared to $9.6 million for 2019. The decrease in interest expense for 2020 was primarily due to decreases in the average rates paid on interest-bearing deposits, partially offset by the addition of interest on subordinated debt in the third quarter of 2020. During 2020, demand deposits, money market/savings deposits and certificates of deposit over $100 thousand experienced the most significant growth with increases in the average balances of $90.9 million, $45.8 million and $16.1 million, respectively, while the average rates paid on these deposits (decreased)/increased (43), (45) and 7bps, respectively. In addition, the elimination of brokered deposits resulted in a decrease in the average balance of $16.4 million for 2020.
During 2020, the lower average rates on interest-bearing liabilities, specifically short-term and long-term advances from the FHLB produced $229 thousand less in interest expense and decreased volume produced $563 thousand less in interest expense, as shown in the table below. Partially offsetting these decreases was the addition of subordinated debt during 2020 resulting in an average balance of $8.6 million with a rate of 6.06%.
The following Rate/Volume Variance Analysis identifies the portion of the changes in tax-equivalent net interest income attributable to changes in volume of average balances or to changes in the yield on earning assets and rates paid on interest-bearing liabilities. The rate and volume variance for each category has been allocated on a consistent basis between rate and volume variances, based on a percentage of rate, or volume, variance to the sum of the absolute two variances.
2020 over (under) 2019
Total
Caused By
(Dollars in thousands)
Variance
Rate
Volume
Interest income from earning assets:
Loans
$
1,008
$
(5,140)
$
6,148
Taxable investment securities
(585)
(193)
(392)
Interest-bearing deposits
(534)
(1,087)
553
Total interest income
(111)
(6,420)
6,309
Interest expense on deposits and borrowed funds:
Interest-bearing demand deposits
(832)
(1,324)
492
Money market and savings deposits
(1,610)
(1,910)
300
Brokered deposits
(388)
—
(388)
Time deposits
544
240
304
Securities sold under repurchase agreements
and short-term FHLB advances
(476)
(231)
(245)
Advances from FHLB - Long-term
(316)
2
(318)
Subordinated debt
522
—
522
Total interest expense
(2,556)
(3,223)
667
Net interest income
$
2,445
$
(3,197)
$
5,642
Noninterest Income
Noninterest income from continuing operations increased $729 thousand, or 7.3%, in 2020 when compared to 2019. The increase in noninterest income in 2020 when compared to 2019 was primarily due to increases in other noninterest income of $1.4 million which was the result of increases in BOLI and COLI income of $656 thousand, swap fee income of $495 thousand and other fees on bank services of $264 thousand, partially offset by a decrease in service charges on deposit accounts of $1.1 million. In addition, the Bank had gains on sales of securities during 2020 of $347 thousand and an increase in trust and investment fee income of $36 thousand. The significant decrease in bank service fees was due to the Bank providing fee waivers during 2020 for customers who were impacted by the pandemic. The increase in BOLI income was attributed to a full year of earnings from $25.6 million in insurance contracts purchased in 2019 used to offset future employee benefit costs.
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The following table summarizes our noninterest income from continuing operations for the years ended December 31.
Years Ended
Change from Prior Year
2020/ 19
(Dollars in thousands)
2020
2019
Amount
Percent
Service charges on deposit accounts
$
2,839
$
3,910
$
(1,071)
(27.4)
%
Trust and investment fee income
1,558
1,522
36
2.4
Gains on sales and calls of investment securities
347
—
347
100.0
Other noninterest income
6,005
4,588
1,417
30.9
Total
$
10,749
$
10,020
$
729
7.3
Noninterest Expense
Noninterest expense from continuing operations increased $842 thousand, or 2.2%, in 2020 when compared to 2019. The increase in noninterest expenses was primarily due to increases in employee benefits of $1.2 million, due to an increase in medical claims from the Company’s self-funded insurance program and a full year of expense for the supplemental executive retirement plans (“SERPs”) in 2020, data processing of $498 thousand, the result of utilizing additional services from our core processor, occupancy expense of $161 thousand due to the addition of a new branch in 2020 and FDIC insurance premium expense due to the absence of a credit received in 2019, partially offset by decreases in salaries and wages of $478 thousand, OREO expenses, net of $369 thousand and other noninterest expenses of $432 thousand. The decrease in salaries and wages resulted from the deferral of direct origination costs related to the origination of PPP loans in 2020. The decrease in other noninterest expense was primarily due to decreases in advertising, marketing, travel and entertainment expenses due to the pandemic, coupled with a decrease in other loan expenses.
The Company had 287 full-time equivalent employees at December 31, 2020, and 294 full-time equivalent employees at December 31, 2019.
The following table summarizes our noninterest expense from continuing operations for the years ended December 31.
Years Ended
Change from Prior Year
2020/ 19
(Dollars in thousands)
2020
2019
Amount
Percent
Salaries and wages
$
14,935
$
15,413
$
(478)
(3.1)
%
Employee benefits
6,461
5,283
1,178
22.3
Occupancy expense
2,919
2,758
161
5.8
Furniture and equipment expense
1,224
1,107
117
10.6
Data processing
4,288
3,790
498
13.1
Directors’ fees
504
479
25
5.2
Amortization of intangible assets
533
605
(72)
(11.9)
FDIC insurance premium expense
485
344
141
41.0
Other real estate owned expenses, net
56
425
(369)
(86.8)
Legal and professional fees
2,296
2,223
73
3.3
Other noninterest expenses
4,698
5,130
(432)
(8.4)
Total
$
38,399
$
37,557
$
842
2.2
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Income Taxes
The Company reported an income tax expense for continuing operations of $5.3 million for 2020, compared to an income tax expense for continuing operations of $5.6 million for 2019. The effective tax rate for continuing operations was 25.3% for 2020 and 25.6% for 2019. The Company’s effective tax rate remained relatively unchanged for 2020 compared to 2019. Please refer to Note 16 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K for further information.
REVIEW OF FINANCIAL CONDITION
Asset and liability composition, capital resources, asset quality, market risk, interest sensitivity and liquidity are all factors that affect our financial condition. The following sections discuss each of these factors.
Assets
Interest-Bearing Deposits with Other Banks and Federal Funds Sold
The Company invests excess cash balances (i.e., the excess cash remaining after funding loans and investing in securities with deposits and borrowings) in interest-bearing accounts and federal funds sold offered by our correspondent banks. These liquid investments are maintained at a level that management believes is necessary to meet current liquidity needs. Total interest-bearing deposits with other banks increased $93.7 million from $76.5 million at December 31, 2019 to $170.3 million at December 31, 2020. This significant increase was the result of deposit growth of $359.4 million, or 26.8%. Average interest-bearing deposits with other banks increased $63.8 million in 2020 when compared to 2019. The increase in 2020 was due to higher average balances on interest and noninterest-bearing deposits of $139.0 million and $82.7 million, respectively.
Investment Securities
The investment portfolio is structured to provide us with liquidity and also plays an important role in the overall management of interest rate risk. Investment securities available for sale are stated at estimated fair value based on quoted prices and may be sold as part of the asset/liability management strategy or which may be sold in response to changing interest rates. Net unrealized holding gains and losses on available for sale debt securities are reported net of related income taxes as accumulated other comprehensive income, a separate component of stockholders’ equity. Investment securities in the held to maturity category are stated at cost adjusted for amortization of premiums and accretion of discounts. We have the intent and current ability to hold such securities until maturity. At December 31, 2020, 68% of the portfolio was classified as available for sale and 32% as held to maturity. At December 31, 2019, 94% of the portfolio was classified as available for sale and 6% as held to maturity. Total investment securities increased $73.2 million from $137.1 million at December 31, 2019 to $210.3 million at December 31, 2020. The Bank purchased $130.7 million in securities in 2020, of which $73.5 million was classified as available for sale and $57.2 million as held to maturity. The significant change in investment strategy when comparing 2020 to 2019 was due to excess liquidity experienced in 2020, which was partially utilized to purchase securities with a higher yield than the then current overnight Fed funds rate. The larger percentage of securities designated as held to maturity reflects the amount that management believes is not needed to support our anticipated growth and liquidity needs. We do not typically invest in derivative securities and held no such investments at December 31, 2020 or December 31, 2019.
Investment securities available for sale were $139.6 million at the end of 2020 and $122.8 million at the end of 2019. The Bank purchased $73.5 million in available for sale securities in 2020 and $0 for 2019. During 2020, the Bank purchased thirteen mortgage-backed securities and four government agency bonds of $55.4 million and $18.0 million, respectively. At year-end 2020, 16.9% of the available for sale securities in the portfolio were U.S. Government agencies and 83.1% of the securities were mortgage-backed securities, compared to 19.4% and 80.6%, respectively, at year-end 2019. Our investments in mortgage-backed securities are issued or guaranteed by U.S. Government agencies or government-sponsored agencies.
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Investment securities held to maturity were $65.7 million at the end of 2020 and $8.8 million at the end of 2019. The Bank purchased $57.2 million in held to maturity securities in 2020 and $4 million for 2019. During 2020, the Bank purchased six mortgage-backed securities of $27.4 million, five government agency bonds of $17.7 million and seven subordinated debt instruments from other banks of $12.1 million. In 2019, the Company purchased one corporate bond of $4.0 million. At year-end 2020, 28.7% of the held to maturity securities in the portfolio were U.S. Government agencies, 41.5% of the securities were mortgage-backed securities, 29.2% were subordinated debt instruments and less than 1% were community reinvestment bonds. At year-end 2019, 16.0% of the held to maturity securities in the portfolio were U.S. Government agencies, 79.4% of the securities were subordinated debt instruments and 4.6% were community reinvestment bonds.
The following tables set forth the weighted average yields by maturity category of the bond investment portfolio as of December 31, 2020 and 2019.
1 Year or Less
1-5 Years
5-10 Years
Over 10 Years
Average
Average
Average
Average
(Dollars in thousands)
Yield
Yield
Yield
Yield
2020
Available for sale:
U.S. Government agencies
1.50
%
—
%
1.20
%
—
%
Mortgage-backed
—
1.57
2.11
1.61
Total available for sale
1.50
1.57
1.82
1.61
Held to maturity:
U.S. Government agencies
—
%
—
%
0.91
%
1.84
%
Mortgage-backed
—
—
—
1.34
States and political subdivisions 1
—
3.02
—
—
Other Debt Securities
—
2.68
4.51
—
Total held to maturity
—
3.02
3.06
1.45
1 Yields have been adjusted to reflect a tax equivalent basis using the statutory federal tax rate of 21%.
1 Year or Less
1-5 Years
5-10 Years
Over 10 Years
Average
Average
Average
Average
(Dollars in thousands)
Yield
Yield
Yield
Yield
2019
Available for sale:
U.S. Government agencies
1.74
%
1.54
%
—
%
4.16
%
Mortgage-backed
—
1.45
2.20
2.19
Total available for sale
1.74
1.53
2.20
2.23
Held to maturity:
U.S. Government agencies
—
%
—
%
—
%
2.08
%
States and political subdivisions 2
—
5.20
—
—
Other Debt Securities
—
—
4.21
—
Total held to maturity
—
5.20
4.21
2.08
2 Yields have been adjusted to reflect a tax equivalent basis using the statutory federal tax rate of 21%.
Loans
The loan portfolio is the primary source of our income. Loans totaled $1.5 billion at December 31, 2020, an increase of $205.6 million, or 16.5%, from 2019. At December 31, 2020, PPP loans accounted for $122.9 million of total loans. Most of our loans, excluding PPP loans, are secured by real estate and are classified as construction, residential or commercial real estate loans. The increase in loans, excluding PPP loans, was comprised of increases in commercial real estate loans of $74.7 million, or 12.7%, consumer loans of $13.7 million, or 77.4%, construction loans of $6.9 million, or 6.9% and residential loans of $1.0 million, or less than 1%, at December 31, 2020 compared to December 31, 2019. These increases
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were partially offset by a decrease of $13.6 million, or 13.4%, in commercial loans, excluding PPP loans. At December 31, 2020, excluding PPP loans, the loan portfolio was comprised of 49.7% commercial real estate, 33.3% residential real estate, 8.0% construction, 6.6% commercial and 2.4% consumer. That compares to 47.0%, 35.4%, 8.0%, 8.2% and 1.4, respectively, at December 31, 2019. At December 31, 2020, 78.8% of the loan portfolio had fixed interest rates and 21.2% had adjustable interest rates, compared to 75.5% and 24.5%, respectively, at December 31, 2019. See the discussion below under the caption “Asset Quality - Provision for Credit Losses and Risk Management” and Note 3, “Loans and Allowance for Credit Losses”, in the Notes to Consolidated Financial Statements for additional information. At December 31, 2020 and 2019, the Company did not have any loans held for sale. We do not engage in foreign or subprime lending activities.
The table below sets forth the maturities and interest rate sensitivity of the loan portfolio at December 31, 2020.
Maturing after
Maturing after
Maturing
one but within
five but within
Maturing after
(Dollars in thousands)
within one year
five years
fifteen years
fifteen years
Total
Construction
$
55,128
$
38,831
$
10,275
$
2,526
$
106,760
Residential real estate
32,342
58,293
110,251
242,656
443,542
Commercial real estate
90,636
184,450
263,492
122,654
661,232
Commercial
10,587
150,048
23,775
26,846
211,256
Consumer
966
26,989
2,325
1,186
31,466
Total
$
189,659
$
458,611
$
410,118
$
395,868
$
1,454,256
Rate terms:
Fixed-interest rate loans
$
160,844
$
430,157
$
384,335
$
171,053
$
1,146,389
Adjustable-interest rate loans
28,815
28,454
25,783
224,815
307,867
Total
$
189,659
$
458,611
$
410,118
$
395,868
$
1,454,256
Liabilities
Deposits
The Bank uses deposits primarily to fund loans and to purchase investment securities. Total deposits increased from $1.34 billion at December 31, 2019 to $1.70 billion at December 31, 2020 due to increases in every deposit product, with the exception of a decrease in time deposits of $2.2 million. The increases in deposit products consisted of the following: noninterest-bearing deposits of $152.5 million, interest-bearing checking deposits of $144.0 million, and savings and money market accounts of $65.1 million. Average interest-bearing deposits increased $139.0 million, or 15.1%, in 2020, compared to an increase of $64.0 million, or 7.5% in 2019. Average certificates of deposit and other time deposits increased $18.6 million, or 7.2% in 2020, compared to a increase of $14.5 million, or 5.9% in 2019. Average noninterest-bearing deposits increased $82.7 million, or 23.7%, in 2020, compared to an increase of $22.0 million, or 6.7% in 2019. The elimination of brokered deposits in late 2019 decreased the average balance in these deposits in 2020 by $16.4 million. Deposits provided funding for approximately 92.4% and 89.0% of average earning assets for 2020 and 2019, respectively.
The following table sets forth the average balances of deposits and the percentage of each category to total average deposits for the years ended December 31, 2020 and 2019.
Average Balances
(Dollars in thousands)
2020
2019
Noninterest-bearing demand
$
431,319
29.0
%
$
348,665
27.5
%
Interest-bearing deposits
Demand
343,848
23.1
252,907
20.0
Money market and savings
434,781
29.2
389,000
30.7
Brokered deposits
—
—
16,369
1.3
Certificates of deposit, $100,000 to $249,999
88,934
6.0
81,696
6.5
Certificates of deposit, $250,000 or more
40,216
2.7
31,321
2.5
Other time deposits
148,823
10.0
146,344
11.5
Total
$
1,487,921
100.0
%
$
1,266,302
100.0
%
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The following table sets forth the maturity ranges of certificates of deposit with balances of $250,000 or more as of December 31, 2020.
(Dollars in thousands)
Uninsured
Three months or less
$
4,370
$
1,370
Over three through 6 months
13,335
4,335
Over 6 through 12 months
14,366
3,616
Over 12 months
11,087
2,190
Total
$
43,158
$
11,511
Securities Sold Under Retail Repurchase Agreements
Securities sold under agreements to repurchase are issued in conjunction with cash management services for commercial depositors. At December 31, 2020 and December 31, 2019, the Company had $1.1 million and $1.2 million, respectively, in securities sold under retail repurchase agreements
Long-Term Advances from FHLB
The Company occasionally borrows from Federal Home Loan Bank to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient. The Company had no long-term FHLB borrowings outstanding at the end of 2020 and $15.0 million outstanding at the end of 2019. The amount of outstanding long-term borrowings at December 31, 2019 consisted of a long-term advance from the FHLB of $15.0 million, which carried an interest rate of 2.82%. This advance was paid off in April of 2020.
Subordinated Debt
On August 25, 2020, the Company entered into Subordinated Note Purchase Agreements with certain accredited purchasers pursuant to which the Company issued and sold $25.0 million in aggregate principal amount with an initial interest rate of 5.375% Fixed-to-Floating Rate Subordinated Notes due September 1, 2030.
The Company plans to use the net proceeds of the offering for general corporate purposes, organic growth and to support the Bank’s regulatory capital ratios. The Notes were structured to qualify as Tier 2 capital of the Company for regulatory capital purposes and bear an initial interest rate of 5.375% until September 1, 2025, with interest during this period payable semi-annually in arrears. From and including September 1, 2025, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month SOFR, plus 526.5 basis points, with interest during this period payable quarterly in arrears. The Notes are redeemable by the Company at its option, in whole or in part, on or after September 1, 2025. Initial debt issuance costs were $611 thousand. The debt balance of $24.4 million is presented net of unamortized issuance costs of $571 thousand at December 31, 2020.
Capital Resources Management
Total stockholders’ equity for the Company was $195.0 million at December 31, 2020, compared to $192.8 million at December 31, 2019. The increase in stockholders’ equity in 2020 was primarily due to 2020 earnings and accumulated other comprehensive income, which primarily consisted of unrealized gains in available-for-sale securities, which was partially offset by dividends paid to common stockholders and stock repurchases. The ratio of period-end equity to total assets was 10.09% for 2020, as compared to 12.37% for 2019.
We record unrealized holding gains (losses), net of tax, on investment securities available for sale as accumulated other comprehensive income (loss), a separate component of stockholders’ equity. At December 31, 2020, the portion of the investment portfolio designated as “available for sale” had a net unrealized holding gain, net of tax, of $1.5 million compared to net unrealized holding gain, net of tax, of $218 thousand at December 31, 2019.
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The Bank is subject to various regulatory capital requirements administered by the 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 material effect on the Company’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 its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications 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 ratios of common equity Tier 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1,250%. The Bank is also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.
In July 2013, federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with certain standards that were developed by Basel III and certain provisions of the Dodd-Frank Act. The final rule currently applies to all depository institutions and bank holding companies and savings and loan holding companies with total consolidated assets of more than $3 billion. The Company has total consolidated assets of less than $3 billion and is currently exempt from the consolidated capital requirements.
As of December 31, 2020, the Bank was in compliance with all applicable regulatory capital requirements to which it was subject, and was classified as “well capitalized” for purposes of the prompt corrective action regulations.
The following table compares the Bank’s capital ratios to the minimum regulatory requirements as of December 31, 2020 and 2019.
Minimum
Regulatory
Requirements
(Dollars in thousands)
2020
2019
for 2020
Common equity Tier 1 capital
$
180,696
$
163,206
Tier 1 capital
180,696
163,206
Tier 2 capital
14,189
10,808
Total risk-based capital
194,885
174,014
Net risk-weighted assets
1,367,544
1,254,980
Adjusted average total assets
1,857,802
1,533,919
Risk-based capital ratios:
Common equity Tier 1
13.21
%
13.00
%
7.00*
Tier 1
13.21
13.00
8.50*
Total capital
14.25
13.87
10.50*
Tier 1 leverage ratio
9.73
10.64
4.00
*
includes phased in capital conservation buffer of 2.50%
See Note 18 to the Consolidated Financial Statements for further information about the regulatory capital positions of the Bank (December 31, 2020 and 2019).
Asset Quality - Provision for Credit Losses and Risk Management
Originating loans involves a degree of risk that credit losses will occur in varying amounts according to, among other factors, the types of loans being made, the credit-worthiness of the borrowers over the terms of the loans, the quality of the collateral for the loans, if any, as well as general economic conditions. Through the Company’s and the Bank’s Asset/Liability Management Committees, the Company’s Audit Committee and the Company’s Board actively reviews critical risk positions, including credit, market, liquidity and operational risk. The Company’s goal in managing risk is to reduce earnings volatility, control exposure to unnecessary risk, and ensure appropriate returns for risk assumed. Senior
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members of management actively manage risk at the product level, supplemented with corporate level oversight through the Asset/Liability Management Committee and internal audit function. The risk management structure is designed to identify risk through a systematic process, enabling timely and appropriate action to avoid and mitigate risk.
Credit risk is mitigated through loan portfolio diversification, limiting exposure to any single industry or customer, collateral protection, and prudent lending policies and underwriting criteria. The following discussion provides information and statistics on the overall quality of the Company’s loan portfolio. Note 1 to the Consolidated Financial Statements describes the accounting policies related to nonperforming loans (nonaccrual and delinquent 90 days or more), TDRs and loan charge-offs and describes the methodologies used to develop the allowance for credit losses, including the specific, historical formula, and qualitative formula components (also discussed below). Management believes the policies governing nonperforming loans, TDRs and charge-offs are consistent with regulatory standards. The amount of the allowance for credit losses and the resulting provision are reviewed monthly by senior members of management and approved quarterly by the Board of Directors.
The allowance is increased by provisions for credit losses charged to expense and recoveries of loans previously charged off. It is decreased by loans charged off in the current period. Loans, or portions thereof, are charged off when considered uncollectible by management. Provisions for credit losses are made to bring the allowance for credit losses within the range of balances that are considered appropriate.
The adequacy of the allowance for credit losses is determined based on management’s estimate of the inherent risks associated with lending activities, estimated fair value of collateral or expected future cash flows, past experience and present indicators such as loan delinquency trends, nonaccrual loans and current market conditions. Management believes the current allowance is adequate to provide for probable and estimable losses inherent in our loan portfolio; however, future changes in the composition of the loan portfolio and financial condition of borrowers may result in additions to the allowance. Examination of the portfolio and allowance by various regulatory agencies and consultants engaged by the Company may result in the need for additional provisions based on information available at the time of the examination. The Bank’s allowance for credit losses, is available to absorb losses from all loan segments of the portfolio. The allowance set by the Bank is subject to regulatory examination and determination as to its adequacy.
The allowance for credit losses is comprised of three parts: (i) the specific allowance; (ii) the historical formula allowance; and (iii) the qualitative formula allowance. The specific allowance is established against impaired loans until charge offs are made. Loans are considered impaired when it is probable that the Company will not collect all principal and interest payments according to the loan’s contractual terms. The qualitative formula allowance is determined based on management’s assessment of industry trends and economic factors in the markets in which we operate. The determination of the formula allowance involves a higher risk of uncertainty and considers current risk factors that may not have yet manifested themselves in our historical loss factors.
The specific allowance is used to individually allocate an allowance to loans identified as impaired. An impaired loan may involve deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral. If it is determined that there is a loss associated with an impaired loan, a specific allowance is established until a charge off is made. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The historical formula allowance is used to estimate the loss on internally risk-rated loans, exclusive of those identified as impaired. Loans are grouped by type (construction, residential real estate, commercial real estate, commercial or consumer). Each loan type is assigned allowance factors based on management’s estimate of the risk, complexity and size of individual loans within a particular category using average historical charge-offs by segment over the last 16 quarters.
The qualitative formula allowance is used to estimate the losses on loans stemming from more global factors such as delinquencies, loss history, effects of changes in lending policy, the experience and depth of management, national and local economic trends, concentrations of credit, the quality of the loan review system and the effect of external factors as deemed appropriate. Loans that are identified as pass-watch, special mention, substandard and doubtful are considered to have elevated credit risk. These loans are assigned higher allowance factors than favorably rated loans due to
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management’s concerns regarding collectability or management’s knowledge of particular elements regarding the borrower.
As seen in the table below, the provision for credit losses was $3.9 million for 2020 and $700 thousand for 2019. The increase in the provision for credit losses was the result of new and elevated qualitative factors within the allowance model related to economic conditions and the COVID-19 pandemic. Net loan charge-offs totaled $519 thousand in 2020 and $536 thousand in 2019.
The allowance for credit losses was $13.9 million, or 1.04% of period end loans, excluding PPP loans, at December 31, 2020, compared to an allowance of $10.5 million, or 0.84% of period end loans at December 31, 2019. The higher allowance percentage at the end of 2020 when compared to the end of 2019 was the result of higher qualitative factors in the analysis of the allowance for loan losses as it related to current economic conditions and the COVID-19 pandemic. While the majority of our credit quality metrics have shown improvement or stability from the prior year end, our allowance and related provision is reflective of our evaluation of risks related to the pandemic’s impact on our borrowers and the overall lending environment. The ratio of net charge-offs to average loans was 0.04% for both 2020 and 2019.
The overall credit quality improved in 2020 compared to 2019 primarily due to a reduction in nonaccrual loans of $5.1 million, loans 90 days and still accruing of $522 thousand and OREO of $74 thousand. In addition, accruing TDRs declined $504 thousand when comparing 2020 to 2019 which reflects continued workout efforts on outstanding problem loans. When comparing 2020 to 2019 loan risk categories, substandard and special mention loans decreased $2.5 million and $2.1 million, respectively. The decrease in substandard and special mention loans was primarily due to property sales, payoffs and credit risk rating upgrades during 2020. Pass/Watch loans increased $41.3 million during 2020 when compared to 2019 due to specific industry loans being added due to the impact of the pandemic. These loans consisted of hospitality, restaurants, retail stores and other commercial loans. Management will continue to monitor and charge off nonperforming assets as rapidly as possible, and focus on the generation of healthy loan growth and new business development opportunities.
The following table sets forth a summary of our loan loss experience for the years ended December 31.
2020
2019
Percentage of net
Percentage of net
charge-offs
charge-offs
(annualized) to
(annualized) to
average loans
average loans
Net (charge-offs)
outstanding
Net (charge-offs)
outstanding
(Dollars in thousands)
recoveries
during the year
recoveries
during the year
Construction
$
17
(0.02)
%
$
15
(0.01)
%
Residential real estate
10
-
(619)
0.14
Commercial real estate
(600)
0.10
206
(0.04)
Commercial
36
(0.02)
(106)
0.10
Consumer
18
(0.07)
(32)
0.29
Total
$
(519)
0.04
%
$
(536)
0.04
%
Average loans outstanding during the period
$
1,368,887
$
1,226,361
Allowance for credit losses at period end as a percentage of total period end loans (1)
0.95
%
0.84
%
Allowance for credit losses at period end as a percentage of average loans (2)
1.01
%
0.86
%
Allowance for credit losses at period end as a percentage of period end nonaccrual loans
254.59
%
99.22
%
(1) As of December 31, 2020, this ratio includes PPP loans of $122.9 million. Excluding these loans, the ratio is 1.04% for December 31, 2020.
(2) As of December 31, 2020, this ratio includes average PPP loans of $85.6 million. Excluding these loans, the ratio is 1.08% for December 31,2020.
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The following table sets forth the allocation of the allowance for credit losses and the percentage of loans in each category to total loans for the years ended December 31.
2020
2019
% of
% of
(Dollars in thousands)
Amount
Loans
Amount
Loans
Construction
$
1,937
7.3
%
$
1,576
8.0
%
Residential real estate
3,338
30.5
2,501
35.4
Commercial real estate
5,872
45.5
4,032
47.0
Commercial
2,089
14.5
1,929
8.2
Consumer
652
2.2
469
1.4
Total
$
$13,888
100.0
%
$
$10,507
100.0
%
At December 31, 2020, nonperforming assets were $6.3 million, a decrease of $5.7 million, or 47.8%, when compared to December 31, 2019. The decrease in nonperforming assets was due to diligent workout efforts by the Company to reduce nonaccrual loans and other real estate owned properties. Accruing TDRs were $7.0 million at December 31, 2020, a decrease of $504 thousand, or 6.7%, when compared to December 31, 2019. At December 31, 2020, the ratio of nonaccrual loans to total assets was 0.28%, a decrease from 0.68% at December 31, 2019. The ratio of accruing TDRs to total assets at December 31, 2020 was 0.36% improving from 0.48% at December 31, 2019.
The Company continues to focus on the resolution of its nonperforming and problem loans. The efforts to accomplish this goal include frequently contacting borrowers until the delinquency is cured or until an acceptable payment plan has been agreed upon; obtaining updated appraisals; provisioning for credit losses; charging off loans; transferring loans to other real estate owned; aggressively marketing other real estate owned; and selling loans. The reduction of nonperforming and problem loans is and will continue to be a high priority for the Company.
The following table summarizes our nonperforming assets and accruing TDRs as of December 31.
(Dollars in thousands)
2020
2019
Nonperforming assets
Nonaccrual loans
$
5,455
$
10,590
Total loans 90 days or more past due and still accruing
804
1,326
Other real estate owned
—
74
Total nonperforming assets
$
6,259
$
11,990
Total accruing TDRs
$
6,997
$
7,501
As a percent of total loans:
Nonaccrual loans
0.38
%
0.85
%
Accruing TDRs
0.48
%
0.60
%
Nonaccrual loans and accruing TDRs
0.86
%
1.45
%
As a percent of total loans and other real estate owned:
Nonperforming assets
0.43
%
0.96
%
Nonperforming assets and accruing TDRs
0.91
%
1.56
%
As a percent of total assets:
Nonaccrual loans
0.28
%
0.68
%
Nonperforming assets
0.32
%
0.77
%
Accruing TDRs
0.36
%
0.48
%
Nonperforming assets and accruing TDRs
0.69
%
1.25
%
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Market Risk Management and Interest Sensitivity
The Company’s net income is largely dependent on its net interest income. Net interest income is susceptible to interest rate risk to the extent that interest-bearing liabilities mature or re-price on a different basis than interest-earning assets. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits and stockholders’ equity.
The Company’s interest rate risk management goals are (1) to increase net interest income at a growth rate consistent with the growth rate of total assets, and (2) to minimize fluctuations in net interest margin as a percentage of interest-earning assets. Management attempts to achieve these goals by balancing, within policy limits, the volume of floating-rate liabilities with a similar volume of floating-rate assets; by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched; by maintaining a pool of administered core deposits; and by adjusting pricing rates to market conditions on a continuing basis.
The Company’s Board of Directors has established a comprehensive asset liability management policy, which is administered by management’s Asset Liability Management Committee (“ALCO”). The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE” at risk) resulting from a hypothetical change in the yield curve of U.S. Treasury interest rates for maturities from one day to thirty years. The Company evaluates the potential adverse impacts that changing interest rates may have on its short-term earnings, long-term value, and liquidity by outsourcing simulation analysis through the use of computer modeling. The simulation model captures optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology used by the Company. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model. As an example, certain money market deposit accounts are assumed to reprice at 50% of the interest rate change in each of the up rate shock scenarios even though this is not a contractual requirement. As a practical matter, management would likely lag the impact of any upward movement in market rates on these accounts as a mechanism to manage the Company’s net interest margin. Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts, or the impact of rate changes on demand for loan, lease, and deposit products.
The Company presents a current base case and several alternative simulations at least once a quarter and reports the analysis to the Board of Directors. In addition, more frequent forecasts could be produced when interest rates are particularly uncertain or when other business conditions so dictate.
The statement of condition is subject to quarterly testing for six alternative interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/- 100, 200, 300 and 400 basis points (“bp”), although the Company may elect not to use particular scenarios that it determines are impractical in a current rate environment. It is management’s goal to structure the balance sheet so that net interest earnings at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels.
Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution.
The measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in interest rates on all of the Company’s cash flows, and by discounting the cash flows to estimate the present value of assets and liabilities. The difference between these discounted values of the assets and liabilities is the EVE, which, in theory, approximates the fair value of the Company’s net assets.
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The following tables present the projected change in the Bank’s net interest income and EVE at December 31, 2020 and 2019 that would occur upon an immediate change in interest rates based on independent analysis, but without giving effect to any steps that management might take to counteract that change:
Estimated Changes in Net Interest Income
Change in Interest Rates:
+400 bp
+300 bp
+200 bp
+100 bp
‑100 bp
‑200 bp
Policy Limit
40
%
30
%
20
%
10
%
(10)
%
(20)
%
December 31, 2020
23.5
%
18.1
%
12.6
%
6.9
%
(3.9)
%
(4.8)
%
December 31, 2019
8.1
%
6.3
%
4.5
%
2.4
%
(7.7)
%
(13.2)
%
Estimated Changes in Economic Value of Equity
Change in Interest Rates:
+400 bp
+300 bp
+200 bp
+100 bp
‑100 bp
‑200 bp
Policy Limit
25
%
20
%
15
%
10
%
(20)
%
(35)
%
December 31, 2020
13.9
%
12.0
%
10.0
%
6.9
%
(16.7)
%
(18.5)
%
December 31, 2019
(3.6)
%
(1.2)
%
1.3
%
1.4
%
(7.7)
%
(20.9)
%
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing tables. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the tables.
Off-Balance Sheet Arrangements
In the normal course of business, to meet the financing needs of its customers, the Bank is party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. The Bank’s exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of the instruments. The Bank uses the same credit policies in making commitments and conditional obligations as they use for on-balance sheet instruments. The Bank generally requires collateral or other security to support the financial instruments with credit risk. The amount of collateral or other security is determined based on management’s credit evaluation of the counterparty. The Bank evaluates each customer’s creditworthiness on a case-by-case basis.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Letters of credit and other commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the letters of credit and commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Further information about these arrangements is provided in Note 21 to the Consolidated Financial Statements.
Management does not believe that any of the foregoing arrangements have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Liquidity Management
Liquidity describes our ability to meet financial obligations that arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of customers and to fund current and planned expenditures. Liquidity is derived through increased customer deposits, maturities in the investment portfolio, loan repayments and income from earning assets. To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds markets. We have arrangements with correspondent banks whereby we
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have $15 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash. The Bank is also a member of the FHLB, which provides another source of liquidity, and had credit availability of approximately $316.7 million from the FHLB as of December 31, 2020.
At December 31, 2020, our loan to deposit ratio was approximately 85.5%, lower than the 93.1% at year-end 2019. This decrease is the result of our excess liquidity position due to our deposits increasing $359.4 million, or 26.8% since year end 2019. Investment securities available for sale totaling $139.6 million at the end of 2020 were available for the management of liquidity and interest rate risk. The comparable amount was $122.8 million at December 31, 2019. Cash and cash equivalents were $186.9 million at December 31, 2020, an increase of $91.9 million, or 96.8%, compared to the $95.0 million at year-end 2019, which reflects the increase in deposits during 2020. Management is not aware of any demands, commitments, events or uncertainties that will materially affect our ability to maintain liquidity at satisfactory levels.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item may be found in Item 7 of Part II of this annual report under the caption “Market Risk Management and Interest Sensitivity”, which is incorporated herein by reference.
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