FAUQUIER BANKSHARES, INC. As used in the following management's discussion and analysis, the terms
"Company," "we," "us" or "our" refer to
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In addition to the historical information contained herein, this report contains
forward-looking statements. Forward-looking statements are based on certain
assumptions and describe future plans, strategies, and expectations of the
Company, and are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," "may," "will" or similar
expressions. Although the Company believes its plans, intentions and
expectations reflected in these forward-looking statements are reasonable, the
Company can give no assurance that these plans, intentions or expectations will
be achieved. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain, and actual results could
differ materially from those contemplated. Factors that could have a material
adverse effect on the Company's operations and future prospects include, but are
not limited to: the effects of the novel coronavirus ("COVID-19") pandemic,
including its potential effects on the economic environment, our clients and our
operations, as well as any changes to federal, state or local government laws,
regulations or orders in connection with the pandemic; changes in interest
rates; the impact of adverse economic conditions; the legislative/regulatory
climate; monetary and fiscal policies of the U.S. Government , including policies
of the U.S. Treasury and the Board of Governors of the Federal Reserve System
(the "Federal Reserve"); acts of war or terrorism; widespread disease or
pandemics, such as the COVID-19 pandemic, or other adverse external events; the
quality or composition of the loan or investment portfolios; the value of the
collateral securing loans in the portfolio; demand for loan products; deposit
flows; the level of net charge-offs on loans and the adequacy of the allowance
for loan losses; competition; effectiveness of the Company's credit processes
and management of the Company's credit risk; demand for financial services in
the Company's market area; the Company's plans to increase market share;
mergers, acquisitions and dispositions; cybersecurity threats or attacks; and
tax and accounting principles, policies and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements in
this report and you should not place undue reliance on such statements, which
reflect the Company's position as of the date of this report.
GENERAL
The Company was incorporated under the laws of the Commonwealth of Virginia on
January 13, 1984 . The Company is a registered bank holding company and owns all
of the shares of The Fauquier Bank (the "Bank"). The Company engages in its
business through the Bank, a Virginia state-chartered bank that commenced
operations in 1902. The Company has no significant operations other than owning
the stock of the Bank. The Bank has 11 full-service branch offices located in
the Virginia communities of Old Town-Warrenton , Warrenton , Catlett , The Plains ,
Sudley Road-Manassas, New Baltimore , Bealeton , Bristow , Haymarket , Gainesville,
and Centreville Road-Manassas. The executive offices of the Company and the main
office of the Bank are located at 10 Courthouse Square , Warrenton, Virginia
20186.
The Bank's general market area principally includes
The Bank provides a full range of financial services, including internet banking, mobile banking, commercial, retail, insurance, wealth management and financial planning services. Retail banking services to individuals and businesses include various types of interest and noninterest-bearing checking accounts, money market and savings accounts, and time deposits. In addition, the Bank provides secured and unsecured commercial and real estate loans, standby letters of credit, secured and unsecured lines of credit, personal loans, residential mortgages and home equity loans, and automobile and other types of consumer financing.
The Bank operates a Wealth Management Services ("WMS") division that began with the granting of trust powers to the Bank in 1919. This division provides personalized services including investment management, financial planning, trust, estate settlement, retirement, insurance, and brokerage services.
The Bank, through its subsidiaryFauquier Bank Services, Inc. , has equity ownership interests inBankers Insurance, LLC , aVirginia independent insurance company, andBankers Title Shenandoah, LLC , a title insurance company, which are each 25
-------------------------------------------------------------------------------- owned by a consortium ofVirginia community banks.Fauquier Bank Services, Inc. previously had an equity ownership interest inInfinex Investments, Inc. , a full-service broker/dealer, owned by banks and banking associations in various states, whose ownership was sold byFauquier Bank Services, Inc. inJanuary 2019 . The revenues of the Bank are primarily derived from interest on and fees received in connection with, real estate and other loans, and from interest and dividends from investment securities. The principal sources of funds for the Bank's lending activities are its deposits, repayment of loans, maturity of investment securities, and borrowings from theFederal Home Loan Bank of Atlanta ("FHLB"). Additional revenues are derived from fees for deposit related and WMS related services. The Bank's operations are influenced by general economic conditions and by related monetary and fiscal policies of regulatory agencies, including theFederal Reserve . As aVirginia -chartered bank and a member of theFederal Reserve , the Bank is supervised and examined by theFederal Reserve and theVirginia State Corporation Commission . Interest rates on competing investments and general market rates of interest influence deposit flows and costs of funds. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rate environment and its impact on local demand and the availability of funds. The Bank faces strong competition in the attraction of deposits, its primary source of lendable funds, and in the origination of loans.
CRITICAL ACCOUNTING POLICIES
GENERAL. The Company's financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The financial information contained within the Company's statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors, including judgements made related to the effect of the COVID-19 pandemic, could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that the Company uses in its estimates. In addition, GAAP itself may change from one previously acceptable accounting method to another method. Although the economics of the Company's transactions would be the same, the timing of the recognition of the Company's transactions could change. ALLOWANCE FOR LOAN LOSSES. The Company establishes the allowance for loan losses through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when it is believed that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in management's judgment, will be adequate to absorb probable losses inherent in the loan portfolio. Management's judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower's ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. Note 1 to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of the Annual Report on Form 10-K for the year endedDecember 31, 2019 , provides additional information related to the allowance for loan losses. The Company employs an independent outsourced loan review function, which annually substantiates and/or adjusts internally generated risk ratings. This independent review function reports directly to the Company's Board of Directors' audit committee, and the results of this review are factored into the calculation of the allowance for loan losses. OTHER-THAN-TEMPORARY IMPAIRMENT ("OTTI") FOR SECURITIES. Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no OTTI. If there is a credit loss, OTTI exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income (loss). For equity securities, impairment is considered to be other-than-temporary based on the Company's ability and intent to hold 26 -------------------------------------------------------------------------------- the investment until recovery of fair value. OTTI of an equity security results in a write-down that must be included in net income. The Company regularly reviews each investment security for OTTI based on criteria that includes the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the best estimate of the present value of cash flows expected to be collected from debt securities, the intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.
SIGNIFICANT DEVELOPMENTS - COVID-19 Update
To the extent the economic impacts of COVID-19 continue for a prolonged period and conditions stagnate or worsen, the Company's provision for loan losses, net interest income and overall profitability may be adversely affected.
Business Continuity
While COVID-19 continues to aggressively spread throughoutthe United States , the Company remains committed to adhering to health and safety-related requirements and best practices across all of our locations by taking proactive and disciplined steps to promote safety and overall wellbeing of our employees, clients, shareholders and communities. Through the Company's Enterprise Risk Management framework, which is governed by the Board of Directors, the Company's Business Continuity Plan and the Bank's Incident Response Plan remain integral parts of monitoring day to day business activities, including the return of the Company's workforce, on a phased-in approach, subject to certain mandates and restrictions. We have not furloughed nor do we expect to furlough any of our employees. Management continues to closely monitor business activities and has or will adjust accordingly as the health and safety of all constituents remain our priority.
Paycheck Protection Program ("PPP")
OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted to, among other provisions, provide emergency assistance for individuals, families and businesses affected by COVID-19. The CARES Act included the creation of the PPP through theSmall Business Administration ("SBA"). Loans provided by the Bank through the PPP may be forgiven based on the borrowers' compliance with the terms of the program. The SBA provides a 100% guaranty to the lender of principal and interest, unless the lender violates an obligation under the agreement. As loan losses are expected to be immaterial, if any at all, due to the SBA guaranty, there is no provision allocated for PPP loans within the allowance for loan loss calculation. The Company disbursed$52.8 million in PPP loans to 543 borrowers throughJune 30, 2020 . There were no loans that were forgiven during the three months endedJune 30, 2020 .
The following table summarizes the details of the Company's PPP loans:
Three Months Ended
(Dollars in thousands) June 30, 2020
PPP loans outstanding $ 52,758
Average PPP loans outstanding $ 35,138
PPP average loan size $ 97
PPP interest income, net $ 295
PPP unearned fees $ 1,872
PPP weighted average processing fee 4.00 %
PPP average yield 3.38 %
Participation in the PPP has impacted the Company's financial metrics in the
second quarter. Loan and deposit growth, earnings per share, and return on
assets have all increased, to a certain extent, due to the PPP. Conversely, net
interest margin, the allowance coverage ratio, and the leverage ratio have
decreased. Since PPP loans are 100% guaranteed by the SBA, the Company's common
equity tier 1, tier 1 and total risk-based capital metrics were not impacted by
PPP loan balances.
Deferral Requests
The CARES Act and interagency guidance provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings ("TDR") for a limited period of time to account for the effects of COVID-19. In response to this guidance, the Company granted short-term loan modifications for the deferral of
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scheduled payments for a 90-day period beginning inApril 2020 . AtJune 30, 2020 , the Company had modified 194 loans totaling$92.8 million under this guidance. The following table summarizes loans modified by category atJune 30, 2020 : June 30, 2020 Loan Deferrals to (Dollars in thousands) Balance Deferrals Total Loans Commercial and industrial$ 87,044 $ 6,612 1.1 % Commercial real estate 187,004 67,789 10.9 % Construction and land 73,701 2,676 0.4 % Consumer 6,428 147 0.0 % Student 7,832 - 0.0 % Residential real estate 227,917 15,591 2.5 % Home equity lines of credit 32,734 - 0.0 % Total$ 622,660 $ 92,815 14.9 % As ofAugust 6, 2020 , approximately 40% of the 90-day deferments have ended and have returned to their normal payment schedules. In addition, as ofAugust 6, 2020 , 13 borrowers have requested an additional deferment period, consisting of 9 commercial loans and 4 consumer loans, with aggregate outstanding balances of$17.6 million . Modifications to borrowers whose industries are expected to be stressed by COVID-19, include, but are not limited to, religious organizations, hospitality, childcare and restaurants. The following table summarizes these industries as it relates to the Company's loan portfolio: (Dollars in thousands) June 30, 2020 Loan Deferrals as a Percent of Loan Percent of Loan Category Balance Total Loans Deferrals Loan Category Religious Organizations$ 25,450 4.09 %$ 13,546 53.23 % Hospitality 13,373 2.15 % 5,393 40.33 % Childcare 14,731 2.37 % 6,594 44.76 % Restaurants 12,378 1.99 % 7,144 57.72 %$ 65,932 10.59 %$ 32,677 49.56 %
Refer to Note 3 of the consolidated financial statements for additional
disclosures related to TDRs as of
Net Interest income
While net interest income has been significantly impacted by the lower interest rate environment, the Company's interest income has benefited from PPP loans and related processing fees. PPP loans carry a fixed rate of 1.0% with a two-year contractual maturity. For the three months endedJune 30, 2020 , PPP loans contributed$295,000 to the Company's net interest income, with the average yield of 3.38%, and a weighted average processing fee of 4.0%. As ofJune 30, 2020 , the Company has collected$2.1 million in processing fees, of which$1.9 million remains unearned. EXECUTIVE OVERVIEW This discussion is intended to focus on certain financial information regarding the Company and the Bank and may not contain all the information that is important to the reader. The purpose of this discussion is to provide the reader with a more thorough understanding of the Company's financial statements. As such, this discussion should be read carefully in conjunction with the consolidated financial statements and accompanying notes contained elsewhere in this report.
The Company strives to be a top performing community bank by providing financial services in its market with consistent, quality client service, premier technological support, value-added products, and a strong commitment to the community.
28
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Financial highlights include:
• Net income of
the second quarter of 2019. Year to date net income of $3.0 million , a
decrease of 6.9% compared to the first six months of 2019;
• Net interest margin of 3.49% for the second quarter, a decrease of 24 basis
points over the second quarter of 2019. Year to date net interest margin of
3.62%, a decrease of 19 basis points compared to the first six months of
2019;
• Cost of funds of 0.35% for the second quarter, a decrease of 41 basis points
from the second quarter of 2019. Year to date cost of funds of 0.45%, a
decrease of 27 basis points compared to the first six months of 2019;
• Provision for loan losses of
losses of
six months of 2019;
• Total loans of
increase of 13.2% compared with
• Allowance for loan losses of
with
• Deposits of
2019;
• Regulatory capital remains strong with ratios exceeding the well capitalized
thresholds in all categories.
Net income of $1.6 million , or $0.42 per diluted share for the second quarter,
was relatively unchanged when compared with the second quarter of 2019. For the
six months ended June 30, 2020 , net income was $3.0 million , or $0.78 per
diluted share compared with $3.2 million , or $0.84 per diluted share for the six
months ended June 30, 2019 .
For the quarter ended June 30, 2020 , the Company's return on average equity
("ROE") and return on average assets ("ROA") were 9.02% and 0.80%, respectively,
compared to 9.94% and 0.89%, for the second quarter of 2019, respectively. For
the six months ended June 30, 2020 , ROE and ROA were 8.62% and 0.79%,
respectively, compared with 10.38% and 0.92%, respectively, for the six months
ended June 30, 2019 .
OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED
NET INTEREST INCOME AND EXPENSE
Net interest income is the largest component of net income, and is the difference between income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities. Future trends regarding net interest income are dependent on the absolute level of market interest rates, the shape of the yield curve, the amount of lost income from nonperforming assets, the amount of prepaying loans, the mix and amount of various deposit types, competition for loans and deposits, and many other factors. These factors are individually difficult to predict, and when taken together, the uncertainty of future trends compounds. TheFederal Reserve decreased the targeted federal funds rate by a total of 75 basis points in the second half of 2019. In addition, in response to COVID-19, theFederal Reserve decreased the targeted federal funds interest rate by a total of 150 basis points inMarch 2020 . These decreases impact the comparability of net interest income between 2019 and 2020. Net interest income increased$300,000 or 4.93% to$6.4 million for the second quarter of 2020 from$6.1 million for the second quarter of 2019. Net interest income increased$356,000 or 2.91% to$12.6 million for the six months endedJune 30, 2020 from$12.2 million for the six months endedJune 30, 2019 . The net interest margin decreased to 3.49% in the second quarter of 2020 from 3.73% in the second quarter of 2019. The net interest margin decreased to 3.62% for the six months endedJune 30, 2020 from 3.81% for the six months endedJune 30, 2019 . Total earning assets increased primarily from organic loan growth and from the origination of PPP loans. This, coupled with the decrease in funding costs contributed to the increase in net interest income, however as a result of the lower interest rate environment and the fixed rate of 1% on PPP loans, yields on investments and loans have declined during the three and six months endedJune 30, 2020 , giving rise to a negative impact on the net interest margin. Given the current interest rate environment, we expect that our net interest income and net interest margin could decrease in future periods. Interest income decreased$271,000 or 3.72% to$7.0 million for the second quarter of 2020 from$7.3 million for the second quarter of 2019. The decrease in interest income was due to the 63 basis points decrease in the average yield on earning assets, from 4.46% during the second quarter of 2019 to 3.83% during the second quarter of 2020. Interest income decreased 29
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While the average loan balances increased from$545.2 million for the second quarter of 2019 to$610.8 million for the second quarter of 2020, the tax equivalent yield decreased 56 basis points to 4.28% for the second quarter of 2020, compared with 4.84% for the second quarter of 2019. Excluding PPP loans, the tax equivalent yield was 4.34% for the second quarter of 2020, a decrease of 50 basis points compared to the second quarter of 2019. Average balances for loans were$582.6 million and$545.3 million for the six months endedJune 30, 2020 and 2019, respectively, resulting in the tax equivalent yield of 4.48% and 4.86% for the six months endedJune 30, 2020 and 2019, respectively. Excluding PPP loans, the tax equivalent yield was 3.0% for the six months endedJune 30, 2020 . Average interest-bearing deposit balances increased$40.2 million to$519.6 million for the second quarter of 2020, from$479.4 million for the second quarter of 2019. Interest expense decreased$571,000 or 47.78% from$1.2 million for the second quarter of 2019 to$624,000 for the second quarter of 2020. Cost of funds decreased to 0.35% for the second quarter of 2020 from 0.76% for the second quarter of 2019. Average interest-bearing deposit balances increased$28.9 million to$507.0 million for the six months endedJune 30, 2020 from$478.1 million for the six months endedJune 30, 2019 . Interest expense decreased$749,000 or 33.42% from$2.2 million for the six months endedJune 30, 2019 to$1.5 million for the six months endedJune 30, 2020 . Cost of funds were 0.45% and 0.72% for the six months endedJune 30, 2020 and 2019, respectively. The increase in interest-bearing deposit balances is primarily the result of organic deposit growth from new and existing personal and business clients. The funding of PPP loans into interest-bearing deposit accounts contributed significantly to this increase. The decreases in the cost of funds is the result of the Company's response to interest rate trends and the reduction of rates on certain interest-bearing transaction accounts, and lower funding costs on FHLB advances. 30
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The following tables set forth information, for the periods indicated, relating
to the Company's average balance sheet which reflects the average yield on
assets, average cost of liabilities and average yields and rates paid. These
yields and costs are derived by dividing income or expense by the average daily
balances of assets and liabilities, respectively.
Average Balances, Income and Expense, and Average Yields and Rates
Three Months Ended Three Months Ended
June 30, 2020 June 30, 2019
(Dollars in thousands) Average Income/ Average Average Income/ Average
Assets Balances Expense Rate Balances Expense Rate
Loans
Taxable $ 609,534 $ 6,507 4.29 % $ 543,237 $ 6,573 4.85 %
Nonaccrual (1) 1,235 - - 1,929 - -
Total loans 610,769 6,507 4.28 % 545,166 6,573 4.84 %
Securities
Taxable 66,768 391 2.35 % 60,317 397 2.63 %
Tax-exempt (2) 16,004 126 3.15 % 12,999 108 3.31 %
Total securities 82,772 517 2.51 % 73,316 505 2.75 %
Deposits in other
banks 44,096 10 0.10 % 38,404 224 2.35 %
Federal funds sold 14 - 0.29 % 14 - 2.32 %
Total earning assets 737,651 7,034 3.83 % 656,900 7,302 4.46 %
Less: Allowance for
loan losses (5,815 ) (5,345 )
Total nonearning
assets 58,225 56,151
Total Assets $ 790,061 $ 707,706
Liabilities and
Shareholders' Equity
Deposits
Demand $ 155,236 $ 119,171
Interest-bearing
NOW 254,375 $ 128 0.20 % 228,675 $ 292 0.51 %
Money market 94,267 75 0.32 % 74,149 159 0.86 %
Savings 99,932 15 0.06 % 86,090 70 0.33 %
Time deposits 71,060 281 1.59 % 90,492 436 1.93 %
Total interest-bearing
deposits 519,634 499 0.39 % 479,406 957 0.80 %
Federal funds
purchased - - - 1 - 2.74 %
FHLB advances 28,597 76 1.07 % 29,749 188 2.54 %
Junior subordinated
debt 4,124 49 4.86 % 4,124 50 4.83 %
Total interest-bearing
liabilities 552,355 624 0.45 % 513,280 1,195 0.93 %
Other liabilities 12,141 12,178
Shareholders' equity 70,329 63,077
Total Liabilities &
Shareholders' Equity $ 790,061 $ 707,706
Net interest income
(tax-equivalent basis) $ 6,410 3.38 % $ 6,107 3.52 %
Less: tax-equivalent
adjustment (26 ) (23 )
Net interest income $ 6,384 $ 6,084
Interest expense as a
percent of
average earning assets 0.34 % 0.73 %
Net interest margin 3.49 % 3.73 %
(1) Nonaccrual loans are included in the average balance of total loans and total
earning assets.
(2) Income and rates on non-taxable assets are computed on a tax-equivalent basis
using a federal tax rate of 21%.
31
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For the Six Months Ended For the Six Months Ended
June 30, 2020 June 30, 2019
(Dollars in thousands) Average Income/ Average Average Income/ Average
Assets Balances Expense Rate Balances Expense Rate
Loans
Taxable $ 581,528 $ 12,974 4.48 % $ 543,323 $ 13,144 4.88 %
Nonaccrual (1) 1,116 - - 1,956 - -
Total loans 582,644 12,974 4.48 % 545,279 13,144 4.86 %
Securities
Taxable 66,516 798 2.42 % 59,253 804 2.72 %
Tax-exempt (2) 16,029 252 3.14 % 13,271 220 3.33 %
Total securities 82,545 1,050 2.56 % 72,524 1,024 2.83 %
Deposits in other
banks 35,965 94 0.53 % 31,401 336 2.16 %
Federal funds sold 14 - 0.63 % 14 - 2.77 %
Total earning assets 701,168 14,118 4.05 % 649,218 14,504 4.50 %
Less: Allowance for
loan losses (5,583 ) (5,363 )
Total nonearning
assets 57,624 56,529
Total Assets $ 753,209 $ 700,384
Liabilities and
Shareholders' Equity
Deposits
Demand $ 139,784 $ 117,292
Interest-bearing
NOW 246,909 $ 343 0.28 % 231,809 $ 554 0.48 %
Money market 92,441 239 0.52 % 71,470 289 0.81 %
Savings 95,666 67 0.14 % 87,818 154 0.35 %
Time 71,985 597 1.67 % 87,026 799 1.85 %
Total interest-bearing
deposits 507,001 1,246 0.49 % 478,123 1,796 0.76 %
Federal funds
purchased 1 - 1.43 % 996 14 2.90 %
FHLB advances 20,993 147 1.41 % 25,543 332 2.63 %
Junior subordinated
debt 4,124 99 4.85 % 4,124 99 4.83 %
Total interest-bearing
liabilities 532,119 1,492 0.56 % 508,786 2,241 0.89 %
Other liabilities 11,921 12,206
Shareholders' equity 69,385 62,100
Total Liabilities &
Shareholders' Equity $ 753,209 $ 700,384
Net interest income
(tax equivalent basis) $ 12,626 3.48 % $ 12,263 3.61 %
Less: tax equivalent
adjustment (53 ) (46 )
Net interest income $ 12,573 $ 12,217
Interest expense as a
percent of
average earning assets 0.43 % 0.70 %
Net interest margin 3.62 % 3.81 %
(1) Nonaccrual loans are included in the average balance of total loans and total
earning assets.
(2) Income and rates on non-taxable assets are computed on a tax-equivalent basis
using a federal tax rate of 21%.
RATE VOLUME ANALYSIS
The following tables set forth certain information regarding changes in interest
income and interest expense for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to changes in volume (change in volume multiplied by old
rate) and changes in rates (change in rate multiplied by
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old volume). Changes in rate and volume, which cannot be separately identified,
are allocated proportionately between changes in rate and changes in volume.
For the Three Months Ended June 30, 2020
Compared to June 30, 2019
(In thousands) Change Due to Volume Due to Rate
Interest Income
Loans
Taxable $ (66 ) $ 802 $ (868 )
Securities
Taxable (6 ) 43 (49 )
Tax-exempt (1) 18 25 (7 )
Deposits in other banks (214 ) 32 (246 )
Total interest income (268 ) 902 (1,170 )
Interest Expense
NOW (164 ) 33 (197 )
Money market (84 ) 43 (127 )
Savings (55 ) 11 (66 )
Time deposits (155 ) (92 ) (63 )
Federal funds purchased - - -
FHLB advances (112 ) (7 ) (105 )
Junior subordinated debt (1 ) - (1 )
Total interest expense (571 ) (12 ) (559 )
Net interest income $ 303 $ 914 $ (611 )
(1) Income and rates on non-taxable assets are computed on a tax equivalent basis
using a federal tax rate of 21%.
For the Six Months Ended June 30, 2020
Compared to June 30, 2019
Due to Due to
(In thousands) Change Volume Rate
Interest Income
Loans
Taxable $ (170 ) $ 924 $ (1,094 )
Securities
Taxable (6 ) 99 (105 )
Tax-exempt (1) 32 46 (14 )
Deposits in other banks (242 ) 48 (290 )
Total interest income (386 ) 1,117 (1,503 )
Interest Expense
NOW (211 ) 37 (248 )
Money market (50 ) 85 (135 )
Savings (87 ) 14 (101 )
Time (202 ) (138 ) (64 )
Federal funds purchased (14 ) (14 ) -
FHLB advances (185 ) (59 ) (126 )
Junior subordinated debt - - -
Total interest expense (749 ) (75 ) (674 )
Net interest income $ 363 $ 1,192 $ (829 )
(1) Income and rates on non-taxable assets are computed on a tax equivalent basis
using a federal tax rate of 21%.
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PROVISION FOR LOAN LOSSES The provision for loan losses is charged to operations in order to maintain the allowance for loan losses at a level considered necessary to absorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan losses, the Company considers the overall risk characteristics of the loan portfolio, past and current loss experience, trends in the Bank's delinquent and nonperforming loans, estimated values of collateral, and the impact of current economic conditions. The amount of the allowance is based on estimates and there can be no assurances, however, that future losses will not exceed estimated amounts, or that increased amounts in the provision for loan losses will not be required in future periods as more information becomes available or events change. The allowance for loan losses is assessed on a quarterly basis and provisions for loan losses are made in order to maintain the allowance. The full impact of COVID-19 is unknown and rapidly changing. The pandemic has caused substantial disruption in theU.S. economy. The outbreak is having a significant adverse impact on certain industries the Company serves, including but not limited to, religious organizations, hospitality, childcare and restaurants. Due to COVID-19 and the economic impact it could have on the Company's loan portfolio, additional details about exposures to these stressed industries is included in the above section titled SIGNIFICANT DEVELOPMENTS - COVID-19 Update. The Company recorded a provision for loan losses of$911,000 for the second quarter of 2020 compared with$205,000 for the second quarter of 2019. The provision for loan losses was$1.3 million and$255,000 for the six months endedJune 30, 2020 and 2019, respectively. Approximately$860,000 of the second quarter provision was due to the change in economic conditions, which worsened significantly beginning inMarch 2020 as a result of the pandemic and the slow-down in business activity. The primary economic loss driver contributing to the increase in the provision for loan losses was the increased unemployment rate for theCommonwealth of Virginia . If economic conditions continue to worsen, the Company could recognize elevated levels of provision for loan losses in future periods. NONINTEREST INCOME Noninterest income decreased$184,000 to$1.2 million for the second quarter of 2020 from$1.4 million for the second quarter of 2019. Noninterest income decreased$322,000 to$2.6 million for the six months endedJune 30, 2020 from$2.9 million for the six months endedJune 30, 2019 . The following summarizes noninterest income for the three and six months endedJune 30, 2020 and 2019: Three Months Ended June 30, Increase (Decrease) Six Months Ended June 30, Increase (Decrease) (Dollars in thousands) 2020 2019 Amount Percent 2020 2019 Amount Percent Noninterest income Trust and estate fees $ 499 $ 427$ 72 16.86 %$ 960 $ 843 $ 117 13.88 % Brokerage fees 120 128 (8 ) (6.25 )% 266 218 48 22.02 % Service charges on deposit accounts 220 378 (158 ) (41.80 )% 572 761 (189 ) (24.84 )% Interchange fee income, net 297 313 (16 ) (5.11 )% 567 584 (17 ) (2.91 )% Bank-owned life insurance 90 90 - - 180 183 (3 ) (1.64 )% Other income (loss) (43 ) 58 (101 ) (174.14 )% (32 ) 206 (238 ) (115.53 )% Gain on sale/call of securities available for sale - - - - - 79 (79 ) (100.00 )% Gain on sale of mortgage loans held for sale, net 33 6 27 450.00 % 45 6 39 650.00 % Total noninterest income$ 1,216 $ 1,400 $ (184 ) (13.14 )%$ 2,558 $ 2,880 $ (322 ) (11.18 )% 34
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The primary changes in noninterest income were:
• Trust, estate and brokerage fee income increased due to the overall increase
in assets under management and stable production from brokerage services.
• Service charges on deposit accounts have declined primarily as a result of
the lower volume of fees generated from nonsufficient fund charges.
• Changes in other income (loss) was primarily the result of twofactors. First, automated teller machine ("ATM") surcharge income decreased
and the Company recognized losses on the disposal of ATMs, due to the
Company outsourcing this activity. Second, income of
during the first quarter of 2020 from the Bank's ownership interest in
losses of
projects during the second quarter of 2020.
NONINTEREST EXPENSE
Noninterest expense decreased $620,000 to $4.9 million for the second quarter of
2020 from $5.5 million for the second quarter of 2019. Noninterest expense
decreased $733,000 to $10.5 million for the six months ended June 30, 2020 from
$11.2 million for the six months ended June 30, 2019 .
The following summarizes noninterest expense for the three and six months ended
Three Months Ended June 30, Increase (Decrease) Six Months Ended June 30, Increase (Decrease)
(Dollars in
thousands) 2020 2019 Amount Percent 2020 2019 Amount Percent
Noninterest Expenses
Salaries and
benefits $ 2,435 $ 2,923 $ (488 ) (16.70 )% $ 5,387 $ 5,935 $ (548 ) (9.23 )%
Occupancy 579 604 (25 ) (4.14 )% 1,243 1,219 24 1.97 %
Furniture and
equipment 190 275 (85 ) (30.91 )% 381 558 (177 ) (31.72 )%
Marketing and
business development 107 171 (64 ) (37.43 )% 216 357 (141 ) (39.50 )%
Legal, audit and
consulting 304 282 22 7.80 % 574 531 43 8.10 %
Data processing 361 325 36 11.08 % 736 679 57 8.39 %
Federal Deposit
Insurance
Corporation
assessment 81 93 (12 ) (12.90 )% 165 187 (22 ) (11.76 )%
Other operating
expenses 832 836 (4 ) (0.48 )% 1,792 1,761 31 1.76 %
Total noninterest
expenses $ 4,889 $ 5,509 $ (620 ) (11.25 )% $ 10,494 $ 11,227 $ (733 ) (6.53 )%
The primary changes in noninterest expense were:
• Salaries and benefits have decreased primarily as a result of origination
costs from PPP loans that are recognized as a contra salary expense in
accordance with GAAP.
• Furniture and equipment expenses decreased primarily due to a decrease in
depreciation and maintenance from the ATMs, as noted above in noninterest
income, that were removed due to the Bank's outsourcing this service.
• Marketing and business development expenses decreased due primarily to
timing differences in marketing campaigns.
• Data processing expenses have increased slightly as a result of the
heightened level of client transactions for the reported periods.
•
reduction in the quarterly assessment multiplier which is based on the
various performance metrics.
INCOME TAXES
Income tax expense was $222,000 and $206,000 for the second quarter of 2020 and
2019, respectively, resulting in an effective tax rate of 12.33% and 11.64%,
respectively. Income tax expense was $402,000 and $419,000 for the six months
ended June 30, 2020 and 2019, respectively, resulting in an effective tax rate
of 11.91% and 11.59%, respectively. The effective tax rate differed from the
statutory federal income tax rate of 21% due to the Bank's investment in
tax-exempt
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securities, income from Bank-owned life insurance policies, and community
development tax credits. The Company's estimated tax credits were
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