AMER NAT BKSHS The purpose of this discussion is to focus on important factors affecting the financial condition and results of operations of the Company. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements. Forward-Looking Statements This report contains forward-looking statements with respect to the financial condition, results of operations and business ofAmerican National Bankshares Inc. (the "Company") and its wholly owned subsidiary,American National Bank and Trust Company (the "Bank"). These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on information available to management at the time these statements and disclosures were prepared. Forward-looking statements are subject to numerous assumptions, estimates, risks, and uncertainties that could cause actual conditions, events, or results to differ materially from those stated or implied by such forward-looking statements. A variety of factors, some of which are discussed in more detail in Item 1A - Risk Factors of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 , may affect the operations, performance, business strategy, and results of the Company. Those factors include, but are not limited to, the following:
• the impact of the recent COVID-19 pandemic and the associated efforts to limit
the spread of the virus;
• financial market volatility, including the level of interest rates, could
affect the values of financial instruments and the amount of net interest
income earned;
• the adequacy of the level of our allowance for loan losses and the amount of
loan loss provisions required in future periods;
• general economic or business conditions, either nationally or in the market
areas in which the Company does business, may be less favorable than expected,
resulting in deteriorating credit quality, reduced demand for credit, or a
weakened ability to generate deposits;
• competition among financial institutions may increase, and competitors may
have greater financial resources and develop products and technology that
enable those competitors to compete more successfully than the Company;
• businesses that the Company is engaged in may be adversely affected by
legislative or regulatory changes, including changes in accounting standards
and tax laws;
• cybersecurity threats or attacks, the implementation of new technologies, and
the ability to develop and maintain reliable and secure electronic systems;
• the ability to retain key personnel;
• the failure of assumptions underlying the allowance for loan losses; and
• risks associated with mergers and acquisitions and other expansion activities.
COVID-19 Impact and Response InMarch 2020 , the outbreak of COVID-19 was recognized as a global pandemic. The spread of the virus has created a global health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity inthe United States and globally. Governmental responses have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by all parties have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, disrupted supply chains, market downturns and volatility, changes in consumer behavior, related emergency response legislation and an expectation that theBoard of Governors of theFederal Reserve System ("Federal Reserve") will maintain a low interest rate environment for the foreseeable future. The Company has implemented a business continuity plan and protocols to continue to maintain a high level of care for its employees, customers and communities. The Company has transitioned to a majority of its employees working remotely and assisting customers by appointment only in branches or directing them to drive-thrus or ATMs. It has cancelled all business travel and has the majority of non-branch personnel working remotely. It now holds all company meetings through virtual platforms. OnMarch 20, 2020 , the federal banking agencies issued an "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus." This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the the effects of COVID-19. The guidance explains that, in consultation with theFinancial Accounting Standards Board ("FASB") staff, the federal banking agencies have concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not troubled debt restructurings ("TDRs"). The Coronavirus Aid, Relief and Economic Security ("CARES") Act was passed by theU.S. Congress onMarch 27, 2020 . Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as ofDecember 31, 2019 are not TDRs. ThroughMarch 31, 2020 , the Bank had applied this guidance and modified loans to over 450 customers on loan balances of approximately$200 million . The Bank implemented aDisaster Assistance Program ("DAP") to provide relief to its borrowers under this guidance. The majority of modifications involved three-month deferments of principal and interest.
The CARES Act included an initial allocation of
PPP
loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The loans are 100% guaranteed by the SBA. The SBA pays the bank a processing fee ranging from 1% to 5%, based on the size of the loan.The SBA began accepting submissions for these loans onApril 3, 2020 , and the SBA reached its initial limit onApril 16, 2020 . Prior to the initial limit being reached, the SBA approved 1,321 applications for loans in excess of$228 million , representing 96% of applications received and processed by the Bank. There was an additional$310 billion in funding authorized, and applications submitted by the Bank were accepted beginningApril 27, 2020 . In total, the SBA approved 1,913 applications totaling$267 million for an acceptance rate of 99.8% for both rounds. From a funding perspective, the Bank expects to utilize core and wholesale funding for liquidity needs related to the DAP loan program and both theFederal Reserve discount window and their newly created Paycheck Protection Program Liquidity Facility to fund the PPP. COVID-19 and the participation and in the PPP and the DAP programs, could significantly impact the Company's liquidity. Management believes that these sources provide sufficient and timely liquidity, both on and off the balance sheet to support the programs and operations. Reclassification
In certain circumstances, reclassifications have been made to prior period information to conform to the 2020 presentation. There were no material reclassifications.
29
--------------------------------------------------------------------------------CRITICAL ACCOUNTING POLICIES The accounting and reporting policies followed by the Company conform withU.S. generally accepted accounting principles ("GAAP") and they conform to general practices within the banking industry. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them, as needed. Management has discussed the Company's critical accounting policies and estimates with the Audit Committee of the Board of Directors. The Company's critical accounting policies, which are summarized below, relate to (1) the allowance for loan losses, (2) mergers and acquisitions, (3) acquired loans with specific credit-related deterioration, (4) goodwill and intangible assets, (5) deferred tax assets and liabilities, and (6) other-than-temporary impairment of securities. A summary of the Company's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K for the year endedDecember 31, 2019 . The financial information contained within the Company's financial statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset, or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Allowance for Loan Losses
The purpose of the allowance for loan losses ("ALLL") is to provide for probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance.
The goal of the Company is to maintain an appropriate, systematic, and consistently applied process to determine the amounts of the ALLL and the provision for loan loss expense.
The Company uses certain practices to manage its credit risk. These practices include (1) appropriate lending limits for loan officers, (2) a loan approval process, (3) careful underwriting of loan requests, including analysis of borrowers, cash flows, collateral, and market risks, (4) regular monitoring of the portfolio, including diversification by type and geography, (5) review of loans by the Loan Review department, which operates independently of loan production, (6) regular meetings of the Credit Committee to discuss portfolio and policy changes and make decisions on large or unusual loan requests, and (7) regular meetings of the Asset Quality Committee which reviews the status of individual loans. Risk grades are assigned as part of the loan origination process. From time to time, risk grades may be modified as warranted by the facts and circumstances surrounding the credit.
Calculation and analysis of the ALLL is prepared quarterly by the
The Company's ALLL has two basic components: the formula allowance and the specific allowance. Each of these components is determined based upon estimates and judgments.
The formula allowance uses historical loss experience as an indicator of future losses, along with various qualitative factors, including levels and trends in delinquencies, nonaccrual loans, charge-offs and recoveries, trends in volume and terms of loans, effects of changes in underwriting standards, experience of lending staff, economic conditions, portfolio concentrations, regulatory, legal, competition, quality of loan review system, and value of underlying collateral. In the formula allowance for commercial and commercial real estate loans, the historical loss rate is combined with the qualitative factors, resulting in an adjusted loss factor for each risk-grade category of loans. The period-end balances for each loan risk-grade category are multiplied by the adjusted loss factor. Allowance calculations for residential real estate and consumer loans are calculated based on historical losses for each product category without regard to risk grade. This loss rate is combined with qualitative factors resulting in an adjusted loss factor for each product category.
The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified impaired loans. These include:
• The present value of expected future cash flows discounted at the loan's
effective interest rate. The effective interest rate on a loan is the rate of
return implicit in the loan (that is, the contractual interest rate adjusted
for any net deferred loan fees or costs and any premium or discount existing
at the origination or acquisition of the loan);
• The loan's observable market price; or
• The fair value of the collateral, net of estimated costs to dispose, if the
loan is collateral dependent.
The use of these computed values is inherently subjective and actual losses could be greater or less than the estimates.
No single statistic, formula, or measurement determines the adequacy of the
allowance. Management makes subjective and complex judgments about matters that
are inherently uncertain, and different amounts would be reported under
different conditions or using different assumptions. For analytical purposes,
management allocates a portion of the allowance to specific loan categories and
specific loans. However, the entire allowance is used to absorb credit losses
inherent in the loan portfolio, including identified and unidentified losses.
The relationships and ratios used in calculating the allowance, including the
qualitative factors, may change from period to period as facts and circumstances
evolve. Furthermore, management cannot provide assurance that in any particular
period the Bank will not have sizable credit losses in relation to the amount
reserved. Management may find it necessary to significantly adjust the
allowance, considering current factors at the time.
30
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Mergers and Acquisitions
Business combinations are accounted for under the FASB Accounting Standards
Codification ("ASC") 805, Business Combinations, using the acquisition method of
accounting. The acquisition method of accounting requires an acquirer to
recognize the assets acquired and the liabilities assumed at the acquisition
date measured at their fair values as of that date. To determine the fair
values, the Company will rely on third party valuations, such as appraisals, or
internal valuations based on discounted cash flow analysis or other valuation
techniques. Under the acquisition method of accounting, the Company will
identify the acquirer and the closing date and apply applicable recognition
principles and conditions.
Acquisition-related costs are costs the Company incurs to effect a business
combination. Those costs include advisory, legal, accounting, valuation, and
other professional or consulting fees. Some other examples of costs to the
Company include systems conversions, integration planning consultants and
advertising costs. The Company will account for acquisition-related costs as
expenses in the periods in which the costs are incurred and the services are
received, with one exception. The costs to issue debt or equity securities will
be recognized in accordance with other applicable GAAP. These
acquisition-related costs have been and will be included within the consolidated
statements of income classified within the noninterest expense caption.
Acquired Loans with Specific Credit-Related Deterioration
Acquired loans with specific credit deterioration are accounted for by the Company in accordance with ASC 310-30, Receivables -Loans and Debt Securities Acquired with Deteriorated Credit Quality. Certain acquired loans, those for which specific credit-related deterioration, since origination, is identified, are recorded at fair value reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on a reasonable expectation about the timing and amount of cash flows to be collected. In accounting for acquired impaired loans, such loans are not classified as nonaccrual when they become 90 days past due. They are considered to be accruing because their interest income relates to the accretable yield and not to contractual interest payments.
The Company performs its annual analysis as ofJune 30 each fiscal year. Accounting guidance permits preliminary assessment of qualitative factors to determine whether more substantial impairment testing is required. The Company chose to bypass the preliminary assessment and utilized a two-step process for impairment testing of goodwill. The first step tests for impairment, while the second step, if necessary, measures the impairment. No indicators of impairment were identified during the three months endedMarch 31, 2020 or 2019.
Deferred Tax Assets and Liabilities
The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized. "More likely than not" is defined as greater than a 50% chance. Management considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed.
Other-than-temporary Impairment of 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 (1) the Company intends to sell the security or (2) 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 it 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 other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income. Non-GAAP Presentations Non-GAAP presentations are provided because the Company believes these may be valuable to investors. These include (1) the analysis of net interest income presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets and (2) the calculation of the efficiency ratio.
Internet Access to Corporate Documents
The Company provides access to itsSecurities and Exchange Commission ("SEC") filings through a link on the Investor Relations page of the Company's web site at www.amnb.com. Reports available include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are filed electronically with theSEC . The information on the Company's website is not incorporated into this report or any other filing the Company makes with theSEC . TheSEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with theSEC at www.sec.gov. Completed Acquisition OnApril 1, 2019 , the Company announced the completion of its acquisition ofHomeTown Bankshares Corporation ("HomeTown"). The combination deepens the Company's footprint in theRoanoke, Virginia metropolitan area and creates a presence in theNew River Valley with an office inChristiansburg, Virginia . After completion of the merger and with two office consolidations and one office closure, the Company has seven offices in the combinedRoanoke/New River Valley market area. As a result of the merger, the holders of shares of HomeTown common stock received 0.4150 shares of the Company's common stock for each share of HomeTown common stock held immediately prior to the effective date of the merger. Following completion of the merger, HomeTown's subsidiary bank,HomeTown Bank , was merged with and into the Bank. 31 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS Executive Overview
First quarter 2020 financial highlights include the following:
? Earnings produced a return on average assets of 1.37% for the first quarter of
2020, compared to 1.20% in the previous quarter and 1.29% for the same quarter
in the prior year.
? Net loans receivable increased $24.1 million for the quarter, or 5.3%
annualized.
? Net interest margin was 3.52% for the quarter, down from 3.62% in the fourth
quarter of 2019 and up from 3.50% in the same quarter of the prior year *.
? Noninterest revenues increased
previous quarter, and increased
$3.5 million in the same quarter in the prior year.
? The first quarter provision for loan losses totaled
compares to a provision of
thousand in the same quarter in the prior year.
? Nonperforming assets as a percentage of total assets remained level at 0.16%
at
at March 31, 2019 .
? Annualized net charge-offs were 0.01% for the first quarter of 2020, compared
to zero for the corresponding quarter in the prior year and down from 0.02%
for the fourth quarter of 2019.
* Refer to the Non-GAAP Financial Measures section within this section for further information on these non-GAAP financial measurements.
Net Interest Income Net interest income is the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest bearing liabilities, primarily deposits and other funding sources. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income. The following discussion of net interest income is presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets, such as certain state and municipal securities. A tax rate of 21% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent basis. Net interest income divided by average earning assets is referred to as the net interest margin. The net interest spread represents the difference between the weighted rate earned on average earning assets and the weighted rate paid on average interest-bearing liabilities
Three months ended
Net interest income on a taxable equivalent basis increased$4,809,000 or 31.7% for the first quarter of 2020 compared to the same quarter of 2019. This improvement in net interest income was primarily related to an increase in earning asset balances and overall higher loan yields for the 2020 quarter compared to the 2019 quarter. Average loan balances for the 2020 quarter were up$477,930,000 or 35.3% over the 2019 quarter, primarily due to the HomeTown acquisition. Loan yields for the quarter were three basis points higher than the 2019 quarter. For the first quarter of 2020, the Company's yield on interest-earning assets was 4.21%, compared to 4.20% for the first quarter of 2019. The cost of interest-bearing liabilities was 1.01% compared to 1.02%. The interest rate spread was 3.20% compared to 3.18%. The net interest margin, on a fully taxable equivalent basis, was 3.52% compared to 3.50%, an increase of two basis points (0.02%). The increase in net interest margin was driven by a$538,033,000 (31.0%) increase in average earning assets, enhanced by a$154,553,000 (36.8%) increase in average noninterest bearing deposits, and partially offset by a$363,961,000 (32.2%) increase in average interest bearing deposits. The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the three months endedMarch 31, 2020 and 2019. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans is only recognized when the loan returns to accrual status or at full payment of principal. 32 --------------------------------------------------------------------------------
Net Interest Income Analysis (dollars in thousands)
Three Months Ended March 31,
Average Balance Income/Expense Yield/Rate
2020 2019 2020 2019 2020 2019
Loans:
Commercial $ 332,920 $ 265,578 $ 3,543 $ 2,891 4.28 % 4.41 %
Real estate 1,489,319 1,083,800 17,663 12,716 4.74 4.69
Consumer 10,042 4,973 157 75 6.29 6.12
Total loans 1,832,281 1,354,351 21,363 15,682 4.67 4.64
Securities:
U.S. Treasury 9,049 - 36 - 1.59 -
Federal agencies and GSEs 103,311 139,465 576 850 2.23 2.44
Mortgage-backed and CMOs 197,774 111,701 1,144 693 2.31 2.48
State and municipal 40,825 78,597 288 538 2.82 2.74
Other securities 18,771 14,071 264 178 5.63 5.06
Total securities 369,730 343,834 2,308 2,259 2.50 2.63
Deposits in other banks 72,909 38,702 264 266 1.46 2.79
Total interest-earning assets 2,274,920 1,736,887 23,935
18,207 4.21 4.20
Non-earning assets 216,671 126,325
Total assets $ 2,491,591 $ 1,863,212
Deposits:
Demand $ 331,357 $ 238,430 123 14 0.15 0.02
Money market 515,339 395,704 1,188 1,153 0.93 1.18
Savings 178,896 134,060 53 10 0.12 0.03
Time 469,973 363,410 1,948 1,295 1.67 1.45
Total deposits 1,495,565 1,131,604 3,312 2,472 0.89 0.89
Customer repurchase agreements 41,519 42,705 129
171 1.25 1.62
Other short-term borrowings 3 61 - 1 1.01 6.56
Long-term borrowings 35,554 27,937 506 384 5.69 5.50
Total interest-bearing
liabilities 1,572,641 1,202,307 3,947 3,028 1.01 1.02
Noninterest bearing demand
deposits 574,362 419,809
Other liabilities 21,015 16,419
Shareholders' equity 323,573 224,677
Total liabilities and
shareholders' equity $ 2,491,591 $ 1,863,212
Interest rate spread 3.20 % 3.18 %
Net interest margin 3.52 % 3.50 %
Net interest income (taxable equivalent basis) 19,988 15,179
Less: Taxable equivalent
adjustment 69 111
Net interest income $ 19,919 $ 15,068
33
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Changes in Net Interest Income (Rate/Volume Analysis)
(in thousands)
Three Months Ended March 31,
2020 vs. 2019
Change
Increase Attributable to
(Decrease) Rate Volume
Interest income
Loans:
Commercial $ 652 $ (66 ) $ 718
Real estate 4,947 139 4,808
Consumer 82 3 79
Total loans 5,681 76 5,605
Securities:
U.S. Treasury 36 - 36
Federal agencies and GSEs (274 ) (68 ) (206 )
Mortgage-backed and CMOs 451 (50 ) 501
State and municipal (250 ) 16 (266 )
Other securities 86 22 64
Total securities 49 (80 ) 129
Deposits in other banks (2 ) (165 ) 163
Total interest income 5,728 (169 ) 5,897
Interest expense
Deposits:
Demand 109 102 7
Money market 35 (271 ) 306
Savings 43 39 4
Time 653 233 420
Total deposits 840 103 737
Customer repurchase agreements (42 ) (37 ) (5 )
Other short-term borrowings (1 ) (1 ) -
Long-term borrowings 122 14 108
Total interest expense 919
79 840
Net interest income (taxable equivalent basis)
Noninterest Income
Three months ended
For the quarter endedMarch 31, 2020 , noninterest income increased$1,044,000 or 30.3% compared to the comparable 2019 quarter. Details of individual accounts are shown in the table below. Three Months Ended March 31, (Dollars in thousands) 2020 2019 $ Change % Change Noninterest income: Trust fees$ 1,012 $ 914 $ 98 10.7 % Service charges on deposit accounts 721 594 127 21.4 Other fees and commissions 941 708 233 32.9 Mortgage banking income 549 406 143 35.2 Securities gains, net 814 323 491 152.0 Brokerage fees 211 147 64 43.5 Income from SBICs 55 168 (113 ) (67.3 ) Losses on premises and equipment, net (82 ) - (82 ) (100.0 ) Other 274 191 83 43.5 Total noninterest income$ 4,495 $ 3,451 $ 1,044 30.3 Service charge income increased$127,000 in the first quarter of 2020 compared to the first quarter of 2019, primarily due to the HomeTown acquisition. Other fees and commissions increased$233,000 in the 2020 quarter compared to the 2019 quarter, mostly on the strength of debit card fee revenue. Mortgage banking income increased$143,000 in the 2020 quarter compared to the 2019 quarter, primarily due to increased volume. Net securities gains increased$491,000 in the 2020 quarter compared to the same quarter in 2019. 34 --------------------------------------------------------------------------------
Noninterest Expense
Three months ended
For the three months endedMarch 31, 2020 , noninterest expense increased$2,405,000 or 22.0%. Details of individual accounts are shown in the table below. Three Months Ended March 31, (Dollars in thousands) 2020 2019 $ Change % Change Noninterest Expense Salaries$ 6,059 $ 4,664 $ 1,395 29.9 % Employee benefits 1,301 1,230 71 5.8 Occupancy and equipment 1,366 1,084 282 26.0 FDIC assessment 95 125 (30 ) (24.0 ) Bank franchise tax 426 290 136 46.9 Core deposit intangible amortization 427 55 372 676.4 Data processing 763 532 231 43.4 Software 356 324 32 9.9 Other real estate owned, net (9 ) 13 (22 ) (169.2 ) Merger related expenses - 451 (451 ) (100.0 ) Other 2,550 2,161 389 18.0 Total noninterest expense$ 13,334 $ 10,929 $ 2,405 22.0 Salaries expense increased$1,395,000 in the 2020 quarter as compared to the 2019 quarter. Total full-time equivalent employees ("FTEs") were 355 at the end of the first quarter of 2020, up from 299 at the end of the first quarter of 2019, for an increase of 56 FTEs due primarily to the HomeTown acquisition. Occupancy and equipment expense increased$282,000 in the 2020 quarter compared to the 2019 quarter, primarily due to the HomeTown acquisition. TheFederal Deposit Insurance Corporation ("FDIC") assessment expense in the 2020 quarter was positively impacted by the Small Bank Assessment Credit, which reduced insurance expense$75,000 . Core deposit intangible amortization increased$372,000 in the 2020 quarter compared to the same quarter in 2019 due to the HomeTown acquisition. Merger related expenses, which are related to the HomeTown acquisition and are nonrecurring in nature, totaled$451,000 during the first quarter of 2019. Non-GAAP Financial Measures The efficiency ratio is calculated by dividing noninterest expense excluding (1) gains or losses on the sale of other real estate owned ("OREO"), (2) core deposit intangible amortization and (3) merger related expense by net interest income including tax equivalent income on nontaxable loans and securities and noninterest income and excluding (a) gains or losses on securities and (b) gains or losses on sale or disposal of premises and equipment. The efficiency ratio for the 2020 quarter was 54.46% compared to 56.95% for the 2019 quarter. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. Such information is not prepared in accordance with GAAP and should not be construed as such. Management believes, however, such financial information is meaningful to the reader in understanding operating performance, but cautions that such information not be viewed as a substitute for GAAP. The Company, in referring to its net income, is referring to income under GAAP. The components of the efficiency ratio calculation are summarized in the following table (dollars in thousands): Three Months Ended March 31, 2020 2019 Efficiency Ratio Noninterest expense$ 13,334 $ 10,929 Add: gain on sale of OREO 27 2 Subtract: core deposit intangible amortization (427 ) (55 ) Subtract: merger related expense - (451 )$ 12,934 $ 10,425 Net interest income$ 19,919 $ 15,068 Tax equivalent adjustment 69 111 Noninterest income 4,495 3,451 Subtract: gain on securities (814 ) (323 ) Add: loss on fixed assets 82 -$ 23,751 $ 18,307 Efficiency ratio 54.46 % 56.95 % 35
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Net interest margin is calculated by dividing tax equivalent net interest income
by total average earning assets. Because a portion of interest income earned by
the Company is nontaxable, the tax equivalent net interest income is considered
in the calculation of this ratio. Tax equivalent net interest income is
calculated by adding the tax benefit realized from interest income that is
nontaxable to total interest income then subtracting total interest expense. The
tax rate utilized in calculating the tax benefit for both the 2020 and 2019
quarters is 21%. The reconciliation of tax equivalent net interest income, which
is not a measurement under GAAP, to net interest income, is reflected in the
table below (dollars in thousands):
Three Months Ended March 31,
2020 2019
Reconciliation of Net Interest Income to Tax-Equivalent
Net Interest Income
Non-GAAP measures:
Interest income - loans $ 21,363 $ 15,682
Interest income - investments and other 2,572 2,525
Interest expense - deposits (3,312 ) (2,472 )
Interest expense - customer repurchase agreements (129 ) (171 )
Interest expense - other short-term borrowings - (1 )
Interest expense - long-term borrowings (506 ) (384 )
Total net interest income $ 19,988 $ 15,179
Less non-GAAP measures:
Tax benefit realized on non-taxable interest income -
loans $ (42 ) $ (44 )
Tax benefit realized on non-taxable interest income -
municipal securities (27 ) (67 )
GAAP measures $ 19,919 $ 15,068
Income Taxes
The effective tax rate for the first quarter of 2020 was 15.65% compared to
20.74% for the first quarter of 2019. The decreased rate for the first quarter
of 2020 compared to the rate for the first quarter of 2019 is a result of tax
benefits recognized. As a result of the enactment of the CARES Act in the first
quarter of 2020, the Company recognized a tax benefit for the net operating loss
("NOL") five-year carryback provision for the NOL acquired in the HomeTown
merger. An income tax benefit was realized for the difference between the
current corporate income tax rate of 21% and the higher federal corporate tax
rate of 35% prior to 2018.
The effective tax rate is ordinarily lower than the statutory rate of 21% due to
the benefit of tax-exempt interest and excess tax benefits recognized on the
exercise of stock options and the vesting of restricted stock.
Fair Value Impact to Net Interest Margin
The Company's fully taxable equivalent net interest margin includes the impact
of acquisition accounting fair value adjustments. The net accretion impact for
the first quarter of 2019 and the first quarter of 2020, as well as the
remaining estimated net accretion impact are reflected in the following table
(dollars in thousands):
Loan Deposit Borrowings
Accretion Accretion Amortization Total
For the quarter ended March 31, 2019 $ 281 $ - $ (26 ) $ 255
For the quarter ended March 31, 2020 905 73 (21 ) 957
For the remaining nine months of 2020
(estimated) 1,667 108 (63 ) 1,712
For the years ending (estimated):
2021 1,793 78 (102 ) 1,769
2022 1,196 50 (102 ) 1,144
2023 767 30 (102 ) 695
2024 472 5 (102 ) 375
2025 376 2 (102 ) 276
Thereafter (estimated) 1,905 3 (743 ) 1,165
Impact of Inflation and Changing Prices
The majority of assets and liabilities of a financial institution are monetary
in nature and therefore differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories. The
most significant effect of inflation is on noninterest expense, which tends to
rise during periods of inflation. Changes in interest rates have a greater
impact on a financial institution's profitability than do the effects of higher
costs for goods and services. Through its balance sheet management practices,
the Company has the ability to react to those changes and measure and monitor
its interest rate and liquidity risk. Price inflation has been consistently
modest over the past several years.
36
--------------------------------------------------------------------------------CHANGES IN FINANCIAL POSITION BALANCE SHEET ANALYSIS Securities The securities portfolio generates income, plays a major role in the management of interest rate sensitivity, provides a source of liquidity, and is used to meet collateral requirements. The securities portfolio consists primarily of high credit quality investments, mostly federal agency, mortgage-backed, and state and municipal securities. The available for sale securities portfolio was$342,769,000 atMarch 31, 2020 , compared to$379,195,000 atDecember 31, 2019 , a decrease of$36,426,000 or 9.6%. AtMarch 31, 2020 , the available for sale portfolio had an amortized cost of$333,693,000 resulting in a net unrealized gain of$9,076,000 . AtDecember 31, 2019 , the available for sale portfolio had an amortized cost of$375,494,000 , resulting in a net unrealized gain of$3,701,000 . The Company had no remaining equity securities atMarch 31, 2020 . During the three months endedMarch 31, 2019 , the Company recognized a$319,000 change in the fair value of equity securities. During the three months endedMarch 31, 2020 , the Company sold$5,000,000 in par value bonds and realized a net gain of$814,000 . This compares to the three months endedMarch 31, 2019 , when the Company did not sell any available for sale securities. The Company had no remaining equity securities atMarch 31, 2020 . During the three months endedMarch 31, 2019 , the Company sold$81,000 in equity securities at fair value. The Company is cognizant of the continuing historically low and currently decreasing rate environment and has elected to execute an asset liability strategy of purchasing high quality taxable securities with relatively low optionality and short and balanced duration in order to reinvest at, eventually, higher rate securities or, preferably, into loans. The objective is to improve yield and duration on the portfolio in advance of any major market moves. During 2020, this strategy will remain in place until market rates stabilize and begin to increase.
The Company is participating in the PPP administered by the SBA and has implemented a DAP as discussed on page 29 to assist its customers during this crisis.
Loans The loan portfolio consists primarily of commercial and residential real estate loans, commercial loans to small and medium-sized businesses, construction and land development loans, and home equity loans. AtMarch 31, 2020 , the commercial real estate portfolio included concentrations of$73 million ,$48 million and$180 million in hotel, restaurants, and retail, respectively. These concentrations total 16% of total loans.
Total loans were
Average loans were$1,832,281,000 for the first quarter of 2020, compared to$1,354,351,000 for the first quarter of 2019, an increase of$477,930,000 or 35.3% primarily related to the HomeTown acquisition but also due to organic growth.
Loans held for sale totaled
Management of the loan portfolio is organized around portfolio segments. Each segment is comprised of various loan types that are reflective of operational and regulatory reporting requirements. The following table presents the Company's loan portfolio by segment as ofMarch 31, 2020 andDecember 31, 2019 (dollars in thousands): March 31, 2020 December 31, 2019 Commercial$ 331,507 $ 339,077 Commercial real estate: Construction and land development 141,154 137,920 Commercial real estate 953,363 899,199 Residential real estate: Residential 301,284 324,315 Home equity 118,030 119,423 Consumer 9,590 10,881 Total loans$ 1,854,928 $ 1,830,815 Provision for Loan Losses The Company had a provision for loan losses of$953,000 for the three month period endedMarch 31, 2020 , compared to a provision of$16,000 for the same period endedMarch 31, 2019 . The increase over the prior year period is a direct result of early stage declines in economic factors associated with increases in unemployment claims and a decrease in retail sales in the wake of the COVID-19 pandemic. The provision for loan losses is dependent on our ability to manage asset quality. The Company continues to monitor the effects of COVID-19 on national and local economies but expects provision for loan losses to increase in the near term as a result of the pandemic. It also reflects$197,000 in impairments recorded during the quarter, compared to$15,000 in the same quarter of the prior year. Net charge-offs for the three months endedMarch 31, 2020 were$40,000 compared to$15,000 for the 2019 quarter. 37 --------------------------------------------------------------------------------
Allowance for Loan Losses The purpose of the ALLL is to provide for probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance. AtMarch 31, 2020 , the ALLL was$14,065,000 , compared to$13,152,000 atDecember 31, 2019 . The ALLL as a percentage of total loans at such dates was 0.76% and 0.72%, respectively. As part of the Company's methodology to evaluate the adequacy of its ALLL, the Company computed its ASC 450 loan balance by reducing total loans by acquired loans and loans that were evaluated for impairment individually. The FASB ASC 450 loan loss reserve balance is the total ALLL reduced by allowances associated with these other pools of loans. The general allowance, ASC 450 (FAS 5) reserves to FASB ASC 450 loans, was 0.88% atMarch 31, 2020 , compared to 0.87% atDecember 31, 2019 . On a dollar basis, the reserve was$13,400,000 atMarch 31, 2020 , compared to$12,684,000 atDecember 31, 2019 . This segment of the allowance represents by far the largest portion of the loan portfolio and the largest aggregate risk. The specific allowance, ASC 310-40 (FAS 114) reserves to FASB ASC 310-40 loans, was 14.34% atMarch 31, 2020 , compared to 10.51% atDecember 31, 2019 . On a dollar basis, the reserve was$411,000 atMarch 31, 2020 , compared to$230,000 atDecember 31, 2019 . There is ongoing turnover in the composition of the impaired loan population, which increased by a net$673,000 overDecember 31, 2019 . The specific allowance does not include reserves related to acquired loans with deteriorated credit quality. This reserve was$254,000 atMarch 31, 2020 compared to$238,000 atDecember 31, 2019 . This is the only portion of the reserve related to acquired impaired loans. Cash flow expectations for these loans are reviewed on a quarterly basis and unfavorable changes in those estimates relative to the initial estimates can result in the need for additional loan loss provision. The following table presents the Company's loan loss and recovery experience for the periods indicated (dollars in thousands): Year Ended December 31, Three Months Ended March 31, 2020 2019 Balance at beginning of period $ 13,152$ 12,805
Charge-offs:
Construction and land development - - Commercial real estate - 6 Residential real estate 41 20 Home equity 1 50 Total real estate 42 76 Commercial and industrial 20 12 Consumer 43 245 Total charge-offs 105 333 Recoveries: Construction and land development - - Commercial real estate 3 9 Residential real estate 4 40 Home equity 4 18 Total real estate 11 67 Commercial and industrial 22 13 Consumer 32 144 Total recoveries 65 224 Net charge-offs 40 109 Provision for loan losses 953 456 Balance at end of period $ 14,065$ 13,152 38
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Asset Quality Indicators
The following table provides qualitative indicators relevant to the Company's loan portfolio for the three month period and year indicated below.
Asset Quality Ratios
March 31, 2020 December 31, 2019
Allowance to loans 0.76 % 0.72 %
ASC 450 (FAS 5) ALLL to ASC 450 loans 0.88 0.87
Net charge-offs to allowance (1) 1.14
0.83
Net charge-offs to average loans (1) 0.01
0.01
Nonperforming assets to total assets 0.16
0.15
Nonperforming loans to loans 0.16
0.13
Provision to net charge-offs (1) 2,382.50
418.35
Provision to average loans (1) 0.21
0.03
Allowance to nonperforming loans 462.97 570.59 __________________________ (1) - Annualized.
Nonperforming Assets (Loans and Other Real Estate Owned)
Nonperforming loans include loans on which interest is no longer accrued and accruing loans that are contractually past due 90 days or more. Nonperforming loans include loans originated and loans acquired.
Nonperforming loans to total loans were 0.16% at
Nonperforming assets include nonperforming loans and OREO. Nonperforming assets represented 0.16% and 0.15% of total assets atMarch 31, 2020 andDecember 31, 2019 , respectively. As ofMarch 31, 2020 , there was no increase in nonperforming assets as a result of the pandemic. The Company continues to monitor the significant impact to its borrowers caused by COVID-19 and anticipates increases in nonperforming assets as a result but the total cannot be determined at this time. In most cases, it is the policy of the Company that any loan that becomes 90 days past due will automatically be placed on nonaccrual loan status, accrued interest reversed out of income, and further interest accrual ceased. Any payments received on such loans will be credited to principal. In some cases a loan in process of renewal may become 90 days past due. In these instances the loan may still be accruing because of a delayed renewal process in which the customer has not been billed. In accounting for acquired impaired loans, such loans are not classified as nonaccrual when they become 90 days past due. They are considered to be accruing because their interest income relates to the accretable yield and not to contractual interest payments. Loans will only be restored to full accrual status after six consecutive months of payments that were each less than 30 days delinquent. The Company strictly adheres with this policy before restoring a loan to normal accrual status.
The following table presents the Company's nonperforming assets as of
Nonperforming Assets
December 31,
March 31, 2020 2019
Nonaccrual loans:
Real estate $ 1,618 $ 1,083
Commercial 958 857
Consumer 3 4
Total nonaccrual loans 2,579 1,944
Loans past due 90 days and accruing interest:
Real estate 428 309
Commercial 31 52
Consumer - -
Total past due 90 days and accruing interest 459 361
Total nonperforming loans 3,038 2,305
Other real estate owned 984 1,308
Total nonperforming assets $ 4,022 $ 3,613
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Impaired Loans A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The following table shows loans that were considered impaired, exclusive of acquired impaired loans, as ofMarch 31, 2020 andDecember 31, 2019 (dollars in thousands): Impaired Loans March 31, 2020 December 31, 2019 Accruing $ 971 $ 969 Nonaccruing 1,894 1,223 Total impaired loans $ 2,865 $ 2,192
Troubled Debt Restructurings ("TDRs")
TDRs exist whenever the Company makes a concession to a customer based on the customer's financial distress that would not have otherwise been made in the normal course of business.
There were
OnMarch 20, 2020 , the federal banking agencies issued an "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus." This was in response to the COVID-19 pandemic affecting societies and economies around the world. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the the effects of COVID-19. The guidance goes on to explain that in consultation with the FASB staff that the federal banking agencies conclude that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not TDRs. The CARES Act was passed byCongress onMarch 27, 2020 . Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as ofDecember 31, 2019 are not TDRs. ThroughMarch 31, 2020 , the Bank had applied this guidance and modified loans to over 450 customers on loan balances of approximately$200 million . FromApril 1, 2020 toMay 6, 2020 , there were additional modifications on$134 million of loans. The majority of modifications involved three-month deferments of principal and interest. Other Real Estate Owned Other real estate owned was$984,000 and$1,308,000 as ofMarch 31, 2020 andDecember 31, 2019 , respectively. OREO is initially recorded at fair value, less estimated costs to sell, at the date of foreclosure. Loan losses resulting from foreclosure are charged against the ALLL at that time. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the new cost basis or fair value, less estimated costs to sell with any additional write-downs charged against earnings. For significant assets, these valuations are typically outside annual appraisals. The following table shows the Company's OREO as ofMarch 31, 2020 andDecember 31, 2019 (dollars in thousands): Other Real Estate Owned March 31, 2020 December 31, 2019 Construction and land development $ 484 $ 600 1-4 family residential 237 285 Commercial real estate 263 423 $ 984 $ 1,308 Deposits The Company's deposits consist primarily of checking, money market, savings, and consumer and commercial time deposits. Total deposits were$2,070,667,000 atMarch 31, 2020 compared to$2,060,547,000 atDecember 31, 2019 , an increase of$10,120,000 or 0.5%. Average interest bearing deposits were$1,495,565,000 for the first quarter of 2020, compared to$1,131,604,000 for the first quarter of 2019, an increase of$363,961,000 or 32.2%. This increase is primarily attributable to deposits acquired in the HomeTown acquisition. Average noninterest bearing deposits for the 2020 quarter were$574,362,000 , compared to$419,809,000 for the 2019 quarter, an increase of$154,553,000 or 36.8%. This increase is due to the HomeTown merger and organic growth.
The Company's primary focus on the liability side of the balance sheet is growing core deposits and their affiliated relationships. The challenge in this changing rate environment is to fund the Bank in a cost effective and competitive manner. The Company's cost of deposits for the first quarter of 2020 and the first quarter of 2019 was 0.89%.
Shareholders' Equity The Company's capital management strategy is to be classified as "well capitalized" under regulatory capital ratios and provide as high as possible total return to shareholders. The Company's capital strategy has not changed in response to COVID-19 except to suspend the stock repurchase program for the near term.
Shareholders' equity was
The Company paid cash dividends of$0.27 per share during the first three months of 2020 while the aggregate basic and diluted earnings per share for the same period was$0.77 . 40
-------------------------------------------------------------------------------- EffectiveJanuary 1, 2015 , the Company and the Bank became subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Basel III Capital Rules"). The Basel III Capital Rules require the Company and the Bank to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The phase-in of the capital conservation buffer requirement began onJanuary 1, 2016 , at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% onJanuary 1, 2019 . In addition, to be well capitalized under the "prompt corrective action" regulations pursuant to Section 38 of the Federal Deposit Insurance Act, the Bank must have the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%. OnAugust 28, 2018 , theFederal Reserve issued an interim final rule required by the Economic Growth, Regulatory Relief, and Consumer Protection Act ("EGRRCPA") that expands the applicability of theFederal Reserve's Small Bank Holding Company Policy Statement ("SBHC Policy Statement") to bank holding companies with total consolidated assets of less than$3 billion (up from the prior$1 billion threshold). Under the SBHC Policy Statement, qualifying bank holding companies, such as the Company, have additional flexibility in the amount of debt they can issue and are also exempt from the Basel III Capital Rules. However, the Company does not currently intend to issue a material amount of debt or take any other action that would cause its capital ratios to fall below the minimum ratios required by the Basel III Capital Rules. The SBHC Policy Statement does not apply to the Bank, and the Bank must comply with theBasel III Capital Rules OnSeptember 17, 2019 , the federal banking agencies jointly issued a final rule required by the EGRRCPA that will permit qualifying banks and bank holding companies that have less than$10 billion in consolidated assets to elect to opt into the Community Bank Leverage Ratio ("CBLR") framework. Under the final rule, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% would not be subject to other risk-based and leverage capital requirements under the Basel III Capital Rules and will be deemed to have met the well capitalized ratio requirements under the "prompt corrective action" framework. In addition, a community bank that falls out of compliance with the framework will have a two-quarter grace period to come back into full compliance, provided its leverage ratio remains above 8%, and will be deemed well-capitalized during the grace period. The CBLR framework was first available for banking organizations to use in theirMarch 31, 2020 regulatory reports. OnApril 6, 2020 , the federal bank regulatory agencies announced the issuance of two interim final rules that make changes to the CBLR framework and implement Section 4012 of the CARES Act. One interim final rule provides that, as of the second quarter of 2020, a banking organization with a leverage ratio of 8% or greater (and that meets the other existing qualifying criteria) may elect to use the CBLR framework. This rule also establishes a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls below 8% so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition back to the leverage ratio requirement of 9%. Under this rule, the required leverage ratio will be 8% beginning in the second quarter and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. This rule also maintains a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1% below the applicable ratio. This transition will allow community banking organizations to focus on supporting lending to creditworthy households and businesses given the recent strains on theU.S. economy caused by COVID-19. The Company and the Bank do not currently expect to opt into the CBLR framework. The following table provides information on the regulatory capital ratios for the Company and the Bank atMarch 31, 2020 andDecember 31, 2019 . Management believes, as ofMarch 31, 2020 , that the Company and the Bank more than satisfy all capital adequacy requirements to which they are subject. Percentage At March 31, 2020 Percentage At December 31, 2019 Risk-Based Capital Ratios: Company Bank Company Bank Common equity tier 1 capital ratio 11.52 % 12.51 % 11.56 % 12.38 % Tier 1 capital ratio 12.93 12.51 12.98 12.38 Total capital ratio 14.02 13.23 14.04 13.06 Leverage Capital Ratio: Tier 1 leverage ratio 10.75 10.41 10.75 10.25 41
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Stock Repurchase Program OnJanuary 19, 2018 , the Company filed a Form 8-K with theSEC to announce the approval by its Board of Directors of a stock repurchase program. The program authorized the repurchase of up to 300,000 shares of the Company's common stock over a two-year period that ended onDecember 31, 2019 .
On
In the three month period endedMarch 31, 2020 , the Company repurchased 140,526 shares at an average cost of$35.44 per share, for a total cost of$4,981,000 . The Company did not repurchase any shares in the three month period endedMarch 31, 2019 . This program has been suspended for the near term due to COVID-19. Liquidity Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities in a timely manner. Liquidity management involves maintaining the Company's ability to meet the daily cash flow requirements of its customers, whether they are borrowers requiring funds or depositors desiring to withdraw funds. Additionally, the Company requires cash for various operating needs including dividends to shareholders, the servicing of debt, and the payment of general corporate expenses. The Company manages its exposure to fluctuations in interest rates through policies approved by the Asset Liability Committee ("ALCO") and Board of Directors, both of which receive periodic reports of the Company's interest rate risk and liquidity position. The Company uses a computer simulation model to assist in the management of the future liquidity needs of the Company.
Liquidity sources include on balance sheet and off balance sheet sources.
Balance sheet liquidity sources include cash, amounts due from banks, loan repayments, and increases in deposits. The Company also maintains a large, high quality, very liquid bond portfolio, which is generally 50% to 60% unpledged and would, accordingly, be available for sale if necessary.
Off balance sheet sources include lines of credit from the
The Company has a line of credit with the FHLB, equal to 30% of the Bank's assets, subject to the amount of collateral pledged. Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, second mortgage loans, home equity lines of credit, and commercial real estate loans. In addition, the Company pledges as collateral its capital stock in and deposits with the FHLB. The Company had$205,000,000 outstanding in letters of credit atMarch 31, 2020 and$170,000,000 outstanding atDecember 31, 2019 . These letters of credit provide the Bank with alternate collateral for securing public entity deposits aboveFDIC insurance levels, thereby providing less need for collateral pledging from the securities portfolio, and thereby maximizing on balance sheet liquidity.
Short-term borrowings are discussed in Note 8 and long-term borrowings are discussed in Note 9 in the Consolidated Financial Statements included in this report.
The Company has federal funds lines of credit established with one correspondent bank in the amount of$50,000,000 and another correspondent bank in the amount of$10,000,000 , and has access to theFederal Reserve Bank of Richmond's discount window. The Company has a relationship with Promontory Network, the sponsoring entity for the Certificate of Deposit Account Registry Service® ("CDARS"). Through CDARS, the Company is able to provide deposit customers with access to aggregateFDIC insurance in amounts exceeding$250,000 . This gives the Company the ability, as and when needed, to attract and retain large deposits from insurance conscious customers. With CDARS, the Company has the option to keep deposits on balance sheet or sell them to other members of the network. Additionally, subject to certain limits, the Bank can use CDARS to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB. In this manner, CDARS can provide the Company with another funding option. Thus, CDARS serves as a deposit-gathering tool and an additional liquidity management tool. Under the EGRRCPA signed into law onMay 24, 2018 , a well-capitalized bank with a CAMELS rating of 1 or 2 may hold reciprocal deposits up to the lesser of 20 percent of its total liabilities or$5 billion without those deposits being treated as brokered deposits. Deposits through the CDARS program as ofMarch 31, 2020 andDecember 31, 2019 , were$18,245,000 and$14,864,000 , respectively. COVID-19 and the participation in the PPP and the DAP programs could significantly impact the Company's liquidity. Management believes that these sources provide sufficient and timely liquidity, both on and off the balance sheet to support the programs and operations.
Off-Balance Sheet Activities
The Company enters into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance sheet transactions. Other than subsidiaries to issue trust preferred securities, the Company does not have any off-balance sheet subsidiaries. Off-balance sheet transactions atMarch 31, 2020 and atDecember 31, 2019 were as follows (dollars in thousands): March 31, 2020 December 31, 2019 Commitments to extend credit$ 532,610 $ 557,364 Standby letters of credit 12,640 13,611 Mortgage loan rate-lock commitments 26,390 10,791 Commitments to extend credit to customers represent legally binding agreements with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future funding requirements. Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. 42
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