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, 2021 , 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 ongoing 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 the Company's allowance for loan losses, the
• amount of loan loss provisions required in future periods, and the failure of
assumptions underlying the allowance for loan losses;
• 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;
• the ability to recruit and retain key personnel;
• cybersecurity threats or attacks, the implementation of new technologies, and
the ability to develop and maintain reliable and secure electronic systems;
• geopolitical conditions, including acts or threats of terrorism and/or
military conflicts, or actions taken by the
response to acts of threats or terrorism and/or military conflicts, negatively
impacting business and economic conditions in the
• risks associated with mergers and acquisitions and other expansion activities.
Reclassification
In certain circumstances, reclassifications have been made to prior period information to conform to the 2022 presentation. There were no material reclassifications.
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, 2021 . 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 or recovery of loan loss expense.
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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, and charge-offs and recoveries; trends in volume and terms of loans; effects of changes in risk selection, underwriting standards, and lending policies; experience of lending staff; national, regional, and local economic trends and conditions; portfolio concentrations; regulatory and legal factors; 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.
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.
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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 purchased credit 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's goodwill was recognized in connection with past business combinations and is reported at the community banking segment. The Company reviews the carrying value of the goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Company elects to bypass the qualitative assessment or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists. In the last evaluation of goodwill, which was the annual evaluation atJune 30, 2021 , the Company concluded that no impairment existed. No indicators of impairment were identified during the three months endedMarch 31, 2022 or 2021. Intangible assets with definite useful lives are amortizing over their estimated useful lives of 5 to 10 years.Goodwill is the only intangible asset with an indefinite life on the Company's consolidated balance sheets.
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 website 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. 29
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Table of Contents RESULTS OF OPERATIONS Executive Overview
First quarter 2022 financial highlights include the following:
• Earnings produced a return on average assets (annualized) of 1.08% for the
first quarter of 2022, compared to 1.35% in the previous quarter and 1.49%
for the first quarter of 2021.
• Average deposits declined 4.6% annualized during the first quarter but grew
11.6% over the same quarter of 2021; the cost of interest-bearing deposits
decreased to 0.12% in the first quarter, compared to 0.14% in the previous
quarter and 0.30% in the same quarter of the prior year.
• Fully taxable equivalent net interest margin was 2.63% for the quarter,
down from 2.93% in the previous quarter and down from 3.20% in the same
quarter of the prior year.*
• Noninterest revenues increased
previous quarter, and decreased
quarter in the prior year.
• Noninterest expense decreased $114 thousand , or less than 1.0%, when
compared to the previous quarter, and increased
compared to the same quarter in the prior year.
• The Company recognized a negative provision for loan losses in the first
quarter of 2022 of
recovery in the first quarter of 2021. Annualized net charge-offs
(recoveries) as a percentage of average loans outstanding were (0.01%) for
the first quarter of 2022, compared to none in the previous quarter or in
the same quarter in the prior year.
• Nonperforming assets as a percentage of total assets were 0.06% at
2022, down from 0.07% at December 31, 2021 and 0.10% at March 31, 2021 .
*Refer to the Non-GAAP Financial Measures within this section for further information on this non-GAAP financial measurement.
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 was$20.5 million , a decrease of$2.0 million , or 8.8%, for the first quarter of 2022 compared to$22.5 million for the same quarter of 2021. The decrease in net interest income from the same quarter in the prior year was attributable to decreased accretion and net fee income associated with Paycheck Protection Program ("PPP") loans partially offset by reduced deposit costs from a significantly lower rate environment in 2022. Average loan balances for the 2022 quarter were down$49.5 million or 2.5%, over the 2021 quarter, primarily due to PPP forgiveness. PPP loans had a net balance of$689 thousand atMarch 31, 2022 , compared to$183.8 million atMarch 31, 2021 . Total net PPP fees recognized in net interest income during the first quarter of 2022 were$273 thousand , compared to$3.4 million for the first quarter of 2021. Loan yields for the quarter were 60 basis points lower than the 2021quarter. For the first quarter of 2022, the Company's yield on interest-earning assets was 2.75%, compared to 3.46% for the first quarter of 2021. The cost of interest-bearing liabilities was 0.20% for the 2022 period compared to 0.40% for the 2021 period. The interest rate spread was 2.55% for the 2022 period compared to 3.06% for the 2021 period. The net interest margin, on a fully taxable equivalent basis, was 2.63% for the 2022 period compared to 3.20% for the 2021 period, a decrease of 57 basis points. The decrease in net interest margin was driven by declining interest rates partially offset by PPP fee and accretion income earned. 30
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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, 2022 and 2021. 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.
Net Interest Income Analysis (dollars in thousands)
Three Months Ended March 31,
2022 2021 2022 2021 2022 2021
Average Balance Income/Expense Yield/Rate
Loans:
Commercial $ 290,051 $ 464,677 $ 2,632 $ 5,790 3.68 % 5.05 %
Real estate 1,674,350 1,548,091 16,078 16,390 3.84 4.23
Consumer 6,509 7,635 112 127 6.98 6.75
Total loans 1,970,910 2,020,403 18,822 22,307 3.83 4.43
Securities:
U.S. Treasury 147,001 15,303 323 12 0.88 0.31
Federal agencies and GSEs 104,905 105,337 293 305 1.12 1.16
Mortgage-backed and CMOs 361,583 258,003 1,207 973 1.34 1.51
State and municipal 67,524 58,493 331 315 1.96 2.15
Other securities 29,860 21,624 312 275 4.18 5.09
Total securities 710,873 458,760 2,466 1,880 1.39 1.64
Deposits in other banks 444,778 335,128 177 77 0.16 0.09
Total interest-earning assets 3,126,561 2,814,291 21,465
24,264 2.75 3.46
Non-earning assets 193,753 212,661
Total assets $ 3,320,314 $ 3,026,952
Deposits:
Demand $ 525,508 $ 450,953 37 40 0.03 0.04
Money market 752,386 683,948 101 276 0.05 0.16
Savings 264,057 227,404 7 7 0.01 0.01
Time 338,922 378,113 424 964 0.51 1.03
Total deposits 1,880,873 1,740,418 569 1,287 0.12 0.30
Customer repurchase agreements 41,337 43,746 6 11 0.06 0.11
Long-term borrowings 28,241 35,640 379 483 5.37 5.41
Total interest-bearing
liabilities 1,950,451 1,819,804 954 1,781 0.20 0.40
Noninterest-bearing demand
deposits 1,000,020 842,121
Other liabilities 18,304 22,796
Shareholders' equity 351,539 342,231
Total liabilities and
shareholders' equity $ 3,320,314 $ 3,026,952
Interest rate spread 2.55 % 3.06 %
Net interest margin 2.63 % 3.20 %
Net interest income (taxable equivalent basis) 20,511 22,483
Less: Taxable equivalent
adjustment 58 60
Net interest income $ 20,453 $ 22,423
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Changes in Net Interest Income (Rate/Volume Analysis)
(in thousands)
Three Months Ended March 31,
2022 vs. 2021
Change
Increase Attributable to
(Decrease) Rate Volume
Interest income
Loans:
Commercial $ (3,158 ) $ (1,325 ) $ (1,833 )
Real estate (312 ) (1,591 ) 1,279
Consumer (15 ) 4 (19 )
Total loans (3,485 ) (2,912 ) (573 )
Securities:
U.S. Treasury 311 54 257
Federal agencies and GSEs (12 ) (11 ) (1 )
Mortgage-backed and CMOs 234 (122 ) 356
State and municipal 16 (30 ) 46
Other securities 37 (55 ) 92
Total securities 586 (164 ) 750
Deposits in other banks 100 69 31
Total interest income (2,799 ) (3,007 ) 208
Interest expense
Deposits:
Demand (3 ) (9 ) 6
Money market (175 ) (200 ) 25
Savings - (1 ) 1
Time (540 ) (449 ) (91 )
Total deposits (718 ) (659 ) (59 )
Customer repurchase agreements (5 ) (4 ) (1 )
Long-term borrowings (104 ) (5 ) (99 )
Total interest expense (827 ) (668
) (159 )
Net interest income (taxable equivalent basis)
32
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Table of Contents Noninterest Income
Three months ended
For the quarter ended
Three Months Ended March 31,
(Dollars in thousands)
2022 2021 $ Change % Change
Noninterest income:
Wealth management income $ 1,809 $ 1,424 $ 385 27.0 %
Service charges on deposit accounts 689 622 67 10.8
Interchange fees 981 889 92 10.3
Other fees and commissions 266 250 16 6.4
Mortgage banking income 673 1,318 (645 ) (48.9 )
Income from Small Business Investment Companies 493 428 65 (15.2 )
Income from insurance investments 447 788 (341 ) (43.3 )
Gains (losses) on premises and equipment, net 4 (49 ) 53 108.2
Other 238 252 (14 ) (5.6 )
Total noninterest income $ 5,600 $ 5,922 $ (322 ) (5.4 )
Wealth management income increased $385 thousand for the three months ended
March 31, 2022 compared to the same quarter in 2021 the result of growth in
clients, growth in market value and a $200 thousand non-recurring estate
settlement fee. Mortgage banking income decreased $645 thousand in
the 2022 quarter compared to the 2021 quarter reflecting decreased demand for
refinancing and lack of inventory, which decreased the demand for new home
financing. Interchange income increased $92 thousand in the 2022 quarter
compared to the 2021 quarter as debit card usage increased. Income from
insurance investments decreased $341 thousand as the Company received less
distributions during the three months ended March 31, 2022 compared to the same
quarter in 2021.
Noninterest Expense
Three months ended
For the three months endedMarch 31, 2022 , noninterest expense increased$1.3 million , or 9.1%, compared to the same quarter of 2021. Details of individual accounts are shown in the table below. Three Months Ended March 31, (Dollars in thousands) 2022 2021 $ Change % Change Noninterest Expense Salaries and employee benefits$ 8,598 $ 7,518 $ 1,080 14.4 % Occupancy and equipment 1,542 1,533 9 0.6 FDIC assessment 239 224 15 6.7 Bank franchise tax 476 438 38 8.7 Core deposit intangible amortization 330 381 (51 ) (13.4 ) Data processing 847 778 69 8.9 Software 363 329 34 10.3 Other real estate owned, net (1 ) 117 (118 ) (100.9 ) Other 2,955 2,747 208 7.6 Total noninterest expense$ 15,349 $ 14,065 $ 1,284 9.1 Salaries and employee benefits increased$1.1 million in the 2022 quarter as compared to the 2021 quarter. The 2022 quarter reflected increases for annual salary and incentive accrual adjustments and reduced salary deferrals for loan origination costs in the 2022 quarter. The first quarter of 2021 reflected a reduction in salary expenses of$604 thousand associated with the origination of PPP loans which were deferred and recognized over the life of the loans. Other real estate owned ("OREO"), net decreased$118 thousand from the first quarter of 2021, where a loss on the sale of OREO of$111 thousand was recognized. The increase in other expenses in the first quarter of 2022 compared to the first quarter of 2021 was primarily attributable to annual vendor price increases for operational expenses and additional costs associated with investments in technology. 33
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Non-GAAP Financial Measures
The efficiency ratio is calculated by dividing noninterest expense excluding (1)
gains or losses on the sale of OREO and (2) core deposit intangible
amortization 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 2022 quarter was 57.53% compared to
47.70% for the 2021 quarter. The efficiency ratio 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 information. 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,
2022 2021
Efficiency Ratio
Noninterest expense $ 15,349 $ 14,065
Subtract: gain on sale of OREO, net of write-downs - (111 )
Subtract: core deposit intangible amortization (330 ) (381 )
$ 15,019 $ 13,573
Net interest income $ 20,453 $ 22,423
Tax equivalent adjustment 58 60
Noninterest income 5,600 5,922
Add: (gain)/loss on fixed assets (4 ) 49
$ 26,107 $ 28,454
Efficiency ratio 57.53 % 47.70 %
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 2022 and 2021
periods 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,
2022 2021
Reconciliation of Net Interest Income to Tax-Equivalent
Net Interest Income
Non-GAAP measures:
Interest income - loans $ 18,822 $ 22,307
Interest income - investments and other 2,643 1,957
Interest expense - deposits (569 ) (1,287 )
Interest expense - customer repurchase agreements (6 ) (11 )
Interest expense - long-term borrowings (379 ) (483 )
Total net interest income $ 20,511 $ 22,483
Less non-GAAP measures:
Tax benefit realized on non-taxable interest income -
loans $ (34 ) $ (34 ) Tax benefit realized on non-taxable interest income - municipal securities
(24 ) (26 )
GAAP measures net interest income $ 20,453 $ 22,423
Income Taxes
The effective tax rate for the first quarter of 2022 was 21.49% compared to
20.95% for the first quarter of 2021. The effective tax rate is ordinarily lower
than the statutory rate of 21% due to the benefit of tax-exempt interest,
tax-exempt changes in the cash surrender value of bank owned life insurance and
excess tax benefits recognized on the exercise of stock options and vesting of
restricted stock. However, it can be more than the statutory rate due to the
presence of state taxes, changes in pre-tax earnings and the levels of permanent
tax differences.
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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 three months endedMarch 31, 2022 and 2021, 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 three months ended March 31, 2022$ 566 $ 15 $ (25 )$ 556 For the three months ended March 31, 2021 952 22 (26 ) 948 For the remaining nine months of 2022 (estimated) 782 44 (101 ) 725 For the years ending (estimated): 2023 808 25 (101 ) 732 2024 529 6 (101 ) 434 2025 393 - (101 ) 292 2026 278 - (101 ) 177 Thereafter (estimated) 867 - (621 ) 246
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 but has substantially increased during the
first quarter of 2022. Management is closely monitoring noninterest expenses as
a result of current inflation trends to implement cost measures, as applicable.
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Table of Contents 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$686.2 million atMarch 31, 2022 , compared to$692.5 million atDecember 31, 2021 , a decrease of$6.3 million or less than 1%. AtMarch 31, 2022 , the available for sale portfolio had an amortized cost of$719.2 million resulting in a net unrealized loss of$33.0 million . AtDecember 31, 2021 , the available for sale portfolio had an amortized cost of$694.7 million , resulting in a net unrealized loss of$2.2 million . The increase in the net unrealized loss was the direct result of a substantial rise in market rates during the quarter. The yield on a 3-yearU.S. Treasury Note, for instance, was 148 basis points higher atMarch 31, 2022 relative toDecember 31, 2021 .
The Company did not sell any securities during the three months ended
The Company is cognizant of the recent volatility in market interest rates and has elected to execute an asset liability strategy of purchasing high quality taxable securities with relatively low optionality and moderate and overall balanced duration. 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, 2022 , the commercial real estate portfolio included concentrations of$84 million ,$46 million and$208 million in hotel, restaurants, and retail loans, respectively. These concentrations total 17.0% of total loans, excluding loans in process. Total loans were$2.0 billion atMarch 31, 2022 , compared to$1.9 billion atDecember 31, 2021 , an increase of$41.4 million , or 2.1%. AtMarch 31, 2022 , net PPP loans, which are in the commercial loan category, totaled$689 thousand compared to$12.2 million atDecember 31, 2021 .
Average loans were
Loans held for sale totaled$2.5 million atMarch 31, 2022 and$8.5 million atDecember 31, 2021 . Secondary loan production volume was$19.8 million for the three month period endedMarch 31, 2022 and$41.2 million for the same period of 2021. These loans were approximately 50% purchase and 50% refinancing for the quarter endedMarch 31, 2022 , and 35% purchase and 65% refinance for the year endedDecember 31, 2021 . Management of the loan portfolio is organized around portfolio segments. Each segment is comprised of various loan types that are reflective of operational and regulatory reporting requirements. The following table presents the Company's loan portfolio by segment (dollars in thousands): As of March 31, 2022 Maturing after Maturing Maturing Maturing after five but after within one one but within within fifteen fifteen year five years years years Total Real estate: Construction and land development$ 26,275 $ 101,727 $ 20,274 $ -$ 148,276 Commercial real estate - owner occupied 31,532 217,441 151,490 1,843 402,306 Commercial real estate - non-owner occupied 51,653 421,976 248,669 30,519 752,817 Residential real estate 19,575 137,614 111,227 27,533 295,949 Home equity 4,793 29,785 55,015 - 89,593 Total real estate 133,828 908,543 586,675 59,895 1,688,941 Commercial and industrial 62,578 146,458 82,222 439 291,697 Consumer 773 3,787 332 2,478 7,370 Total loans, net of deferred fees and costs$ 197,179 $ 1,058,788 $ 669,229 $ 62,812 $ 1,988,008 Interest rate sensitivity: Fixed interest rates$ 126,671 $ 898,848 $ 561,334 $ 16,704 $ 1,603,557 Floating or adjustable rates 70,508 159,940 107,895 46,108 384,451 Total loans, gross$ 197,179 $ 1,058,788 $ 669,229 $ 62,812 $ 1,988,008 36
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Table of Contents 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, 2022 , the ALLL was$18.0 million compared to$18.7 million atDecember 31, 2021 . The ALLL as a percentage of total loans at such dates was 0.90% and 0.96%, respectively. Management will continue to evaluate the adequacy of the Company's ALLL. The Company recognized a negative provision (recovery) of($758) thousand in the first quarter of 2022 and no provision expense or recovery in the same quarter of 2021. The continued improvement in economic conditions, ongoing low charge-off and delinquency rates, and overall strong asset quality metrics contributed to the qualitative factor adjustments that resulted in the recovery for the 2022 quarter. The provision expense that would have been required in the first quarter of 2021 based on loan activity was offset by the adjustments to qualitative factors for improved economic conditions. Net recoveries for the three months endedMarch 31, 2022 were$68 thousand compared to$13 thousand for the same 2021 period. 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 0.94% atMarch 31, 2022 , compared to 1.01% atDecember 31, 2021 . On a dollar basis, the reserve was$17.3 million atMarch 31, 2022 , compared to$18.0 million atDecember 31, 2021 . 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 ASC 310-40 loans is immaterial and does not include reserves related to acquired loans with deteriorated credit quality. This reserve was$654 thousand atMarch 31, 2022 compared to$667 thousand atDecember 31, 2021 . This is the only portion of the reserve related to purchased credit impaired loans. Cash flow expectations for these loans are reviewed on a quarterly basis and unfavorable changes in those estimates relative to the initial estimates can result in the need for additional loan loss provision. The following table presents the Company's loan loss and recovery experience for the periods indicated (dollars in thousands): Three Months Year Ended Ended March December 31, 31, 2022 2021 Balance at beginning of period$ 18,678
Charge-offs:
Construction and land development - - Commercial real estate - owner occupied - 3 Commercial real estate - non-owner occupied - - Residential real estate 5 53 Home equity - - Total real estate 5 56 Commercial and industrial 3 - Consumer 29 90 Total charge-offs 37 146 Recoveries: Construction and land development - - Commercial real estate - owner occupied 2 7 Commercial real estate - non-owner occupied 1 8 Residential real estate 2 42 Home equity 2 57 Total real estate 7 114 Commercial and industrial 72 40 Consumer 26 92 Total recoveries 105 246 Net recoveries (68 ) (100 ) (Recovery of) provision for loan losses (758 ) (2,825 ) Balance at end of period$ 17,988 $ 18,678 37
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Table of Contents 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, 2022 December 31, 2021
Allowance to loans (1) 0.90 % 0.96 %
ASC 450 (FAS 5) ALLL to ASC 450 loans (2) 0.94 1.01
Net recoveries to allowance (3) (0.38 ) (0.54 ) Net recoveries to average loans (3) (0.01 ) (0.00 ) Nonperforming assets to total assets 0.06
0.07
Nonperforming loans to loans 0.09
0.11
Recoveries to net charge-offs (3) 1,115.00
2,825.00
Recovery of provision to average loans (3) (0.04 ) (0.14 ) Allowance to nonperforming loans 981.34 840.59 __________________________
(1) - Excluding PPP loans, 0.91% at
(2) - Excluding PPP loans, 0.94% at
(3) - 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 exclusive of purchased credit impaired loans. Nonperforming loans to total loans were 0.09% atMarch 31, 2022 and 0.11% atDecember 31, 2021 . Nonperforming assets include nonperforming loans, OREO and repossessions. Nonperforming assets represented 0.06% and 0.07% of total assets atMarch 31, 2022 andDecember 31, 2021 , respectively. The decrease in nonperforming assets resulted from a decrease of$389 thousand in nonperforming loans. 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. 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. Total impaired loans, exclusive of purchased credit impaired loans, atMarch 31, 2022 andDecember 31, 2021 were$2.0 million and$2.2 million , respectively. Troubled Debt Restructurings 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
Other Real Estate Owned OREO was$143 thousand atMarch 31, 2022 andDecember 31 , 2021OREO 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. 38
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Table of Contents Deposits The Company's deposits consist primarily of checking, money market, savings, and consumer and commercial time deposits. Total deposits were$2.9 billion at bothMarch 31, 2022 and atDecember 31, 2021 , with an increase of$35.9 million , or 5.0%. The growth over the prior quarter is a result of continued higher than average cash balances being maintained by customers. This pattern is consistent with trends at other commercial banks. Average interest-bearing deposits were$1.9 billion for the first quarter of 2022, compared to$1.7 for the first quarter of 2021, an increase of$140.5 million , or 8.1%. Average noninterest-bearing deposits for the 2022 quarter were$1.0 billion , compared to$842 million for the 2021 quarter, an increase of$158 million , or 18.8%. The Company's primary focus on the liability side of the balance sheet is growing core deposits and their affiliated relationships. The Company's cost of interest-bearing deposits for the first quarter of 2022 was 0.12%, down from 0.30% for the first quarter of 2021.
Certificates of Deposit over
AtMarch 31, 2022 , certificates of deposit that met or exceeded theFederal Deposit Insurance Corporation ("FDIC") insurance limit held by the Company were$138.3 million , and were$153.2 million atDecember 31, 2021 . The following table provides information on the maturity distribution of the time deposits exceeding theFDIC insurance limits atMarch 31, 2022 (dollars in thousands): March 31, 2022 3 months or less $ 68,491 Over 3 through 6 months 23,580 Over 6 through 12 months 20,408 Over 12 months 25,804 Total$ 138,283 The Company's total uninsured deposits, which are the amounts of deposit accounts that exceed theFDIC insurance limit, currently$250,000 , were approximately$1.2 billion atMarch 31, 2022 and atDecember 31, 2021 . These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes. 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.
Shareholders' equity was$335 million atMarch 31, 2022 compared to$355 million atDecember 31, 2021 , a decrease of$19.7 million , or 5.6%. This decrease is attributable to an increase in net unrealized losses in the available for sale portfolio which increased$30.9 million fromDecember 31, 2021 .
The Company paid cash dividends of
The following table provides information on the regulatory capital ratios for the Company and the Bank atMarch 31, 2022 andDecember 31, 2021 . Management believes, as ofMarch 31, 2022 , that the Company and the Bank more than satisfy all capital adequacy requirements to which they are subject. Percentage At March 31, 2022 Percentage At December 31, 2021 Risk-Based Capital Ratios: Company Bank Company Bank Common equity tier 1 capital ratio 12.04 % 12.85 % 12.43 % 13.15 % Tier 1 capital ratio 13.28 12.82 13.73 13.15 Total capital ratio 14.09 13.66 14.61 14.03 Leverage Capital Ratio: Tier 1 leverage ratio 9.31 9.01 9.13 8.76 Stock Repurchase Program
The Company has an approved one year stock repurchase plan that authorizes
repurchases of up to
During the three month period endedMarch 31, 2022 , the Company repurchased 88,929 shares at an average cost of$38.18 per share, for a total cost of$3.4 million . In the three month period endedMarch 31, 2021 , the Company repurchased 54,023 shares at an average cost of$29.51 per share, for a total cost of$1.6 million . 39
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Table of Contents
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$270.0 million and$275.0 million outstanding in letters of credit atMarch 31, 2022 andDecember 31, 2021 , respectively. 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 7 and long-term borrowings are discussed in Note 8 in the Consolidated Financial Statements included in this report.
The Company has federal funds lines of credit established with correspondent banks in the amount of$60.0 million and has access to theFederal Reserve Bank of Richmond's discount window. The Company has a relationship with IntraFi Promontory Network, allowing the Company to provide deposit customers with access to aggregateFDIC insurance in amounts exceeding$250 thousand . This gives the Company the ability, as and when needed, to attract and retain large deposits from insurance conscious customers. With IntraFi, 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 IntraFi to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB. In this manner, IntraFi can provide the Company with another funding option. Thus, it serves as a deposit-gathering tool and an additional liquidity management tool. Under EGRRCPA, a well-capitalized bank with a CAMELS rating of 1 or 2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities or$5 billion without those deposits being treated as brokered deposits. Deposits through IntraFi's program as ofMarch 31, 2022 andDecember 31, 2021 , were$0 and$550 thousand , respectively. Off-Balance Sheet Activities The Company enters into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance sheet transactions. Other than subsidiaries to issue trust preferred securities, the Company does not have any off-balance sheet subsidiaries. Off-balance sheet transactions atMarch 31, 2022 and atDecember 31, 2021 were as follows (dollars in thousands): March 31, 2022 December 31, 2021 Commitments to extend credit$ 697,199 $ 654,436 Standby letters of credit 9,774 10,201 Mortgage loan rate-lock commitments 10,891 10,891 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. 40
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