F & M BANK CORP. The following discussion provides information about the major components of the results of operations and financial condition, liquidity and capital resources ofF & M Bank Corp. and its subsidiaries. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Information, of this Form 10-K. Lending Activities Credit Policies The principal risk associated with each of the segments of loans in our portfolio is the creditworthiness of our borrowers. Within each segment, such risk is increased or decreased, depending on prevailing economic conditions. In an effort to manage the risk, our loan policy gives loan amount approval limits to individual loan officers based on their position and level of experience and to our loan committees based on the size of the lending relationship. The risk associated with real estate and construction loans, commercial loans and consumer loans varies, based on market employment levels, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay indebtedness. The risk associated with real estate construction loans varies, based on the supply and demand for the type of real estate under construction. We have written policies and procedures to help manage credit risk. We have a loan review policy that includes regular portfolio reviews to establish loss exposure and to ascertain compliance with our loan policy.
We use a management loan committee and a directors' loan committee to approve loans. The management loan committee is comprised of members of senior management, credit administration and senior lenders; the directors' loan committee is comprised of any six directors. Both committees approve new, renewed and or modified loans that exceed officer loan authorities. The directors' loan committee also reviews any changes to our lending policies, which are then approved by our board of directors.
Construction and Development Lending
We make construction loans, primarily residential, and land acquisition and development loans. The residential construction loans are secured by residential houses under construction and the underlying land for which the loan was obtained. The land acquisition and development loans are secured by the land for which the loan was obtained. The average life of a construction loan is approximately 12 months, and it is typically re-priced as the prime rate of interest changes. Construction lending entails significant additional risks, compared with residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers. Another risk involved in construction lending is attributable to the fact that loan funds are advanced upon the security of the land or home under construction, which value is estimated prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and related loan-to-value ratios. To mitigate the risks associated with construction lending, we generally limit loan amounts to 75% to 90% of appraised value, in addition to analyzing the creditworthiness of our borrowers. We also obtain a first lien on the property as security for our construction loans and typically require personal guarantees from the borrower's principal owners.
Commercial Real Estate Lending
Commercial real estate loans are secured by various types of commercial real
estate in our market area, including multi-family residential buildings,
commercial buildings and offices, shopping centers and churches. Commercial real
estate lending entails significant additional risks, compared with residential
mortgage lending. Commercial real estate loans typically involve larger loan
balances concentrated with single borrowers or groups of related borrowers.
Additionally, the payment experience on loans secured by income producing
properties is typically dependent on the successful operation of a business or a
real estate project and thus may be subject, to a greater extent, to adverse
conditions in the real estate market or in the economy in general. Our
commercial real estate loan underwriting criteria require an examination of debt
service coverage ratios and the borrower's creditworthiness, prior credit
history and reputation. We also evaluate the location of the property securing
the loan and typically require personal guarantees or endorsements of the
borrower's principal owners.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), Continued
Commercial & Industry -
Business loans generally have a higher degree of risk than residential mortgage loans but have higher yields. To manage these risks, we generally obtain appropriate collateral and personal guarantees from the borrower's principal owners and monitor the financial condition of our business borrowers. Residential mortgage loans generally are made on the basis of the borrower's ability to make repayment from employment and other income and are secured by real estate whose value tends to be readily ascertainable. In contrast, business loans typically are made on the basis of the borrower's ability to make repayment from cash flow from its business and are secured by business assets, such as real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate. Consumer Lending We offer various consumer loans, including personal loans, automobile loans, deposit account loans, installment and demand loans, and home equity loans. We currently originate all of our consumer loans in our geographic market area. The underwriting standards employed by us for consumer loans include a determination of the applicant's payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan. The stability of the applicant's monthly income may be determined by verification of gross monthly income from primary employment and additionally from any verifiable secondary income. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes an analysis of the value of the security in relation to the proposed loan amount. For home equity lines of credit and loans we require title insurance, hazard insurance and, if required, flood insurance. Residential Mortgage Lending
The Bank makes residential mortgage loans for the purchase or refinance of existing loans with loan to value limits generally ranging between 80 and 90% depending on the age of the property, borrower's income and credit worthiness. Loans that are retained in our portfolio generally carry adjustable rates that can change every one, three or five years, based on amortization periods of
twenty to thirty years. Loans Held for Sale
The Bank makes fixed rate mortgage loans with terms of typically fifteen or thirty years through its subsidiary F&M Mortgage. These loans are funded by F&M Mortgage utilizing a line of credit at the Bank until sold to investors in the secondary market. Similarly, the Bank also has a relationship withNorthpointe Bank inGrand Rapids, MI whereby it can purchase fixed rate conforming 1-4 family mortgage loans for short periods of time pending those loans being sold to investors in the secondary market. These loans have an average duration of ten days to two weeks, but occasionally remain on the Bank's books for up to 60 days. The Bank began its relationship withNorthpointe Bank in 2014 and had a similar program with a prior bank since 2003.F&M Bank does not share in the gains on sale of loans for the Northpointe participation and only earns interest during the holding period. Dealer Finance Division
InSeptember 2012 , the Bank started a loan production office inPenn Laird, VA which specializes in providing automobile financing through a network of automobile dealers. The Dealer Finance Division is staffed with officers that have extensive experience in Dealer Finance. This office is serving the automobile finance needs for customers of dealers throughout the existing geographic footprint of the Bank. Approximately eighty dealers have signed contracts to originate loans on behalf of the Bank. As of year-end 2021, the division had total loans outstanding of$107,346 . 15 Table of Contents PART II, continued
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), Continued
Critical Accounting Policies General The Company's financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The financial information contained within the 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. The Company's financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company's consolidated financial position and/or results of operations. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change. Following is a summary of the Company's significant accounting policies that are highly dependent on estimates, assumptions and judgments. Allowance for Loan Losses The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 "Contingencies", which requires that losses be accrued when they are probable of occurring and estimable and (ii) ASC 310, "Receivables", which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The Company's allowance for loan losses is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent an estimation performed pursuant to either ASC 450 or ASC 310. Management's estimate of each ASC 450 component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; loan volumes; economic conditions, borrower and industry concentrations; changes in the experience and depths of lending management and staff; effects of any concentrations of credit; the findings of internal credit quality assessments, results from external bank regulatory examinations and third-party loan reviews. These factors, as well as historical losses and current economic and business conditions, are used in developing estimated loss factors used in the calculations. Allowances for loan losses are determined by applying estimated loss factors to the portfolio based on management's evaluation and "risk grading" of the loan portfolio. Specific allowances, if required, are typically provided on all impaired loans in excess of a defined loan size threshold that are classified in the Substandard or Doubtful risk grades and on all troubled debt restructurings. The specific reserves are determined on a loan-by-loan basis based on management's evaluation of the Company's exposure for each credit, given the current payment status of the loan, the value of any underlying collateral or future discounted cash flows. While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance may be necessary if economic conditions change or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates. 16 Table of Contents PART II, continued
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), continued
Fair Value The estimate of fair value involves the use of (1) quoted prices for identical instruments traded in active markets, (2) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques using significant assumptions that are observable in the market or (3) model-based techniques that use significant assumptions not observable in the market. When observable market prices and parameters are not fully available, management's judgment is necessary to arrive at fair value including estimates of current market participant expectations of future cash flows, risk premiums, among other things. Additionally, significant judgment may be required to determine whether certain assets measured at fair value are classified within the fair value hierarchy as Level 2 or Level 3. The estimation process and the potential materiality of the amounts involved result in this item being identified as
critical. Pension Obligations
The accounting guidance for the measurement and recognition of obligations and expense related to pension plans generally applies the concept that the cost of benefits provided during retirement should be recognized over the employees' active working life. Inherent in this concept is the requirement to use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Major actuarial assumptions that require significant management judgment and have a material impact on the measurement of benefits expense and accumulated benefit obligation include discount rates, expected return on assets, mortality rates, and projected salary increases, among others. Changes in assumptions or judgments related to any of these variables could result in significant volatility in the Company's financial condition and results of operations. As a result, accounting for the Company's pension expense and obligation is considered a significant estimate. The estimation process and the potential materiality of the amounts involved result in this item being identified as critical. COVID-19 TheWorld Health Organization declared a global pandemic in the first quarter of 2020 due to the spread of the coronavirus ("COVID-19") around the globe. As a result, the state ofVirginia issued a stay at home order inMarch 2020 requiring all nonessential businesses to shut down and nonessential workers to stay home. The Company, while considered an essential business, implemented procedures to protect its employees, customers and the community and still serve their banking needs. Branch lobbies were closed untilApril 12, 2021 . During this time the Company utilized drive through windows and courier service to handle transactions, new accounts were opened electronically with limited in person contact for document signing and verification of identification, and lenders accepted applications by appointment with limited in person contact as well. Due to high transmission rates in our service area, branch lobbies were closed again fromJanuary 18, 2022 toMarch 7, 2022 , and only open by appointment. The Company serviced customers in similar methods as when the lobbies closed in 2020. The SBA implemented the Paycheck Protection Program ("PPP") to support small business operations with loans during the shutdown and into the following months. The Company worked diligently to support both our customers and noncustomers within our footprint with these loans. The Company originated a total of 1,080 PPP loans totaling$87,061 and associated fees of$3,824 through the SBA program. The fees will be recognized over the life of the associated loans. As ofFebruary 4, 2022 , there are 50 loans outstanding with a balance of$4,767 and unamortized fees of$122 . The full impact of COVID-19 and its length of duration remains uncertain at this time. The Company is closely monitoring the effects of the pandemic on our customers. Management assessed the risks in our loan portfolio and worked with our customers to minimize losses. The company granted 1,266 modifications allowing principal and interest deferrals in connection with the COVID-19 related needs from first quarter 2020 to first quarter 2021. These modifications, 75% of which were short-term dealer loan modifications, were consistent with regulatory guidance and/or the CARES Act. As ofJanuary 18, 2022 , no loans remain in deferral. 17 Table of Contents PART II, continued
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), continued
COVID-19, continued Based on the Company's capital levels, current underwriting policies, low loan-to-deposit ratio, loan concentration diversification and rural operating environment, management believes that it is well positioned to support its customers and communities and to manage the economic risks and uncertainties associated with COVID-19 pandemic and remain adequately capitalized. Given the rapidly changing and unprecedented nature of the pandemic, however, the Company could experience material and adverse effects on its business, including as a result of credit deterioration, operational disruptions, decreased demand for products and services, or other reasons. The extent to which the pandemic impacts the Company will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, its duration and severity, the actions to contain it or treat its impact, and how quickly and to what extent normal economic and operating conditions
will
resume.
18
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), continued
Five Year Summary of Selected Financial Data
(Dollars and shares in thousands, except per share 2021 2020 2019 data) 20186 20176 Income Statement Data: Interest and Dividend Income$ 35,576 $ 36,792 $ 38,210 $ 36,377 $ 33,719 Interest Expense 4,302 5,728 6,818 4,832 3,897 Net Interest Income 31,274 31,064 31,392 31,545 29,822 (Recovery of) Provision for Loan Losses (2,821 ) 3,300 7,405 2,930 - Net Interest Income After (Recovery of) Provision for Loan Losses 34,095 27,764 23,987 28,615 29,822 Noninterest Income 12,167 13,103 10,759 8,770 8,517 Low-income housing partnership losses (861 ) (893 ) (839 ) (767 ) (625 ) Noninterest Expenses 33,340 29,939 29,518 26,744 24,719 Income before income taxes 12,061 10,035 4,389 9,874 12,995 Income Tax Expense (Benefit) 1,323 1,142 (250 ) 1,041 4,202 Net income attributable to noncontrolling interest - (105 ) (130 ) (10 ) (31 ) Net Income attributable to F & M Bank Corp.$ 10,738 $ 8.788 $ 4,509 $ 8,823 $ 8,762 Per Common Share Data: Net Income - basic$ 3.25 $ 2.66 $ 1.32 $ 2.60 $ 2.68 Net Income - diluted 3.12 2.56 1.30 2.45 2.41 Dividends Declared 1.04 1.04 1.02 1.20 .94 Book Value per Common Share 29.42 28.43 27.11 26.68 25.65 Balance Sheet Data: Assets$ 1,219,342 $ 966,930 $ 813,999 $ 779,743 $ 752,894 Loans Held for Investment 662,421 661,329 603,425 638,799 616,974 Loans Held for Sale 4,887 58,679 66,798 55,910 39,775 Securities 413,217 117,898 18,015 21,844 41,243 Deposits 1,080,295 818,582 641,709 591,325 569,177 Short-Term Debt - - 10,000 40,116 25,296 Long-Term Debt 21,772 33,202 53,201 40,218 49,733 Stockholders' Equity 100,456 95,629 91,575 91,401 91,027 Average Common Shares Outstanding - basic 3,245 3,200 3,189 3,238 3,270 Average Common Shares Outstanding - diluted 3,442 3,429 3,460 3,596 3,632 Financial Ratios: Return on Average Assets1 0.98 % 0.95 % 0.57 % 1.15 % 1.17 % Return on Average Equity1 10.84 % 9.46 % 4.93 % 9.67 % 9.89 % Net Interest Margin 3.00 % 3.61 % 4.33 % 4.65 % 4.48 % Efficiency Ratio 2 75.44 % 67.51 % 69.03 % 66.04 % 64.27 % Dividend Payout Ratio - Common 32.00 % 39.10 % 77.27 % 46.15 % 35.07 % Capital and Credit Quality Ratios: Average Equity to Average Assets1 9.05 % 10.08 % 11.48 % 11.90 % 12.10 % Allowance for Loan Losses to Loans3 1.17 % 1.58 % 1.39 % 0.82 % 0.98 % Nonperforming Loans to Total Assets4 0.45 % 0.68 % 0.70 % 1.31 % 0.94 % Nonperforming Assets to Total Assets5 0.45 % 0.68 % 0.89 % 1.62 % 1.21 % Net Charge-offs to Total Loans3 (.01 )% 0.18 % 0.71 % 0.58 % 0.24 %
1 Ratios are primarily based on daily average balances. 2 The Efficiency Ratio equals noninterest expenses divided by the sum of tax
equivalent net interest income and noninterest income. Noninterest income
excludes gains (losses) on securities transactions and
Noninterest expense excludes amortization of intangibles. 3 Calculated based on Loans Held for Investment, excludes Loans Held for Sale. 4 Calculated based on 90 day past due loans and non-accrual loans to Total
Assets.
5 Calculated based on 90 day past due loans, non-accrual loans and OREO to Total
Assets.
6 The 2018 and 2017 financial information has been adjusted to reflect the
correction of a prior periods error.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), continued
Overview
The Company's net income for 2021 totaled$10,738 or$3.25 per common share (basic), an increase of 22.19% from$8,788 or$2.66 a share (basic) in 2020. Return on average equity increased in 2021 to 10.84% versus 9.46% in 2020, and the return on average assets increased from .95% in 2020 to .98% in 2021. The Company's net income per share (dilutive) totaled$3.12 in 2021, an increase from$2.56 in 2020.
Changes in Net Income per Common Share (Basic)
2021 2020
to 2020 to 2019
Prior Year Net Income Per Common Share (Basic)
0.06 (0.10 )
Provision for loan losses 1.89 1.28
Noninterest income, excluding securities gains (0.08 ) 0.72 Noninterest expenses
(0.16 ) (0.13 )
Income taxes (1.05 ) (0.44 )
Effect of preferred stock dividend (0.06 ) 0.02
Change in average shares outstanding (0.01 ) (0.01 )
Total Change 0.59 1.34
Net Income Per Common Share (Basic) $ 3.25 $ 2.66
Net Interest Income
The largest source of operating revenue for the Company is net interest income,
which is calculated as the difference between the interest earned on earning
assets and the interest expense paid on interest bearing liabilities. Net
interest income increased 0.68% from 2020 to 2021 following a decrease of 1.04%
from 2019 to 2020. The net interest margin is the net interest income expressed
as a percentage of interest earning assets. Changes in the volume and mix of
interest earning assets and interest-bearing liabilities, along with their
yields and rates, have a significant impact on the level of net interest income.
Tax equivalent net interest income for 2021 was $31,385 representing an increase
of $231 or 0.74% over the prior year. A 0.99% decrease in 2020 versus 2019
resulted in total tax equivalent net interest income of $31,154 .
In this discussion and in the tabular analysis of net interest income
performance, entitled "Consolidated Average Balances, Yields and Rates," the
interest earned on tax exempt loans and investment securities has been adjusted
to reflect the amount that would have been earned had these investments been
subject to normal income taxation. This is referred to as tax equivalent net
interest income. For a reconciliation of tax equivalent net interest income to
GAAP measures, see the accompanying table.
Tax equivalent income on earning assets decreased $1,196 in 2021 compared to
2020. Loans held for investment, expressed as a percentage of total earning
assets, decreased in 2021 to 63.77% as compared to 76.37% in 2020. During 2021,
yields on earning assets decreased 86 basis points (BP) and the average cost of
interest-bearing liabilities decreased 34BP. Both are a result of the declining
interest rate environment experienced in 2021.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), continued
Net Interest Income, continued
The following table provides detail on the components of tax equivalent net interest income: GAAP Financial Measurements: 2021 2020 Interest Income - Loans$ 32,560 $ 35,411 Interest Income - Securities and Other Interest-Earnings Assets 3,016
1,381
Interest Expense - Deposits 3,336
4,615
Interest Expense - Other Borrowings 966
1,113
Total Net Interest Income 31,274
31,064
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income -
110 90
Total Tax Benefit on Tax-Exempt Interest Income 110
90
Tax-Equivalent Net Interest Income$ 31,384
$ 31,154 Interest Income Tax equivalent net interest income increased$230 or 0.73% in 2021, after decreasing 0.99% or$312 in 2020. Overall, the yield on earning assets decreased 0.86%, from 4.27% to 3.41%. Average loans held for investment increased during 2021, with average loans outstanding increasing$7,973 to$667,082 . Average real estate loans decreased 4.20%, commercial loans increased 3.26%, and consumer installment loans increased 12.29% on average. Average investment securities increased 288.46%, with average securities outstanding increasing$175,455
to$236,280 . Interest Expense Interest expense decreased$1,426 or 24.90% during 2021. The average cost of funds of 0.60% decreased 34BP compared to 2020, which followed a decrease of 36BP in 2020. Average interest-bearing liabilities increased$105,694 or 17.31% in 2021. Interest expense on deposits decreased 27.74%, in spite of a 28.17% increase in average deposits. Interest expense on borrowings decreased 13.21% as average debt decreased 61.21%. Changes in the cost of funds attributable to rate and volume variances are reflected in a following table. The following analysis reveals a decrease in the net interest margin to 3.00% in 2021 from 3.61% in 2020, due to changes in balance sheet mix during the year and decreases in interest rates in earning assets and interest-bearing liabilities. The investment portfolio has grown significantly due to the increase in deposits and a decrease in funding loans held for sale withNorthpointe Bank . The rate environment remained low in 2021 due to uncertainties in the economy. 21 Table of Contents PART II, Continued
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), Continued
Consolidated Average Balances, Yields and Rates1
2021 2020
Balance Interest Rate Balance Interest Rate
ASSETS
Loans2
Commercial $ 246,495 $ 11,667 4.73 % $ 238,722 $ 11,165 4.68 %
Real estate
298,983 13,506 4.52 % 312,092 15,893 5.09 %
Consumer 121,604 7,277 5.98 % 108,295 7,124 6.58 %
Loans held for
investment4 667,082 32,450 4.86 % 659,109 34,182 5.19 %
Loans held for
sale 3,844 186 4.84 % 45,784 1,298 2.84 %
Investment securities3
Fully
taxable 228,287 2,739 1.20 % 60,700 1,051 1.73 %
Partially
taxable 125 1 0.80 % 125 2 1.60 %
Tax exempt 7,868 168 2.14 % - - - %
Total investment
securities 236,280 2,908 1.23 % 60,825 1,053 1.73 %
Interest bearing
deposits in
banks 2,184 3 0.14 % 1,227 3 0.24 %
Federal funds sold 136,705 139 0.10 % 96,127 346 0.36 %
Total Earning Assets 1,046,095 35,686 3.41 % 863,072 36,882 4.27 %
Allowance for loan
losses (9,000 ) (9,433 )
Nonearning assets 57,474 67,645
Total Assets $ 1,094,569 $ 921,284
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
Demand -interest
bearing $ 147,008 $ 280 0.19 % $ 107,961 $ 292 0.27 %
Savings 410,769 1,689 0.41 % 296,403 2,190 0.74 %
Time deposits 129,760 1,367 1.05 % 132,081 2,133 1.61 %
Total interest-bearing
deposits 687,537 3,336 0.49 % 536,445 4,615 0.86 %
Shortterm debt - - -% 1,776 41 2.31 %
Long-term debt 28,770 966 3.36 % 72,392 1,072 1.48 %
Total interest-bearing
liabilities 716,307 4,302 0.60 % 610,6135,728 0.94 %
Noninterest bearing deposits 263,911 203,312 Other liabilities 15,258 14,484 Total liabilities 995,476 828,409 Stockholders' equity 99,093 92,875 Total liabilities and stockholders' equity$ 1,094,569 $ 921,284 Net interest earnings$ 31,384 $ 31,154 Net yield on interest earning assets (NIM) 3.00 % 3.61 %
1 Income and yields are presented on a tax-equivalent basis using the applicable
federal income tax rate of 21%.
2 Interest income on loans includes loan fees.
3 Average balance information is reflective of historical cost and has not been
adjusted for changes in market value.
4 Includes nonaccrual loans.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), Continued
The following table illustrates the effect of changes in volumes and rates.
2021 Compared to 2020
Increase (Decrease)
Due to Change Increase
in Average: Or
Volume Rate (Decrease)
Interest income
Loans held for investment $ 414 $ (2,146 ) $ (1,732 )
Loans held for sale (1,191 ) 79 (1,112 )
Investment securities
Fully taxable 2,899 (1,211 ) 1,688
Partially taxable - (1 ) (1 )
Tax exempt - 168 168
Interest bearing deposits in banks 2 (2 ) -
Federal funds sold 146 (353 ) (207 ) Total Interest Income 2,270 (3,466 ) (1,196 ) Interest expense Deposits Demand - interest bearing 105 (117 ) (12 ) Savings 846 (1,347 ) (501 ) Time deposits 3,408 (4,174 ) (766 ) Short-term debt (41 ) - (41 ) Long-term debt (646 ) 540 (106 ) Total Interest Expense 3,672 (5,099 ) (1,426 ) Net Interest Income$ (1,402 ) $ 1,633 $ 230 Note: Volume changes have been determined by multiplying the prior years' average rate by the change in average balances outstanding. The rate change is determined by multiplying the current year average balance outstanding by the change in rate from the prior year to the current year. Noninterest Income
Noninterest income continues to be an increasingly important factor for the Company in maintaining and growing profitability. Management is conscious of the need to constantly review fee income and develop additional sources of complementary revenue.
Noninterest income decreased 7.40% or$904 , in 2021. The 2021 decrease is due primarily to a decline in the gross revenue of F&M Mortgage and realized security losses. The decline in revenue from F&M Mortgage was due to a decrease in refinance volume. The Company experienced growth in investment services and insurance income, title insurance income and ATM and check card fees. 23 Table of Contents PART II, Continued
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), Continued
Noninterest Expense
Noninterest expenses increased from$29,939 in 2020 to$33,340 in 2021, an 11.36% increase. Expenses increased primarily in the areas of salaries and benefits ($2,003 ), legal and professional expense ($406 ), telecommunication and data processing expense ($406 ), and other operating expenses ($376 ). Salary increases were due to expansion into theWinchester andWaynesboro markets; this also increased legal and professional fees and data processing expenses. Other operating expenses include loss on the sale of bank property ($112 ), donation of bank property ($162 ) and prepayment penalties on FHLB debt repayments ($228 ). Total noninterest expense as a percentage of average assets totaled 3.05% and 3.36% in 2021 and 2020, respectively. Peer group averages (as reported in the most recent Uniform Bank Performance Report) were 2.40% for 2021 and 2.60%
for 2020. Provision for Loan Losses Management evaluates the loan portfolio in light of national and local economic trends, changes in the nature and volume of the portfolio and industry standards. Specific factors considered by management in determining the adequacy of the level of the allowance for loan losses include internally generated and third-party loan review reports, past due reports and historical loan loss experience. This review also considers concentrations of loans in terms of geography, business type and level of risk. Management evaluates nonperforming loans relative to their collateral value, when deemed collateral dependent, and makes the appropriate adjustments to the allowance for loan losses when needed. Due to COVID-19, the Company had added or increased qualitative factors for the economy and concentrations in industries specifically affected by the virus. The Company continues to evaluate these factors in light of the changing effects the virus has on the economy, supply chains, and labor markets. The Company has experienced improvements in past dues and nonperforming loans sinceDecember 31, 2020 . Past due loans have decreased$4,609 and nonperforming loans have decreased$1,029 sinceDecember 31, 2020 . As a result of the above factors, the current year recovery of provision for loan losses totaled$2,821 compared to a provision of$3,300 for 2020. Net charge offs decreased from$1,215 in 2020 to net recoveries of$94 in 2021. Net charge-offs as a percentage of loans held for investment totaled (0.01)% and 0.18% in 2021 and 2020, respectively. The dealer finance charge-off percentage is the largest category at 0.04% of loans held for investment. Losses in the dealer finance segment are closely monitored, and due to payment deferrals, government stimulus programs and record high used car prices, have declined in 2021. As stated in the most recently available Uniform Bank Performance Report (UPBR), peer group loss averages were 0.04% in 2021 and 0.08% in 2020. The current levels of the allowance for loan losses reflect net charge-off activity and other credit risk factors that the Company considers in assessing the adequacy of the allowance for loan losses. Management will continue to monitor the effects of COVID-19 and nonperforming, adversely classified and past due loans to make necessary adjustments to specific reserves and provision for loan losses should conditions change regarding collateral values or cash flow expectations. Balance Sheet
Total assets increased 26.10% during the year to$1,219,342 atDecember 31, 2021 , an increase of$252,412 from$966,930 atDecember 31, 2020 . Cash and cash equivalents increased$9,713 , the AFS security portfolio grew$296,983 , net loans held for investment increased$3,819 , and loans held for sale declined$53,792 . Average earning assets increased 21.21% to$1,046,095 for 2021. The increase in earning assets is due largely to the growth in investment securities and federal funds sold. Deposits grew$261,713 and non-deposit liabilities decreased$14,128 in 2021 as the Bank paid off long-term debt with the FHLB. Average interest-bearing deposits increased$151,092 for 2021 or 28.17%, with increases in interest-bearing demand accounts and savings while time deposits declined. The Company continues to utilize its assets well, with 95.57% of average assets consisting of earning assets. 24 Table of Contents PART II, Continued
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), Continued
Balance Sheet, continued InJanuary 2021 , the Bank entered into an agreement to purchase the operations of a branch office inWaynesboro, Virginia fromCarter Bank & Trust . The Bank acquired deposits of$14,229 in the transaction and received a cash payment of$13,758 , which was net of a premium paid on deposits of$135 . No loans were included in the transaction. The transaction closed onApril 23, 2021 ; see Note 29 to the consolidated financial statements in this Form 10-K for additional details on the transaction.Investment Securities Due to the deposit growth initiatives implemented in recent years and the COVID-19 pandemic, management has invested excess funds into securities during 2021. Total securities increased$295,319 or 250.49% in 2021 to$413,217 atDecember 31, 2021 from$117,898 atDecember 31, 2020 . Average balances in investment securities increased 288.46% in 2021 to$236,280 . At year end, 22.59% of average earning assets of the Company were held as investment securities, all of which are unpledged. Management strives to match the types and maturities of securities owned to balance projected liquidity needs, interest rate sensitivity and to maximize earnings through a portfolio bearing low credit risk. Portfolio yields averaged 1.23% for 2021, compared to 1.73% in 2020; this is due to the overall market declines in 2021. There were no Other Than Temporary Impairments (OTTI) write-downs in 2021 or 2020. There were$525 in realized security losses on sales of securities in 2021; there were no realized security gains or loss on sales of securities
in 2020. Maturities and weighted average yields of securities atDecember 31, 2021 are presented in the table below. Amounts are shown by contractual maturity; expected maturities will differ as issuers may have the right to call or prepay obligations. Maturities of other investments are not readily determinable due to the nature of the investment; see Note 4 to the Consolidated Financial Statements for a description of these investments. Less One to Five to Over Than one Year Five Years Ten Years Ten Years Amount Yield1 Amount Yield1 Amount Yield1 Amount Yield1 Total Yield1 Debt Securities Available for Sale: U.S. Treasuries $ -$ 14,895 0.68 %$ 14,587 0.99 % $ -$ 29,482 0.83 % U.S. Government sponsored enterprises - 95,313 0.98 % 38,401 1.37 % - 133,714 1.09 % Securities issued by States & political subdivisions of the U.S. 2,005 0.21 % 18,181 0.98 %
3,730 1.63 % 10,421 2.38 % 34,337 1.43 % Mortgage-backed obligations of federal agencies - 18,299 0.92 % 11,678 1.21 % 153,670 1.46 % 183,647 1.39 % Corporate debt securities 2,013 2.13 % - 19,189 3.19 % 1,500 3.75 % 22,702 3.13 % Total$ 4,018 1.17 %$ 146,688 0.94 %$ 87,585 1.70 %$ 165,591 1.54 %$ 403,882 1.35 %
Debt Securities Held to Maturity:U.S. Treasury & Agency$ 125 0.52 % $ - $ - $ -$ 125 0.52 % Total$ 125 0.52 % $ - $ - $ -$ 125 0.52 %
1Tax equivalent yield to the lower of call or maturity date. On securities without a call date, it is the stated yield.
Analysis of Loan Portfolio
The Company's market area has a relatively stable economy which tends to be less
cyclical than the national economy. Major industries in the market area include
agricultural production and processing, higher education, retail sales, services
and light manufacturing.
25
Table of Contents
PART II, Continued
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), Continued
Analysis of Loan Portfolio, continued
The Company's market area has a relatively stable economy which tends to be less cyclical than the national economy. Major industries in the market area include agricultural production and processing, higher education, retail sales, services and light manufacturing. The Company's portfolio of loans held for investment totaled$662,421 atDecember 31, 2021 compared with$661,329 atDecember 31, 2020 . Collateral required by the Company is determined on an individual basis depending on the purpose of the loan and the financial condition of the borrower. Real estate mortgages decreased$23,466 or 14.39%. Construction loans increased$3,769 or 5.27%. Commercial loans, including agricultural and multifamily loans, increased 4.25% during 2021 to$279,019 ; PPP loans decreased from$34,908 atDecember 31, 2020 to$7,936 atDecember 31, 2021 . Consumer loans increased$14,116 or 13.94% mainly due to the dealer finance division loans. Consumer loans include personal loans, auto loans and other loans to individuals.
The following table shows the maturity of loans and leases, outstanding as of
1 Year or
less 1-5 Years 5-15 Years After 15 Years Total
Construction/Land
Development $ 39,177 $ 25,215 $ 8,818 $ 2,026 $ 75,236
Farmland 4,851 7,745 37,143 16,605 66,344
Real Estate 24,356 74,824 31,832 8,540 139,552
Multi-Family - 241 2,530 2,116 4,887
Commercial Real
Estate 16,442 52,962 69,670 24,490 163,564
Home Equity -
closed end 1,187 3,239 1,836 - 6,262
Home Equity - open
end 1,965 6,997 34,247 1,038 44,247
Commercial &
Industrial -
Non-Real Estate 9,091 16,023 19,110 - 44,224
Consumer 1,014 5,940 1,082 - 8,036
Dealer Finance 1,976 38,922 66,448 - 107,346
Credit Cards 3,000 - -
- 3,000
Total $ 103,059 $ 232,108 $ 272,716 $ 54,815 $ 662,698
26
PART II, Continued
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), Continued
Analysis of Loan Portfolio, continued
AtDecember 31, 2021 , for loans and leases due after one year, interest rate information is as follows: 1-5 Years 5-15 Years After 15 Years TotalConstruction/Land Development Outstanding with fixed interest rates$ 12,052 $ 1,968 $ 1,164$ 15,184 Outstanding with adjustable rates 13,163 6,850 862 20,875Total Construction /Land Development 25,215 8,818 2,026 36,059 Farmland Outstanding with fixed interest rates$ 218 $ 4,547 $ -$ 4,765 Outstanding with adjustable rates 7,527 32,596 16,605 56,728 Total Farmland 7,745 37,143 16,605 61,493 Real Estate Outstanding with fixed interest rates$ 417 $ 1,473 $ 1,807$ 3,697 Outstanding with adjustable rates 74,407 30,359 6,733 111,499Total Real Estate 74,824 31,832 8,540 115,196 Multi-Family Outstanding with fixed interest rates $ - $ - $ - $ - Outstanding with adjustable rates 241 2,530 2,116 4,887 Total Multi-Family 241 2,530 2,116 4,887Commercial Real Estate Outstanding with fixed interest rates$ 1,234 $ 7,694 $ -$ 8,928 Outstanding with adjustable rates 51,728 61,976 24,490 138,194Total Commercial Real Estate 52,962 69,670 24,490 147,122 Home Equity - closed end Outstanding with fixed interest rates$ 357 $ 1,623 $ -$ 1,980 Outstanding with adjustable rates 2,882 213 - 3,095 Total Home Equity - closed end 3,239 1,836
- 5,075 Home Equity - open end Outstanding with fixed interest rates $ - $ - $ - $ - Outstanding with adjustable rates 6,997 34,247 1,038 42,282 Total Home Equity - open end 6,997 34,247
1,038 42,282 Commercial & Industrial - Non-Real Estate Outstanding with fixed interest rates$ 5,549 $ 12,616 $ -$ 18,165 Outstanding with adjustable rates 10,474 6,494 - 16,968 Total Commercial & Industrial - Non-Real Estate 16,023 19,110 - 35,133 Consumer Outstanding with fixed interest rates$ 5,008 $ 633 $ -$ 5,641 Outstanding with adjustable rates 932 449 - 1,381 Total Consumer 5,940 1,082 - 7,022 Dealer Finance Outstanding with fixed interest rates$ 38,922 $ 66,448 $ -$ 105,370 Outstanding with adjustable rates - - - - Total Dealer Finance 38,922 66,448 - 105,370 Total outstanding with fixed interest rates$ 63,757 $ 97,002 $ 2,971$ 163,730 Total outstanding with adjustable interest rates$ 168,351 $ 175,714 $ 51,844 $ 395,909 Total$ 232,108 $ 272,716 $ 54,815 $ 559,639
Residential real estate loans are made for a period up to 30 years and are secured by a first deed of trust which normally does not exceed 90% of the appraised value. If the loan to value ratio exceeds 90%, the Company requires additional collateral, guarantees or mortgage insurance. On approximately 81% of the real estate loans, interest is adjustable after each one, three or five-year period. The remainder of the portfolio is comprised of fixed rate loans that are generally made for a fifteen-year or a twenty-year period with an interest rate adjustment after ten years, except for dealer loans that generally have a term of 5 years. Fixed rate real estate loans were partially funded with fixed rate borrowings from theFederal Home Loan Bank , which allowed the Company to control its interest rate risk. The Company has not had a need for additional funding from the FHLB due to the growth in deposits, but there may be a time where we match the maturities in the future. In addition, the Company makes home equity loans secured by second deeds of trust with total indebtedness not to exceed 90% of the appraised value. Home equity loans are made for ten or twenty year periods as a revolving line of credit. 27 Table of Contents PART II, Continued
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), Continued
Analysis of Loan Portfolio, continued
Construction loans may be made to individuals,who have arranged with a contractor for the construction of a residence, or to contractors that are involved in building pre-sold, spec-homes or subdivisions. The majority of commercial loans are made to small retail, manufacturing and service businesses. Commercial construction loans are made to construct commercial and agricultural buildings. Consumer loans are made for a variety of reasons; however, approximately 75% of the loans are secured by vehicles. Approximately 75% of the Company's loans are secured by real estate; however, policies relating to appraisals and loan to value ratios are adequate to control the related risk. Market values continue to be stable with increases in sales prices, reduction in inventory and reduction in days on the market. Unemployment rates in the Company's market area continue to be below both the national and state averages. The Bank has not identified any loan categories that would be considered loan concentrations of greater than 25% of capital. The Bank has an approved limit of 16% for dealer loans as a percentage of total loans. The Bank has not developed a formal policy limiting the concentration level of any other particular loan type or industry segment; it has established target limits on both a nominal and percentage of capital basis. Concentrations are monitored and reported to the board of directors quarterly. Concentration levels have been used by management to determine how aggressively we may price or pursue new loan requests.
Nonaccrual and Past Due Loans
Nonperforming loans include nonaccrual loans and loans 90 days or more past due still accruing. Nonaccrual loans are loans on which interest accruals have been suspended or discontinued permanently. The Company would have earned approximately$276 in additional interest income in 2021 had the loans on nonaccrual status been current and performing. Nonperforming loans totaled$5,508 atDecember 31, 2021 compared to$6,537 atDecember 31, 2020 . AtDecember 31, 2021 , there were$43 of loans 90 days or more past due and accruing compared to$102 atDecember 31, 2020 . The remainder of nonperforming loans were on nonaccrual. Management continues their efforts to reduce nonperforming loans, which decreased 15.74% fromDecember 31, 2020 toDecember 31, 2021 and from 0.99% of loans held for investment atDecember 31, 2020 to 0.83% atDecember 31, 2021 . Approximately 98.48% of these nonperforming loans are secured by real estate and were in the process of collection. The Bank believes that adequate specific reserves have been established on impaired loans and continues to actively work with its customers to effect payment. As ofDecember 31, 2021 and 2020, the Company holds$0 of real estate acquired through foreclosure.
A summary of credit ratios for nonaccrual loans is as follows:
2021 2020
Allowance for loan losses $ 7,748 $ 10,475
Nonaccrual loans $ 5,465 $ 6,435
Total Loans $ 662,421 $ 661,329
Allowance for loan losses to Total Loans 1.17 % 1.58 %
Nonaccrual Loans to Total Loans 0.83 % 0.97 %
Allowance for loan losses to Nonaccrual loans 141.77 % 162.78 %
28
Table of Contents
PART II, Continued
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), Continued
Potential Problem Loans As ofDecember 31, 2021 , management is not aware of any potential problem loans which are not already classified for regulatory purposes or on the watch list as part of the Bank's internal grading system.
Loan Losses and the Allowance for Loan Losses
Management evaluates the allowance for loan losses on a quarterly basis in light of national and local economic trends, changes in the nature and volume of the loan portfolio and trends in past due and criticized loans. Specific factors evaluated include internally generated loan review reports, past due reports, historical loan loss experience and changes in the financial strength of individual borrowers that have been included on the Bank's watch list or schedule of classified loans. In evaluating the portfolio, loans are segregated by segment with identified potential losses, pools of loans by type, with separate weighting for past dues and a general allowance based on a variety of criteria. Loans with identified potential losses include examiner and bank classified loans. Classified relationships in excess of$500,000 and loans identified as troubled debt restructurings are reviewed individually for impairment under ASC 310. A variety of factors are considered when reviewing these credits, including borrower cash flow, payment history, fair value of collateral, company management, industry and economic factors. Loans that are not reviewed for impairment are categorized by call report code and an estimate is calculated based on actual loss experience over the last three years. As reflected in Note 6, the Company made a change in its allowance for loan losses methodology to increase the look back period on historical losses from two years to three years. This revised lookback period more accurately reflects the average loss history within the portfolio, as loss history during the most recent two years was impacted by government programs in response to the COVID-19 pandemic. A general allowance for inherent losses has been established to reflect other unidentified losses within the portfolio. The general allowance is calculated using nine qualitative factors identified in the 2006 Interagency Policy Statement on the allowance for loan losses. The general allowance assists in managing recent changes in portfolio risk that may not be captured in individually impaired loans, or in the homogeneous pools based on loss histories. The Board approves the loan loss provision for each quarter based on this evaluation. The allowance for loan losses of$7,748 atDecember 31, 2021 is equal to 1.17% of total loans held for investment. This compares to an allowance of$10,475 or 1.58% of total loans atDecember 31, 2020 . PPP loans are 100% guaranteed by the SBA; thus, they do not have an allowance. PPP loans totaled$7,936 and$34,908 atDecember 31, 2021 and 2020, respectively. During 2021, three relationships reviewed for impairment improved their collateral and/or cash flow position and were moved to the general allowance; proceeds were received on one foreclosure sale, sales of collateral to reduce the debt and amortization; and new appraisals on three relationships decreased the calculated impairment. Due to COVID-19, the bank increased the qualitative factor for the economy and concentrations in industries specifically affected by the virus in 2020. Due to improvements in 2021 in the unemployment rate, nonperforming, past due and classified loans, and the end of CARES Act modifications, the bank decreased the environmental factor for COVID-19's impact on the economy. The Company continues to monitor COVID-19's effects on the labor market, inflation, the supply chain, government stimulus programs and increased used car prices. Nonaccrual loans atDecember 31, 2021 totaled$5,465 compared to$6,435 atDecember 31, 2020 . Classified loans (internally rated substandard or watch) decreased from a total of$67,592 atDecember 31, 2020 to$43,230 atDecember 31, 2021 , or 36%. This remains above the pre-pandemic total of$41,343 . Management is closely monitoring the effects of COVID-19 on the loan portfolio and makes adjustments to specific reserves, the environmental factors and the provision for loan losses as necessary.
Loan recoveries, net of losses, totaled
29
Table of Contents
PART II, Continued
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), Continued
Loan Losses and the Allowance for Loan Losses, continued
A summary of the activity in the allowance for loan losses follows:
2021 2020
Balance at beginning of period$ 10,475 $ 8,390 (Recovery of) Provision charged to expenses (2,821 )
3,300
Loan losses:
Construction/land development - 7
Farmland - -
Real Estate - 158
Multi-family - -
Commercial Real Estate - 64
Home Equity - closed end - -
Home Equity - open end - 34Commercial & Industrial -Non-Real Estate 40
138
Consumer 33 89
Dealer Finance 1,038 1,551
Credit Cards 54 123
Total loan losses 1,165 2,164
Recoveries:
Construction/land development 307 -
Farmland - -
Real Estate 76 7
Multi-family - -
Commercial Real Estate 19 11
Home Equity - closed end - -
Home Equity - open end 13 3Commercial & Industrial -Non-Real Estate 37
19
Consumer 24 50
Dealer Finance 754 784
Credit Cards 29 75
Total recoveries 1,259 949
Net loan (losses) recoveries 94 (1,215 )
Balance at end of period $ 7,748 $ 10,475
Net loan (recoveries) losses to average loans held for
investment:
Construction/land development (.05 )% - %
Farmland - % - %
Real Estate (.01 )% .02 %
Multi-family - % - %
Commercial Real Estate - % .01 %
Home Equity - closed end - % - %
Home Equity - open end - % - %Commercial & Industrial -Non-Real Estate - %
.02 %
Consumer - % .01 %
Dealer Finance .04 % .12 %
Credit Cards - % .01 %
Total (.01 )% .18 %
Allowance for loan losses as a percentage of loans held for
investment 1.17 % 1.58 %
30
Table of Contents
PART II, Continued
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), Continued
Loan Losses and the Allowance for Loan Losses, continued
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
2021 2020
Percentage of Percentage of
Loans in Each Loans in Each
Balance Category Balance Category
Construction/Land
Development $ 977 12.61 % $ 1,249 11.92 %
Farmland 448 5.78 % 731 6.98 %
Real Estate 1,162 15.00 % 1,624 15.50 %
Multi-Family 29 .38 % 54 .52 %
Commercial Real Estate 2,205 28.46 % 3,662 34.96 %
Home Equity - closed end 41 .53 % 55 .53 %
Home Equity - open end 407 5.25 % 463 4.42 %
Commercial & Industrial -
Non-Real Estate 288 3.72 % 363 3.46 %
Consumer 520 6.71 % 521 4.98 %
Dealer Finance 1,601 20.66 % 1,674 15.96 %
Credit Cards 70 .90 % 79 .76 %
Total $ 7,748 100.00 % $ 10,475 100.00 %
Deposits and Borrowings
The average deposit balances and average rates paid for 2021 and 2020 were as
follows:
December 31,
2021 2020
Average Average
Balance Rate Balance Rate
Noninterest-bearing $ 263,911 $ 203,312
Interest-bearing:
Interest Checking $ 147,008 0.19 % $ 107,961 0.27 %
Savings Accounts 410,769 0.41 % 296,403 0.74 %
Time Deposits 129,760 1.05 % 132,081 1.61 %
Total interest-bearing deposits 687,537 0.48 % 536,445 0.86 %
Total deposits $ 951,448 0.35 % $ 739,757 0.61 %
Average noninterest-bearing demand deposits, which are comprised of checking
accounts, increased $60,599 or 29.81% from $203,312 at December 31, 2020 to
$263,911 at December 31, 2021 . Average interest-bearing deposits, which include
interest checking accounts, money market accounts, regular savings accounts and
time deposits, increased $151,092 or 28.17% from $536,445 at December 31, 2020
to $687,537 at December 31, 2021 . Total average interest checking account
balances increased $39,047 or 36.17% from $107,961 at December 31, 2020 to
$147,008 at December 31, 2021 . Total average savings account balances (including
money market accounts) increased $114,366 or 38.58% from $296,403 at
December 31, 2020 to $410,769 at December 31, 2021 . The bank has a competitive
money market rate to maintain and attract core deposits.
31
Table of Contents
PART II, Continued
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), Continued
Deposits and Borrowings, continued
Average time deposits decreased$2,321 or 1.76% from$132,081 atDecember 31, 2020 to$129,760 atDecember 31, 2021 . The money market rate has been attractive and as time deposits matured, customers moved their deposits to the money market account. The maturity distribution of certificates of deposit in excess ofFDIC limits is as follows: 2021 2020 Less than 3 months $ - $ - 3 to 6 months 3,206 300 6 to 12 months 257 - 1 year to 5 years 8,910 11,983 Total$ 12,373 $ 12,283
Total uninsured deposits in excess of
Non-deposit borrowings include
Borrowings from the FHLB are used to support the Bank's lending program and allow the Bank to manage interest rate risk by laddering maturities and matching funding terms to the terms of various loan types in the loan portfolio. The Company had no short-term borrowings in 2021 or 2020 due to deposit growth. Repayment of amortizing and fixed maturity loans through FHLB totaled$11,268 during 2021. One loan with a balance of$10,000 and rate of 0.81% was outstanding atDecember 31, 2021 . Other long-term debt includes$11,772 of subordinated notes, net of unamortized costs atDecember 31, 2021 . OnJuly 29, 2020 , the Company issued$5,000 in aggregate principal amount of 5.75% fixed rate subordinated notes dueJuly 31, 2027 and$7,000 in aggregate principal amount of 6% fixed to floating rate subordinated notes dueJuly 31, 2030 .
Contractual Obligations and Scheduled Payments:
December 31, 2021
Three Years
Less than One Year Through Through More than
One Year Three Years Five Years Five Years Total
FHLB long
term
advances $ - $ - $ - $ 10,000 $ 10,000
Subordinated
debt - - - 11,772 11,772
Total $ - $ - $ - $ 21,772 $ 21,772 See Note 11 (Short Term Debt) and Note 12 (Long Term Debt) to the Consolidated Financial Statements for a discussion of the rates, terms, and conversion features on these advances.
Stockholders' Equity
Total stockholders' equity increased$4,827 or 5.05% in 2021. Capital was increased by net income totaling$10,738 , issuance of common stock totaling$263 , common stock issued in the Company's stock incentive plan of$121 , and pension adjustment of$530 . Capital was reduced by common and preferred dividends totaling$3,593 , unrealized gains on available for sale securities of$2,605 , and redemption of preferred stock totaling$627 . As ofDecember 31, 2021 , book value per common share was$29.42 compared to$28.43 as ofDecember 31, 2020 . Dividends are paid to stockholders quarterly based on decisions by the Board of Directors unless unexpected fluctuations in net income indicate a change to this policy is needed. 32 Table of Contents PART II, Continued
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), Continued
Stockholders' Equity, continued
Banking regulators have established a uniform system to address the adequacy of capital for financial institutions. The rules require minimum capital levels based on risk-adjusted assets. Simply stated, the riskier an entity's investments, the more capital it is required to maintain. The Bank is required to maintain these minimum capital levels. Beginning in 2015, the Bank implemented the Basel III capital requirements, which introduced the Common Equity Tier I ratio in addition to the two previous capital guidelines of Tier I capital (referred to as core capital) and Tier II capital (referred to as supplementary capital). AtDecember 31, 2021 , the Bank had Common Equity Tier I capital of 13.95%, Tier I risked based capital of 13.95% and total risked based capital of 15.00% of risk weighted assets. Regulatory minimums at this date were 4.5%, 6% and 8%, respectively. The Bank has maintained capital levels far above the minimum requirements throughout the year. In the unlikely event that such capital levels are not met, regulatory agencies are empowered to require the Bank to raise additional capital and/or reallocate present capital. In addition, the regulatory agencies have issued guidelines requiring the maintenance of a capital leverage ratio. The leverage ratio is computed by dividing Tier I capital by average total assets. The regulators have established a minimum of 4% for this ratio but can increase the minimum requirement based upon an institution's overall financial condition. AtDecember 31, 2021 , the Bank reported a leverage ratio of 8.62%. The Bank's leverage ratio was also substantially above the minimum. The Bank also reported a capital conservation buffer of 7.00% atDecember 31, 2021 . The capital conservation buffer is designed to strengthen an institution's financial resilience during economic cycles. Financial institutions are required to maintain a minimum buffer as required by the Basel III final rules in order to avoid restrictions on capital distributions and other payments. Market Risk Management Most of the Company's net income is dependent on the Bank's net interest income. Rapid changes in short-term interest rates may lead to volatility in net interest income resulting in additional interest rate risk to the extent that imbalances exist between the maturities or repricing of interest-bearing liabilities and interest earning assets. The Company's net interest margin decreased .61% in 2021 following a decrease of .72% in 2020. This decrease is primarily due to decreases in interest rates as well as changes in balance sheet structure including a decrease in loans held for investment, establishing an investment portfolio, and substantial deposit growth which led to excess funds on hand. In 2020, theFederal Open Market Committee elected to decrease the short-term rates target 150BP to 0% from 1.50%. Net interest income is also affected by changes in the mix of funding that supports earning assets. For example, higher levels of non-interest bearing demand deposits and leveraging earning assets by funding with stockholder's equity would result in greater levels of net interest income than if most of the earning assets were funded with higher cost interest-bearing liabilities, such as certificates of deposit and borrowings. Liquid assets, which include cash and cash equivalents, federal funds sold, interest bearing deposits and short-term investments averaged$83,265 for 2021. The Bank historically has had a stable core deposit base and, therefore, does not have to rely on volatile funding sources. Because of growth in the core deposit base, liquid assets have grown over the prior year. The Company has increased efforts to raise deposits and depositors have changed their savings habits during 2021 due to the COVID-19 pandemic. While this helps liquidity, the investment options and rate market in general have hurt the net interest margin. The Company has lowered core deposit rates throughout 2021 to mitigate the decline in net interest margin. The Bank's membership in theFederal Home Loan Bank has historically provided liquidity as the Bank borrows money that is repaid over a five to ten-year period and uses the money to make fixed rate loans. With excess funds provided by deposit growth, management anticipates no additional borrowings in 2022. The matching of the long-term receivables and liabilities helps the Bank reduce its sensitivity to interest rate changes. The Company reviews its interest rate gap periodically and makes adjustments as needed. Management is not aware of any off-balance sheet items that will impair future liquidity. 33 Table of Contents PART II, Continued
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands), Continued
Market Risk Management, continued
The following table depicts the Company's interest rate sensitivity, as measured by the repricing of its interest sensitive assets and liabilities as ofDecember 31, 2021 . As the notes to the table indicate, the data was based in part on assumptions as to when certain assets or liabilities would mature or reprice. The analysis indicates an asset sensitive one-year cumulative GAP position of -1.96% of total earning assets, compared to 17.03% in 2020. Approximately 22.42% of rate sensitive assets and 34.19% of rate sensitive liabilities are subject to repricing within one year. Short term assets (less than one year) decreased$99,862 during the year, while total earning assets increased$256,998 . The growth in earning assets is primarily due to the utilization of excess funds created by deposit growth. Short term deposits, maturities less than 365 days, increased$78,658 and short-term borrowings decreased$3,623 . Short term borrowings decreased as advances matured and were not renewed.
The following GAP analysis shows the time frames as of
1-90 91-365 1-5 Over 5 Not
Days Days Years Years Classified Total
Rate Sensitive
Assets:
Loans held for
investment $ 108,743 $ 60,772 $ 360,168 $ 133,015 $ - $ 662,698
Loans held for
sale 4,887 - - - - 4,887
Federal funds
sold 76,667 - - - - 76,667
Investment
securities 125 4,018 146,688 253,176 - 404,007
Interest
bearing money
market and
bank deposits
in other banks 2,938 - - - - 2,938
Total Earning
Assets 193,360 64,790 506,856 386,191 - 1,151,197
Rate Sensitive
Liabilities:
Interest
bearing demand
deposits - 38,394 115,181 38,394 - 191,969
Savings
deposits - 198,946 256,003 28,527 - 483,476
Certificates
of deposit 12,622 30,790 80,445 - - 123,857
Total Deposits 12,622 268,130 451,629 66,921 - 799,302
Long-term debt - - - 21,772 - 21,772
Total 12,622 268,130 451,629 88,693 - 821,074
Discrete Gap 180,738 (203,340 ) 55,227 297,498 - 330,123
Cumulative Gap 180,738 (22,602 ) 32,625 330,123 330,123
As a % of
Earning Assets 15.70 % -1.96 % 2.83 % 28.68 % 28.68 %
· In preparing the above table, no assumptions are made with respect to loan
prepayments or deposit run off. Loan principal payments are included in
the earliest period in which the loan matures or can be repriced.
Principal payments on installment loans scheduled prior to maturity are
included in the period of maturity or repricing. Proceeds from the
redemption of investments and deposits are included in the period ofmaturity. Estimated maturities on deposits which have no stated maturity
dates were derived from regulatory guidance.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Note Applicable
34
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