FAUQUIER BANKSHARES, INC. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about (i) the benefits, expenses and expected completion date of the merger between Virginia National andFauquier ; (ii)Fauquier's plans, objectives, expectations and intentions and other statements contained in this report that are not historical facts; and (iii) other statements identified by words such as "may", "assumes", "approximately", "will", "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "targets", "projects", or words of similar meaning generally intended to identify forward-looking statements. These forward-looking statements are based upon the current beliefs and expectations of the management ofFauquier and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of the Company. In addition, these forward-looking statements are subject to various risks, uncertainties and assumptions with respect to future business strategies and decisions that are subject to change and difficult to predict with regard to timing, extent, likelihood and degree of occurrence. As a result, althoughFauquier believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, actual results may differ materially from any projected future results performance or achievements expressed or implied by such forward-looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (1) the businesses of Virginia National andFauquier may not be combined successfully, or such combination may take longer, be more difficult, time-consuming or costly to accomplish than expected; (2) the expected growth opportunities or cost savings from the Merger may not be fully realized or may take longer to realize than expected; (3) deposit attrition, operating costs, customer losses and business disruption following the Merger, including adverse effects on relationships with employees and customers, may be greater than expected; (4) the regulatory approvals required for the Merger may not be obtained on the proposed terms or on the anticipated schedule; (5) the shareholders of Virginia National orFauquier may fail to approve the Merger; (6) economic, legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which Virginia National andFauquier are engaged; (7) the interest rate environment may further compress margins and adversely affect net interest income; (8) results may be adversely affected by continued diversification of assets and adverse changes to credit quality; (9) competition from other financial services companies inVirginia National's andFauquier's markets could adversely affect operations; (10) an economic slowdown could adversely affect credit quality and loan originations; (11) general economic conditions, including unemployment levels and slowdowns in economic growth, and particularly related to further and sustained economic impacts of the COVID-19 pandemic; (12) monetary and fiscal policies of theU.S. Government , including policies of theU.S. Department of Treasury and theFederal Reserve ; (13) cyber threats, attacks or events; (14) accounting principles, policies and guidelines and elections made byFauquier thereunder; (15) competition from other financial institutions and financial-intermediaries; (16) the novel COVID-19 pandemic is adversely affecting Virginia National,Fauquier , and their respective customers, employees and third-party service providers; the adverse impacts of the pandemic on their respective business, financial position, operations and prospects have been material, and it is not possible to accurately predict the extent, severity or duration of the pandemic or when normal economic and operation conditions will return; (17) potential claims, damages and fines related to litigation or government actions, including litigation or actions arising fromFauquier or Virginia National's participation in and administration of programs related to COVID-19, including, among other things, the PPP under the CARES Act, as subsequently extended; and (18) other factors that may affect future results of Virginia National andFauquier , including: changes in asset quality and credit risk; the inability to sustain revenue and earnings growth; changes in interest rates and capital markets; inflation; customer borrowing, repayment, investment and deposit practices; the impact, extent and timing of technological changes; capital management activities; and other actions of the bank regulatory agencies and legislative and regulatory actions and reforms. Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed inFauquier's reports (such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed with theSEC and available on theSEC's Internet site (http://www.sec.gov). Readers are cautioned not to rely too heavily on the forward-looking statements contained in this report. Forward-looking statements speak only as of the date they are made andFauquier does not undertake any obligation to update, revise or clarify these forward-looking statements, whether as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES
GENERAL. The Company's financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The financial information contained within the Company's statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value 24
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that is obtained either when earning income, recognizing an expense, recovering
an asset or relieving a liability. The Company uses historical loss factors as
one factor in determining the inherent loss that may be present in its loan
portfolio. Actual losses could differ significantly from the historical factors
that the Company uses in its estimates. In addition, GAAP itself may change from
one previously acceptable accounting method to another method. Although the
economics of the Company's transactions would be the same, the timing of the
recognition of the Company's transactions could change.
ALLOWANCE FOR LOAN LOSSES. The Company establishes the allowance for loan losses
through charges to earnings in the form of a provision for loan losses. Loan
losses are charged against the allowance when it is believed that the collection
of the principal is unlikely. Subsequent recoveries of losses previously charged
against the allowance are credited to the allowance. The allowance represents an
amount that, in management's judgment, will be adequate to absorb probable
losses inherent in the loan portfolio. Management's judgment in determining the
level of the allowance is based on evaluations of the collectability of loans
while taking into consideration such factors as trends in delinquencies and
charge-offs for relevant periods of time, changes in the nature and volume of
the loan portfolio, current economic conditions that may affect a borrower's
ability to repay and the value of collateral, overall portfolio quality and
review of specific potential losses. This evaluation is inherently subjective
because it requires estimates that are susceptible to significant revision as
more information becomes available. Note 1 to the Consolidated Financial
Statements presented in Item 8, Financial Statements and Supplementary Data
provides additional information related to the allowance for loan losses.
The Company employs an independent outsourced loan review function, which
annually substantiates and/or adjusts internally generated risk ratings. This
independent review function reports directly to the Company's Board of
Directors' audit committee, and the results of this review are factored into the
calculation of the allowance for loan losses.
OTHER-THAN-TEMPORARY IMPAIRMENT ("OTTI") FOR SECURITIES. Impairment of
securities occurs when the fair value of a security is less than its amortized
cost. For debt securities, impairment is considered other-than-temporary and
recognized in its entirety in net income if either (i) the Company intends to
sell the security or (ii) it is more-likely-than-not that the Company will be
required to sell the security before recovery of its amortized cost basis. If,
however, the Company does not intend to sell the security and it is not
more-likely-than-not that the Company will be required to sell the security
before recovery, the Company must determine what portion of the impairment is
attributable to a credit loss, which occurs when the amortized cost basis of the
security exceeds the present value of the cash flows expected to be collected
from the security. If there is no credit loss, there is no OTTI. If there is a
credit loss, OTTI exists, and the credit loss must be recognized in net income
and the remaining portion of impairment must be recognized in other
comprehensive income (loss). For equity securities, impairment is considered to
be other-than-temporary based on the Company's ability and intent to hold the
investment until recovery of fair value. OTTI of an equity security results in a
write-down that must be included in net income. The Company regularly reviews
each investment security for OTTI based on criteria that includes the extent to
which cost exceeds market price, the duration of that market decline, the
financial health of and specific prospects for the issuer, the best estimate of
the present value of cash flows expected to be collected from debt securities,
the intention with regard to holding the security to maturity and the likelihood
that the Company would be required to sell the security before recovery.
IMPACT OF COVID-19
On March 11, 2020 , the World Health Organization declared COVID-19 a pandemic as
a result of the global spread of the illness. In response to the outbreak,
federal and state authorities in the U.S. introduced various measures to try to
limit or slow the spread of COVID-19, including travel restrictions,
nonessential business closures, stay-at-home orders and strict social
distancing.
To the extent the economic impacts of COVID-19 continue for a prolonged period
and conditions stagnate or worsen, the Company's provision for loan losses, net
interest income and overall profitability may be adversely affected.
Business Continuity
The Company remains committed to adhering to health and safety-related
requirements and best practices across all locations by taking proactive and
disciplined steps to promote safety and overall wellbeing of employees, clients,
shareholders and communities. The Company's Enterprise Risk Management
framework, which is overseen by the Board of Directors, the Company's Business
Continuity Plan and the Bank's Incident Response Plan remain integral parts of
monitoring day to day business activities. The Company has not furloughed nor
does the Company expect to furlough any employees. Management continues to
closely monitor business activities and has or will adjust accordingly as the
health and safety of all constituents continues to be the priority.
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Table of Contents Paycheck Protection Program OnMarch 27, 2020 , the CARES Act was enacted to, among other provisions, provide emergency assistance for individuals, families and businesses affected by COVID-19. The CARES Act included the creation of the PPP through the SBA. Loans provided by the Bank through the PPP may be forgiven based on the borrowers' compliance with the terms of the program. The SBA provides a 100% guaranty to the lender of principal and interest, unless the lender violates an obligation under the agreement. As loan losses are expected to be immaterial, if any at all, due to the SBA guaranty, there is no provision allocated for PPP loans within the allowance for loan loss calculation. The Company disbursed$53.1 million in PPP loans to 549 borrowers and has forgiven 223 PPP loans with an aggregate principal balance of$22.6 million in aggregate principal loan balances throughDecember 31, 2020 . During the first quarter of 2021, the Company disbursed$28.6 million in PPP loans to 346 borrowers and has forgiven 126 PPP loans with an aggregate principal balance of$9.2 million .
The following table summarizes the details of the Company's PPP loans:
(Dollars in thousands) December 31, 2020 PPP loans originated $ 53,082 PPP loans forgiven $ 22,555 Average PPP loans outstanding $ 34,672 PPP average loan size outstanding $ 82 PPP interest income $ 347 PPP fee income, net $ 879 PPP outstanding unearned fees $ 963 PPP weighted average processing fee 4.00 %
Average yield on PPP loans 3.54 % Short-term Loan Modifications Under the provisions of the CARES Act, the Company established a short-term loan modification program, allowing the deferral of scheduled payments for a 90-day period beginning inApril 2020 . Modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief were not considered trouble debt restructurings ("TDRs"). Borrowers who were considered current were ones whose loans were less than 30 days past due on their contractual payments at the time the modification was entered. The CARES Act and interagency guidance provided financial institutions the option to temporarily suspend certain accounting requirements related to TDRs with respect to loan modifications, including the deferral of scheduled payments. The following table summarizes loans modifications and loan payment deferrals, by loan segment, as ofDecember 31, 2020 .December 31, 2020 Loan Deferrals and Loan Modifications to
(Dollars in thousands) Balance Deferrals Loan Modifications
Total Loans
Commercial and industrial $ 68,390 $ 147 $ - 0.02 %
Commercial real estate 200,690 229 2,576 0.45 %
Construction and land 73,966 - - -
Consumer 6,355 - - -
Student 6,971 - - -
Residential real estate 230,885 72 - 0.01 %
Home equity lines of credit 29,492 - - -
Total $ 616,749 $ 448 $ 2,576 0.49 %
Borrowers whose industries are expected to be stressed by COVID-19, include, but
are not limited to, religious organizations, hospitality, childcare and
restaurants. The following table summarizes these industries as it relates to
the Company's loan portfolio at December 31, 2020 :
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(Dollars in thousands) December 31, 2020
Percent of
Loan Category Balance Total Loans
Religious Organizations $ 25,625 4.15 %
Hospitality 15,691 2.54 %
Childcare 14,407 2.34 %
Restaurants 11,189 1.81 %
$ 66,912 10.85 %
Net interest income
While net interest income was significantly impacted by the lower interest rate
environment during 2020, the Company's interest income benefited from PPP loans
and related processing fees. PPP loans carry a fixed rate of 1.0% with a
two-year contractual maturity. For the year ended December 31, 2020 , PPP loans
contributed approximately $1.2 million to the Company's net interest income,
with the average yield of 3.54%.
EXECUTIVE OVERVIEW
This discussion is intended to focus on certain financial information regarding
the Company and the Bank and may not contain all the information that is
important to the reader. The purpose of this discussion is to provide the reader
with a more thorough understanding of the Company's financial statements. As
such, this discussion should be read carefully in conjunction with the
consolidated financial statements and accompanying notes contained elsewhere in
this report.
The Company's primary financial objectives are to maximize earnings and to
deploy capital in profitable growth initiatives that will enhance long-term
shareholder value. The Company monitors the following financial performance
metrics towards achieving these goals: (i) return on average assets ("ROA"),
(ii) return on average equity ("ROE"), and (iii) growth in earnings. The Company
also actively manages capital through growth and dividends, while considering
the need to maintain a strong regulatory capital position.
Future trends regarding net interest income are dependent on the absolute level
of market interest rates, the shape of the yield curve, the amount of lost
income from nonperforming assets, loan prepayments, the mix and amount of
various deposit types, and many other factors, as well as the overall volume of
interest-earning assets. Many of these factors are individually difficult to
predict, and when factored together, the uncertainty of future trends compounds.
For the year ended December 31, 2020 , the Company's ROE and ROA were 8.31% and
0.73%, respectively, compared to 10.64% and 0.96%, respectively, for the year
ended December 31, 2019 .
Total assets were $867.2 million on December 31, 2020 compared to $722.2 million
on December 31, 2019 . Net loans were $609.9 million on December 31, 2020
compared to $545.0 million on December 31, 2019 . Total deposits were $766.1
million on December 31, 2020 compared to $622.2 million on December 31, 2019 ,
respectively. Low cost transaction deposits (demand and interest checking
accounts) increased to $449.2 million on December 31, 2020 , from $366.0 on
December 31, 2019 .
The Company had net income of $5.9 million , or $1.55 per diluted share, in 2020
compared to $6.8 million , or $1.80 per diluted share for 2019. Net interest
margin was 3.46% for the year ended December 31, 2020 compared to 3.74% for the
year ended December 31, 2019 . Net interest income for the year ended
December 31, 2020 was $25.8 million compared to $24.7 million for the year ended
December 31, 2019 .
On October 1, 2020 , the Company and Virginia National announced the Merger
Agreement pursuant to which the Company and Virginia National will engage in the
"Merger. Upon consummation of the Merger, the holders of shares of the Company's
common stock will be converted into the right to receive 0.675 shares of
Virginia National common stock for each share of the Company's common stock held
immediately prior to the effective date of the Merger, plus cash in lieu of
fractional shares. The transaction is expected to be completed in the second
quarter of 2021. The companies have received regulatory and shareholder
approvals, and the transaction remains subject to other customary closing
conditions.
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The following table presents a quarterly summary of consolidated net income for
the last two years.
For the Quarter Ended For the Quarter Ended
(Dollars in thousands, December 31, September 30, June 30,
2020 2020 2020 2019 2019 2019 2019
Interest income $ 7,406 $ 6,841 $ 7,008 $ 7,057 $ 7,350 $ 7,362 $ 7,279 $ 7,179
Interest expense 502 547 624 868 1,108 1,171 1,195 1,046
Net interest income 6,904 6,294 6,384 6,189 6,242 6,191 6,084 6,133
Provision for loan
losses 167 345 911 350 91 - 205 50
Net interest income
after provision for
loan losses 6,737 5,949 5,473 5,839 6,151 6,191 5,879 6,083
Gains on sales of
securities available
for sale, net 992 - - - - - - -
Other noninterest
income 1,438 1,478 1,216 1,342 1,484 1,610 1,400 1,480
Noninterest expense 7,357 5,670 4,889 5,605 5,808 5,419 5,509 5,718
Income before income
taxes 1,810 1,757 1,800 1,576 1,827 2,382 1,770 1,845
Income tax expense 454 210 222 180 255 330 206 213
Net income $ 1,356 $ 1,547 $ 1,578 $ 1,396 $ 1,572 $ 2,052 $ 1,564 $ 1,632
Net income per share,
basic $ 0.36 $ 0.41 $ 0.42 $ 0.37 $ 0.42 $ 0.54 $ 0.41 $ 0.43
Net income per share,
diluted $ 0.36 $ 0.41 $ 0.42 $ 0.37 $ 0.42 $ 0.54 $ 0.41 $ 0.43
RESULTS OF OPERATIONS
NET INTEREST INCOME
2020 COMPARED WITH 2019
Net interest income increased to $25.8 million for the year ended December 31,
2020 from $24.7 million for the same period of 2019. The net interest margin was
3.46% for the year ended December 31, 2020 compared to 3.74% for the same period
in 2019.
Interest income decreased while average earning assets increased from $660.8
million in 2019 to $747.4 million in 2020. The decrease of 63 basis points
("bp") in the average yield on assets from 4.43% in 2019 to 3.80% in 2020 was
primarily the result of:
• Average loans increased $60.0 million from $544.9 million in 2019 to
$604.9 million in 2020. The tax-equivalent yield on loans decreased to4.33% in 2020 compared to 4.84% in 2019. Together, interest and fee income
from loans decreased
loan balances increased as a result of organic loan growth as well as
approximately
to PPP loans, loan yields decreased as a result of the lower interest rate
environment and the fixed rate of 1% on PPP loans.
• Average securities increased
2.52% in 2020 compared to 2.81% in 2019. Tax-equivalent interest and
dividend income on securities remained relatively unchanged at $2.1
million for 2020 and 2019.
Total interest expense decreased $2.0 million from $4.5 million in 2019 to $2.5
million in 2020, resulting in the average rate on total interest-bearing
liabilities decreasing from 0.88% in 2019 to 0.46% in 2020, and cost of funds
decreasing from 0.71% in 2019 to 0.35% in 2020. As described below, the
decreases in the cost of funds were the result of the Company's response to
interest rate trends and the reduction of rates on certain interest-bearing
transaction accounts, and lower funding costs on FHLB advances. The decrease in
interest expense from 2019 to 2020 was due primarily to the following:
• Average interest-bearing deposits increased
million in 2019 to $532.8 million in 2020. The average rate paid on
interest-bearing deposits decreased from 0.75% in 2019 to 0.39% in
2020. This resulted in a decrease in interest paid on deposits of $1.5
million from
interest-bearing deposit balances was primarily the result of organic
deposit growth from new and existing personal and business clients.
• Average FHLB advances decreased
$21.3 million in 2020. Interest expense on FHLB advances decreased$421,000 from$712,000 in 2019 to$291,000 in 2020.
The Company believes that, given the current interest rate environment, net interest income and the net interest margin could decrease in future periods.
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Table of Contents 2019 COMPARED WITH 2018 Net interest income increased to$24.7 million for the year endedDecember 31, 2019 from$23.5 million for the same period of 2018. The net interest margin was 3.74% for the year endedDecember 31, 2019 compared to 3.81% for the same period in 2018. Interest income increased as the result of an overall increase in average earning assets from$619.1 million in 2018 to$660.8 million in 2019, a direct result of management's emphasis on growing the loan and securities portfolios. The increase of 10 bps in the average yield on assets from 4.33% in 2018 to 4.43% in 2019 was primarily the result of: • Average loans increased$27.2 million from$517.7 million in 2018 to$544.9 million in 2019. The tax-equivalent yield on loans increased to
4.84% in 2019 compared to 4.69% in 2018. Together, interest and fee income
from loans increased
• Average securities increased
million in 2019. The tax-equivalent yield on investments remained
unchanged at 2.81% in 2019 compared to 2018. Tax-equivalent interest and
dividend income on securities decreased $11,000 from 2018 to 2019.
Total interest expense increased $1.3 million from $3.2 million in 2018 to $4.5
million in 2019, resulting in the average rate on total interest-bearing
liabilities increasing from 0.67% in 2018 to 0.88% in 2019, due primarily to the
following:
• Average interest-bearing deposits increased
million in 2018 to $481.9 million in 2019. The average rate paid on
interest-bearing deposits increased from 0.54% in 2018 to 0.75% in
2019. This resulted in an increase in interest paid on deposits of $1.1
million from $2.4 million in 2018 to $3.6 million in 2019.
• Average FHLB advances increased
$27.6 million in 2019. Interest expense on FHLB advances increased$171,000 from$541,000 in 2018 to$712,000 in 2019. 29
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Table of Contents The following table sets forth, on a tax-equivalent basis, information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the years endedDecember 31, 2020 , 2019 and 2018 and the average yields and rates paid for the periods indicated. These yields and costs are derived by dividing income or expense by the average daily balances of assets and liabilities, respectively, for the periods presented. December 31, 2020 December 31, 2019 December 31, 2018 (Dollars in thousands) Average Income/ Average Average Income/ Average Average Income/ Average Assets Balances Expense Rate Balances Expense Rate Balances Expense Rate Loans Taxable$ 603,810 $ 26,192 4.34 %$ 543,111 $ 26,398 4.86 %$ 514,958 $ 24,291 4.72 % Nonaccrual (2) 1,125 - - 1,834 - - 2,770 - - Total loans 604,935 26,192 4.33 % 544,945 26,398 4.84 % 517,728 24,291 4.69 % Securities Taxable 65,949 1,554 2.38 % 60,847 1,631 2.71 % 60,560 1,622 2.68 % Tax-exempt (1) 18,041 545 3.02 % 13,956 454 3.25 % 14,059 474 3.37 % Total securities 83,990 2,099 2.52 % 74,803 2,085 2.81 % 74,619 2,096 2.81 % Deposits in other banks 58,460 135 0.23 % 41,077 782 1.90 % 26,777 410 1.53 % Federal funds sold 14 - 0.35 % 14 - 2.31 % 14 - 1.59 % Total earning assets 747,399 28,426 3.80 %
660,839 29,265 4.43 % 619,138 26,797 4.33 % Less: Allowance for loan losses (6,149 )
(5,429 ) (5,317 ) Total nonearning assets 59,367 57,000 50,848 Total Assets$ 800,617 $ 712,410 $ 664,669 Liabilities and Shareholders' Equity Deposits Demand$ 159,668 $ 121,910 $ 117,422 Interest-bearing NOW 252,648$ 493 0.20 % 230,081$ 1,028 0.45 % 231,819$ 893 0.39 % Money market 105,218 420 0.40 % 78,097 645 0.83 % 59,400 310 0.52 % Savings 102,862 94 0.09 % 87,478 281 0.32 % 89,103 235 0.26 % Time deposits 72,095 1,057 1.47 %
86,205 1,641 1.90 % 73,717 1,009 1.37 % Total interest-bearing deposits 532,823 2,064 0.39 %
481,861 3,595 0.75 % 454,039 2,447 0.54 % Federal funds purchased 1 - 1.05 % 494 14 2.90 % 2,044 46 2.26 % FHLB advances 21,324 291 1.37 % 27,611 712 2.58 % 23,315 541 2.32 % Junior subordinated debt 4,124 186 4.50 % 4,124 199 4.83 % 4,124 199 4.83 % Total interest-bearing liabilities 558,272 2,541 0.46 % 514,090 4,520 0.88 % 483,522 3,233 0.67 % Other liabilities 11,968 12,331 6,088 Shareholders' equity 70,709 64,079 57,637 Total Liabilities and Shareholders' Equity$ 800,617 $ 712,410 $ 664,669 Net interest income (tax-equivalent basis)$ 25,885 3.35 %$ 24,745 3.55 %$ 23,564 3.66 % Less: tax equivalent adjustment 114 95 99 Net interest income$ 25,771 $ 24,650 $ 23,465 Interest expense as a percent of average earning assets 0.34 % 0.68 % 0.52 % Net interest margin 3.46 % 3.74 % 3.81 %
(1) Income and rates on nontaxable assets are computed on a tax-equivalent basis
using a federal tax rate of 21%.
(2) Nonaccrual loans are included in the average balance of total loans and total
earning assets.
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RATE/VOLUME ANALYSIS
The following table sets forth certain information regarding changes in interest
income and interest expense for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to changes in volume (change in volume multiplied by old
rate); and changes in rates (change in rate multiplied by old volume). Changes
in rate-volume, which cannot be separately identified, are allocated
proportionately between changes in rate and changes in volume.
2020 Compared to 2019 2019 Compared to 2018
Due to Due to Due to Due to
(In thousands) Change Volume Rate Change Volume Rate
Interest Income
Loans
Taxable $ (206 ) $ 2,953 $ (3,159 ) $ 2,107 $ 1,328 $ 779
Securities
Taxable (77 ) 136 (213 ) 9 7 2
Tax-exempt (1) 91 133 (42 ) (20 ) (3 ) (17 )
Deposits in other banks (647 ) 331 (978 ) 372 219 153
Total interest income (839 ) 3,553 (4,392 ) 2,468 1,551 917
Interest Expense
NOW (535 ) 101 (636 ) 135 (7 ) 142
Money market (225 ) 224 (449 ) 335 98 237
Savings (187 ) 49 (236 ) 46 (4 ) 50
Time deposits (584 ) (269 ) (315 ) 632 171 461
Federal funds purchased (14 ) (14 ) - (32 ) (35 ) 3
FHLB advances (421 ) (163 ) (258 ) 171 99 72
Junior subordinated debt (13 ) - (13 ) - - -
Total interest expense (1,979 ) (72 ) (1,907 ) 1,287 322 965
Net interest income $ 1,140 $ 3,625 $ (2,485 ) $ 1,181 $ 1,229 $ (48 ) (1) Income and rates on nontaxable assets are computed on a tax-equivalent basis
using a federal tax rate of 21%.
NONINTEREST INCOME
Increase (Decrease) 2020 Increase (Decrease) 2019
December 31, vs. 2019 vs. 2018(Dollars in thousands) 2020 2019 2018 Amount
Percent Amount Percent
Noninterest Income
Trust and estate fees $ 2,249 $ 1,743 $ 1,542 $ 506 29.0 % $ 201 13.0 %
Brokerage fees 557 453 180 104 23.0 % 273 151.7 %
Service charges on deposit
accounts 1,118 1,522 1,706 (404 ) (26.5 )% (184 ) (10.8 )%
Interchange fee income, net 1,215 1,305 1,252 (90 ) (6.9 )% 53 4.2 %
Bank-owned life insurance 360 366 361 (6 ) (1.6 )% 5 1.4 %
Gain on sale/call of
securities available for
sale, net 992 79 838 913 1155.7 % (759 ) (90.6 )%
Gain on sale of mortgage
loans held for sale, net 86 69 37 17 24.6 % 32 86.5 %
Other income (111 ) 437 158 (548 ) (125.4 )% 279 176.6 %
$ 6,466 $ 5,974 $ 6,074 $ 492 8.2 % $ (100 ) (1.6 )%
2020 COMPARED WITH 2019
Total noninterest income increased
• Trust, estate and brokerage fees increased as a result of an increase in
assets under management for both trust and investment management accounts
and brokerage accounts. Assets under management were $530.8 million at
December 31, 2020 compared to $455.0 million at December 31, 2019 .
• Service charges on deposit accounts continued to decline as a result of
the decline in non-sufficient funds ("NSF") fees which is directly related
to customer behavior. NSF fees were $978,000 in 2020 compared to $1.5
million in 2019.
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• During 2020, the net gain on the sale of securities available for sale was
the result of a portfolio reallocation to align with the Company's
investment goals. During 2019, the gain on calls of securities available
for sale was the result of two calls of trust preferred securities that
went to auction and were settled at their par value.
• Other income decreased primarily as a result of several factors. Automated
teller machine ("ATM") surcharge income decreased
2019, due to the Company outsourcing this activity. Losses on the disposal
of these ATMs totaled
primarily derived from the Bank's ownership interest in
LLC, increased $112,000 when compared to 2019. The increase in this income
was partially offset by an increase of $172,000 in pass-through lossesfrom the Bank's investment in qualified affordable housing projects.
2019 COMPARED WITH 2018
Total noninterest income decreased
• Trust, estate and brokerage fees increased as a result of increased
brokerage production and increased assets under management. Assets under
management were
million at
• Service charges on deposit accounts continued to decline due to customer
behavior and increased mobile banking usage.
• The decrease in the net gains on the sale of securities available for sale
in 2019 was due to the Company's portfolio reallocation to align with its
investment goals and the gain on calls of securities available for sale in
2018 which was the result of two calls of trust preferred securities that
went to auction and were settled at their par value.
• The net gain on mortgage loans held for sale increased as a result of
increased loans sold on the secondary market. Loans originated for sale on
the secondary market were
2018.
• Other income increased as a result of decreased net losses on partnerships
of
from the sale of an equity ownership interest of
is recognized over the life of the contract.
NONINTEREST EXPENSE
Increase (Decrease) 2020 Increase (Decrease) 2019
December 31, vs. 2019 vs. 2018
(Dollars in thousands) 2020 2019 2018 Amount Percent Amount Percent
Noninterest Expenses
Salaries and benefits $ 12,103 $ 12,084 $ 12,108 $ 19 0.2 % $ (24 ) (0.2 )%
Occupancy 2,409 2,352 2,331 57 2.4 % 21 0.9 %
Furniture and equipment 776 1,050 1,012 (274 ) (26.1 )% 38 3.8 %
Marketing and business
development 487 648 610 (161 ) (24.8 )% 38 6.2 %
Legal, audit and consulting 1,129 1,054 1,015 75 7.1 % 39 3.8 %
Data processing 1,432 1,381 1,292 51 3.7 % 89 6.9 %
Federal Deposit Insurance
Corporation assessment 388 190 369 198 104.2 % (179 ) (48.5 )%
Merger related expenses 1,231 - - 1,231 - - 0.0 %
Prepayment penalty on early
debt extinguishment - 268 - (268 ) - 268 -
Other operating expenses 3,565 3,427 3,414 138 4.0 % 13 0.4 %
$ 23,520 $ 22,454 $ 22,151 $ 1,066 4.7 % $ 303 1.4 %
2020 COMPARED WITH 2019
Total noninterest expense increased $1.1 million from $22.5 million in 2019 to
$23.5 million in 2020. Management continued to strive for increased efficiencies
through process improvements and expense monitoring. The following were the
primary changes in noninterest expense:
• Furniture and equipment expenses decreased primarily due to a decrease in
depreciation associated with the ATMs, as noted above in noninterest
income, that were removed due to the Bank's outsourcing this
activity. Depreciation expense for furniture and equipment was
for 2020 compared to $323,000 for 2019.
• Marketing expenses decreased by $92,000 primarily due to timing
differences in marketing campaigns. Business development activities
decreased $60,000 , as a result of the COVID-19 pandemic.
•
Assessment Credit of
the portion of the Company's assessment that contributed to the growth in
the DIF reserve ratio from 1.15% to 1.35%.
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• Merger expenses of
National, announced on
incur merger expenses until the Merger with Virginia National is
completed, which is currently expected to occur in the second quarter of
2021.
2019 COMPARED WITH 2018
Total noninterest expense increased
• While the Company's personnel expenses were its largest noninterest
expense, total salary and benefit expenses remained relatively flat.
• Occupancy, furniture and equipment expenses remained relatively unchanged.
• Marketing and business development expenses increased slightly as a result
of advertising campaigns, business development opportunities and community
support.
• Consulting expense, which includes legal and auditing fees, remained
relatively unchanged.
•
Assessment Credit. This credit is the portion of the Company's assessment
that contributed to the growth in the DIF reserve ratio from 1.15% to
1.35%.
• The Company incurred prepayment penalties on the early extinguishment of
$13.0 million of FHLB advances. • Other operating expenses remained relatively unchanged. INCOME TAXES Income tax expense for 2020 was$1.1 million , resulting in an effective tax rate of 15.4%, compared with$1.0 million or 12.8%, in 2019 and$746,000 , or 10.8%, in 2018. Income tax expense and the effective tax rate differed from the statutory federal income tax rate of 21% primarily due to the Bank's investment in tax-exempt securities, income from bank-owned life insurance and community development tax credits. Community development tax credits were$479,000 ,$552,000 , and$504,000 for 2020, 2019 and 2018, respectively.
ASSET QUALITY
Loans that are separately identified as impaired are measured based on the present value of expected future cash flows or, alternatively, the observable market price of the loans or the fair value of the collateral. However, for those loans that are collateral dependent and for which management has determined foreclosure is probable, impairment is based on the net realizable value of the collateral. A loan is considered impaired when there is an identified weakness which makes it probable that the collection of all principal and interest according to the contractual terms of the loan agreement will not be made. Factors involved in determining if a loan is impaired include, but are not limited to, expected future cash flows, financial condition of the borrower, and current economic conditions. Loans that are considered doubtful or loss generally qualify as impaired loans.
Nonperforming assets, in most cases, consist of nonaccrual loans, TDRs, OREO, and loans that are greater than 90 days past due and accruing interest.
As mentioned above, in response to COVID-19, the Company established a short-term loan modification program, which included the deferral of scheduled payments for a 90-day period. Borrowers who were considered current were ones whose loans were less than 30 days past due on their contractual payments at the time the modification was entered. As ofDecember 31, 2020 , there was one loan modification totaling$2.6 million and 5 loans in payment deferral totaling$518,000 . These additional deferrals remained within the CARES Act and theMarch 2020 interagency guidance and were not considered TDRs. 33
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The following table sets forth certain information with respect to the Company's nonperforming assets at the dates indicated:
At December 31,
(Dollars in thousands) 2020 2019 2018 2017 2016
Nonaccrual loans $ 1,245 $ 989 $ 1,993 $ 3,180 $ 3,523
TDR loans still accruing 8,363 2,471 3,361 4,182 5,305
Loans 90+ days past due and accruing 584 1,636 1,227 1,665 2,859
Total nonperforming loans 10,192 5,096 6,581 9,027 11,687
OREO, net 1,356 1,356 1,356 1,356 1,356
Total nonperforming assets $ 11,548 $ 6,452 $ 7,937 $ 10,383 $ 13,043
Allowance for loan losses to total
loans 1.11 % 0.95 % 0.94 % 1.00 % 1.00 %
Nonaccrual loans to total loans 0.20 % 0.18 % 0.36 % 0.60 % 0.80 %
Allowance for loan losses to
nonperforming loans 67.41 % 102.57 % 78.65 % 56.40 % 38.70 %
Nonperforming loans to total loans 1.65 % 0.93 % 1.20 % 1.80 % 2.50 %
Nonperforming assets to total assets 1.33 % 0.89 % 1.09 % 1.60 % 2.10 %
Nonperforming assets totaled
• Nonaccrual loans were
and 2019, respectively. Changes in nonaccrual loans during 2020 was the
result of the principal curtailment for one commercial real estate loans
totaling
loan totaling
• OREO remained unchanged at
of undeveloped property.
• Loans greater than 90 or more days past due and still accruing interest
totaled
respectively. Included are
still accruing interest. Student loans that are past due continue to
accrue interest due to the 98% guarantee by the U.S. Department of
Education .
• There were five loans in the portfolio totaling
identified as TDRs (non-COVID related) at
five loans at $2.5 million at December 31, 2019 . One commercial and
industrial loan was modified and identified as a TDR during 2020. There
were no loans modified and identified as TDRs during 2019. At
their modified terms.
ANALYSIS OF LOAN LOSS EXPERIENCE
The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb credit losses inherent in the loan portfolio. Management periodically evaluates the collectability of the loan portfolio, credit concentrations, trends in historical loan loss experience, impaired loans, and current economic conditions in determining the adequacy of the allowance. The allowance is increased by the provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Because of uncertainties inherent in the estimation process, management's estimate of credit losses inherent in the loan portfolio and the related allowance remains subject to change. Additions to the allowance, recorded as the provision for loan losses on the Company's statements of operations, are made, as needed, to maintain the allowance at an appropriate level based on management's analysis. The amount of the provision is a function of the level of loans outstanding, the level and nature of impaired and nonperforming loans, historical loan loss experience, the amount of loan losses actually charged-off or recovered during a given period and current national and local economic conditions. There can be no assurances, however, that future losses will not exceed estimated amounts, or that increased amounts of provisions for loan losses will not be required in future periods. The allowance for loan losses was$6.9 million or 1.11% of total loans atDecember 31, 2020 compared to$5.2 million or 0.95% of total loans atDecember 31, 2019 . The provision for loan losses was$1.8 million and$346,000 for the years endedDecember 31, 2020 and 2019, respectively. The increase in the allowance for loan losses was due primarily to the increase in qualitative factors related to COVID-19 and the current economic conditions, including, but not limited to, the increased unemployment rate for theCommonwealth of Virginia . The allowance for loan losses was not impacted by PPP loans during the year endedDecember 31, 2020 due to the 100% SBA guaranty for loans funded under this program. 34
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While Management believes that adequate loan loss reserves existed as ofDecember 31, 2020 , Management also recognizes that the full impact of COVID-19 may have a continued adverse effect on the credit quality of the Company's loan portfolio subsequent to 2020. Impaired loans were$9.6 million and$3.6 million atDecember 31, 2020 and 2019, respectively. Reserves allocated to impaired loans were$72,000 and$229,000 atDecember 31, 2020 and 2019, respectively. There are no loans other than those disclosed above either as nonperforming or impaired, where information known about the borrower has caused management to have serious doubts about the borrower's ability to repay. The following table summarizes the Bank's loan loss experience for the periods indicated: Years ended December 31, (Dollars in thousands) 2020 2019 2018 2017 2016 Allowance for loan losses, January 1,$ 5,227 $ 5,176 $ 5,094 $ 4,525 $ 4,193 Charged-off loans: Commercial and industrial 148 328 106 19 226 Commercial real estate - - 47 476 380 Construction and land - - 312 - - Consumer 34 50 14 114 46 Student 15 13 24 31 36 Residential real estate - - 200 51 36 Home equity lines of credit - - 80 - - Total loans charged-off 197 391 783 691 724 Recoveries: Commercial and industrial 13 2 35 154 1,527 Commercial real estate 24 80 70 575 24 Construction and land - - - - - Consumer 30 14 4 2 10 Student - - - - - Residential real estate - - 248 6 - Home equity lines of credit - - 1 3 3 Total loan recoveries 67 96 358 740 1,564 Net charge-offs (recoveries) 130 295 425 (49 ) (840 ) Provision for (recovery of) loan losses 1,773 346 507 520 (508 ) Allowance for loan losses, December 31,$ 6,870 $ 5,227 $ 5,176 $
5,094
Ratio of net charge-offs (recoveries) to average loans 0.02 % 0.05 % 0.08 % (0.01 )% (0.19 )%
The following table allocates the allowance for loan losses to each loan portfolio segment. The allowance has been allocated according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred, although the entire allowance balance is available to absorb any actual charge-offs that may occur.
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At December 31,
2020 2019 2018 2017 2016
Allowance for Percentage of Allowance for Percentage of Allowance for Percentage of Allowance for Percentage of Allowance for Percentage of
Loan Losses Total Loans Loan Losses Total Loans Loan Losses Total Loans Loan Losses Total Loans Loan Losses Total Loans
(Dollars in
thousands)
Commercial and
industrial $ 751 11.09 % $ 296 4.98 % $ 483 4.86 % $ 518 4.90 % $ 561 5.50 %
Commercial real
estate 2,334 32.54 % 1,788 33.06 % 1,738 34.18 % 1,609 35.20 % 1,569 35.70 %
Construction and
land 1,080 11.99 % 652 11.86 % 635 13.00 % 879 10.70 % 661 10.70 %
Consumer 126 1.03 % 154 1.08 % 145 1.01 % 105 1.00 % 21 0.70 %
Student 81 1.13 % 65 1.48 % 68 1.67 % 72 2.10 % 76 2.80 %
Residential real
estate 1,839 37.44 % 1,596 40.95 % 1,311 37.49 % 1174 37.20 % 943 35.10 %
Home equity
lines of credit 309 4.78 % 326 6.59 % 446 7.79 % 387 8.90 % 307 9.50 %
Unallocated 350 - 350 - 350 - 350 - 387 -
$ 6,870 100.00 % $ 5,227 100.00 % $ 5,176 100.00 % $ 5,094 100.00 % $ 4,525 100.00 %
COMPARISON OF FINANCIAL CONDITION AT
SUMMARY A financial institution's primary sources of revenue are generated by its earning assets and sales of financial assets, while its major expenses are produced by the funding of those assets with interest-bearing liabilities, provisions for loan losses and compensation to employees. Effective management of these sources and uses of funds is essential in attaining a financial institution's maximum profitability while maintaining an acceptable level of risk. AtDecember 31, 2020 , the Company had total assets of$867.2 million compared to$722.2 million atDecember 31, 2019 . The significant components of the Company's consolidated balance sheets are discussed below.
SECURITIES
AtDecember 31, 2020 , 2019 and 2018, the carrying values of securities available for sale at fair value were: Available for Sale (Dollars in thousands) 2020 2019 2018 Obligations ofU.S. Government corporations and agencies$ 59,210 $ 63,941 $ 56,409 Obligations of states and political subdivisions 23,638 15,842 14,580 Corporate bonds - - 895 Total$ 82,848 $ 79,783 $ 71,884 36
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The following is a schedule of estimated maturities, or call date if more
probable, or next rate repricing adjustment date, and related weighted average
yields of securities at
Due after Due after
Due in one year or less One through Five years Five through Ten years Due after Ten years Total
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Securities available for sale:
Obligations of U.S. Government
corporations and agencies $ 2,016 1.37 % $ 8,118 2.59 % $ 5,409 1.54 % $ 43,667 1.84 % $ 59,210 1.90 %
Obligations of states and 23,638
political subdivisions 55 5.28 % 301 4.58 % 4,060 3.13 % 19,222 2.78 % 2.87 %
Total securities $ 2,071 1.48 % $ 8,419 2.66 % $ 9,469 2.22 % $ 62,889 2.13 % $ 82,848 2.18 %
Excluding obligations of
LOAN PORTFOLIO
Loans are made mainly to customers located within the Company's primary market area. Loan pricing strategies and product offerings are continually modified in an effort to increase lending activity without sacrificing the existing credit quality standards. AtDecember 31, 2020 and 2019, net loans were 70.33% and 75.46% of total assets, respectively, and were the largest category of the Company's earning assets. Loans are shown on the balance sheets net of unearned discounts and the allowance for loan losses. Interest is computed by methods that result in level rates of return on principal. Loans are charged-off when deemed by management to be uncollectible, after taking into consideration such factors as the current financial condition of the customer and the underlying collateral and guarantees.
Total loans on the balance sheet are comprised of the following portfolio segments at the dates indicated:
At December 31,
(Dollars in thousands) 2020 2019 2018 2017 2016
Commercial and industrial loans $ 68,390 $ 27,404 $ 26,721 $ 24,413 $ 25,735
Commercial real estate 200,690 181,898 187,797 176,827 165,271
Construction and land 73,966 65,231 71,409 54,162 49,777
Consumer 6,355 5,958 5,562 5,068 3,100
Student 6,971 8,151 9,158 10,677 13,006
Residential real estate 230,885 225,316 205,945 187,104 162,383
Home equity lines of credit 29,492 36,268 42,772 44,548 43,861
Total loans $ 616,749 $ 550,226 $ 549,364 $ 502,799 $ 463,133
At December 31, 2020 , there were no loan concentrations to commercial borrowers
engaged in similar activities that exceeded 10% of total loans. Based on
regulatory guidelines, the Bank is required to monitor the commercial real
estate loan portfolio for: (i) concentrations above 100% of Tier 1 capital for
construction and land loans and; (ii) concentrations above 300% for permanent
investor real estate loans. As of December 31, 2020 , the Company was well below
these thresholds.
The following is a schedule of maturities and sensitivities of loans subject to
changes in interest rates as of
One Year
through Five After Five
(Dollars in thousands) Within One Year Years Years Total
Commercial and industrial $ 8,487 $ 52,498 $ 7,405 $ 68,390
Commercial real estate 27,948 96,382 76,360 200,690
Construction and land 48,192 25,198 576 73,966
$ 84,627 $ 174,078 $ 84,341 $ 343,046
For maturities over one year:
Floating and adjustable rate loans $ 14,938 $ 32,271 $ 47,209
Fixed rate loans 159,140 52,070 211,210
$ 174,078 $ 84,341 $ 258,419
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Table of Contents DEPOSITS
Deposits totaled
The average daily amounts of deposits and rates paid on deposits is summarized for the periods indicated in the following table:
Year Ended December 31,
2020 2019 2018
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
Demand $ 159,668 $ 121,910 $ 117,422
Interest-bearing:
NOW 252,648 0.20 % 230,081 0.45 % 231,819 0.39 %
Money market 105,218 0.40 % 78,097 0.83 % 59,400 0.52 %
Savings 102,862 0.09 % 87,478 0.32 % 89,103 0.26 %
Time deposits 72,095 1.47 % 86,205 1.90 % 73,717 1.37 %
Total interest-bearing deposits 532,823 0.39 % 481,861 0.75 % 454,039 0.54 %
Total deposits $ 692,491 $ 603,771 $ 571,461 The following is a schedule of maturities of time deposits in amounts of
December 31, 2020
Three Six through
Within through Six Twelve Over Twelve
(Dollars in thousands) Three Months Months Months Months Total
$100,000 to $250,000 $ 8,849 $ 7,100 $ 8,379 $ 2,889 $ 27,217
Over $250,000 1,832 4,525 5,190 1,478 13,025
Total $ 10,681 $ 11,625 $ 13,569 $ 4,367 $ 40,242
BORROWINGS
Amounts and weighted average rates for long-and short-term borrowings as of
December 31, 2020 December 31, 2019 December 31, 2018
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
FHLB advances $ 12,606 2.06 % $ 16,695 2.21 % $ 23,780 2.66 %
At
In 2019, the Company sought to reduce its cost of interest-bearing liabilities by reducing the balance of its FHLB advances from$23.8 million atDecember 31, 2018 , to$16.7 million atDecember 31, 2019 . The reduction of FHLB advances included early repayments of$13.0 million onDecember 31, 2019 , resulting in prepayment penalties totaling$268,000 .
LIQUIDITY
Liquidity management involves meeting the present and future financial obligations of the Company with the sale or maturity of assets or with the occurrence of additional liabilities. Liquidity needs are met with cash on hand, deposits in other banks, federal funds sold and unencumbered securities classified as available for sale. AtDecember 31, 2020 , liquid assets totaled$193.0 million , or 22.26% of total assets and 24.29% of total liabilities. Securities provide a constant source of liquidity through paydowns and maturities. The Company maintains short-term borrowing arrangements, namely federal funds lines of credit, with larger financial institutions as an additional source of liquidity and the Bank's membership with the FHLB also provides a source of borrowings with numerous rate and term structures. Management monitors the liquidity position regularly and attempts to maintain a position which utilizes available funds most efficiently. As a result, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers' credit needs.
CAPITAL
Shareholders' equity totaled$72.5 million atDecember 31, 2020 compared with$67.1 million atDecember 31, 2019 . The amount of equity reflects management's desire to increase shareholders' return on equity while maintaining a strong capital base. 38
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Table of Contents The Company and the Bank are subject to various regulatory capital requirements administered by banking agencies. Failure to meet minimum capital requirements can trigger certain mandatory and discretionary actions by regulators that could have a direct material effect on the Company's financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. In addition to the regulatory risk-based capital, the Company must maintain a capital conservation buffer of additional total capital and common equity Tier 1 capital as required by the Basel III Capital Rules. The phase-in of the capital conservation buffer requirement began onJanuary 1, 2016 , at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% onJanuary 1, 2019 . Management believes that the Bank satisfies all capital adequacy requirements to which they are subject as ofDecember 31, 2020 and 2019. As ofDecember 31, 2020 andDecember 31, 2019 , the Company qualified as a small bank holding company under SBHC Policy Statement and, as a result, the Company was exempt from the Basel III Capital Rules. See the discussion under the heading "Government Supervision and Regulation" in Item 1 of this Annual Report on Form 10-K for more information.
As of
(Dollars in thousands) December 31, 2020 December 31, 2019 Tier 1 Capital: Common equity $ 75,588 $ 70,312 Unrealized (gain) loss on securities available for sale, net (2,643 ) (1,294 ) Unrealized benefit obligation for supplemental retirement plans (31 ) (155 ) Total Common equity tier 1 capital 72,914 68,863 Tier 2 Capital: Allowable allowance for loan losses 6,870 5,227 Total Capital: $ 79,784 $ 74,090 Risk-Weighted Assets: $ 575,302 $ 547,202 Regulatory Capital Ratios: Leverage Ratio 8.54 % 9.40 % Common Equity Tier 1 Capital Ratio 12.67 % 12.58 % Tier 1 Capital Ratio 12.67 % 12.58 % Total Capital Ratio 13.87 % 13.54 % CONTRACTUAL OBLIGATIONS
The following table sets forth information relating to the Company's contractual
obligations as of
(Dollars in thousands) Payments due by period
More than
Less than Two through Four through Five Years
Contractual Obligations: Total One Year Three Years Five Years (1)
Debt obligations $ 16,730 $ - $ 2,606 $ 10,000 $ 4,124
Data processing obligations 2,494 - 2,494 - -
Lease obligations 5,277 - 1,320 1,353 2,604
Total $ 24,501 $ - $ 6,420 $ 11,353 $ 6,728 (1) Includes
with a mandatory redemption September 21, 2036 .
OFF-BALANCE SHEET ARRANGEMENTS
The Company's off-balance sheet arrangements consist of interest rate swap agreements, commitments to extend credit and letters of credit. Refer to Note 15 "Financial Instruments with Off-Balance Sheet Risk" and Note 16 "Derivative Instruments and Hedging Activities" of the Notes to Consolidated Financial Statements for further discussion on the specific arrangements and elements of credit and interest rate risk inherent to the arrangements. These arrangements increase the degree of both credit and interest rate risk beyond that which is recognized through the financial assets and liabilities on the consolidated balance sheets.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and the accompanying notes presented
elsewhere in this document have been prepared in accordance with GAAP, which
require the measurement of financial position and operating results in terms of
historical dollars without considering
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the change in the relative purchasing power of money over time and due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of the Company and the Bank are monetary in nature. The impact of inflation is reflected in the increased cost of operations. As a result, interest rates have a greater impact on the Company's performance than inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements affecting the Company are described in Item 8. "Financial Statements and Supplementary Data" under the heading Note 1 "Nature of Banking Activities and Significant Accounting Policies-Recent Significant Accounting Pronouncements and Other Regulatory Statements."
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