OLD FINANCIAL POINT: Management report and analysis of the financial situation and operating results (Form 10-K)
The following discussion is intended to assist readers in understanding and evaluating the financial condition, changes in financial condition and the results of operations of the Company, consisting of the parent company (the Parent) and its wholly-owned subsidiaries, the Bank and Trust. This discussion should be read in conjunction with the Consolidated Financial Statements and other financial information contained elsewhere in this report. In addition to current and historical information, the following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future business, financial condition or results of operations. For a description of certain factors that may have a significant impact on the Company's future business, financial condition or results of operations, see "Cautionary Statement Regarding Forward-Looking Statements" prior to Item 1. "Business." Executive Overview Headquartered in
Hampton, Virginia, the Company is the parent company of Trust and the Bank. Trust is a wealth management services provider. The Bank offers a complete line of consumer, mortgage and business banking services, including loan, deposit, and cash management services to individual and commercial customers. The Bank is an independent community bank and has 16 branches throughout the Hampton Roadslocalities of Chesapeake, Hampton, Isle of Wight County, Newport News, Norfolk, Virginia Beach, Williamsburg/ James City Countyand York County. The Bank also has a loan production office in Richmondand a mortgage loan origination office in Charlotte, NC. Net income for 2020 was $5.4 million( $1.03per diluted share) compared to $7.9 million( $1.51per diluted share) in 2019. Net income for 2020 was affected by one-time pre-tax expenses of $1.1 millionassociated with three strategic initiatives: prepayment of FHLB advances during the fourth quarter of 2020, a voluntary Early Retirement Incentive Plan (ERIP) offered in the fourth quarter of 2020, and a loss on sale of a loan pool effectively removing non- or under-performing credit relationships from the balance sheet. The impact of excluding these one-time strategic initiative expenses would be an increase of $900 thousandto net income and an increase of $0.18to earnings per diluted common share. Assets as of December 31, 2020were $1.2 billion, an increase of $171.7 millionor 16.3% compared to assets as of December 31, 2019. During 2020, the Company experienced significant balance sheet growth. Net loans held for investment increased $88.6 million, or 12.0% from December 31, 2019to $826.8 millionat December 31, 2020and was primarily attributable to PPP loans. Securities available for sale, at fair value, increased $40.7 millionfrom December 31, 2019to $186.4 millionat December 31, 2020, utilizing additional liquidity provided by growth in deposit accounts. Critical Accounting Policies and Estimates The accounting and reporting policies of the Company are in accordance with U.S.generally accepted accounting principles (GAAP) and conform to general practices within the banking industry. 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. The accounting policy that required management's most difficult, subjective or complex judgments is the Company's allowance for loan losses, which is described below. Allowance for Loan Losses The allowance for loan losses is an estimate of probable and estimable losses inherent in the loan portfolio. The allowance is based on three basic principles of accounting which require: (i) that losses be accrued when they are probable of occurring and estimable, (ii) that losses be accrued based on the differences between the loan balances and the value of collateral, present value of expected future cash flows (discounted at the loan's effective interest rate) or values that are observable in the secondary market and (iii) that adequate documentation exist to support the allowance for loan losses estimate. The Company's allowance for loan losses is the accumulation of various components that are calculated based on independent methodologies. Management's estimate is based on certain observable, historical data and other factors that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; discounted cash flow analysis; loan volumes; geographic, borrower and industry concentrations; the findings of internal credit quality assessments; and results from external bank regulatory examinations. These factors, as well as identified impaired loans, historical losses and current economic and business conditions, are used in developing estimated loss factors used in the calculations. Authoritative accounting literature requires that the impairment of loans that have been separately identified for evaluation be measured based on the present value of expected future cash flows (discounted at the loan's effective interest rate) or, alternatively, the observable market price of the loans or the fair value of the collateral. However, for those loans that are collateral dependent (that is, if repayment of those loans is expected to be provided solely by the underlying collateral) and for which management has determined foreclosure is probable, the measure of impairment is to be based on the net realizable value of the collateral. Authoritative accounting literature, as amended, also requires certain disclosures about investments in impaired loans and the allowance for loan losses and interest income recognized on loans. 25
For loans not individually evaluated for impairment, the loan portfolio is segmented into pools, based on the loan classifications as defined by Schedule RC-C of the Federal Financial Institutions Examination Council Consolidated Reports of Condition and Income Form 041 (Call Report) and collectively evaluated for impairment. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on whether the loan's payments are current (including loans 1-29 days past due), 30 - 59 days past due, 60 - 89 days past due, or 90 days or more past due. All other loans, including loans to consumers that are secured by real estate, are segmented by the Company's internally assigned risk grades: substandard, other assets especially mentioned (rated just above substandard), and pass (all other loans). The Company may also assign loans to the risk grades of doubtful or loss, but as of
December 31, 2020and December 31, 2019, the Company had no loans in these categories. 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 and the net market value of any underlying collateral. While management uses the best information available to establish the allowance for loan losses, future adjustment to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations 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. Results of Operations Net income for 2020 was $5.4 millioncompared to $7.9 millionin 2019. The decrease was primarily attributable to higher net interest income and non-interest income offset by increased provision for loan loss and non-interest expense. As of December 31, 2020return on average assets was 0.45% compared to 0.76% in 2019 and the return on average equity was 4.68% at December 31, 2020compared to 7.33% in 2019. In 2020, the Company recognized one-time pre-tax expenses of $1.1 millionassociated with three strategic initiatives: prepayment of FHLB advances, the ERIP, and a loss on sale of a non- or under-performing credit relationships. The impact of excluding these one-time strategic initiative expenses would be an increase of $900 thousandto net income and an increase of 8 basis points and 79 basis points to return on average assets and return on average equity, respectively. During 2020, the Company experienced significant balance sheet growth. Assets as of December 31, 2020were $1.2 billion, an increase of $171.7 millionor 16.28% compared to assets as of December 31, 2019. Net loans held for investment increased $88.6 million, or 12.0% from December 31, 2019to $826.8 millionat December 31, 2020. The increase was primarily attributable to PPP loans. Securities available for sale, at fair value, increased $40.7 millionfrom December 31, 2019to $186.4 millionat December 31, 2020, utilizing additional liquidity provided by growth in deposit accounts. Net Interest Income The principal source of earnings for the Company is net interest income. Net interest income is the difference between interest and fees generated by earning assets and interest expense paid to fund them. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. The net interest margin is calculated by dividing tax-equivalent net interest income by average earning assets. Net interest income was $34.7 millionin 2020, an increase of $898 thousandfrom 2019. The net interest margin was 3.18% in 2020 as compared to 3.58% in 2019. Net interest income, on a fully tax-equivalent basis, was $34.9 millionin 2020, an increase of $832 thousandfrom 2019. The net interest margin was 3.19% in 2020 as compared to 3.61% in 2019. The movements year-over-year were due to significant growth in average earning asset balances at lower average earning yields offset by higher average interest bearing liabilities balances at lower interest bearing costs. The low interest rate environment, high levels of liquidity invested at lower yielding short-term levels, and PPP participation continue to impact and challenge the net interest margin. While accretive to net interest income, PPP loans, which have a fixed interest rate of 1%, compressed the net interest margin. Related loan fees and costs are deferred at time of loan origination and amortized into interest income over the remaining lives of the loans, which for the majority of PPP loans was 24 months at origination. Recognition of these deferred fees and costs will be accelerated upon forgiveness or repayment of the PPP loans. For more information about these FTE financial measures, please see "Non-GAAP- Financial Measures" and "Reconciliation of Certain Non-GAAP Financial Measures". When comparing 2020 to 2019, the following changes occurred. Tax equivalent interest income decreased $298 thousand, or 0.74%. Average earning assets increased $148.9 million, or 15.78%. The average tax-equivalent yield decreased 61 basis points to 3.68%. Total average loans increased $76.6 million, or 10.11%, and average investment securities increased $16.9 million, or 11.58%. The increase in average loans was primarily attributable to PPP loan originations. Interest bearing due from banks increased $56.6 millionas a result of increased deposits liabilities but saw their yield decline by 170 basis points due to action by the Federal Reserve Boardrelated to the decrease of the federal funds target rate to a range of 0 to 25 basis points. 26
Average interest-bearing liabilities increased
$59.8 million, or 8.77%. Increases in average interest-bearing deposits of $59.6 millionand average FRB borrowings of $11.5 millionwere partially offset by an $11.5 millionreduction in average FHLB advances and average repurchase agreements. Total interest expense decreased $1.1 million, or 17.60%, when comparing 2020 to 2019. The decrease was driven by decreased deposit and borrowing costs. The average rate on interest-bearing liabilities in 2020 was 0.71%, a decrease of 23 basis points from 2019.
The following table presents an analysis of average earning assets, interest-bearing liabilities, and rates and returns. Non-criminal loans are included in loans receivable.
AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES For the years ended December 31, 2020 2019 2018 Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ (dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate ASSETS Loans*
$ 834,247 $ 36,0614.32 % $ 757,677 $ 35,7714.72 % $ 768,960 $ 34,5044.49 % Investment securities: Taxable 145,029 3,068 2.12 % 116,930 2,827 2.42 % 95,752 2,080 2.17 % Tax-exempt* 18,270 654 3.58 % 29,425 955 3.25 % 50,426 1,547 3.07 % Total investment securities 163,299 3,722 2.28 % 146,355 3,782 2.58 % 146,178 3,627 2.48 % Interest-bearing due from banks 91,160 267 0.29 % 34,592 689 1.99 % 9,358 198 2.12 % Federal funds sold 841 12 1.45 % 1,546 31 2.01 % 1,150 21 1.83 % Other investments 3,020 134 4.43 % 3,484 221 6.36 % 4,083 253 6.20 % Total earning assets 1,092,567 $ 40,1963.68 % 943,654 $ 40,4944.29 % 929,729 $ 38,6034.15 % Allowance for loan losses (9,723 ) (10,562 ) (10,254 ) Other nonearning assets 104,414 105,422 101,100 Total assets $ 1,187,258 $ 1,038,514 $ 1,020,575LIABILITIES AND STOCKHOLDERS' EQUITY Time and savings deposits: Interest-bearing transaction accounts $ 55,667$ 12 0.02 % $ 32,603$ 11 0.03 % $ 28,246$ 10 0.04 % Money market deposit accounts 307,190 1,012 0.33 % 257,884 1,037 0.40 % 242,025 542 0.22 % Savings accounts 96,149 56 0.06 % 86,787 88 0.10 % 87,534 76 0.09 % Time deposits 209,727 3,337 1.59 % 231,774 3,845 1.66 % 228,800 2,916 1.27 % Total time and savings deposits 668,733 4,417 0.66 % 609,048 4,981 0.82 % 586,605 3,544 0.60 % Federal funds purchased, repurchase agreements and other borrowings 33,846 150 0.44 % 22,302 132 0.59 % 28,427 131 0.46 % Federal Home Loan Bank advances 38,942 725 1.86 % 50,397 1,309 2.60 % 66,151 1,294 1.96 % Total interest-bearing liabilities 741,521 5,292 0.71 % 681,747 6,422 0.94 % 681,183 4,969 0.73 % Demand deposits 325,596 245,518 236,249 Other liabilities 5,055 3,947 3,378 Stockholders' equity 115,086 107,302
Total liabilities and stockholders' equity
$ 1,187,258 $ 1,038,514 $ 1,020,575Net interest margin $ 34,9043.19 % $ 34,0723.61 % $ 33,6343.62 %
* Calculated on a fully equivalent tax basis using a rate of 21%, adjusting the interest income of
The following table summarizes changes in net interest income attributable to changes in the volume of interest-bearing assets and liabilities and changes in interest rates. TABLE II VOLUME AND RATE ANALYSIS* 2020 vs. 2019 2019 vs. 2018 Increase (Decrease) Increase (Decrease) Due to Changes in: Due to Changes in: (dollars in thousands) Volume Rate Total Volume Rate Total EARNING ASSETS Loans
$ 3,723 $ (3,433 ) $ 290 $ (520 ) $ 1,787 $ 1,267Investment securities: Taxable 689 (448 ) 241 457 290 747 Tax-exempt (360 ) 59 (301 ) (645 ) 53 (592 ) Total investment securities 329 (389 ) (60 ) (188 ) 343 155 Federal funds sold (14 ) (5 ) (19 ) 7 3 10 Other investments 1,345 (1,854 ) (509 ) 827 (368 ) 459 Total earning assets 5,383 (5,681 ) (298 ) 126 1,765 1,891 INTEREST-BEARING LIABILITIES Interest-bearing transaction accounts 8 (7 ) 1 2 (1 ) 1 Money market deposit accounts 202 (227 ) (25 ) 35 460 495 Savings accounts 10 (42 ) (32 ) (1 ) 13 12 Time deposits (356 ) (152 ) (508 ) 37 892 929 Total time and savings deposits (136 ) (428 ) (564 ) 73 1,364 1,437 Federal funds purchased, repurchase agreements and other borrowings 68 (50 ) 18 (28 ) 29 1 Federal Home Loan Bank advances (298 ) (286 ) (584 ) (309 ) 324 15 Total interest-bearing liabilities (366 ) (764 )
(1,130) (264) 1,717 1,453
Change in net interest income
$ 5,749 $ (4,917 )$
* Calculated on a fully equivalent tax basis using a rate of 21%.
The Company believes the net interest margin may be affected in future periods by several factors that are difficult to predict, including: (1) changes in interest rates, which may depend on the severity of adverse economic conditions, the timing and extent of any economic recovery, and the extent of government stimulus measures, which are inherently uncertain, (2) possible changes in the composition of earning assets which may result from decreased loan demand as a result of the current economic environment (3) the repricing of higher-rate time deposits at maturity to lower rates, which may occur at a slower rate than the repricing of interest earning assets and (4) the recognition of net deferred fees on PPP loans, which is subject to the timing of repayment or forgiveness.
Analysis of net interest income for the year ended
Provision for Loan Losses The provision for loan losses is a charge against earnings necessary to maintain the allowance for loan losses at a level consistent with management's evaluation of the portfolio. This expense is based on management's estimate of probable credit losses inherent in the loan portfolio. Management's evaluation included credit quality trends, collateral values, discounted cash flow analysis, loan volumes, geographic, borrower and industry concentrations, the findings of internal credit quality assessments and results from external regulatory examinations. These factors, as well as identified impaired loans, historical losses and current economic and business conditions including uncertainties associated with the COVID-19 pandemic, were used in developing estimated loss factors for determining the loan loss provision. Based on its analysis of the adequacy of the allowance for loan losses, management concluded that the provision was appropriate. The provision for loan losses was
$1.0 millionfor the year ended December 31, 2020as compared to $318 thousandfor 2019. While historical loss rates, levels of non-performing assets, and credit quality continued to improve in 2020, increased qualitative reserves primarily related to uncertainties associated with potential asset quality deterioration which may arise as a result of the COVID-19 pandemic and related economic disruption. The level of provision for loan losses in 2019 was largely due to a $695 thousandrecapture driven by the prior year decrease in loans, the upgrade of one large classified asset to a pass rating, and declines in past due loans as well as adversely, classified non-performing loans offset somewhat by an increase in specific reserves required on impaired loans. Charged-off loans totaled $2.0 millionin 2020, compared to $1.4 millionin 2019. Recoveries amounted to $886 thousandin 2020 and $629 thousandin 2019. The Company's net loans charged off to average loans were 0.13% in 2020 as compared to 0.10% in 2019. 28
The state of the local economy can have a significant impact on the level of loan charge-offs. If the economy begins to contract, nonperforming assets could increase as a result of declines in real estate values and home sales or increases in unemployment rates and financial stress on borrowers. Increased nonperforming assets would increase charge-offs and reduce earnings due to larger contributions to the loan loss provision. Noninterest Income Unless otherwise noted, all comparisons in this section are between the twelve months ended
December 31, 2020and the twelve months ended December 31, 2019. Noninterest income increased $621 thousandor 4.41% for the year ended December 31, 2020as compared to the year ended December 31, 2019. In 2020, increases in other service charges, commissions and fees ( $103 thousandor 2.62%), mortgage banking income ( $897 thousandor 101.47%) and nonrecurring gains on sale of real estate ( $818 thousand) partially offset by decreases in service charges on deposit accounts ( $1.21 millionor 29.69%) were the primary drivers of noninterest income growth. Other service charges, commissions and fees increased primarily due to growth in merchant processing income and debit card fee income, while the increase in mortgage banking income is primarily due to the expansion of the mortgage lending team in early 2020 and increased mortgage lending activity in the current low interest rate environment. The decrease in service charges on deposit accounts is primarily attributable to lower nonsufficient fund, or NSF, and overdraft charges.
The company continues to focus on diversifying non-interest income by striving to expand its trust, insurance and mortgage business, and by continuing to focus on business audit and other business services.
Discussion of non-interest income for the year ended
Noninterest Expense Unless otherwise noted, all comparisons in this section are between the twelve months ended
December 31, 2020and the twelve months ended December 31, 2019. The Company's noninterest expense increased $3.9 millionor 10.01%. Year-over-year increases were primarily related to salaries and employee benefits, data processing, ATM and other losses, loss on FHLB prepayment, and other operating expenses partially offset by decreases in occupancy and equipment, customer development, professional services, and employee professional development. In 2020, salaries and benefit costs increased $1.5 millionor 6.20% which were primarily attributable to (i) the full-year effect of the addition of highly skilled bankers in lending, credit management and executive management to the team in 2019; (ii) increased commission expense related to higher mortgage loan originations during 2020; (iii) ERIP severance costs; and (iv) increased overtime and incentive pay related to the COVID-19 pandemic, which were partially offset by the deferral of costs related to PPP loan origination. The costs related to PPP loan originations were deferred at time of origination and are being amortized to interest income over the remaining lives of the loans, which for the majority of PPP loans was 24 months at origination. These costs are amortized against the related loan fees received for the origination of the PPP loans. Recognition of the deferred costs and related fees will be accelerated upon forgiveness or repayment of the PPP loans. Data processing expenses increased $1.7 millionthousand, or 93.44%, driven by implementation of Bank-wide technology and efficiency initiatives which when combined with a pivot from in-house to outsourced environments, also shifted costs previously included in occupancy and equipment expense. In 2020, the Company effectively completed outsourcing of the Bank's core application, outsourcing of item processing, migration of our digital platform to a new vendor, and implementation of an automated solution for PPP. Implementation of Bank-wide technology and efficiency initiatives is expected to flow through 2021 with the full roll-out of a new loan origination system, upgrades to critical infrastructure software related to imaging, and implementations of a new data analytics solution, deposit origination platform, and teller systems. Leveraging our digital and technological strategies to gain efficiencies continues to be a focus as well as noninterest expense control.
Among other categories of non-interest expense, the most significant changes comparing 2020 to 2019 were in:
• ATM and other losses, which have increased
certain equity investments in low-rental housing.
• Loss on extinguishment of loans, which is linked to the FHLB advance
• Other operating expenses (increased
charge for part of 2019, attendance fees (
expenses primarily due to costs associated with higher mortgage volumes. 29
The provision for income taxes is based upon the results of operations, adjusted for the effect of certain tax-exempt income, non-deductible expenses, and tax credits. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.
The effective tax rates for the years ended
Discussion of noninterest expense and income taxes for the year ended
December 31, 2018has been omitted as such discussion was provided in Part II, Item 7. "Management's Discussion and Analysis," under the heading "Noninterest Expense" in the Company's 2019 Form 10-K. Balance Sheet Review At December 31, 2020, the Company had total assets of $1.23 billion, an increase of $171.7 millionor 16.28% compared to assets as of December 31, 2019. Net loans held for investment increased $88.6 millionor 12.00%, from $738.2 millionat December 31, 2019to $826.8 millionat December 31, 2020. Net loan growth of $86.0 millionwas attributed to PPP loans with the remaining $2.6 millionin the real estate secured portfolio segments partially offset by pay-downs in the indirect automobile segment. Cash and cash equivalents increased $30.6 millionor 34.02% from December 31, 2019to December 31, 2020, and securities available for sale increased $40.7 millionor 27.93% over the same period utilizing additional liquidity provided by growth in deposit accounts. Total deposits as of December 31, 2020increased $177.7 million, or 20.0%, to $1.1 billionfrom December 31, 2019. Noninterest-bearing deposits increased $98.0 million, or 37.3%, savings deposits increased $113.9 million, or 28.6%, and time deposits decreased $34.2 million, or 15.0%. The impact of government stimulus, PPP loan related deposits, and higher levels of consumer savings were primary drivers of the increase on total deposits. Deposit growth continued to shift year-over-year resulting from strategies for expanding low cost deposits and re-pricing to reduce interest expense.
The Company used the PPPLF initiated by the
Portfolio of securities When comparing
The Company's strategy for the securities portfolio is primarily intended to manage the portfolio's susceptibility to interest rate risk and to provide liquidity to fund loan growth. The securities portfolio is also adjusted to achieve other asset/liability objectives, including pledging requirements, and to manage tax exposure when necessary. 30
The following table presents a summary of the securities portfolio:
TABLE III SECURITIES PORTFOLIO As of December 31, (Dollars in thousands) 2020 2019 2018 U.S. Treasury securities
$ 7,043 $ 7,003 $ 12,328Obligations of U.S. Government agencies 36,696 33,604
State and political subdivision obligations 45,995 24,742
48,837 Mortgage-backed securities 73,501 71,908 71,191 Money market investments 4,743 3,825 1,897 Corporate bonds and other securities 18,431 4,633
Restricted securities: Federal Home Loan Bank stock
Federal Reserve Bank stock 382 382
Community Bankers' Bank stock 42 42 42 1,367 2,926 3,853
Total Securities $ 187,776 $ 148,641 $ 152,100
The following table summarizes the contractual maturity of the securities portfolio and their average yields weighted at
1 year or less (Dollars in thousands) 2020 1-5 years 5-10 years Over 10 years Total U.S. Treasury securities $ 7,043 $ - $ - $ -
$ 7,043Weighted average yield 2.50 % 0.00 % - - 2.50 % Obligations of U.S. Government agencies $ - $
Weighted average return
0.00 % 0.36 % 1.37 % 1.02 % 1.03 % Obligations of state and policitcal subdivisions $ -
$ 2,474 $ 2,635 $ 40,886 $ 45,995Weighted average yield 0.00 % 3.54 % 3.27 % 2.87 % 2.93 % Mortgage-backed securities $ - $ - $ 23,280 $ 50,221 $ 73,501Weighted average yield - 0.00 % 1.94 % 1.75 % 1.81 % Money market investments $ 4,743 $ - $ - $ - $ 4,743Weighted average yield 0.36 % - - - 0.36 % Corporate bonds and other securities $ 102 $ 743 $ 17,586$ - $ 18,431Weighted average yield 3.15 % 3.06 % 5.16 % - 5.06 % Federal Home Loan Bank stock $ - $ - $ - $ 943 $ 943Weighted average yield - - - 3.90 % 3.90 % Federal Reserve Bank stock $ - $ - $ - $ 382 $ 382Weighted average yield - - - 6.00 % 6.00 % Community Bankers' Bank stock $ - $ - $ - $ 42 $ 42Weighted average yield - - - 0.00 % 0.00 % Total Securities $ 11,888 $ 4,617 $ 47,665 $ 123,606 $ 187,776Weighted average yield 1.65 % 2.10 % 3.15 % 1.95 % 2.24 % The table above is based on maturity. Therefore, it does not reflect cash flow from principal payments or prepayments prior to maturity. The weighted average life of the $73.5 millionin mortgage-backed securities as of December 31, 2020was 5.97 years. Yields are calculated on a fully tax-equivalent basis using a 21% rate. 31
Index Loan Portfolio The following table shows a breakdown of total loans by segment at
December 31for years 2016 through 2020: TABLE IV LOAN PORTFOLIO As of December 31, (Dollars in thousands) 2020 2019 2018 2017 2016 Commercial and industrial $ 141,746 $ 75,383 $ 63,398 $ 60,398 $ 54,434Real estate-construction 43,732 40,716 32,383 27,489 23,116 Real estate-mortgage (1) 207,536 210,653 213,909 175,549 162,979 Real estate-commercial 316,851 277,541 286,532 289,682 285,429 Consumer 118,368 137,007 169,138 174,225 58,907 Other 8,067 6,565 8,649 11,197 19,017 Ending Balance $ 836,300 $ 747,865 $ 774,009 $ 738,540 $ 603,882
(1) The real estate-mortgage segment consisted of residential 1-4, multi-family, senior mortgages and equity lines of credit.
Based on the North American Industry Classification System code, there are no categories of loans that exceed 10% of total loans other than the categories disclosed in the preceding table. As of
December 31, 2020, the total loan portfolio increased by $88.6 millionor 12.00% from December 31, 2019, primarily due to increases in commercial and industrial and real estate-commercial which were partially offset by reductions in indirect automobile dealer lending. The growth in commercial and industrial is attributed to PPP loans, which were $86.0 millionat December 31, 2020.
The maturity distribution and the interest rate sensitivity of certain categories of the loan portfolio of the
TABLE V MATURITY SCHEDULE OF SELECTED LOANS As of December 31, 2020 (Dollars in thousands) Within 1 year 1 to 5 years After 5 years Total Commercial and industrial $ 8,563
$ 111,317 $ 21,866 $ 141,746Real estate-construction 25,125 9,972 8,635 43,732 Total $ 33,688 $ 121,289
Loans due after 1 year with: Fixed interest rate
$ 111,087 $ 17,032 $ 128,119Variable interest rate 10,202 13,469 23,671 Total $ 121,289 $ 30,501 $ 151,790Nonperforming Assets Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more and accruing interest, nonperforming restructured loans, and other real estate owned (OREO). Restructured loans are loans with terms that were modified in a troubled debt restructuring (TDR) for borrowers experiencing financial difficulties. Refer to Note 4 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report Form 10-K for more information. Nonperforming assets decreased by $5.2 millionor 72.53%, from $7.1 millionat December 31, 2019to $2.0 millionat December 31, 2020. The 2020 total consisted of $744 thousandin loans still accruing interest but past due 90 days or more and $1.2 millionin nonaccrual loans. All of the nonaccrual loans at December 31, 2020was secured by real estate. All of the nonaccrual loans are classified as impaired. Impaired loans are a component of the allowance for loan losses. When a loan changes from "90 days past due but still accruing interest" to "nonaccrual" status, the loan is normally reviewed for impairment. If impairment is identified, then the Company records a charge-off based on the value of the collateral or the present value of the loan's expected future cash flows, discounted at the loan's effective interest rate. If the Company is waiting on an appraisal to determine the collateral's value, management allocates funds to cover the deficiency to the allowance for loan losses based on information available to management at the time. The recorded investment in impaired loans decreased to $2.1 millionas of December 31, 2020from $8.4 millionas of December 31, 2019as detailed in Note 4 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K. The majority of these loans were collateralized. 32
The following table presents information concerning the aggregate amount of nonperforming assets, which includes nonaccrual loans, past due loans, TDRs and OREO: TABLE VI NONPERFORMING ASSETS As of
(dollars in thousands) 2020 2019 2018 2017 2016 Nonaccrual loans Commercial and industrial $ -
$ 257 $ 298 $ 836 $ 231Real estate-construction - - 417 721 - Real estate-mortgage (1) 311 5,780 1,772 1,857 814 Real estate-commercial 903 - 9,654 9,468 6,033 Consumer loans - - - - 81 Total nonaccrual loans $ 1,214 $ 6,037 $ 12,141 $ 12,882 $ 7,159
Loans 90 days or more past due and accrued interest Commercial and industrial
$ – $ –
- - 205 - - Real estate-mortgage (1) - - 315 306 276 Consumer loans (2) 744 1,091 1,965 2,401 2,603 Other - - 12 4 5
Total loans 90 days or more past due and accrued interest
$ 1,091 $ 2,497 $ 3,182 $ 2,884Restructured loans Commercial and industrial $ - $ 257 $ 217 $ 98 $ 144Real estate-construction 83 88 92 92 96 Real estate-mortgage (1) 492 6,754 1,956 2,458 2,731 Real estate-commercial 1,352 - 10,142 12,323 8,885 Consumer loans - - - - - Total restructured loans $ 1,927
Less restructured loans not at fault (included above)
1,120 4,693 8,454 8,561 2,838 Less restructured loans currently in compliance (3) 807 2,406 3,953 6,410 9,018 Net nonperforming, accruing restructured loans $ - $ - $ - $ - $ - Nonperforming loans
$ 1,958 $ 7,128 $ 14,638 $ 16,064 $ 10,043Other real estate owned Construction, land development, and other land $ - $ - $ 83$ - $ 940Former branch site - - - - 127 Total other real estate owned $ - $ - $ 83$ - $ 1,067Total nonperforming assets $ 1,958 $ 7,128 $ 14,721 $ 16,064 $ 11,110
Interest income that would have been recognized under the original loan terms on the above non -crual loans
Interest income recorded for the period on nonaccrual loans included above
$ 34 $ 115 $ 336 $ 281 $ 269(1) The real estate-mortgage segment includes residential 1 - 4 family, second mortgages and equity lines of credit. (2) Amounts listed include student loans and small business loans with principal and interest amounts that are 97 - 100% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled $547 thousandat December 31, 2020and $885 thousandat December 31, 2019. For additional information, refer to Note 4 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K. (3) Amounts listed represent restructured loans that are in compliance with their modified terms as of the date presented. As shown in the table above, as of December 31, 2020compared to December 31, 2019, the nonaccrual loan category decreased by $4.8 millionor 79.89% and the 90-days past due and still accruing interest category decreased by $347 thousandor 31.81%. 33
The majority of the balance of nonaccrual loans at
December 31, 2020was related to one large credit relationship. Of the $1.2 millionof nonaccrual loans at December 31, 2020, $903 thousand, or approximately 74.35%, was comprised of one credit relationship. All loans in these relationships have been analyzed to determine whether the cash flow of the borrower and the collateral pledged to secure the loans is sufficient to cover outstanding principal balances. The Company has set aside specific allocations for those loans without sufficient cash flow or collateral and charged off any balance that management does not expect to collect. The majority of the loans past due 90 days or more and still accruing interest at December 31, 2020( $547 thousand) were student loans. The federal government has provided guarantees of repayment of these student loans in an amount ranging from 97% to 98% of the total principal and interest of the loans; as such, management does not expect even a significant increase in past due student loans to have a material effect on the Company. Management believes the Company has excellent credit quality review processes in place to identify problem loans quickly. For a detailed discussion of the Company's nonperforming assets, refer to Note 4 and Note 5 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K. The Allowance for Loan Losses The allowance for loan losses is based on several components. In evaluating the adequacy of the allowance, each segment of the loan portfolio is divided into several pools of loans:
1. Specific identification (regardless of the risk rating)
2. Poor quality pool
3. Pool-other specially mentioned assets (OAEM) (rated just above the lower grade)
4. Passport loans (all other rated loans)
The first component of the allowance for loan losses is determined based on specifically identified loans that may become impaired. These loans are individually analyzed for impairment and include nonperforming loans and both performing and nonperforming TDRs. This component may also include loans considered impaired for other reasons, such as outdated financial information on the borrower or guarantors or financial problems of the borrower, including operating losses, marginal working capital, inadequate cash flow, or business interruptions. Changes in TDRs and nonperforming loans affect the dollar amount of the allowance. Increases in the impairment allowance for TDRs and nonperforming loans are reflected as an increase in the allowance for loan losses except in situations where the TDR or nonperforming loan does not require a specific allocation (i.e., the discounted present value of expected future cash flows or the collateral value is considered sufficient). The majority of the Company's TDRs and nonperforming loans are collateralized by real estate. When reviewing loans for impairment, the Company obtains current appraisals when applicable. If the Company has not yet received a current appraisal on loans being reviewed for impairment, any loan balance that is in excess of the estimated appraised value is allocated in the allowance. As of
December 31, 2020and December 31, 2019, the impaired loan component of the allowance for loan losses amounted to $11 thousandand $481 thousand, respectively. The decrease in the impaired loan component is due to resolution of several non- or under-performing credit relationships. The impaired loan component of the allowance for loan losses is reflected as a valuation allowance related to impaired loans in Note 4 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K. The second component of the allowance consists of qualitative factors and includes items such as economic conditions, growth trends, loan concentrations, changes in certain loans, changes in underwriting, changes in management and legal and regulatory changes. Historical loss is the final component of the allowance for loan losses. The calculation of the historical loss component is conducted on loans evaluated collectively for impairment and uses migration analysis with eight migration periods covering twelve quarters each on pooled segments. These segments are based on the loan classifications set by the Federal Financial Institutions Examination Councilin the instructions for the Call Report applicable to the Bank. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on whether the loan's payments are current (including loans 1 - 29 days past due), 30 - 59 days past due, 60 - 89 days past due, or 90 days or more past due. All other loans, including loans to consumers that are secured by real estate, are segmented by the Company's internally assigned risk grades: substandard, other assets especially mentioned (rated just above substandard), and pass (all other loans). The Company may also assign loans to the risk grades of doubtful or loss, but as of December 31, 2020and December 31, 2019, the Company had no loans in these categories. The overall historical loss rate from December 31, 2019to December 31, 2020, improved 20 basis points as a percentage of loans evaluated collectively for impairment as a result of overall improving asset quality combined with continued improvement in non-performing assets. For the same period, the qualitative factor components increased 20 basis points as a percentage of loans evaluated collectively for impairment overall. This increase was primarily due to segment adjustments for economic conditions and uncertainty related to the COVID-19 pandemic and change in volume. As the economic impact of the COVID-19 pandemic and the related federal relief programs continue to evolve, elevated levels of risk within the loan portfolio may require additional increases in the allowance for loan losses. 34
On a combined basis, the historical loss and qualitative factor components amounted to
$9.4 millionas of December 31, 2020and $9.2 millionat December 31, 2019. Management is monitoring portfolio activity, such as levels of deferral and/or modification requests, deferral and/or modification concentration levels by collateral, as well as industry concentration levels to identify areas within the loan portfolio which may create elevated levels of risk should the economic environment created by the COVID-19 pandemic or limited positive impact from federal government relief programs present indications of economic instability that is other than temporary in nature. Acquired loans are recorded at their fair value at acquisition date without carryover of the acquiree's previously established ALLL, as credit discounts are included in the determination of fair value. The fair value of the loans is determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and then applying a market-based discount rate to those cash flows. During evaluation upon acquisition, acquired loans are also classified as either purchased credit impaired or purchased performing. Acquired impaired loans reflect credit quality deterioration since origination, as it is probable at acquisition that the Company will not be able to collect all contractually required payments. These acquired impaired loans are accounted for under ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality. The acquired impaired loans are segregated into pools based on loan type and credit risk. Loan type is determined based on collateral type, purpose, and lien position. Credit risk characteristics include risk rating groups, nonaccrual status, and past due status. For valuation purposes, these pools are further disaggregated by maturity, pricing characteristics, and re-payment structure. Acquired impaired loans are written down at acquisition to fair value using an estimate of cash flows deemed to be collectible. Accordingly, such loans are no longer classified as nonaccrual even though they may be contractually past due because the Company expects to fully collect the new carrying values of such loans, which is the new cost basis arising from purchase accounting. Acquired performing loans are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs. The difference between the fair value and unpaid principal balance of the loan at acquisition date (premium or discount) is amortized or accreted into interest income over the life of the loans. If the acquired performing loan has revolving privileges, it is accounted for using the straight-line method? otherwise the effective interest method is used. Overall Change in Allowance As a result of management's analysis, the Company added, through the provision, $1.0 millionto the ALLL for the year ended December 31, 2020. The ALLL, as a percentage of year-end loans held for investment, was 1.14% in 2020 and 1.29% in 2019. The decrease in the ALLL as a percentage of loans held for investment at December 31, 2020compared to the prior year was directly attributable to PPP loan originations, creating a 0.13% compression. Excluding PPP loans, the ALLL as a percentage of loans held for investment was 1.27% at December 31, 2020. Management believes that the allowance has been appropriately funded for losses on existing loans, based on currently available information. Nonperforming asset levels and year-over-year quantitative historical loss rates continue to demonstrate improvement but are balanced by increased qualitative factors related to economic uncertainty stemming primarily from the COVID-19 pandemic. The Company will continue to monitor the loan portfolio, levels of nonperforming assets, and the sustainability of improving asset quality trends experienced in 2020 closely and make changes to the allowance for loan losses when necessary. As the economic impact of the COVID-19 pandemic continues to evolve, elevated levels of risk within the loan portfolio may require additional increases in the ALLL. For more information about these financial measures, which are not calculated in accordance with GAAP, please see "Non-GAAP Financial Measures" and "Reconciliation of Certain Non-GAAP Financial Measures". 35
The following table presents an analysis of the allowance for loan losses:
TABLE VII ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS
As of December 31, (Dollars in thousands) 2020 2019 2018 2017 2016 Balance, beginning
$ 9,660 $ 10,111 $ 9,448 $ 8,245 $ 7,738Charge-offs: Commercial and industrial 25 - 81 807 915 Real estate-construction - - - - - Real estate-mortgage (1) 149 170 325 273 473 Real estate-commercial 654 27 1,300 1,661 31 Consumer 822 776 769 279 204 Other 355 425 367 267 147 Total charge-offs 2,005 1,398 2,842 3,287 1,770 Recoveries: Commercial and industrial 47 10 140 37 79 Real estate-construction 10 - - 104 3 Real estate-mortgage (1) 69 113 111 44 196 Real estate-commercial 317 87 47 1 1 Consumer 377 351 262 56 28 Other 66 68 84 88 40 Total recoveries 886 629 644 330 347 Net charge-offs 1,119 769 2,198 2,957 1,423 Provision for loan 1,000 318 2,861 4,160 1,930 Ending Balance $ 9,541 $ 9,660 $ 10,111 $ 9,448 $ 8,245Selected loan loss statistics Loans (net of unearned income): End of period balance $ 836,300 $ 747,865 $ 774,009 $ 738,540 $ 603,882Average balance $ 834,247 $ 757,677 $ 768,960 $ 673,015 $ 585,206Net charge-offs to average total loans 0.13 % 0.10 % 0.29 % 0.44 % 0.24 % Provision for loan losses to average total loans 0.12 % 0.04 % 0.37 % 0.62 % 0.33 % Provision for loan losses to net charge-offs 89.37 % 41.35 % 130.16 % 140.68 % 135.63 % Allowance for loan losses to period end loans 1.14 % 1.29 % 1.31 % 1.28 % 1.37 % Earnings to loan loss coverage (2) 6.18 12.04
3.67 1.36 4.14 Allowance for loan losses on non-performing loans 487.28% 135.52% 69.07% 58.81% 82.10%
(1) The real estate-mortgage segment includes residential 1-4 mortgages, second mortgage loans and equity lines of credit. (2) Profit before taxes plus allowance for loan losses, divided by net write-offs.
The following table shows the amount of the allowance for loan losses allocated to each category at
December 31of the years presented. Although the allowance for loan losses is allocated into these categories, the entire allowance for loan losses is available to cover loan losses in any category. TABLE VIII ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES As of December 31, 2020 2019 2018 2017 2016 Percent of Percent of Percent of Percent of Percent of Loans to Loans to Loans to Loans to Loans to Total Total Total Total Total (Dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Commercial and industrial $ 65016.95 % $ 1,24410.08 % $ 2,3408.19 % $ 1,8898.18 % $ 1,4939.16 % Real estate-construction 339 5.23 % 258 5.44 % 156 4.18 % 541 3.72 % 846 3.83 % Real estate-mortgage (1) 2,560 24.82 % 2,505 28.17 % 2,497 27.64 % 2,779 23.77 % 2,656 26.98 % Real estate-commercial 4,434 37.89 % 3,663 37.11 % 3,459 37.02 % 2,438 39.22 % 2,611 47.27 % Consumer 1,302 14.15 % 1,694 18.32 % 1,354 21.85 % 1,644 23.59 % 455 9.61 % Other 123 0.96 % 296 0.88 % 305 1.12 % 157 1.52 % 184 3.15 % Unallocated 133 0.00 % - - - - - - - - Ending Balance $ 9,541100.00 % $ 9,660100.00 % $ 10,111100.00 % $ 9,448100.00 % $ 8,245100.00 %
(1) The real estate-mortgage segment includes residential 1-4, multi-family, second-ranking mortgages and equity lines of credit.
For the year ended
December 31, 2020as compared to the year ended December 31, 2019, there was a decrease in the allowance for loan losses due to improving asset quality trends and historical loss rates as well as resolution of non-performing loans. The change in the allowance was distributed among the loan segments based on the composition of loans in each segment.
The following table shows the average balances and the average rates paid on deposits for the periods presented.
TABLE IX DEPOSITS Years ended December 31, 2020 2019 2018 Average Average Average Average Average Average (Dollars in thousands) Balance Rate Balance Rate Balance Rate
$ 55,6670.02 % $ 32,6030.03 % $ 28,2460.04 % Money market 307,190 0.33 % 257,884 0.40 % 242,025 0.22 % Savings 96,149 0.06 % 86,787 0.10 % 87,534 0.09 % Time deposits 209,727 1.59 % 231,774 1.66 % 228,800 1.27 % Total interest bearing 668,733 0.66 % 609,048 0.82 % 586,605 0.60 % Demand 325,596 245,518 236,249 Total deposits $ 994,329 $ 854,566 $ 822,854The Company's average total deposits were $994.3 millionfor the year ended December 31, 2020, an increase of $139.8 millionor 16.35% from average total deposits for the year ended December 31, 2019. Demand deposit and money market account categories had the largest increases, totaling $80.1 millionand $49.3 million, respectively. Average time deposits, which is the Company's most expensive deposit category, decreased by a total of $22.0 millionas seen in the table above. The average rate paid on interest-bearing deposits by the Company in 2020 was 0.66% compared to 0.82% in 2019. The impact of government stimulus, PPP loan related deposits, and higher levels of consumer savings were primary drivers of the increase in total deposits. The Company remains focused on increasing lower-cost deposits by actively targeting new noninterest-bearing deposits and savings deposits.
The following table presents term deposits in amounts of
TABLE XI TIME DEPOSITS OF
As of December 31, (dollars in thousands) 2020 2019 Maturing in: Within 3 months
$ 26,494 $ 19,1214 through 6 months 12,391 8,699 7 through 12 months 20,751 25,820 Greater than 12 months 46,672 75,689 $ 106,308 $ 129,32937
Index Capital Resources Total stockholders' equity as of
December 31, 2020was $117.1 million, up 6.70% from $109.8 millionon December 31, 2019as the result of increased retained earnings and the reversal of the net unrealized loss on available-for-sale securities, a component of accumulated other comprehensive income (loss) on the consolidated balance sheets. The improvement in the unrealized gain/loss position was driven by changes in market rates and shift in portfolio composition. The Bank's capital position remains strong as evidenced by the regulatory capital measurements. Under the banking regulations, Total Capital is composed of core capital (Tier 1) and supplemental capital (Tier 2). Tier 1 capital consists of common stockholders' equity less goodwill. Tier 2 capital consists of certain qualifying debt and a qualifying portion of the allowance for loan losses. In June 2013, the federal bank regulatory agencies adopted the Basel III CapitalRules (i) to implement the Basel III capital framework and (ii) for calculating risk-weighted assets. These rules became effective January 1, 2015, subject to limited phase-in periods. The EGRRCPA, enacted in May 2018, required action by the FRB to expand the applicability of its small bank holding company policy statement, which, among other things, exempts certain bank holding companies from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements that apply to other bank holding companies. In August 2018, the FRB issued an interim final rule provisionally expanding the applicability of the small bank holding company policy statement to bank holding companies with consolidated total assets of less than $3 billion. The statement previously applied only to bank holding companies with consolidated total assets of less than $1 billion. As a result of the interim final rule, which was effective upon its issuance, the Company expects that it will be treated as a small bank holding company and will no longer be subject to regulatory capital requirements. For an overview of the Basel III Capital Rules and the EGRRCPA, refer to "Regulation and Supervision" included in Item 1, "Business" of this report on Form 10-K.
In order to qualify for the CBLR framework, a community banking organization must have a Tier 1 leverage ratio of greater than 9%, less than
$10 billionin total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. The CBLR framework was available for banks to begin using in their March 31, 2020, Call Report. The Bank did not opt into the CBLR framework. The following is a summary of the Bank's capital ratios for the past two years. As shown below, these ratios were all well above the recommended regulatory minimum levels. 2020 2019 Regulatory Regulatory Minimums
Ordinary Tier 1 capital relative to risk-weighted assets 4.500%
11.69 % 4.500 % 11.73 % Tier 1 Capital to Risk-Weighted Assets 6.000 % 11.69 % 6.000 % 11.73 % Tier 1 Leverage to Average Assets 4.000 % 8.56 % 4.000 % 9.73 % Total Capital to Risk-Weighted Assets 8.000 % 12.77 % 8.000 % 12.86 % Capital Conservation Buffer 2.500 % 4.77 % 2.500 % 4.86 % Risk-Weighted Assets (in thousands) $ 890,091 $ 863,905 Year-end book value per share was
$22.53in 2020 and $21.11in 2019. The common stock of the Company has not been extensively traded. The stock is quoted on the NASDAQ Capital Market under the symbol "OPOF." There were 1,611 stockholders of record of the Company as of March 15, 2021. This stockholder count does not include stockholders who hold their stock in a nominee registration.
Liquidity is the ability of the company to meet its present and future financial obligations through the sale or maturity of existing assets or through the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, sold federal funds, securities investments, and loans maturing within one year.
The Company's major source of liquidity is its large, stable deposit base. In addition, secondary liquidity sources are available through the use of borrowed funds if the need should arise, including secured advances from the FHLB and FRB. As of
December 31, 2020, the Company had $374.7 millionin FHLB borrowing availability. The Company believes that the availability at the FHLB is sufficient to meet future cash-flow needs. As of year-end 2020 and 2019, the Company had $100.0 millionand $55.0 millionavailable in federal funds lines of credit to address any short-term borrowing needs, respectively. 38
As a result of the Company's management of liquid assets, the availability of borrowed funds and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and to meet its customers' future borrowing needs. Notwithstanding the foregoing, the Company's ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in the Company's markets. Depending on its liquidity levels, its capital position, conditions in the capital markets and other factors, the Company may from time to time consider the issuance of debt, equity, other securities or other possible capital markets transactions, the proceeds of which could provide additional liquidity for the Company's operations. The following table sets forth information relating to the Company's sources of liquidity and the outstanding commitments for use of liquidity at
December 31, 2020and December 31, 2019. Dividing the total short-term sources of liquidity by the outstanding commitments for use of liquidity derives the liquidity coverage ratio. December 31, 2020 2019 (dollars in thousands) Total In Use Available Total In Use Available Sources: Federal funds lines of credit $ 100,000$ - $ 100,000 $ 55,000$ - $ 55,000Federal Home Loan Bank advances 374,743 - 374,743 313,275 37,000 276,275 Federal funds sold & balances at the Federal Reserve 93,727 50,665 Securities, available for sale and unpledged at fair value 112,229 71,712 Total short-term funding sources $ 680,699 $ 453,652Uses: (1) Unfunded loan commitments and available lending lines of credit 71,742 66,986 Letters of credit 1,452 2,317 Total potential short-term funding uses 73,194 69,303 Liquidity coverage ratio 930.0 % 654.6 %
(1) Represents partial withdrawal levels based on loan segment.
The fair value of unsecured AFS securities increased from
Management is not aware of any market or institutional trends, events or uncertainties, other than potential impacts from the COVID-19 pandemic, that are expected to have a material effect on the liquidity, capital resources or operations of the Company. Nor is management aware of any current recommendations by regulatory authorities that would have a material effect on liquidity or operations. The Company's internal sources of liquidity are deposits, loan and investment repayments and securities available-for-sale. The Company's primary external source of liquidity is advances from the FHLB. The Company's operating activities used
$8.6 millionof cash during the year ended December 31, 2020, compared to $12.3 millionprovided during 2019. The Company's investing activities used $122.2 millionof cash during 2020, compared to $29.2 millionprovided during 2019. The Company's financing activities provided $161.4 millionof cash during 2020 compared to $6.1 millionof cash provided during 2019. Effects of Inflation Management believes changes in interest rates affect the financial condition of the Company, and other financial institutions, to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond the control of the Company, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the U.S.government, its agencies and various other governmental regulatory authorities. Management believes that the key to achieving satisfactory performance in an inflationary environment is the Company's ability to maintain or improve its net interest margin and to generate additional fee income. The Company's policy of investing in and funding with interest-sensitive assets and liabilities is intended to reduce the risks inherent in a volatile inflationary economy. 39
Off-Balance Sheet Lending Related Commitments The Company had
$151.6 millionin consumer and commercial commitments at December 31, 2020. As of the same date, the Company also had $4.8 millionin letters of credit that the Company will fund if certain future events occur. It is expected that only a portion of these commitments will ever actually be funded. Management believes that the Company has the liquidity and capital resources to handle these commitments in the normal course of business. See Note 15 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K. Contractual Obligations In the normal course of business, there are various outstanding contractual obligations of the Company that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit, which may or may not require future cash outflows. The following table provides the Company's contractual obligations as of December 31, 2020: Payments due by period Less More Than 1 1-3 3-5 Than 5 (dollars in thousands) Total Year Years Years Years Contractual Obligations Short-Term Debt Obligations $ 6,619 $ 6,619$ - $ - $ - Long-Term Debt Obligations 29,900 600 29,150 150 - Operating Lease Obligations 1,488 352 587 549 - Total contractual cash obligations excluding deposits 38,007 7,571 29,737 699 - Deposits 1,067,236 985,095 65,393 16,748 - Total $ 1,105,243 $ 992,666 $ 95,130 $ 17,447$ - Short-term debt obligations include federal funds purchased, overnight repurchase agreements and Federal Home Loan Bankadvances maturing within a year of origination. Long-term debt obligations consist of FRB borrowings under PPPLF with original maturities greater than one year. Non-GAAP Financial Measures In reporting the results of the year ended December 31, 2020, the Company has provided supplemental financial measures on a tax-equivalent or an adjusted basis. These non-GAAP financial measures are a supplement to GAAP, which is used to prepare the Company's financial statements, and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, the Company's non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. The Company uses the non-GAAP financial measures discussed herein in its analysis of the Company's performance. The Company's management believes that these non-GAAP financial measures provide additional understanding of ongoing operations and enhance comparability of results of operations with prior periods presented without the impact of items or events that may obscure trends in the Company's underlying performance. A reconciliation of the non-GAAP financial measures used by the Company to evaluate and measure the Company's performance to the most directly comparable GAAP financial measures is presented below. 40
Index Years Ended December 31, (dollar in thousands, except per share data) 2020 2019 Fully Taxable Equivalent Net Interest Income Net interest income (GAAP)
$ 34,717 $ 33,819FTE adjustment 187 253 Net interest income (FTE) (non-GAAP) $ 34,904 $ 34,072Noninterest income (GAAP) 14,698 14,077 Total revenue (FTE) (non-GAAP) $ 49,602 $ 48,149Noninterest expense (GAAP) 42,505 38,638 Average earning assets $ 1,092,567 $ 943,654Net interest margin 3.18 % 3.58 % Net interest margin (FTE) 3.19 % 3.61 % Efficiency ratio 86.02 % 80.67 % Efficiency ratio (FTE) 85.69 % 80.25 % ALLL as a Percentage of Loans Held for Investment Loans held for investment (net of deferred fees and costs) (GAAP) $ 836,300 $ 871,890Less PPP originations 85,983 102,489 Loans held for investment, (net of deferred fees and costs), excluding PPP (non-GAAP) $ 750,317 $ 769,401ALLL $ 9,541 $ 9,920ALLL as a Percentage of Loans Held for Investment 1.14 % 1.14 %
ALLL as a percentage of loans held for investment, net of PPP initiations
1.27 % 1.29 %
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