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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to           

 

Commission file number:  0-12820

 

AMERICAN NATIONAL BANKSHARES INC.

(Exact name of registrant as specified in its charter)

   

virginia

 

54-1284688

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

628 Main Street, Danville, Virginia

 

24541

(Address of principal executive offices)

 

(Zip Code)

(434) 792-5111

(Registrant's telephone number, including area code)

 

(Not applicable)

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

   

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

AMNB

Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes

No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

  

Large accelerated filer  ☐

Accelerated filer  ☒

Non-accelerated filer  ☐ 

Smaller reporting company

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.              ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes

No

 

At May 3, 2021, the Company had 10,944,484 shares of Common Stock outstanding, $1 par value.

 

 

 

 

AMERICAN NATIONAL BANKSHARES INC.

 

       

Index

 

 

Page

 

 

 

 

Part I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020

3

 

 

 

 

 

 

Consolidated Statements of Income for the three months ended March 31, 2021 and 2020 (unaudited)

4

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020 (unaudited)

5

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2021 and 2020 (unaudited)

6

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited)

7

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

8

 

 

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

32

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

48

 

 

 

 

 

Item 4.

Controls and Procedures

49

 

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

50

 

 

 

 

 

Item 1A.

Risk Factors

50

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

51

 

 

 

 

 

Item 4.

Mine Safety Disclosures

51

       

 

Item 5.

Other Information

51

 

 

 

 

 

Item 6.

Exhibits

52

 

 

 

 

SIGNATURES

53

 

 

2

 

 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

American National Bankshares Inc.

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

 

  

(Unaudited) March 31, 2021

  

(Audited) December 31, 2020

 

Assets

        

Cash and due from banks

 $33,266  $30,767 

Interest-bearing deposits in other banks

  383,984   343,603 

Securities available for sale, at fair value

  482,143   466,091 

Restricted stock, at cost

  8,024   8,715 

Loans held for sale

  17,929   15,591 

Loans, net of deferred fees and costs

  1,978,640   2,015,056 

Less allowance for loan losses

  (21,416)  (21,403)

Net loans

  1,957,224   1,993,653 

Premises and equipment, net

  39,336   39,723 

Other real estate owned, net of valuation allowance

  443   958 

Goodwill

  85,048   85,048 

Core deposit intangibles, net

  5,710   6,091 

Bank owned life insurance

  28,635   28,482 

Other assets

  31,690   31,288 

Total assets

 $3,073,432  $3,050,010 
         

Liabilities

        

Noninterest-bearing deposits

 $907,721  $830,094 

Interest-bearing deposits

  1,724,813   1,781,236 

Total deposits

  2,632,534   2,611,330 

Customer repurchase agreements

  39,205   42,551 

Long-term borrowings

  35,656   35,630 

Other liabilities

  24,244   22,605 

Total liabilities

  2,731,639   2,712,116 
         

Shareholders' equity

        

Preferred stock, $5 par value, 2,000,000 shares authorized, none outstanding

      

Common stock, $1 par value, 20,000,000 shares authorized, 10,958,171 shares outstanding at March 31, 2021 and 10,982,367 shares outstanding at December 31, 2020

  10,894   10,926 

Capital in excess of par value

  153,651   154,850 

Retained earnings

  178,015   169,681 

Accumulated other comprehensive income (loss), net

  (767)  2,437 

Total shareholders' equity

  341,793   337,894 

Total liabilities and shareholders' equity

 $3,073,432  $3,050,010 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3

 

 

 

American National Bankshares Inc.

Consolidated Statements of Income

(Dollars in thousands, except per share data) (Unaudited)

 

  

Three Months Ended March 31,

 
  

2021

  

2020

 

Interest and Dividend Income:

        

Interest and fees on loans

 $22,273  $21,321 

Interest and dividends on securities:

        

Taxable

  1,632   2,037 

Tax-exempt

  103   112 

Dividends

  119   132 

Other interest income

  77   264 

Total interest and dividend income

  24,204   23,866 

Interest Expense:

        

Interest on deposits

  1,287   3,312 

Interest on short-term borrowings

  11   129 

Interest on long-term borrowings

  483   506 

Total interest expense

  1,781   3,947 

Net Interest Income

  22,423   19,919 

Provision for loan losses

     953 

Net Interest Income After Provision for Loan Losses

  22,423   18,966 

Noninterest Income:

        

Trust fees

  1,206   1,012 

Service charges on deposit accounts

  622   721 

Other fees and commissions

  1,139   941 

Mortgage banking income

  1,318   549 

Securities gains, net

     814 

Brokerage fees

  218   211 

Income from Small Business Investment Companies

  428   55 
Income from insurance investments  788   48 

Losses on premises and equipment, net

  (49)  (82)

Other

  252   226 

Total noninterest income

  5,922   4,495 

Noninterest Expense:

        

Salaries and employee benefits

  7,518   7,360 

Occupancy and equipment

  1,533   1,366 

FDIC assessment

  224   95 

Bank franchise tax

  438   426 

Core deposit intangible amortization

  381   427 

Data processing

  778   763 

Software

  329   356 

Other real estate owned, net

  117   (9)

Other

  2,747   2,550 

Total noninterest expense

  14,065   13,334 

Income Before Income Taxes

  14,280   10,127 

Income Taxes

  2,991   1,585 

Net Income

 $11,289  $8,542 

Net Income Per Common Share:

        

Basic

 $1.03  $0.77 

Diluted

 $1.03  $0.77 

Weighted Average Common Shares Outstanding:

        

Basic

  10,971,466   11,025,185 

Diluted

  10,976,177   11,031,310 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4

 

 

 

American National Bankshares Inc.

Consolidated Statements of Comprehensive Income

(Dollars in thousands) (Unaudited)

 

  Three Months Ended March 31, 
  

2021

  

2020

 

Net income

 $11,289  $8,542 
         

Other comprehensive income (loss):

        
         

Unrealized gains (losses) on securities available for sale

  (5,882)  6,189 

Tax effect

  1,271   (1,336)
         

Reclassification adjustment for gains on sales or calls of securities available for sale

     (814)

Tax effect

     176 
         

Unrealized gains (losses) on cash flow hedges

  1,781   (2,829)

Tax effect

  (374)  611 
         

Other comprehensive income (loss)

  (3,204)  1,997 
         

Comprehensive income

 $8,085  $10,539 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5

 

 

American National Bankshares Inc.

Consolidated Statements of Changes in Shareholders' Equity

Three Months Ended March 31, 2021 and 2020

(Dollars in thousands, except per share data) (Unaudited)

  Common Stock  

Capital in Excess of Par Value

  Retained Earnings  

Accumulated Other Comprehensive Income (Loss)

  

Total Shareholders' Equity

 

Balance, December 31, 2019

 $11,019  $158,244  $151,478  $(483) $320,258 
                     

Net income

        8,542      8,542 
                     

Other comprehensive income

           1,997   1,997 
                     

Stock repurchased (140,526)

  (141)  (4,840)        (4,981)
                     

Stock options exercised (1,743 shares)

  2   27         29 
                     

Vesting of restricted stock (12,245 shares)

  12   (12)         
                     

Equity based compensation (24,745 shares)

  6   398         404 
                     

Cash dividends paid, $0.27 per share

        (2,956)     (2,956)
                     

Balance, March 31, 2020

 $10,898  $153,817  $157,064  $1,514  $323,293 
                     

Balance, December 31, 2020

 $10,926  $154,850  $169,681  $2,437  $337,894 
                     

Net income

        11,289      11,289 
                     

Other comprehensive loss

           (3,204)  (3,204)
                     
Stock repurchased (54,023 shares)  (54)  (1,540)        (1,594)
                     

Vesting of restricted stock (15,315 shares)

  15   (15)         
                     

Equity based compensation (29,827 shares)

  7   356         363 
                     

Cash dividends paid, $0.27 per share

        (2,955)     (2,955)
                     

Balance, March 31, 2021

 $10,894  $153,651  $178,015  $(767) $341,793 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6

 

 

American National Bankshares Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands) (Unaudited)

 

  Three Months Ended March 31, 
  

2021

  

2020

 

Cash Flows from Operating Activities:

        

Net income

 $11,289  $8,542 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Provision for loan losses

     953 

Depreciation

  580   521 

Net accretion of acquisition accounting adjustments

  (948)  (957)

Core deposit intangible amortization

  381   427 

Net amortization of securities

  406   202 

Net gain on sale or call of securities available for sale

     (814)
Gain on sale of loans held for sale  (1,318)  (549)
Proceeds from sales of loans held for sale  40,166   25,655 

Originations of loans held for sale

  (41,186)  (25,745)

Net loss (gain) on other real estate owned

  111   (27)

Net loss on sale or disposal of premises and equipment

  49   82 

Equity based compensation expense

  363   404 

Earnings on bank owned life insurance

  (153)  (153)

Deferred income tax expense

  106   800 

Net change in other assets

  389   (179)

Net change in other liabilities

  3,420   (1,401)

Net cash provided by operating activities

  13,655   7,761 
         

Cash Flows from Investing Activities:

        

Proceeds from sales of securities available for sale

     5,811 

Proceeds from maturities, calls and paydowns of securities available for sale

  55,825   94,731 

Purchases of securities available for sale

  (78,165)  (58,129)

Net change in restricted stock

  691   (52)

Net decrease (increase) in loans

  37,381   (23,295)

Proceeds from sale of premises and equipment

  4    

Purchases of premises and equipment

  (246)  (907)

Proceeds from sales of other real estate owned

  404   144 

Net cash provided by investing activities

  15,894   18,303 
         

Cash Flows from Financing Activities:

        

Net change in noninterest-bearing deposits

  77,627   (10,834)

Net change in interest-bearing deposits

  (56,401)  21,027 

Net change in customer repurchase agreements

  (3,346)  1,639 

Common stock dividends paid

  (2,955)  (2,956)

Repurchase of common stock

  (1,594)  (4,981)

Proceeds from exercise of stock options

     29 

Net cash provided by financing activities

  13,331   3,924 

Net Increase in Cash and Cash Equivalents

  42,880   29,988 

Cash and Cash Equivalents at Beginning of Period

  374,370   79,582 

Cash and Cash Equivalents at End of Period

 $417,250  $109,570 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

7

 

AMERICAN NATIONAL BANKSHARES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1 – Accounting Policies

 

The consolidated financial statements include the accounts of American National Bankshares Inc. (NASDAQ: AMNB) (the "Company") and its wholly-owned subsidiary, American National Bank and Trust Company (the "Bank"). The Company is a multi-state bank holding company headquartered in Danville, Virginia. The Bank is a community bank organization serving Virginia and North Carolina with 26 banking offices. In addition to traditional retail, commercial and mortgage offerings, the Bank also provides trust and investment services through its Trust and Investment Services Division.

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, goodwill and intangible assets, other-than-temporary impairment of securities, accounting for merger and acquisition activity, accounting for acquired loans with specific credit-related deterioration, and the valuation of deferred tax assets and liabilities.

 

COVID-19 spread rapidly across the world in the first quarter of 2020 and was declared a pandemic by the World Health Organization. On March 13, 2020, the United States President declared a national emergency in the face of a growing public health and economic crisis due to the COVID-19 global pandemic. The government and private sector responses to contain its spread began to significantly affect the Company's operations beginning in March 2020 and will likely continue to adversely affect its operations through 2021, although such effects may vary significantly. The duration and extent of the effects over longer terms cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic will most likely affect future earnings, cash flows and overall financial condition of the Company. These uncertainties include the nature and duration of the financial effects felt by its customers impacting their ability to perform in accordance with their underlying loan agreements, the Company's ability to generate demand for non-loan related products and services, as well as potential declines in real estate values resulting from the market disruption which may impair the recorded values of collateral-dependent loans and other real estate owned. Further, these factors, in addition to those pervasive to the industry and overall U.S. economy, may necessitate an overall valuation of the Company's franchise in such a way an impairment charge to the carrying value of goodwill would be required. Accordingly, significant estimates used in the preparation of the Company's financial statements including those associated with the evaluation of the allowance for loan losses as well as other valuation-based estimates may be subject to significant adjustments in future periods. While we have seen some improvement in the severity of the pandemic, it is still expected that estimates could be impacted by its effects.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results that may occur for any other period. These statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020. Certain prior period adjustments have been reclassified to conform to the current period presentation.

 

Recently Adopted Accounting Developments

 

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes." The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers' application of certain income tax-related guidance. This ASU is part of the FASB's simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. ASU 2019-12 was effective for the Company on January 1, 2021. The adoption of ASU 2019-12 did not have a material effect on the Company's consolidated financial statements.

 

In January 2020, the FASB issued ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815." The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. ASU 2020-01 was effective for the Company on January 1, 2021. The adoption of ASU 2020-01 did not have a material effect on the Company's consolidated financial statements.

 

8

 

In October 2020, the FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs." This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of FASB Accounting Standards Codification ("ASC") paragraph 310-20-35-33 for each reporting period. ASU 2019-12 was effective for the Company on January 1, 2021. The adoption of ASU 2019-12 did not have a material effect on the Company's consolidated financial statements.

 

In December 2020, the Consolidated Appropriations Act of 2021 ("CAA") was passed. Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, including the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") and treatment of certain loan modifications related to the COVID-19 pandemic.

 

During the first quarter of 2021, the Bank continued to assist borrowers through the Disaster Assistance Program ("DAP") adopted in March 2020 in response to the federal banking agencies issuance of the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus." This was in response to the COVID-19 pandemic affecting societies and economies around the world. This guidance encouraged financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance explained that, in consultation with the FASB staff, the federal banking agencies have concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not troubled debt restructurings ("TDRs"). On  March 31, 2021, the balance of loans remaining in this program was $19.3 million, or less than 1.0% of the total portfolio, compared to $30.0 million, or 1.5%, at December 31, 2020. At March 31, 2021, $16.4 million of the $19.3 million was the result of second and third interest deferrals. The majority of the remaining modifications involved six-month deferments of interest.

 

The Company continued to participate in the PPP under the CARES Act in the first quarter of 2021. During the quarter, there were 805 loans processed for approximately $80.7 million from the second round of the program. The loans are 100% guaranteed by the SBA and therefore do not have a related allowance. The SBA pays the Bank a processing fee based on the size of the loan which is amortized to income over the life of the loan or until the loan is forgiven or otherwise repaid. In addition to the new loans, $105.1 million of first round loans from 2020 were forgiven in first quarter 2021 compared to $56.4 million in the fourth quarter of 2020. Total outstanding net PPP loans were $183.8 million and $211.3 million at March 31, 2021 and December 31, 2020, respectively.

 

Recent Accounting Pronouncements and Other Authoritative Accounting Guidance

 

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission ("SEC") and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. At the one-time evaluation date, the Company qualified as a smaller reporting company and elected to defer the adoption of the standard. The Company will continue to validate its models that will be used upon future adoption of the standard. The implementation of this ASU will likely result in an adjustment to the Company's reserves when implemented.

 

In August 2018, the FASB issued ASU 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans." The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: the projected benefit obligation ("PBO") and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation ("ABO") and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements.

 

Effective  November 25, 2019, the SEC adopted Staff Accounting Bulletin ("SAB") 119. SAB 119 updated portions of SEC interpretative guidance to align with ASC 326, Financial Instruments - Credit Losses. It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

 

9

 

In  March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments in this ASU provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope." This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is assessing ASU 2020-04 and its impact on the Company's transition away from LIBOR for its loans and other financial instruments.

 

In August 2020, the FASB issued ASU 2020-06, "Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity." The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.  For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.

 

 

Note 2 – Securities

 

The amortized cost and fair value of investments in securities available for sale at March 31, 2021 were as follows (dollars in thousands):

 

  

March 31, 2021

 
  Amortized Cost  Unrealized Gains  Unrealized Losses  Fair Value 

Securities available for sale:

                
U.S. Treasury $30,152  $  $106  $30,046 

Federal agencies and GSEs

  108,465   1,539   677   109,327 

Mortgage-backed and CMOs

  262,898   4,384   2,369   264,913 

State and municipal

  63,410   1,597   434   64,573 

Corporate

  13,001   284   1   13,284 

Total securities available for sale

 $477,926  $7,804  $3,587  $482,143 

 

The amortized cost and fair value of investments in securities available for sale at December 31, 2020 were as follows (dollars in thousands):

 

  

December 31, 2020

 
  Amortized Cost  Unrealized Gains  Unrealized Losses  Fair Value 

Securities available for sale:

                
U.S. Treasury $34,997  $1  $  $34,998 

Federal agencies and GSEs

  104,092   1,976   45   106,023 

Mortgage-backed and CMOs

  246,770   6,117   105   252,782 

State and municipal

  57,122   1,979   2   59,099 

Corporate

  13,011   188   10   13,189 

Total securities available for sale

 $455,992  $10,261  $162  $466,091 

 

10

 

Restricted Stock

 

Due to restrictions placed upon the Bank's common stock investment in the Federal Reserve Bank of Richmond ("FRB") and Federal Home Loan Bank of Atlanta ("FHLB"), these securities have been classified as restricted equity securities and carried at cost. The restricted securities are not subject to the investment security classification requirements and are included as a separate line item on the Company's consolidated balance sheets. The FRB requires the Bank to maintain stock with a par value equal to 3.00% of its outstanding capital and an additional 3.00% is on call. The FHLB requires the Bank to maintain stock in an amount equal to 3.75% of outstanding borrowings and a specific percentage of the Bank's total assets. The cost of restricted stock at March 31, 2021 and  December 31, 2020 was as follows (dollars in thousands):

 

  March 31, 2021  December 31, 2020 

FRB stock

 $6,468  $6,458 

FHLB stock

  1,556   2,257 

Total restricted stock

 $8,024  $8,715 

 

Temporarily Impaired Securities

 

The following table shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2021. The reference point for determining when securities are in an unrealized loss position is month end. Therefore, it is possible that a security's market value exceeded its amortized cost on other days during the past twelve-month period.

 

Available for sale securities that have been in a continuous unrealized loss position, at March 31, 2021, are as follows (dollars in thousands):

 

  

Total

  

Less than 12 Months

  

12 Months or More

 
  

Fair Value

  

Unrealized Loss

  

Fair Value

  

Unrealized Loss

  

Fair Value

  

Unrealized Loss

 
U.S. Treasury $30,046  $106  $30,046  $106  $  $ 

Federal agencies and GSEs

  56,948   677   55,779   660   1,169   17 

Mortgage-backed and CMOs

  123,513   2,369   119,315   2,363   4,198   6 

State and municipal

  18,278   434   18,278   434       

Corporate

  1,999   1   1,999   1       

Total

 $230,784  $3,587  $225,417  $3,564  $5,367  $23 

 

The table below shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, at December 31, 2020 (dollars in thousands):

 

  

Total

  

Less than 12 Months

  

12 Months or More

 
  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss 

Federal agencies and GSEs

 $21,237  $45  $19,974  $26  $1,263  $19 

Mortgage-backed and CMOs

  46,640   105   46,640   105       

State and municipal

  3,456   2   3,456   2       

Corporate

  5,990   10   5,990   10       

Total

 $77,323  $162  $76,060  $143  $1,263  $19 

 

U.S. Treasury securities: The unrealized losses on the Company's investment in five U.S. Treasury securities were caused by normal market fluctuations. None of these securities were in an unrealized loss position for 12 months or more. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2021.

 

11

 

Federal agencies and GSEs: The unrealized losses on the Company's investment in 24 government sponsored entities ("GSE") securities were caused by normal market fluctuations. Ten of these securities were in an unrealized loss position for 12 months or more. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2021.

 

Mortgage-backed securities: The unrealized losses on the Company's investment in 13 GSE mortgage-backed securities were caused by normal market fluctuations. None of these securities were in an unrealized loss position for 12 months or more. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2021.

 

Collateralized Mortgage Obligations: The unrealized losses associated with nine GSE collateralized mortgage obligations ("CMOs") were due to normal market fluctuations. One of these securities was in an unrealized loss position for 12 months or more. The contractual cash flows of these investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2021.

 

State and municipal securities: The unrealized losses on 28 state and municipal securities were caused by normal market fluctuations. None of these securities were in an unrealized loss position for 12 months or more. These securities are of high credit quality (rated A- or higher), and principal and interest payments have been made timely. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2021.

 

Corporate securities: The unrealized loss on one corporate security was caused by normal market fluctuations and not credit deterioration. This security remains investment grade, and the Company's analysis did not indicate the existence of credit loss. The contractual terms of this investment does not permit the issuer to settle the security at a price less than the amortized cost basis of the investment. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at  March 31, 2021.

 

Restricted stock: When evaluating restricted stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider restricted stock to be other-than-temporarily impaired at March 31, 2021, and no impairment has been recognized.

 

Other-Than-Temporarily-Impaired Securities

 

As of March 31, 2021 and December 31, 2020, there were no securities classified as other-than-temporarily impaired.

 

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Realized Gains and Losses

 

The following table presents the gross realized gains and losses on, and the proceeds from the sale of, securities available for sale during the three months ended March 31, 2021 and 2020 (dollars in thousands):

 

  

Three Months Ended March 31, 2021

 

Realized gains (losses):

    

Gross realized gains

 $ 

Gross realized losses

   

Net realized gains

 $ 

Proceeds from sales of securities

 $ 

 

  

Three Months Ended March 31, 2020

 

Realized gains (losses):

    

Gross realized gains

 $814 

Gross realized losses

   

Net realized gains

 $814 

Proceeds from sales of securities

 $5,811 

 

 

Note 3 – Loans

 

Loans, net of deferred fees and costs and excluding loans held for sale, at March 31, 2021 and  December 31, 2020, were comprised of the following (dollars in thousands):

 

  March 31, 2021  December 31, 2020 

Commercial

 $447,109  $491,256 

Commercial real estate:

        

Construction and land development

  159,801   140,071 

Commercial real estate - owner occupied

  364,549   373,680 
Commercial real estate - non-owner occupied  628,742   627,569 

Residential real estate:

        

Residential

  266,595   269,137 

Home equity

  100,643   104,881 

Consumer

  11,201   8,462 

Total loans, net of deferred fees and costs

 $1,978,640  $2,015,056 
         

 

Acquired Loans 

 

The outstanding principal balance and the carrying amount of these loans, including loans accounted for under ASC 310-30, included in the consolidated balance sheets at March 31, 2021 and  December 31, 2020 are as follows (dollars in thousands):

 

  March 31, 2021  December 31, 2020 

Outstanding principal balance

 $227,525  $251,730 

Carrying amount

  217,738   241,008 

 

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The outstanding principal balance and related carrying amount of purchased credit impaired loans, for which the Company applies ASC 310-30 to account for interest earned, as of the indicated dates are as follows (dollars in thousands):

 

  March 31, 2021  December 31, 2020 

Outstanding principal balance

 $34,916  $37,417 

Carrying amount

  27,966   30,201 

 

The following table presents changes in the accretable yield on acquired impaired loans, for which the Company applies ASC 310-30, for the three months ended March 31, 2021 and the year ended December 31, 2020 (dollars in thousands):

 

  March 31, 2021  December 31, 2020 

Balance at January 1

 $6,513  $7,893 

Accretion

  (712)  (3,553)

Reclassification from nonaccretable difference

  451   2,233 

Other changes, net (1)

  79   (60)
  $6,331  $6,513 

  __________________________

  (1) This line item represents changes in the cash flows expected to be collected due to the impact of non-credit changes such as prepayment assumptions, changes in interest rates on variable rate acquired impaired loans, and discounted payoffs that occurred in the period.

 

Past Due Loans

 

The following table shows an analysis by portfolio segment of the Company's past due loans at March 31, 2021 (dollars in thousands):

 

  30- 59 Days Past Due  60-89 Days Past Due  90 Days + Past Due and Still Accruing  Non Accrual Loans  Total Past Due  

Current

  Total Loans 

Commercial

 $  $23  $  $68  $91  $447,018  $447,109 

Commercial real estate:

                            

Construction and land development

           5   5   159,796   159,801 

Commercial real estate - owner occupied

           45   45   364,504   364,549 
Commercial real estate - non-owner occupied           1,003   1,003   627,739   628,742 

Residential:

                            

Residential

  202   78   162   1,128   1,570   265,025   266,595 

Home equity

  90         67   157   100,486   100,643 

Consumer

  14   4      7   25   11,176   11,201 

Total

 $306  $105  $162  $2,323  $2,896  $1,975,744  $1,978,640 

 

The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 2020 (dollars in thousands):

 

  30- 59 Days Past Due  60-89 Days Past Due  90 Days + Past Due and Still Accruing  Non Accrual Loans  Total Past Due  

Current

  Total Loans 

Commercial

 $153  $9  $  $100  $262  $490,994  $491,256 

Commercial real estate:

                            

Construction and land development

  168         5   173   139,898   140,071 

Commercial real estate - owner occupied

  62      209   304   575   373,105   373,680 
Commercial real estate - non-owner occupied           1,158   1,158   626,411   627,569 

Residential:

                            

Residential

  711   211   53   792   1,767   267,370   269,137 

Home equity

           69   69   104,812   104,881 

Consumer

  49   14      6   69   8,393   8,462 

Total

 $1,143  $234  $262  $2,434  $4,073  $2,010,983  $2,015,056 

 

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Impaired Loans

 

The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at March 31, 2021 (dollars in thousands):

 

  

Recorded Investment

  Unpaid Principal Balance  Related Allowance  Average Recorded Investment  Interest Income Recognized 

With no related allowance recorded:

                    

Commercial

 $  $  $  $9  $ 

Commercial real estate:

                    

Construction and land development

               

Commercial real estate - owner occupied

  30   27      158   1 
Commercial real estate - non-owner occupied  1,108   1,107      1,127   17 

Residential: