COMMUNITY BANKERS TRUST CORPORATION The following discussion and analysis of the financial condition atJune 30, 2021 and results of operations ofCommunity Bankers Trust Corporation (the "Company") for the three and six months endedJune 30, 2021 should be read in conjunction with the Company's consolidated financial statements and the accompanying notes to consolidated financial statements included in this report and in the Company's Annual Report on Form 10-K for the year ended December
31, 2020. OVERVIEWCommunity Bankers Trust Corporation (the "Company") is headquartered inRichmond, Virginia and is the holding company forEssex Bank (the "Bank"), aVirginia state bank with 24 full-service offices, 18 of which are inVirginia and six of which are inMaryland . The Bank also operates two loan production offices.
The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals, small businesses and larger commercial companies, including individual and commercial demand and time
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deposit accounts, commercial and industrial loans, consumer and small business
loans, real estate and mortgage loans, investment services, on-line and mobile
banking products, and cash management services.
On June 2, 2021 , the Company entered into a merger agreement with United
Bankshares, Inc. ("United"), the parent company of United Bank . Under the
merger agreement, United will acquire 100% of the outstanding shares of the
Company's common stock in exchange for shares of United's common stock. The
exchange ratio will be fixed at 0.3173 of United's shares for each share of the
Company. The merger is expected to close in the fourth quarter of 2021, subject
to satisfaction of customary closing conditions, including receipt of regulatory
approvals and approval by the Company's shareholders. Upon closing, the Company
will merge into United, and Essex Bank will merge into United Bank , with United
and United Bank being the surviving entities.
The Company generates a significant amount of its income from the net interest
income earned by the Bank. Net interest income is the difference between
interest income and interest expense. Interest income depends on the amount of
interest earning assets outstanding during the period and the interest rates
earned thereon. The Company's cost of funds is a function of the average amount
of interest bearing deposits and borrowed money outstanding during the period
and the interest rates paid thereon. The mix and product type for both loans and
deposits can have a significant effect on the net interest income of the Bank.
For the past several years, the Bank's focus has been on maximizing that mix
through customer growth and targeted product types, with lenders and other
employees directly involved with customer relationships. Additionally, the
quality of the interest earning assets further influences the amount of interest
income lost on nonaccrual loans and the amount of additions to the allowance for
loan losses.
The Bank also earns noninterest income from service charges on deposit accounts
and other fee or commission-based services and products, such as insurance,
mortgage loans, annuities, and other wealth management products. Other sources
of noninterest income can include gains or losses on securities transactions and
income from bank owned life insurance (BOLI) policies. The Company's income is
offset by noninterest expense, which consists of salaries and employee benefits,
occupancy and equipment costs, data processing expenses, professional fees,
transactions involving bank-owned property, and other operational expenses. The
provision for loan losses and income taxes may also materially affect net
income.
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
The Company makes certain forward-looking statements in this report that are subject to risks and uncertainties. These forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, future strategy, and financial and other goals. These forward-looking statements are generally identified by phrases such as "the Company expects," "the Company believes" or words of similar import.
These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by factors, including, without limitation, the effects of and changes in the following:
the quality or composition of the Company's loan or investment portfolios,
? including collateral values and the repayment abilities of borrowers and
issuers;
? assumptions that underlie the Company's allowance for loan losses;
? general economic and market conditions, either nationally or in the Company's
market areas;
unusual and infrequently occurring events, such as weather-related disasters,
? terrorist acts or public health events (such as the current COVID-19 pandemic),
and of governmental and societal responses to them
the pending merger with United Bankshares, including its closing on the
? expected terms and schedule, the costs associated with completing it and
integrating the businesses, and business operations until and through its
closing
? the interest rate environment;
? competitive pressures among banks and financial institutions or from companies
outside the banking industry;
? real estate values;
? the demand for deposit, loan, and investment products and other financial
services;
? the demand, development and acceptance of new products and services;
? the performance of vendors or other parties with which the Company does
business;
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? time and costs associated with de novo branching, acquisitions, dispositions
and similar transactions;
? the realization of gains and expense savings from acquisitions, dispositions
and similar transactions;
? assumptions and estimates that underlie the accounting for purchased credit
impaired loans;
? consumer profiles and spending and savings habits;
? levels of fraud in the banking industry;
? the level of attempted cyber attacks in the banking industry;
? the securities and credit markets;
? costs associated with the integration of banking and other internal operations;
? the soundness of other financial institutions with which the Company does
business; ? inflation; ? technology; and
? legislative and regulatory requirements.
These factors and additional risks and uncertainties are described in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 and other reports filed from time to time by the Company with theSecurities and Exchange Commission . Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with accounting principles generally accepted inthe United States (GAAP). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when either earning income, recognizing an expense, recovering an asset or relieving a liability. For example, the Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that the Company uses. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company's transactions would be the same, the timing of events that would impact its transactions could change.
The following is a summary of the Company's critical accounting policies that are highly dependent on estimates, assumptions and judgments.
Allowance for Loan Losses on Loans
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes is appropriate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. The evaluation also considers the following risk characteristics of each loan portfolio:
Residential 1-4 family mortgage loans include HELOCs and single family
investment properties secured by first liens. The carry risks associated with
? owner-occupied and investment properties are the continued credit-worthiness of
the borrower, changes in the value of the collateral, successful property
maintenance and
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collection of rents due from tenants. The Company manages these risks by using
specific underwriting policies and procedures and by avoiding concentrations in
geographic regions.
Commercial real estate loans, including owner occupied and non-owner occupied
mortgages, carry risks associated with the successful operations of the
principal business operated on the property securing the loan or the successful
operation of the real estate project securing the loan. General market
? conditions and economic activity may impact the performance of these loans. In
addition to using specific underwriting policies and procedures for these types
of loans, the Company manages risk by avoiding concentrations to any one
business or industry, and by diversifying the lending to various lines of
businesses, such as retail, office, office warehouse, industrial and hotel.
Construction and land development loans are generally made to commercial and
residential builders/developers for specific construction projects, as well as
to consumer borrowers. These carry more risk than real estate term loans due to
the dynamics of construction projects, changes in interest rates, the long-term
? financing market and state and local government regulations. The Company
manages risk by using specific underwriting policies and procedures for these
types of loans and by avoiding concentrations to any one business or industry
and by diversifying lending to various lines of businesses, in various geographic regions and in various sales or rental price points.
Second mortgages on residential 1-4 family loans carry risk associated with the
continued credit-worthiness of the borrower, changes in value of the collateral
? and a higher risk of loss in the event the collateral is liquidated due to the
inferior lien position. The Company manages risk by using specific underwriting
policies and procedures.
Multifamily loans carry risks associated with the successful operation of the
property, general real estate market conditions and economic activity. In
? addition to using specific underwriting policies and procedures, the Company
manages risk by avoiding concentrations in geographic regions and by
diversifying the lending to various unit mixes, tenant profiles and rental
rates.
Agriculture loans carry risks associated with the successful operation of the
business, changes in value of non-real estate collateral that may depreciate
over time and inventory that may be affected by weather, biological, price,
? labor, regulatory and economic factors. The Company manages risks by using
specific underwriting policies and procedures, as well as avoiding
concentrations to individual borrowers and by diversifying lending to various
agricultural lines of business (i.e., crops, cattle, dairy, etc.).
Commercial loans carry risks associated with the successful operation of the
business, changes in value of non-real estate collateral that may depreciate
over time, accounts receivable whose collectability may change and inventory
? values that may be subject to various risks including obsolescence. General
market conditions and economic activity may also impact the performance of
these loans. In addition to using specific underwriting policies and procedures
for these types of loans, the Company manages risk by diversifying the lending
to various industries and avoids geographic concentrations. Consumer installment loans carry risks associated with the continued
credit-worthiness of the borrower and the value of rapidly depreciating assets
? or lack thereof. These types of loans are more likely than real estate loans to
be quickly and adversely affected by job loss, divorce, illness or personal
bankruptcy. The Company manages risk by using specific underwriting policies
and procedures for these types of loans. All other loans generally support the obligations of state and political
subdivisions in the
? Company. The loans carry risks associated with the continued credit-worthiness
of the obligations and economic activity. The Company manages risk by using
specific underwriting policies and procedures for these types of loans.
While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations. The allowance consists of specific, general and unallocated components. For loans that are also classified as impaired, an allowance is established when the collateral value (or discounted cash flows or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. Qualitative factors relate to loan growth
and
concentrations,
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internal environment, loan quality deterioration and delinquencies. The unallocated component covers uncertainties that could affect management's estimate of probable losses.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured by either the present value of the expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are evaluated for impairment as a pool. Accordingly, the Company does not separately analyze these individual loans for impairment disclosures.
Accounting for Certain Loans Acquired in a Transfer
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 310, Receivables, requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances in the initial accounting for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit arrangements are excluded from the scope of FASB ASC 310, which limits the yield that may be accreted to the excess of the undiscounted expected cash flows over the investor's initial investment in the loan. The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows to be collected are recognized prospectively through an adjustment of the loan's yield over its remaining life. Decreases in expected cash flows are recognized as impairments through the allowance for loan losses. The Company's acquired loans from theSuburban Federal Savings Bank (SFSB) transaction (the "PCI loans"), subject to FASB ASC Topic 805, Business Combinations, were recorded at fair value and no separate valuation allowance was recorded at the date of acquisition. FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to loans acquired in a transfer with evidence of deterioration of credit quality for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. The Company is applying the provisions of FASB ASC 310-30 to all loans acquired in the SFSB transaction. The Company has grouped loans together based on common risk characteristics including product type, delinquency status and loan documentation requirements among others. The PCI loans are subject to the credit review standards described above for loans. If and when credit deterioration occurs subsequent to the date that the loans were acquired, a provision for loan loss for PCI loans will be charged to earnings for the full amount. The Company has made an estimate of the total cash flows it expects to collect from each pool of loans, which includes undiscounted expected principal and interest. The excess of that amount over the fair value of the pool is referred to as accretable yield. Accretable yield is recognized as interest income on a constant yield basis over the life of the pool. The Company also determines each pool's contractual principal and contractual interest payments. The excess of that amount over the total cash flows that it expects to collect from the pool is referred to as nonaccretable difference, which is not recorded. Judgmental prepayment assumptions are applied to both contractually required payments and cash flows expected to be collected at acquisition. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as an impairment in the current period through the allowance for loan losses. Subsequent increases in expected or actual cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the accretable yield with the amount of periodic accretion adjusted over the remaining life of the pool. 33 Table of Contents RESULTS OF OPERATIONS Overview
The coronavirus (COVID-19) pandemic that set off an economic crisis in 2020 continues to impact the Company's financial results for the three and six months endingJune 30 2021 , and will impact future financial results. While the government mandated business closures enacted in 2020 have eased, the Company's customers and markets are not back to pre-COVID business levels, and unemployment continues to be a major issue. Continued uncertainties in the economy and the time that it could take to fully recover underlie the financial impacts that the Company may experience. The Company continues to focus on assessing the risks in its loan portfolio and to work with its customers to minimize future losses. See below for additional discussion regarding trends and the potential effects of COVID-19. Net income in the second quarter of 2021 increased$1.3 million when compared to the same period in 2020. Net income was$5.4 million in the second quarter of 2021, with earnings per share of$0.24 basic and fully diluted. Net income for the second quarter of 2020 was$4.2 million , with earnings per share of$0.19 basic and$0.18 fully diluted. There was an increase of$2.1 million in net interest income, primarily from a decline in interest expense of$1.8 million in the second quarter of 2021 compared with the same period one year earlier. Provision for loan losses decreased$900,000 year over year and is reflective of no provision taken during the second quarter of 2021. Offsetting these increases to net income were an increase of$1.3 million in noninterest expenses and a decrease of$155,000 in noninterest income. There was also an increase of$297,000 in income tax expense year over year. Net income of$12.1 million for the first six months of 2021 reflects an increase of$6.5 million , or 116.5%, over net income of$5.6 million for the same period in 2020. Provision for loan losses reflects a reserve recovery of$1.4 million for the first six months of 2021 compared with a provision of$4.2 million during the early stage of the COVID-19 pandemic for the first six months of 2020. Interest expense declined$3.8 million and was$3.3 million for the first six months of 2021 compared with$7.1 million for the first six months of 2020. Smaller increases were in interest and dividend income, which increased$227,000 , and in noninterest income, which increased$138,000 in the first six months of 2021 compared with the same period in 2020. Offsetting these increases to net income were an increase of$1.5 million in noninterest expenses, which were$17.9 million for the first six months of 2021, and$1.7 million greater expense in income taxes, which were$3.0 million for the first six months of 2021. Net Interest Income The Company's operating results depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, including securities and loans, and interest expense incurred on interest bearing liabilities, including deposits and other borrowed funds. Net interest income is affected by changes in the amount and mix of interest earning assets and interest bearing liabilities, referred to as a "volume change." It is also affected by changes in yields earned on interest earning assets and rates paid on interest bearing deposits and other borrowed funds, referred to as a "rate change." Net interest income increased$2.1 million , or 17.3%, from the second quarter of 2020 to the second quarter of 2021. Net interest income was$14.5 million in the second quarter of 2021 compared with$12.4 million for the same period in 2020. Interest and dividend income increased$313,000 , or 2.0%, over this time period. In the second quarter of 2021,$562,000 in net origination fees under the Paycheck Protection Program (PPP) were recognized as income versus$304,000 in the same period of 2020. Interest and fees on loans were$13.2 million in the second quarter of 2021, an increase of$184,000 , or 1.4%, over the same period in 2020. Interest and fees on PCI loans decreased by$278,000 and were$784,000 in the second quarter of 2021. Securities income was$2.0 million in the second quarter of 2021, an increase of$394,000 over the same period in 2020. Income on interest on deposits in other banks increased by$13,000 year over year. The average balance of the loan portfolio, excluding PCI loans, increased by$58.7 million year over year and averaged$1.205 billion for the second quarter of 2021. The average balance of the PCI portfolio declined$10.2 million during the year-over-year comparison period. The average balance of securities increased by$82.8 million in the second quarter of 2021 compared with the same period one year earlier. The average balance of total earning assets increased$165.0 million , or 11.2%, from the second quarter of 2020 to the second quarter of 2021. The yield on earning assets decreased from 4.33% in the second quarter of 2020 to 3.97% in the second quarter of 2021. The change in yield on earning assets was 34 Table of Contents the culmination of decreases in the yield on all loans, from 4.80% in the second quarter of 2020 to 4.58% in the second quarter of 2021, in the tax-equivalent yield on securities, from 2.88% in the second quarter of 2020 to 2.63% in the second quarter of 2021, and in the yield on interest bearing bank balances, from 0.31% to 0.25% year over year. Interest expense decreased$1.8 million , or 53.8%, when comparing the second quarter of 2021 and the second quarter of 2020. Interest expense on deposits decreased$1.8 million , or 57.7%, as the cost declined from 1.20% in the second quarter of 2020 to 0.48% for the same period in 2021. The average balance of interest bearing deposits increased$60.2 million , or 5.6%. This growth was from non-maturity deposit sources. First, there was an increase of$86.7 million , or 47.7%, in the average balance of interest bearing checking accounts, which averaged$268.5 million in the second quarter of 2021. Additionally, there was an increase of$81.5 million in the average balance of savings and money market accounts from the second quarter of 2020 to the same period in 2021. Offsetting these increases was a decrease of$108.0 million in the average balance of time deposits, to$535.5 million for the second quarter of 2021. FHLB and other borrowings costs were stable over the time frame and were 1.22% in the second quarter of 2021 compared with 1.15% for the same period in 2020. All of the above contributed to the reduction of interest expense for interest bearing liabilities by$1.8 million despite an increase of$60.1 million in the average amount outstanding. Also noteworthy is that, although not an interest bearing category, a sizeable amount of funding was generated in the second quarter of 2021 by a year-over-year average balance increase of$83.7 million in noninterest bearing deposits. The amount of liquidity in the banking system, along with lower interest rates and a shift in deposit balances, decreased the cost of interest bearing liabilities from 1.19% in the second quarter of 2020 to 0.52% in the second quarter of 2021. The tax-equivalent net interest margin increased 18 basis points, from 3.40% in the second quarter of 2020 to 3.58% in the second quarter of 2021. Likewise, the interest spread increased from 3.14% to 3.45% over the same time period. The increase in the margin was precipitated by a decrease of 36 basis points in the yield on earning assets compared with a greater decline of 67 basis points in the cost of interest bearing liabilities applied against growth of$165.0 million , or 11.2%, in earning assets. The Company also examined the net interest margin without the effects of PPP net fees, interest income and average balances. Excluding these PPP related items from the net interest margin calculation would have resulted in a margin of 3.54% in the second quarter
of 2021. Net interest income was$28.6 million for the first six months of 2021. This is an increase of$4.0 million , or 16.2%, from net interest income of$24.6 million for the first six months of 2020. Interest and dividend income increased by$227,000 over this time frame. Interest and dividend income was impacted by volume increases offset by a decline in yield. First, there was an increase of$248,000 , or 1.0%, in interest and fees on loans, which increased as a result of growth of$92.5 million , or 8.4%, in the average balance of loans in 2021 over 2020. The yield on loans declined from 4.73% for the first six months of 2020 to 4.43% for the same period in 2021. Interest and fees on PCI loans declined by$519,000 , or 24.0%. The yield on the PCI portfolio was 15.16% for the first six months of 2021 compared with 13.94% for the first six months of 2020. Interest and dividends on securities increased by$494,000 in the first six months of 2021 compared with the same period in 2020. The average balance of the securities portfolio increased$67.7 million , or 28.7%, and the yield declined from 2.98% for the first six months of 2020 to 2.64% for the same period in 2021. The yield on earning assets was 4.04% for the first six months of 2021, a decline of 50 basis points from 4.54% in the first six months of 2020. The yield on total loans, which includes PCI loans and PPP loans, declined from 4.99% for the first six months of 2020 compared to 4.63% for the same period in 2021. Interest expense of$3.3 million for the first six months of 2021 was a decrease of$3.8 million , or 52.8%, from interest expense of$7.1 million for the first six months of 2020. The cost of interest bearing liabilities decreased over this time frame from 1.28% for the first six months of 2020 to 0.57% for the same period in 2021. Interest on deposits decreased$3.7 million due to a decline in the rate paid from 1.27% for the first six months of 2020 to 0.53% for the first six months of 2021. The average balance of interest bearing liabilities increased over this time frame by$64.7 million , or 5.8%. Short term borrowing expense decreased by$23,000 , and the cost of FHLB and other borrowings decreased by$38,000 , or 8.0%, as the rate paid decreased from 1.36% for the first six months of 2020 to 1.23% for the first six months of 2021. The changes noted to interest income and interest expense led to an increase in the net interest margin from 3.53% for the first six months of 2020 to 3.62% for the same period in 2021. The interest spread also increased over this time frame from 3.26% in 2020 to 3.47% in 2021. Excluding PPP related items from the net interest margin calculation would have resulted in a margin of 3.57% for the first six months of 2021 compared with the actual margin of 3.62%. Excluding PPP related items from the net interest margin calculation for the first six months of 2020 would have resulted in a margin of 35 Table of Contents
3.54% for the first six months of 2020 compared with the actual margin of 3.53%.
The yield on the loan portfolio for the first six months of 2021 would have been 4.40% excluding PPP related items versus the actual yield of 4.43%. The yield on the loan portfolio for the first six months of 2020 would have been 4.78% excluding PPP related items versus the actual yield of 4.73% with PPP related items. The yield on earning assets for the first six months of 2021 would have been 4.00% without PPP related items as opposed to the actual yield of 4.04%. The yield on earning assets for the first six months of 2020 would have been 4.58% without PPP related items as opposed to the actual yield of 4.54% that included the PPP related items. The following tables set forth, for each category of interest-earning assets and interest bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid for the three and six months endedJune 30, 2021 and 2020. The tables also set forth the average rate paid on total interest bearing liabilities, and the net interest margin on average total interest earning assets for the same periods. Except as indicated in the footnotes, no tax equivalent adjustments were made and all average balances are daily average balances. Any nonaccruing loans have been included in the tables, as loans carrying a zero yield. Three months endedJune 30, 2021
Three months ended
Average Average
Average Interest Rates Average Interest Rates
Balance Income/ Earned/ Balance Income/ Earned/(Dollars in thousands) Sheet Expense Paid
Sheet Expense Paid ASSETS: Loans$ 1,204,691 $ 13,196 4.39 %$ 1,145,956 $ 13,012 4.55 % PCI loans 19,827 784 15.63 29,978 1,062 14.01 Total loans 1,224,518 13,980 4.58 1,175,934 14,074 4.80
Interest bearing bank balances 86,130 54 0.25 52,551 41 0.31 Federal funds sold 208 - 0.08 210 - 0.07 Securities (taxable) 272,556 1,695 2.49 189,378 1,287 2.72 Securities (tax exempt) (1) 50,260 424 3.37 50,629 442 3.49 Total earning assets 1,633,672 16,153 3.97 1,468,702 15,844 4.33 Allowance for loan losses (11,037)
(12,007) Non-earning assets 104,716 109,847 Total assets$ 1,727,351 $ 1,566,542 LIABILITIES AND SHAREHOLDERS' EQUITY
Demand - interest bearing$ 268,525 $ 119 0.18$ 181,789 98 0.22 Savings and money market 323,137 205 0.25 241,646 228 0.38 Time deposits 535,455 1,023 0.77 643,465 2,856 1.78 Total interest bearing deposits 1,127,117 1,347 0.48 1,066,900 3,182 1.20 Short-term borrowings 134 - 0.20 323 - 0.20 FHLB and other borrowings 71,785 220 1.22 71,685 209 1.15 Total interest bearing liabilities 1,199,036 1,567 0.52 1,138,908 3,391 1.19 Noninterest bearing deposits 337,907 254,216 Other liabilities 13,921 14,396 Total liabilities 1,550,864 1,407,520 Shareholders' equity 176,487 159,022 Total liabilities and shareholders' equity$ 1,727,351 $ 1,566,542 Net interest earnings$ 14,586 $ 12,453 Interest spread 3.45 % 3.14 % Net interest margin 3.58 % 3.40 % Tax equivalent adjustment: Securities$ 89 $ 93 (1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 21%. 36 Table of Contents Six months ended June 30, 2021
Six months ended
Average Average
Average Interest Rates Average Interest Rates
Balance Income/ Earned/ Balance Income/ Earned/
(Dollars in thousands) Sheet Expense Paid Sheet Expense Paid
ASSETS:
Loans $ 1,198,080 $ 26,346 4.43 % $ 1,105,612 $ 26,098 4.73 %
PCI loans 21,517 1,640 15.16 30,644 2,159 13.94
Total loans 1,219,597 27,986 4.63 1,136,256 28,257 4.99
Interest bearing bank
balances 78,204 114 0.29 34,503 110 0.64
Federal funds sold 203 - 0.07 176 - 0.47
Securities (taxable) 253,851 3,162 2.49 185,859 2,638 2.84
Securities (tax exempt)
(1) 49,712 838 3.37 50,010 876 3.51
Total earning assets 1,601,567 32,100 4.04 1,406,804 31,881 4.54
Allowance for loan losses (11,744) (10,314)
Non-earning assets 105,329 107,694
Total assets $ 1,695,152 $ 1,504,184
LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand - interest bearing
307,545 389 0.25 230,654 508 0.44
Time deposits 542,835 2,266 0.84 638,064 5,901 1.85
Total interest bearing
deposits 1,110,135 2,912 0.53 1,044,752 6,601 1.27
Short-term borrowings 286 - 0.20 2,254 23 2.06FHLB and other borrowings 70,487 437 1.23
69,240 475 1.36 Total interest bearing liabilities 1,180,908 3,349 0.57 1,116,246 7,099 1.28 Noninterest bearing deposits 326,506 215,044 Other liabilities 13,567 14,290 Total liabilities 1,520,981 1,345,580 Shareholders' equity 174,171 158,604 Total liabilities and shareholders' equity$ 1,695,152 $ 1,504,184 Net interest earnings$ 28,751 $ 24,782 Interest spread 3.47 % 3.26 % Net interest margin 3.62 % 3.53 % Tax equivalent adjustment: Securities$ 176 $ 184
(1) Income and yields are reported on a tax equivalent basis assuming a federal
tax rate of 21%.
Provision for Loan Losses
Management actively monitors the Company's asset quality and provides specific
loss provisions when necessary. Provisions for loan losses are charged to income
to bring the total allowance for loan losses to a level deemed appropriate by
management of the Company based on such factors as historical credit loss
experience, industry diversification of the commercial loan portfolio, the
amount of nonperforming loans and related collateral, the volume growth and
composition of the loan portfolio, current economic conditions that may affect
the borrower's ability to pay and the value of collateral, the evaluation of the
loan portfolio through the internal loan review function and other relevant
factors. See Allowance for Loan Losses on Loans in the Critical Accounting
Policies section above for further discussion.
Loans are charged-off against the allowance for loan losses when appropriate.
Although management believes it uses the best information available to make
determinations with respect to the provision for loan losses, future adjustments
may be necessary if economic conditions differ from the assumptions used in
making the initial determinations.
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Management also actively monitors its PCI loan portfolio for impairment and necessary loan loss provisions. Provisions for these loans may be necessary due to a change in expected cash flows or an increase in expected losses within a pool of loans. The Company records a separate provision for loan losses for its loan portfolio, excluding PCI loans, and the PCI loan portfolio. There was no provision for loan losses in the second quarter of 2021 compared with$900,000 in provision for loan losses for the second quarter of 2020. The recovery of$1.4 million of provision for loan losses for the first six months of 2021 compares with a provision of$4.2 million for the first six months of 2020. The recovery of provision recorded in the first six months of 2021 was due to continued improvement in the quality of the loan portfolio and an overall improvement in the risks associated with the potential economic impact of the COVID-19 pandemic. Beginning with the first quarter of 2020, management performs a review of each loan within the portfolio to identify, and monitor on a going forward basis, those borrowers that management believed to be possibly impacted by the economy. Loans identified with increased risk are aggregated by loan type. During the first quarter of 2020, this analysis indicated a risk grade migration in a number of loan categories that led to a heightened risk level in the loan portfolio. The impact of the loans' risk grade migration was applied to the allowance for loan loss calculation, which led to the provision for loan losses of$4.2 million for the six month period endedJune 30, 2020 . The Company determined that no provision was necessary for the third or fourth quarters of 2020 after a similar analysis and review process. Despite the stay-at-home orders, shut downs, higher than historical unemployment levels and slow growth, the loan portfolio has exhibited a trend over the last year of lower nonaccrual loans, lower other real estate loans and very low charge-offs. Due to the COVID-19 pandemic, the Company is closely monitoring loan concentrations in various "at risk areas" that it has deemed most likely to be affected by the stay-at-home orders and lack of general business activity, including a lack of travel in our geographic territory. As ofJune 30, 2021 , the Company identified the following categories of borrowers as being potentially at risk: Category % of Total Loans Lessors of commercial properties 20.8 % Lessors of residential properties 11.9 Consumer 11.7 Hotels and other lodging 5.6 Medical and care services 3.4 Food service & drinking 2.6 Retail stores 1.7 Personal services 1.3
The Company continues to work with borrowers who have currently expressed a need for relief due to the effects of COVID-19. AtJune 30, 2021 , there were$33.5 million in loans under COVID-19 related payment relief. PCI loans comprised
$1.4 million of this total. With respect to the PCI portfolio, due to the stable nature of its performance and its declining balances over time as the portfolio amortizes, no provision was taken during either of the three and six months endedJune 30, 2021 and 2020. Additional discussion of loan quality is presented below. The loan portfolio, excluding PCI loans, had net recoveries of$178,000 in the second quarter of 2021, compared with net charge-offs of$481,000 in the second quarter of 2020. Total charge-offs were$57,000 for the second quarter of 2021 compared with$618,000 in the second quarter of 2020. Recoveries of previously charged-off loans were$235,000 for the second quarter of 2021 compared with$137,000 in the first quarter of 2020. The loan portfolio, excluding PCI loans, had net recoveries of$66,000 for the six months endedJune 30, 2021 , compared with net charge-offs of$391,000 in the same period of 2020. Total charge-offs were$303,000 for the six months endedJune 30, 2021 , compared with$712,000 in the same period of 2020. Recoveries of previously charged-off loans were$369,000 for the six months endedJune 30, 2021 , compared with$321,000 in the same period of 2021. 38 Table of Contents Noninterest Income Noninterest income of$1.5 million in the second quarter of 2021 was a decrease of$155,000 , or 9.6%, over the second quarter of 2020. Gains (losses) on securities transactions decreased$270,000 year over year as securities losses of$28,000 were recognized in the second quarter of 2021 compared with gains of$242,000 in the second quarter of 2020. Mortgage loan income of$235,000 in the second quarter of 2021 was a decrease of$138,000 year over year. Offsetting these decreases to noninterest income was an increase of$139,000 in other noninterest income, which was$435,000 in the second quarter of 2021. The increase was driven mainly by an increase of$199,000 in partnership investment income, partially offset by decreases of$39,000 and$48,000 in swap fee and brokerage/commission fee income, respectively. Additionally, there was an increase of$119,000 in service charges and fees, which were$651,000 . Noninterest income was$3.1 million for the first six months of 2021, an increase of$138,000 , or 4.7%, over noninterest income of$3.0 million for the first six months of 2020. Other noninterest income was$882,000 for the first six months of 2021, an increase of$290,000 over the same period in 2020. The increase was the result of increases of$312,000 and$141,000 in partnership income and insurance commissions, respectively, offset by a decrease of$120,000 in swap fee income. Service charges and fees of$1.3 million for the first six months of 2021 was an increase of$126,000 over the same period in 2020. These increases were primarily offset by a decrease of$215,000 in gain (loss) on securities transactions, net, which were losses of$12,000 for the first six months of 2021 compared with gains of$203,000 for the first six months of 2020. Mortgage loan income was$555,000 for the first six months of 2021, a decrease of$39,000 over the same period in 2020. Noninterest Expense
Noninterest expenses were$9.2 million for the second quarter of 2021. This is an increase of$1.3 million , or 16.8%, from noninterest expenses of$7.9 million for the second quarter of 2020. The largest component of the increase was an increase in other noninterest expenses, which were$2.3 million in the second quarter of 2021, an increase of$932,000 over the same quarter one year earlier. The increase reflects$570,000 of merger related expenses from legal, professional and director fees during the second quarter of 2021, along with non-merger related increases of$105,000 and$73,000 in legal and professional fees, respectively. Salaries and employee benefits of$5.4 million in the second quarter of 2021 increased$739,000 over the second quarter of 2020. The second quarter of 2020 was positively affected by credits to internal costs for the volume of PPP loans that were booked in the quarter, as these costs were deferred and amortized over the life of the respective loans. Data processing fees of$741,000 in the second quarter of 2021 reflected an increase of$168,000 year over year. Offsetting these increases was a year-over-year decline of$427,000 in other real estate expenses, net, which reflect gains on the disposition of other real estate owned in the second quarter of 2021, in which they were a credit of$431,000 . Also offsetting these increases year over year were a decrease of$48,000 inFDIC assessment, which was$108,000 in the second quarter of 2021, a decrease of$28,000 in equipment expenses, which was$317,000 , and a decrease of$17,000 in occupancy expenses, which was$761,000 . Noninterest expenses were$17.9 million for the six months endedJune 30, 2021 , an increase of$1.5 million , or 9.0%, year over year. Other operating expenses were$3.9 million and increased by$1.0 million in the first six months of 2021 compared with the same period in 2020. Part of the increase is attributed to$570,000 in merger related expenses, a downward adjustment of$154,000 related to an assessment of the fair value of a qualified affordable housing project investment, and non-merger related increases of$201,000 and$114,000 in legal and professional fees, respectively, incurred during the second quarter of 2021. Salaries and employee benefits of$10.6 million were an increase of$795,000 for the first six months of 2021 over the same period in 2020. A portion of this increase,$559,000 , was the result of the large loan volume of PPP loans in the second quarter of 2020 that generated ASC 310-20 credits to salaries and employee benefits. Data processing fees, which were$1.3 million , increased by$184,000 , or 15.8%, for the first six months of 2021 over the same period in 2020. Offsetting these increases was a decrease of$422,000 in OREO expenses, net, as a result of gains recognized in the second quarter of 2021 on the disposition of OREO. Also offsetting these increases was a decline of$112,000 in equipment expenses, which was$605,000 for the first half of 2021. 39 Table of Contents Income Taxes Income tax expense was$1.3 million for the second quarter of 2021, compared with income tax expense of$1.0 million for the second quarter of 2020. The effective tax rate for the second quarter of 2021 was 19.8% compared with 20.0% for the second quarter of 2020. Income tax expense was$3.0 million for the first six months of 2021 compared with$1.3 million for the same period in 2020. The effective tax rate was 20.2% for the first half of 2021 compared with an effective tax rate of 19.0% for
the first half of 2020. FINANCIAL CONDITION General Total assets were$1.754 billion atJune 30, 2021 and increased$109.4 million , or 6.7%, when compared withDecember 31, 2020 . Total loans, excluding PCI loans, were$1.192 billion atJune 30, 2021 , increasing$9.5 million , or 0.8%, from year end 2020. Total PCI loans were$17.9 million atJune 30, 2021 versus$24.0 million atDecember 31, 2020 . Loans, net of fees that the Bank originated under the PPP were$52.0 million atJune 30, 2021 compared with$49.3 million atDecember 31, 2020 . All of these balances are included in commercial loans. As a result of the economic conditions that existed during the first half of 2021, commercial loans, excluding PPP loans, declined by$3.7 million sinceDecember 31, 2020 . Commercial real estate loans, the largest category of loans at$507.0 million , or 42.5% of gross loans outstanding atJune 30, 2021 , increased$32.1 million , or 6.8%, sinceDecember 31, 2020 . Residential 1 - 4 family loans declined during the first half of 2021 by$14.3 million , or 7.2%, and ended the period at$182.9 million , or 15.4% of the portfolio. The Company's securities portfolio, excluding restricted equity securities, was$341.6 million atJune 30, 2021 and increased$49.1 million during the first half of 2021.U.S. Treasury issues decreased by$13.3 million during the first half of 2021.U.S. Government agencies increased$21.9 million during the first half of 2021 and were$47.8 million atJune 30, 2021 . State, county and municipal securities, the largest investment category totaling$171.1 million atJune 30, 2021 , increased by$24.2 million during the first two quarters of 2021. Asset backed securities, consisting of student loan pools 97% guaranteed by theU.S. Government , increased$10.3 million during the first two quarters of 2021 and were$47.8 million atJune 30, 2021 . Mortgage backed securities were$38.0 million atJune 30, 2021 and grew by$5.8 million during 2021. Corporate securities were$26.7 million atJune 30, 2021 . The Company had cash and cash equivalents of$123.6 million atJune 30, 2021 compared with$63.2 million at year end 2020. The majority of this category growth,$56.9 million , occurred in interest bearing bank balances, which were$102.0 million atJune 30, 2021 , as large amounts of liquidity have been funneled into the banking system through the facilitation of PPP loans by the banking industry and stimulus checks issued by theU.S. Treasury under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). Interest bearing deposits atJune 30, 2021 were$1.149 billion , an increase of$49.3 million , or 4.5%, fromDecember 31, 2020 . Interest bearing checking accounts of$285.0 million grew by$45.4 million , or 19.0%, during the first six months of 2021. Money market deposit accounts were$182.7 million atJune 30, 2021 and grew$28.2 million , or 18.3%, during the first six months of 2021. Savings accounts totaled$142.1 million atJune 30, 2021 and grew$17.7 million , or 14.3%, during the first half of 2021. Strong growth in these non-maturity categories for the year has allowed the Bank to react to lower interest rates through proactive repricing in certificates of deposit, the highest costing deposit category. As a result, there has been a decline in time deposits less than or equal to$250,000 , which decreased by$27.0 million , or 6.0%, in the first half of 2021 and were$425.8 million atJune 30, 2021 . Time deposits over$250,000 declined$15.0 million in the first half of 2021 and were$113.4 million atJune 30, 2021 . Time deposit balances combined were 46.9% of interest bearing deposits atJune 30, 2021 and 36.2% of all deposit balances. This is a decline from 52.9% of interest bearing balances and 41.6% of all deposit balances atDecember 31, 2020 . The growth in interest bearing checking accounts, money market accounts and savings accounts, as well as in noninterest bearing checking accounts, was$132.2 million during the first half of 2021. A portion of this growth was associated with the PPP loans originated during 2020 and
2021
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and stimulus checks issued under the CARES Act, as well as previously postponed business activity that resulted from the COVID-19 stay-at-home orders.
FHLB borrowings were$67.5 million atJune 30, 2021 compared with$57.8 million atDecember 31, 2020 . The stable level of FHLB borrowings during 2020 and into 2021 has been due to the FHLB swiftly responding to theMarch 16, 2020 rate cut of 1.50% to the discount rate by repricing advances downward to ensure low cost liquidity for the banking system. As a result, the Bank has found this level of borrowing to be a stable source of low cost funding. The average rate paid on FHLB borrowings was 1.23% during the first half of 2021. There were no Federal funds purchased atJune 30, 2021 orDecember 31, 2020 .
Shareholders' equity was
Asset Quality - excluding PCI loans
The allowance for loan losses represents management's estimate of the amount appropriate to provide for probable losses inherent in the loan portfolio.
Loan quality is continually monitored, and the Company's management has established an allowance for loan losses that it believes is appropriate for the risks inherent in the loan portfolio. Among other factors, management considers the Company's historical loss experience, the size and composition of the loan portfolio, the value and appropriateness of collateral and guarantors, nonperforming loans and current and anticipated economic conditions. There are additional risks of future loan losses, which cannot be precisely quantified nor attributed to particular loans or classes of loans. Because those risks include general economic trends, as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determination as to appropriateness, which may take into account such factors as the methodology used to calculate the allowance and size of the allowance in comparison to peer companies identified by regulatory agencies. See Allowance for Loan Losses on Loans in the Critical Accounting Policies section above for further discussion. The Company maintains a list of loans that have potential weaknesses and thus may need special attention. This loan list is used to monitor such loans and is used in the determination of the appropriateness of the allowance for loan losses. Nonperforming loans were$3.6 million atJune 30, 2021 , a decrease of$950,000 fromDecember 31, 2020 . Total non-performing assets totaled$3.9 million atJune 30, 2021 compared with$8.9 million atDecember 31, 2020 . OnApril 7, 2021 , the Company sold an item included in OREO atMarch 31, 2021 in the amount of$3.8 million , and this sale was the primary reason for the decline in non-performing assets. There were net recoveries of$66,000 in the first
half of 2021.
The allowance for loan losses equaled 309.6% of nonaccrual loans at
The allowance for loan losses to total loans was 0.92% atJune 30, 2021 compared with 1.04% atDecember 31, 2020 . The volume of PPP loans originated since the second quarter of 2020 impacted the ratio. PPP loans, net of fees, were$52.0 million atJune 30, 2021 and$49.3 million atDecember 31, 2020 . AtJune 30, 2021 , when excluding PPP loans, the allowance for loan losses to total loans would have been 0.97% compared with 1.09% atDecember 31, 2020 . These loans are fully guaranteed by theSmall Business Administration in accordance with the CARES Act; therefore, no allowance is required. The Company monitors and adjusts the allowance for loan losses based on loans requiring a reserve. The allowance for loan losses includes an amount that cannot be related to individual types of loans, and this is referred to as the unallocated component of the allowance. The Company recognizes the inherent imprecision in the estimates of losses due to various uncertainties and variability related to the factors used. Specifically, the partial recovery of$1.4 million from the provision of$4.2 million taken during the year endedDecember 31, 2020 drove theJune 30, 2021 unallocated amount of$1.2 million , which is reflective of the on-going COVID-related risk grade stresses inherent in the loan portfolio. Several factors justify the maintenance of this unallocated amount, as follows: 41 Table of Contents
The uncertainty of the economic impact of COVID-19 continues to be a factor for
the remainder of 2021. The Company does not believe that any of its
? COVID-related modifications currently rise to the level of a TDR under the
current regulatory guidance, and it continues to monitor impacted loans closely
with regularity as modification periods expire and the economy recovers from
the pandemic. While the Company believes that it has appropriately assigned risk grade
factors to address COVID-related risk in the most vulnerable pools, there is
still a degree of uncertainty. For example, monthly and yearly gains of the
? Consumer Price Index have increased at a level not seen since 2008, which
affects all borrowers. Hiring struggles and corresponding minimum wage
increases affect our customers in the hospitality sector. Also, new variants of
COVID-19 are emerging causing concern for increased cases resulting in the
return of some restrictions.
Coverage ratios at
table below, were consistent with prior periods when the ratios were proven to
be adequate and produced provisions and allowances for loan losses that are
? directionally consistent with the credit quality of the loan portfolio. This
is an indication that the allowance, in the aggregate, is reasonably stated
when considering both total loans and loans with some doubt regarding ultimate
collectability.
The Company believes that, if the portfolio continues to show improvement and
? the calculation continues to yield a significant unallocated component, it will
make adjustments as considered appropriate after observing a longer, more
substantiated time horizon.
In accordance with GAAP, an individual loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due in accordance with contractual terms of the loan agreement. The Company considers all troubled debt restructures and nonaccrual loans to be impaired loans. In addition, the Company reviews all substandard and doubtful loans that are not on nonaccrual status, as well as loans with other risk characteristics, pursuant to and specifically for compliance with the accounting definition of impairment as described above. These impaired loans have been determined through analysis, appraisals, or other methods used by management.
See Note 3 to the Company's financial statements for information related to the
allowance for loan losses. At
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The following table sets forth selected asset quality data, excluding PCI loans, and ratios for the dates indicated (dollars in thousands):
June 30, 2021 December 31, 2020
Nonaccrual loans $ 3,555 $ 4,460Loans past due 90 days and accruing interest -
45
Total nonperforming loans 3,555 4,505
OREO 364 4,361
Total nonperforming assets $ 3,919 $ 8,866
Accruing troubled debt restructure loans $ 4,161 $
4,679
Balances
Specific reserve on impaired loans 914
1,165
General reserve related to unimpaired loans 10,092
11,175
Total allowance for loan losses 11,006
12,340
Average loans during the year, net of unearned income 1,198,080 1,138,603 Impaired loans 7,716 9,139 Non-impaired loans 1,184,125 1,173,223
Total loans, net of unearned income 1,191,841
1,182,362
Ratios
Allowance for loan losses to loans 0.92 %
1.04
Allowance for loan losses to nonaccrual loans 309.59
276.68
General reserve to non-impaired loans 0.85
0.95
Nonaccrual loans to loans 0.30
0.38
Nonperforming assets to loans and OREO 0.33
0.75
Net (recoveries) charge-offs to average loans (0.01)
0.03
A further breakout of nonaccrual loans, excluding PCI loans, at
June 30, 2021 December 31, 2020
Mortgage loans on real estate:
Residential 14 family $ 1,316 $ 1,357
Commercial 953 730 Construction and land development 2 44
Agriculture - 45 Total real estate loans 2,271 2,176 Commercial loans 1,284 2,264 Consumer installment loans - 20 Total loans $ 3,555 $ 4,460 Asset Quality - PCI loans
Loans accounted for under FASB ASC 310-30 are generally considered accruing and
performing loans as the loans accrete interest income over the estimated life of
the loan. Accordingly, acquired impaired loans that are contractually past due
are still considered to be accruing and performing loans.
The PCI loans are subject to credit review standards for loans. If and when
credit deterioration occurs subsequent to the date that they were acquired, a
provision for credit loss for PCI loans will be charged to earnings for the full
amount. The Company makes an estimate of the total cash flows that it expects to
collect from a pool of PCI loans, which includes undiscounted expected principal
and interest. Over the life of the loan or pool, the Company continues to
estimate cash
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flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as impairments in the current period through the allowance for loan losses. Subsequent increases in expected cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the yield over the remaining life of the pool. Capital Requirements The determination of capital adequacy depends upon a number of factors, such as asset quality, liquidity, earnings, growth trends and economic conditions. The Company seeks to maintain a strong capital base exceeding regulatory minimums for well capitalized institutions to support its growth and expansion plans, provide stability to current operations and promote public confidence in the Company. Activity under the stock repurchase program that the Company adopted inJanuary 2020 was suspended effectiveApril 2, 2020 . The sole reason for this suspension was due to the uncertainties surrounding COVID-19. OnOctober 29, 2020 , the Company announced the recommencement of this program for the repurchase of up to 200,000 shares of its common stock throughJanuary 2021 . OnFebruary 19, 2021 , the Company's Board of Directors authorized a new share repurchase program to purchase up to 1,000,000 shares of the Company's common stock throughFebruary 2022 . Shares of common stock may be purchased under the program periodically in privately negotiated transactions or in open market transactions at prevailing market prices, and pursuant to a trading plan in accordance with applicable securities laws. The actual means and timing of any purchases, target number of shares and prices or range of prices under the repurchase program, which the Company determines in its discretion, depend on a number of factors, including the market price of the Company's common stock, share issuances under the Company's equity plans, general market and economic conditions, and applicable legal and regulatory requirements. The Company's Board of Directors may modify, amend or terminate the program at any time. There is no assurance as to the amount of shares that the Company will purchase under the program. The Company continues to place a heightened emphasis on capital and liquidity to safeguard shareholders, its balance sheet and the needs of its customers. Management believes that the Company possesses strong capital and liquidity. The actions taken with regard to capital and liquidity as a result of the pandemic were put into effect to safeguard these areas of strength. EffectiveSeptember 2018 , theFederal Reserve raised the total consolidated asset limit in the Small Bank Holding Company Policy Statement from$1 billion to$3 billion , thereby eliminating the Company's consolidated capital reporting requirements. Therefore, the Company only reports capital information at the Bank level. Under the final rule on Enhanced Regulatory Capital Standards, commonly referred to as Basel III and which became effectiveJanuary 1, 2015 , the federal banking regulators have defined four tests for assessing the capital strength and adequacy of banks, based on four definitions of capital. "Common equity tier 1 capital" is defined as common equity, retained earnings, and accumulated other comprehensive income (AOCI), less certain intangibles. "Tier 1 capital" is defined as common equity tier 1 capital plus qualifying perpetual preferred stock, tier 1 minority interests, and grandfathered trust preferred securities. "Tier 2 capital" is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock, non-tier 1 minority interests and a limited amount of the allowance for loan losses. "Total capital" is defined as tier 1 capital plus tier 2 capital. Four risk-based capital ratios are computed using the above capital definitions, total assets and risk-weighted assets, and the ratios are measured against regulatory minimums to ascertain adequacy. All assets and off-balance sheet risk items are grouped into categories according to degree of risk and assigned a risk-weighting and the resulting total is risk-weighted assets. "Common equity tier 1 capital ratio" is common equity tier 1 capital divided by risk-weighted assets. "Tier 1 risk-based capital ratio" is tier 1 capital divided by risk-weighted assets. "Total risk-based capital ratio" is total capital divided by risk-weighted assets. The "leverage ratio" is tier 1 capital divided by total average assets. The Bank's ratio of total risk-based capital was 14.1% atJune 30, 2021 compared with 13.6% atDecember 31, 2020 . The tier 1 risk-based capital ratio was 13.3% atJune 30, 2021 and 12.7% atDecember 31, 2020 . The Bank's tier 1 leverage ratio was 10.3% atJune 30, 2021 and 10.1% atDecember 31, 2020 . All capital ratios exceed regulatory minimums to be considered well capitalized.BASEL III introduced the common equity tier 1 capital ratio, which was 13.3% atJune 30, 2021 and 12.7% atDecember 31, 2020 . 44 Table of Contents
Under Basel III, a capital conservation buffer of 2.5% above the minimum
risk-based capital thresholds was established. Dividend and executive
compensation restrictions begin if the Bank does not maintain the full amount of
the buffer. At
Liquidity
Liquidity represents the Company's ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest bearing deposits with banks, federal funds sold and certain investment securities. As a result of the Company's management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers' credit needs. The Company's results of operations are significantly affected by its ability to manage effectively the interest rate sensitivity and maturity of its interest earning assets and interest bearing liabilities. A summary of the Company's liquid assets atJune 30, 2021 andDecember 31, 2020 was as follows (dollars in thousands): June 30, 2021 December 31, 2020 Cash and due from banks$ 21,414 $ 17,845
Interest bearing bank deposits 101,996 45,118 Federal funds sold 234 222 Available for sale securities, at fair value, unpledged 273,796 235,784 Total liquid assets$ 397,440 $ 298,969 Deposits and other liabilities$ 1,574,482 $ 1,475,155 Ratio of liquid assets to deposits and other liabilities 25.24
% 20.27 %
The Company maintains unsecured lines of credit of varying amounts with
correspondent banks to facilitate short-term liquidity needs. The Company has a
total of
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