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Virginia National Bankshares Corp - Quarter Report: 2021 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2021

OR

 

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: 001-40305

 

VIRGINIA NATIONAL BANKSHARES CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

Virginia

46-2331578

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

404 People Place

 

Charlottesville, Virginia

22911

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (434) 817-8621

 

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                                                                                                  

 

VABK 

 

The Nasdaq Capital 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  

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes      No  

As of May 7, 2021, the registrant had 5,305,270 shares of common stock, $2.50 par value per share, outstanding.

 

 


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

 

FORM 10-Q

 

TABLE OF CONTENTS

 

Part I. Financial Information

 

 

Item 1    Financial Statements

 

Page   3

Consolidated Balance Sheets (unaudited)

 

Page   3

Consolidated Statements of Income (unaudited)

 

Page   4

Consolidated Statements of Comprehensive Income (unaudited)

 

Page   5

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

 

Page   6

Consolidated Statements of Cash Flows (unaudited)

 

Page   7

Notes to Consolidated Financial Statements (unaudited)

 

Page   8

 

 

 

Item 2    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Page 33

Application of Critical Accounting Policies and Estimates

 

Page 35

Financial Condition

 

Page 36

Results of Operations

 

Page 42

 

 

 

Item 3    Quantitative and Qualitative Disclosures About Market Risk

 

Page 47

 

 

 

Item 4    Controls and Procedures

 

Page 48

 

 

 

Part II. Other Information

 

 

Item 1    Legal Proceedings

 

Page 48

Item 1A  Risk Factors

 

Page 48

Item 2    Unregistered Sales of Equity Securities and Use of Proceeds

 

Page 48

Item 3    Defaults Upon Senior Securities

 

Page 48

Item 4    Mine Safety Disclosures

 

Page 48

Item 5    Other Information

 

Page 48

Item 6    Exhibits

 

Page 49

 

 

 

Signatures

 

Page 50

 

 

2


 

 

PART I.  FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

 

 

March 31, 2021

 

 

December 31, 2020*

 

ASSETS

 

(Unaudited)

 

 

 

 

 

Cash and due from banks

 

$

17,407

 

 

$

8,116

 

Federal funds sold

 

 

77,089

 

 

 

26,579

 

Securities:

 

 

 

 

 

 

 

 

Available for sale, at fair value

 

 

173,088

 

 

 

174,086

 

Restricted securities, at cost

 

 

2,653

 

 

 

3,010

 

Total securities

 

 

175,741

 

 

 

177,096

 

Loans

 

 

621,068

 

 

 

609,406

 

Allowance for loan losses

 

 

(5,615

)

 

 

(5,455

)

Loans, net

 

 

615,453

 

 

 

603,951

 

Premises and equipment, net

 

 

5,104

 

 

 

5,238

 

Bank owned life insurance

 

 

16,956

 

 

 

16,849

 

Goodwill

 

 

372

 

 

 

372

 

Other intangible assets, net

 

 

324

 

 

 

341

 

Accrued interest receivable and other assets

 

 

9,957

 

 

 

9,868

 

Total assets

 

$

918,403

 

 

$

848,410

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Demand deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

248,212

 

 

$

209,772

 

Interest-bearing

 

 

162,218

 

 

 

148,910

 

Money market and savings deposit accounts

 

 

292,886

 

 

 

272,980

 

Certificates of deposit and other time deposits

 

 

100,844

 

 

 

99,102

 

Total deposits

 

 

804,160

 

 

 

730,764

 

Advances from the FHLB

 

 

30,000

 

 

 

30,000

 

Accrued interest payable and other liabilities

 

 

4,231

 

 

 

5,048

 

Total liabilities

 

 

838,391

 

 

 

765,812

 

 

 

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $2.50 par value, 2,000,000 shares authorized, no

   shares outstanding

 

 

-

 

 

 

-

 

Common stock, $2.50 par value, 10,000,000 shares authorized;

   2,728,327 (including 36,179 nonvested) shares issued

   and outstanding as of March 31, 2021 and 2,714,273

   (including 25,268 nonvested) shares issued and outstanding

   as of December 31, 2020

 

 

6,730

 

 

 

6,722

 

Capital surplus

 

 

32,559

 

 

 

32,457

 

Retained earnings

 

 

42,650

 

 

 

41,959

 

Accumulated other comprehensive income (loss)

 

 

(1,927

)

 

 

1,460

 

Total shareholders' equity

 

 

80,012

 

 

 

82,598

 

Total liabilities and shareholders' equity

 

$

918,403

 

 

$

848,410

 

 

*

Derived from audited Consolidated Financial Statements

See Notes to Consolidated Financial Statements

3


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)

 

 

 

For the three months ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

Interest and dividend income:

 

 

 

 

 

 

 

 

Loans, including fees

 

$

5,938

 

 

$

5,871

 

Federal funds sold

 

 

12

 

 

 

85

 

Investment securities:

 

 

 

 

 

 

 

 

Taxable

 

 

507

 

 

 

509

 

Tax exempt

 

 

176

 

 

 

75

 

Dividends

 

 

34

 

 

 

24

 

Total interest and dividend income

 

 

6,667

 

 

 

6,564

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

Demand and savings deposits

 

 

377

 

 

 

695

 

Certificates and other time deposits

 

 

280

 

 

 

494

 

Repurchase agreements and other borrowings

 

 

36

 

 

-

 

Total interest expense

 

 

693

 

 

 

1,189

 

Net interest income

 

 

5,974

 

 

 

5,375

 

Provision for loan losses

 

 

351

 

 

 

765

 

Net interest income after provision for loan losses

 

 

5,623

 

 

 

4,610

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

Wealth management fees

 

 

329

 

 

 

310

 

Advisory and brokerage income

 

 

191

 

 

 

178

 

Royalty income

 

 

5

 

 

 

47

 

Deposit account fees

 

 

160

 

 

 

179

 

Debit/credit card and ATM fees

 

 

154

 

 

 

157

 

Earnings/increase in value of bank owned life insurance

 

 

107

 

 

 

107

 

Fees on mortgage sales

 

 

-

 

 

 

47

 

Gains on sales of securities

 

 

-

 

 

 

53

 

Loan swap fee income

 

 

15

 

 

 

509

 

Other

 

 

78

 

 

 

82

 

Total noninterest income

 

 

1,039

 

 

 

1,669

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

2,402

 

 

 

2,424

 

Net occupancy

 

 

495

 

 

 

452

 

Equipment

 

 

116

 

 

 

131

 

Data processing

 

 

289

 

 

 

301

 

Merger expenses

 

 

278

 

 

 

-

 

Other

 

 

1,201

 

 

 

1,235

 

Total noninterest expense

 

 

4,781

 

 

 

4,543

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

1,881

 

 

 

1,736

 

Provision for income taxes

 

 

376

 

 

 

332

 

Net income

 

$

1,505

 

 

$

1,404

 

Net income per common share, basic

 

$

0.55

 

 

$

0.52

 

Net income per common share, diluted

 

$

0.55

 

 

$

0.52

 

 

 

See Notes to Consolidated Financial Statements

4


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

(Unaudited)

 

 

 

For the three months ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

Net income

 

$

1,505

 

 

$

1,404

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on securities, net of tax

   of ($900) for the three months ended

   March 31, 2021; and net of tax of

   ($109) for the three months ended

   March 31, 2020

 

 

(3,387

)

 

 

(406

)

 

 

 

 

 

 

 

 

 

Reclassification adjustment for realized gains

   on sales of securities, net of tax of ($0)

   for the three months ended

   March 31, 2021; and net of tax of ($11)

   for the three months ended

   March 31, 2020

 

 

 

 

 

(42

)

 

 

 

 

 

 

 

 

 

Total other comprehensive loss

 

 

(3,387

)

 

 

(448

)

 

 

 

 

 

 

 

 

 

Total comprehensive (loss) income

 

$

(1,882

)

 

$

956

 

 

See Notes to Consolidated Financial Statements

5


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(Dollars in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common

 

 

Capital

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

 

 

Stock

 

 

Surplus

 

 

Earnings

 

 

Income (Loss)

 

 

Total

 

Balance, December 31, 2019

 

$

6,720

 

 

$

32,195

 

 

$

37,235

 

 

$

(43

)

 

$

76,107

 

Stock option expense

 

 

-

 

 

 

24

 

 

 

-

 

 

 

-

 

 

 

24

 

Restricted stock grant expense

 

 

-

 

 

 

15

 

 

 

-

 

 

 

-

 

 

 

15

 

Cash dividends declared ($0.30 per share)

 

 

-

 

 

 

-

 

 

 

(811

)

 

 

-

 

 

 

(811

)

Net income

 

 

-

 

 

 

-

 

 

 

1,404

 

 

 

-

 

 

 

1,404

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(448

)

 

 

(448

)

Balance, March 31, 2020

 

$

6,720

 

 

$

32,234

 

 

$

37,828

 

 

$

(491

)

 

$

76,291

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2020

 

$

6,722

 

 

$

32,457

 

 

$

41,959

 

 

$

1,460

 

 

$

82,598

 

Exercise of stock options

 

 

1

 

 

 

14

 

 

 

-

 

 

 

-

 

 

 

15

 

Stock option expense

 

 

-

 

 

 

34

 

 

 

-

 

 

 

-

 

 

 

34

 

Restricted stock grant expense

 

 

-

 

 

 

61

 

 

 

-

 

 

 

-

 

 

 

61

 

Vested stock grants

 

 

7

 

 

 

(7

)

 

 

-

 

 

 

-

 

 

 

-

 

Cash dividends declared ($0.30 per share)

 

 

-

 

 

 

-

 

 

 

(814

)

 

 

-

 

 

 

(814

)

Net income

 

 

-

 

 

 

-

 

 

 

1,505

 

 

 

-

 

 

 

1,505

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,387

)

 

 

(3,387

)

Balance, March 31, 2021

 

$

6,730

 

 

$

32,559

 

 

$

42,650

 

 

$

(1,927

)

 

$

80,012

 

 

      

See Notes to Consolidated Financial Statements

6


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

 

 

For the three months ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

1,505

 

 

$

1,404

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

351

 

 

 

765

 

Net amortization and accretion of securities

 

 

241

 

 

 

103

 

Net gains on sale of securities

 

 

-

 

 

 

(53

)

Earnings on bank owned life insurance

 

 

(107

)

 

 

(107

)

Amortization of intangible assets

 

 

17

 

 

 

40

 

Deferred tax

 

 

25

 

 

 

-

 

Depreciation and other amortization

 

 

476

 

 

 

518

 

Stock option expense

 

 

34

 

 

 

24

 

Stock grant expense, restricted

 

 

61

 

 

 

15

 

Net change in:

 

 

 

 

 

 

 

 

Accrued interest receivable and other assets

 

 

586

 

 

 

(205

)

Accrued interest payable and other liabilities

 

 

(3

)

 

 

387

 

Net cash provided by operating activities

 

 

3,186

 

 

 

2,891

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Net decrease (increase) in restricted investments

 

 

358

 

 

 

(53

)

Purchases of available for sale securities

 

 

(7,974

)

 

 

(7,109

)

Proceeds from maturities, calls and principal payments of available for sale securities

 

 

4,443

 

 

 

13,112

 

Proceeds from sales of available for sale securities

 

 

 

 

 

5,366

 

Net increase in organic loans

 

 

(17,745

)

 

 

(20,641

)

Net decrease in purchased loans

 

 

5,892

 

 

 

5,945

 

Cash payment for wealth management book of business

 

 

-

 

 

 

(50

)

Purchase of bank premises and equipment

 

 

(142

)

 

 

(89

)

Net cash used in investing activities

 

 

(15,168

)

 

 

(3,519

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Net increase in demand deposits, NOW accounts, and money market accounts

 

 

71,654

 

 

 

21,467

 

Net increase (decrease) in certificates of deposit and other time deposits

 

 

1,742

 

 

 

(7,542

)

Proceeds from stock options exercised

 

 

15

 

 

 

-

 

Cash dividends paid

 

 

(1,628

)

 

 

(808

)

Net cash provided by financing activities

 

 

71,783

 

 

 

13,117

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

$

59,801

 

 

$

12,489

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

 

 

 

Beginning of period

 

$

34,695

 

 

$

19,085

 

End of period

 

$

94,496

 

 

$

31,574

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

 

 

Interest

 

$

702

 

 

$

1,215

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING

   ACTIVITIES

 

 

 

 

 

 

 

 

Unrealized losses on available for sale securities

 

$

(4,287

)

 

$

(568

)

 

See Notes to Consolidated Financial Statements

7


 

VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2021

 

Note 1.  Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Virginia National Bankshares Corporation (the “Company”), and its subsidiaries Virginia National Bank (the “Bank”) and Masonry Capital Management, LLC (“Masonry Capital”), a registered investment advisor.  Beginning in 2019, the services offered under the umbrella of VNB Wealth are provided by Masonry Capital or by the Bank under VNB Trust & Estate Services or Sturman Wealth Advisors, formerly known as VNB Investment Services.  All significant intercompany balances and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with GAAP and the reporting guidelines prescribed by regulatory authorities 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 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 (including impaired loans), other-than-temporary impairment of securities, intangible assets, and fair value measurements. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2020. If needed, certain previously reported amounts have been reclassified to conform to current period presentation. No such reclassifications were significant.

Merger with Fauquier Bankshares, Inc.

On April 1, 2021, the Company completed its merger with Fauquier Bankshares, Inc. (“Fauquier”).  The merger of Fauquier with and into the Company (the “Merger”) was effected pursuant to the terms and conditions of the Agreement and Plan of Reorganization, dated as of September 30, 2020, between the Company and Fauquier, and a related Plan of Merger (together, the “Merger Agreement”).

Pursuant to the Merger Agreement, holders of shares of Fauquier common stock received 0.675 shares of the Company’s common stock for each share of Fauquier common stock held immediately prior to the effective date of the Merger, plus cash in lieu of fractional shares. Each share of the Company’s common stock outstanding immediately prior to the Merger remained outstanding and was unaffected by the Merger.

Shortly after the effective time of the Merger, The Fauquier Bank, Fauquier’s wholly-owned bank subsidiary, was merged with and into Virginia National Bank, the Company’s wholly-owned bank subsidiary, with Virginia National Bank surviving. 

The first quarter balance sheet and financial results of the Company do not include the financial position or results of Fauquier.  At March 31, 2021, Fauquier had total assets of $911.3 million, net loans of $616.4 million and total deposits of $817.5 million. 

Recent Accounting Pronouncements

Financial Instruments – Credit Losses In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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,

8


 

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 ASUs 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), such as the Company, 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. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.  Early in 2017, the Company formed a cross-functional steering committee, including some members of senior management, to provide governance and guidance over the project plan.  The Company is capturing the additional loan data which is anticipated to be needed for this calculation.  The extent of the change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions and forecasts at that time.  Upon adoption, the impact to the allowance for credit losses (currently allowance for loan losses) will have an offsetting one-time cumulative-effect adjustment to retained earnings.  

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (“SAB”) 119.  SAB 119 updated portions of SEC interpretative guidance to align with FASB Accounting Standards Codification (“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.

 

LIBOR and Other Reference Rates 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.” These amendments 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 Inter-bank 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 has identified all loans that are directly or indirectly impacted by LIBOR.  The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

 

Recently Adopted Accounting Developments

 

Accounting for Income Taxes In December 2019, the FASB issued 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 impact on the Company’s consolidated financial statements.  

 

Nonrefundable Fees and Other Costs 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 ASC paragraph 310-20-35-33 for each reporting period. ASU 2020-08 was effective for the Company on January 1, 2021. The adoption of ASU 2020-08 did not have a material impact on the Company’s consolidated financial statements.

 

CARES Act In December 2020, the Consolidated Appropriates 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 Act (“CARES Act”), including the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”)

9


 

and treatment of certain loan modifications related to the COVID-19 pandemic. The adoption of the CARES Act had no material impact on the Company’s consolidated financial statements.   See further discussion of PPP loans and loan modifications in Notes 3 and 4 of the notes to the Consolidated Financial Statements.

 

Note 2.  Securities

The amortized cost and fair values of securities available for sale as of March 31, 2021 and December 31, 2020 were as follows (dollars in thousands):

 

March 31, 2021

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Value

 

U.S. Government agencies

 

$

33,471

 

 

$

-

 

 

$

(910

)

 

$

32,561

 

Mortgage-backed securities/CMOs

 

 

72,795

 

 

 

443

 

 

 

(910

)

 

 

72,328

 

Municipal bonds

 

 

69,261

 

 

 

585

 

 

 

(1,647

)

 

 

68,199

 

Total Securities Available for Sale

 

$

175,527

 

 

$

1,028

 

 

$

(3,467

)

 

$

173,088

 

 

December 31, 2020

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Value

 

U.S. Government agencies

 

$

25,496

 

 

$

7

 

 

$

(198

)

 

$

25,305

 

Mortgage-backed securities/CMOs

 

 

77,438

 

 

 

844

 

 

 

(182

)

 

 

78,100

 

Municipal bonds

 

 

69,303

 

 

 

1,499

 

 

 

(121

)

 

 

70,681

 

Total Securities Available for Sale

 

$

172,237

 

 

$

2,350

 

 

$

(501

)

 

$

174,086

 

 

 

As of March 31, 2021, there were $130.7 million, or 80 issues of individual securities, held in an unrealized loss position.  These securities have an unrealized loss of $3.5 million and consisted of 29 mortgage-backed/collateralized mortgage obligations (“CMOs”), 34 municipal bonds, and 17 agency bonds.  

The following table summarizes all securities with unrealized losses, segregated by length of time in a continuous unrealized loss position, at March 31, 2021, and December 31, 2020 (dollars in thousands):

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or more

 

 

Total

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Unrealized

 

 

 

Fair Value

 

 

Losses

 

 

Fair Value

 

 

Losses

 

 

Fair Value

 

 

Losses

 

U.S. Government agencies

 

$

30,561

 

 

$

(910

)

 

$

 

 

$

 

 

$

30,561

 

 

$

(910

)

Mortgage-backed/CMOs

 

 

52,510

 

 

 

(910

)

 

 

 

 

 

 

 

 

52,510

 

 

 

(910

)

Municipal bonds

 

 

46,852

 

 

 

(1,632

)

 

 

750

 

 

 

(15

)

 

 

47,602

 

 

 

(1,647

)

 

 

$

129,923

 

 

$

(3,452

)

 

$

750

 

 

$

(15

)

 

$

130,673

 

 

$

(3,467

)

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or more

 

 

Total

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Unrealized

 

 

 

Fair Value

 

 

Losses

 

 

Fair Value

 

 

Losses

 

 

Fair Value

 

 

Losses

 

U.S. Government agencies

 

$

19,298

 

 

$

(198

)

 

$

 

 

$

 

 

$

19,298

 

 

$

(198

)

Mortgage-backed/CMOs

 

 

24,523

 

 

 

(182

)

 

 

 

 

 

 

 

 

24,523

 

 

 

(182

)

Municipal bonds

 

 

21,501

 

 

 

(121

)

 

 

 

 

 

 

 

 

21,501

 

 

 

(121

)

 

 

$

65,322

 

 

$

(501

)

 

$

 

 

$

 

 

$

65,322

 

 

$

(501

)

 

The Company’s securities portfolio is primarily made up of fixed rate bonds, the prices of which move inversely with interest rates.  Any unrealized losses are considered by management to be driven by increases in market interest rates over the

10


 

yields available at the time the underlying securities were purchased.  The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline.  At the end of any accounting period, the portfolio may have both unrealized gains and losses.  Management does not believe any of the securities in an unrealized loss position are impaired due to credit quality.  Accordingly, as of March 31, 2021, management believes the impairments detailed in the table above are temporary, and no impairment loss has been realized in the Company’s consolidated income statement.

An “other-than-temporary impairment” (“OTTI”) is considered to exist if either of the following conditions are met: it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or the Company does not expect to recover the security’s entire amortized cost basis (even if the Company does not intend to sell).  In the event that a security would suffer impairment for a reason that was “other than temporary,” the Company would be expected to write down the security’s value to its new fair value, and the amount of the write down would be included in earnings as a realized loss.  As of March 31, 2021, management has concluded that none of its investment securities have an OTTI based upon the information available.  Additionally, management has the ability to hold any security with an unrealized loss until maturity or until such time as the value of the security has recovered from its unrealized loss position.

Securities having carrying values of $5.9 million at March 31, 2021 were pledged as collateral to secure public deposits and facilitate borrowing from the Federal Reserve Bank of Richmond (“FRB”).  At December 31, 2020, securities having carrying values of $6.0 million were similarly pledged.

For the three months ended March 31, 2021, there were no sales of securities. For the three months ended March 31, 2020, proceeds from the sales of securities amounted to $5.4 million, with realized gains of $53 thousand.    

Restricted securities are securities with limited marketability and consist of stock in the FRB, the Federal Home Loan Bank of Atlanta (“FHLB”), and CBB Financial Corporation, the holding company for Community Bankers Bank.  These restricted securities, totaling $2.7 million and $3.0 million as of March 31, 2021 and December 31, 2020, are carried at cost.

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Note 3.  Loans

The composition of the loan portfolio by loan classification at March 31, 2021 and December 31, 2020 appears below (dollars in thousands).  

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Commercial

 

 

 

 

 

 

 

 

Commercial and industrial - organic

 

$

26,753

 

 

$

27,238

 

Commercial and industrial - Paycheck Protection Program

 

 

68,254

 

 

 

54,176

 

Commercial and industrial - government guaranteed

 

 

29,027

 

 

 

30,920

 

Commercial and industrial - syndicated

 

 

6,354

 

 

 

6,354

 

Total commercial and industrial

 

 

130,388

 

 

 

118,688

 

Real estate construction and land

 

 

 

 

 

 

 

 

Residential construction

 

 

3,544

 

 

 

2,238

 

Commercial construction

 

 

17,109

 

 

 

14,302

 

Land and land development

 

 

5,601

 

 

 

5,969

 

Total construction and land

 

 

26,254

 

 

 

22,509

 

Real estate mortgages

 

 

 

 

 

 

 

 

1-4 family residential, first lien, investment

 

 

75,388

 

 

 

69,851

 

1-4 family residential, first lien, owner occupied

 

 

18,595

 

 

 

19,864

 

1-4 family residential, junior lien

 

 

1,768

 

 

 

2,938

 

1-4 family residential - purchased

 

 

16,097

 

 

 

18,534

 

Home equity lines of credit, first lien

 

 

9,299

 

 

 

8,715

 

Home equity lines of credit, junior lien

 

 

8,074

 

 

 

7,392

 

Farm

 

 

5,605

 

 

 

5,672

 

Multifamily

 

 

46,818

 

 

 

43,490

 

Commercial owner occupied

 

 

91,444

 

 

 

95,726

 

Commercial non-owner occupied

 

 

136,348

 

 

 

137,893

 

Total real estate mortgage

 

 

409,436

 

 

 

410,075

 

Consumer

 

 

 

 

 

 

 

 

Consumer revolving credit

 

 

16,992

 

 

 

17,624

 

Consumer all other credit

 

 

2,327

 

 

 

3,074

 

Student loans purchased

 

 

35,671

 

 

 

37,436

 

Total consumer

 

 

54,990

 

 

 

58,134

 

Total loans

 

 

621,068

 

 

 

609,406

 

Less:  Allowance for loan losses

 

 

(5,615

)

 

 

(5,455

)

Net loans

 

$

615,453

 

 

$

603,951

 

 

During the last three quarters of 2020, the Company assisted nonprofit organizations and local businesses by funding $86.9 million of Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans, which were designed to provide economic relief to small businesses adversely impacted by COVID-19.  During the three months ended March 31, 2021, the Company funded an additional $36.2 million in PPP loans.  

The balances in the table above include unamortized premiums and net deferred loan costs (fees). As of March 31, 2021 and December 31, 2020, unamortized premiums on loans purchased were $1.7 million and $1.8 million, respectively.  Net deferred loan costs (fees) totaled $(2.0) million and $(931) thousand as of March 31, 2021 and December 31, 2020, respectively.  The deferred fees increased $1.1 million due to the fees collected from the SBA for the additional PPP loans funded during the three months ended March 31, 2021. Net deferred fees on PPP loans are being amortized over the contractual life of the underlying loans, most of which are over a 60-month period.

Accounting guidance requires certain disclosures about investments in impaired loans, the allowance for loan losses and interest income recognized on impaired loans.  A loan is considered impaired when it is probable that the Company will be unable to collect all principal and interest amounts when due according to the contractual terms of the loan agreement.  

12


 

Factors involved in determining impairment include, but are not limited to, expected future cash flows, financial condition of the borrower, and current economic conditions.

The following tables reflect the breakdown by class of the loans classified as impaired loans as of March 31, 2021 and December 31, 2020.  These loans are reported at their recorded investment, which is the carrying amount of the loan as reflected on the Company’s balance sheet, net of charge-offs and other amounts applied to reduce the net book balance.  Average recorded investment in impaired loans is computed using an average of month-end balances for these loans for either the three months ended March 31, 2021 or the twelve months ended December 31, 2020.  Interest income recognized is for the three months ended March 31, 2021 or the twelve months ended December 31, 2020 (dollars below reported in thousands).

 

March 31, 2021

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Associated

Allowance

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land and land development

 

$

5

 

 

$

53

 

 

$

-

 

 

$

6

 

 

$

-

 

1-4 family residential mortgages, junior lien

 

 

106

 

 

 

105

 

 

 

-

 

 

 

107

 

 

 

1

 

Total impaired loans without a valuation allowance

 

 

111

 

 

 

158

 

 

 

-

 

 

 

113

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a valuation allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Student loans purchased

 

 

1,053

 

 

 

1,053

 

 

 

6

 

 

 

1,053

 

 

 

15

 

Total impaired loans with a valuation allowance

 

 

1,053

 

 

 

1,053

 

 

 

6

 

 

 

1,053

 

 

 

15

 

Total impaired loans

 

$

1,164

 

 

$

1,211

 

 

$

6

 

 

$

1,166

 

 

$

16

 

 

December 31, 2020

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Associated

Allowance

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land and land development

 

$

8

 

 

$

55

 

 

$

-

 

 

$

97

 

 

$

-

 

1-4 family residential mortgages, junior lien

 

 

109

 

 

 

109

 

 

 

-

 

 

 

113

 

 

 

6

 

Commercial non-owner occupied real estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

781

 

 

 

48

 

Total impaired loans without a valuation allowance

 

 

117

 

 

 

164

 

 

 

-

 

 

 

991

 

 

 

54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a valuation allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Student loans purchased

 

 

1,156

 

 

 

1,156

 

 

 

4

 

 

 

1,145

 

 

 

70

 

Total impaired loans with a valuation allowance

 

 

1,156

 

 

 

1,156

 

 

 

4

 

 

 

1,145

 

 

 

70

 

Total impaired loans

 

$

1,273

 

 

$

1,320

 

 

$

4

 

 

$

2,136

 

 

$

124

 

 

Included in the impaired loans above are non-accrual loans.  Generally, a loan is placed on non-accrual when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more.  Any unpaid interest previously accrued on those loans is reversed from income.  Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote.  Interest payments received on such loans are applied as a reduction of the loan principal balance.  Interest income on other non-accrual loans is recognized only to the extent of interest payments received.  The recorded investment in non-accrual loans is shown below by class (dollars in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Land and land development

 

$

5

 

 

$

8

 

Total non-accrual loans

 

$

5

 

 

$

8

 

 

Additionally, troubled debt restructurings (“TDRs”) are considered impaired loans.  TDRs occur when the Company agrees to modify the original terms of a loan by granting a concession that it would not otherwise consider due to the deterioration in the financial condition of the borrower.  These concessions are done in an attempt to improve the paying capacity of the borrower, and in some cases to avoid foreclosure, and are made with the intent to restore the loan to a performing status once sufficient payment history can be demonstrated.  These concessions could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.

13


 

In accordance with regulatory guidance, the Company has approved for certain customers who have been adversely affected by COVID-19 to defer principal-only, or principal and interest.  Such short-term modifications, which were made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs.  While interest will continue to accrue to income, in accordance with GAAP, if the Company ultimately incurs a credit loss on these deferred payments, interest income would need to be reversed and therefore, interest income in future periods could be negatively impacted.  A total of $59.0 million in loan deferments have been approved since the beginning of the pandemic.  As of March 31, 2021, $57.5 million, or 97.4%, of the total loan deferments approved have returned to normal payment schedules and are now current.  

Based on regulatory guidance on student lending, the Company has classified 68 of its student loans purchased as TDRs for a total of $1.1 million as of March 31, 2021.  These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered TDRs.  Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance.  Initially, all student loans were fully insured by a surety bond, and the Company did not expect to experience a loss on these loans.  Based on the loss of insurance after July 27, 2018 due to the insolvency of the insurer, management has evaluated these loans individually for impairment and included any probable loss in the allowance for loan losses; interest continues to accrue on these TDRs during any deferment and forbearance periods.

The following provides a summary, by class, of TDRs that continue to accrue interest under the terms of the restructuring agreement, which are considered to be performing, and TDRs that have been placed in non-accrual status, which are considered to be nonperforming (dollars in thousands).

 

Troubled debt restructurings

 

March 31, 2021

 

 

December 31, 2020

 

 

 

No. of

 

 

Recorded

 

 

No. of

 

 

Recorded

 

 

 

Loans

 

 

Investment

 

 

Loans

 

 

Investment

 

Performing TDRs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages, junior lien

 

 

1

 

 

$

106

 

 

 

1

 

 

$

109

 

Student loans purchased

 

 

68

 

 

 

1,053

 

 

 

75

 

 

 

1,156

 

Total performing TDRs

 

 

69

 

 

$

1,159

 

 

 

76

 

 

$

1,265

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming TDRs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land and land development

 

 

1

 

 

$

5

 

 

 

1

 

 

$

8

 

Total nonperforming TDRs

 

 

1

 

 

$

5

 

 

 

1

 

 

$

8

 

Total TDRs

 

 

70

 

 

$

1,164

 

 

 

77

 

 

$

1,273

 

 

A summary of loans shown above that were modified under the terms of a TDR during the three months ended March 31, 2021 and 2020 is shown below by class (dollars in thousands).  The Post-Modification Recorded Balance reflects the period end balances, inclusive of any interest capitalized to principal, partial principal paydowns, and principal charge-offs since the modification date.  Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported.

 

 

 

For three months ended

 

 

For three months ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

 

Number

of Loans

 

 

Pre-

Modification

Recorded

Balance

 

 

Post-

Modification

Recorded

Balance

 

 

Number

of Loans

 

 

Pre-

Modification

Recorded

Balance

 

 

Post-

Modification

Recorded

Balance

 

Student loans purchased

 

 

6

 

 

$

63

 

 

$

63

 

 

 

5

 

 

$

60

 

 

$

60

 

Total loans modified during the period

 

 

6

 

 

$

63

 

 

$

63

 

 

 

5

 

 

$

60

 

 

$

60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the three months ended March 31, 2021, there was one loan modified as a TDR that subsequently defaulted which had been modified as a TDR during the twelve months prior to default.  This student loan had a balance of $19 thousand prior to being charged off. There were five loans modified as a TDR that subsequently defaulted during the year ended December 31, 2020 which had been modified as a TDR during the twelve months prior to default.  These student loans had balances totaling $48 thousand prior to being charged off.

14


 

There were no loans secured by 1-4 family residential property that were in the process of foreclosure at either March 31, 2021 or December 31, 2020.

Note 4.  Allowance for Loan Losses

The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s quarterly evaluation of the collectability of the loan portfolio, credit concentrations, historical loss experience, specific impaired loans, and economic conditions. To determine the total allowance for loan losses, the Company estimates the reserves needed for each segment of the portfolio, including loans analyzed individually and loans analyzed on a pooled basis. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows.  

For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type.  Within these segments, the Company has sub-segmented its portfolio by classes within the segments, based on the associated risks within these classes.  

 

Loan Classes by Segments

 

Commercial loan segment:

 

Commercial and industrial - organic

 

Commercial and industrial - Paycheck Protection Program

 

Commercial and industrial - government guaranteed 1

 

Commercial and industrial - syndicated

 

 

Real estate construction and land loan segment:

 

Residential construction

 

Commercial construction

 

Land and land development

 

 

Real estate mortgage loan segment:

 

1-4 family residential, first lien, investment

 

1-4 family residential, first lien, owner occupied

 

1-4 family residential, junior lien

 

Home equity lines of credit, first lien

 

Home equity lines of credit, junior lien

 

Farm

 

Multifamily

 

Commercial owner occupied

 

Commercial non-owner occupied

 

 

Consumer loan segment:

 

Consumer revolving credit

 

Consumer all other credit

 

Student loans purchased

 

1 Commercial and industrial – government guaranteed class excludes PPP loans

 


15


 

Management utilizes a loss migration model for determining the quantitative risk assigned to unimpaired loans in order to capture historical loss information at the loan level, track loss migration through risk grade deterioration, and increase efficiencies related to performing the calculations.  The quantitative risk factor for each loan class primarily utilizes a migration analysis loss method based on loss history for the prior twelve quarters.

The migration analysis loss method is used for all loan classes except for the following:

 

Commercial and industrial PPP loans – These loans require no reserve as these are 100% guaranteed by the SBA.  

 

Student loans purchased - On June 27, 2018, the Company was notified that ReliaMax Surety Company (“ReliaMax Surety”), the South Dakota insurance company which issued surety bonds for the student loan pools, was placed into liquidation due to insolvency.  As such, the historical charge-off rate on this portfolio is determined by using the Company’s own losses/charge-offs since July 1, 2018 together with prior insurance claim history. For reporting periods prior to June 30, 2018, the Company did not charge off student loans as the insurance covered the past due loans, but the Company did apply qualitative factors to calculate a reserve on these loans, net of the deposit reserve accounts held by the Company for this group of loans.

 

Commercial and industrial government guaranteed loans - These purchased loans require no reserve as these are 100% guaranteed by either the SBA or the United States Department of Agriculture.

 

Commercial and industrial syndicated loans - Beginning with the quarter ended September 30, 2016, migration analysis was utilized on the Pass pool. For all other pools, there was not an established loss history; therefore the S&P credit and recovery ratings on the credit facilities were utilized to calculate a three-year weighted average historical default rate. As of December 31, 2019, only migration analysis was utilized since all outstanding syndicated loans at that time were in the Pass pool.

Under the migration analysis method, average loss rates are calculated at the risk grade and class levels by dividing the twelve-quarter average net charge-off amount by the twelve-quarter average loan balances.  Qualitative factors are combined with these quantitative factors to arrive at the overall general allowances.

The Company’s internal creditworthiness grading system is based on experiences with similarly graded loans. The Company performs regular credit reviews of the loan portfolio to review the credit quality and adherence to its underwriting standards. Additionally, external reviews of a portion of the credits are conducted annually.

Loans that trend upward on the risk ratings scale, toward more positive risk ratings, generally exhibit lower risk factor characteristics. Conversely, loans that migrate toward more negative ratings generally will result in a higher risk factor being applied to those related loan balances.


16


 

 

Risk Ratings and Historical Loss Factor Assigned

Excellent

A 0% historical loss factor is applied, as these loans are secured by cash or fully guaranteed by a U.S. government agency and represent a minimal risk.  The Company has never experienced a loss within this category.

Good

A 0% historical loss factor is applied, as these loans represent a low risk and are secured by marketable collateral within margin. In an abundance of caution, a nominal loss reserve is applied to these loans. The Company has never experienced a loss within this category.

Pass

A historical loss factor for loans rated “Pass” is applied to current balances of like-rated loans, pooled by class.  Loans with the following risk ratings are pooled by class and considered together as “Pass”:

Satisfactory – modest risk loans where the borrower has strong and liquid financial statements and more than adequate cash flow

Average – average risk loans where the borrower has reasonable debt service capacity

Marginal – acceptable risk loans where the borrower has acceptable financial statements but is leveraged

Watch

These loans have an acceptable risk but require more attention than normal servicing.  A historical loss factor for loans rated “Watch” is applied to current balances of like-rated loans pooled by class.

Special Mention

These potential problem loans are currently protected but are potentially weak.  A historical loss factor for loans rated “Special Mention” is applied to current balances of like-rated loans pooled by class.

Substandard

These problem loans are inadequately protected by the sound worth and paying capacity of the borrower and/or the value of any collateral pledged.  These loans may be considered impaired and evaluated on an individual basis.  Otherwise, a historical loss factor for loans rated “Substandard” is applied to current balances of all other “Substandard” loans pooled by class.

Doubtful

Loans with this rating have significant deterioration in the sound worth and paying capacity of the borrower and/or the value of any collateral pledged, making collection or liquidation of the loan in full highly questionable.  These loans would be considered impaired and evaluated on an individual basis.  

17


 

The following represents the loan portfolio designated by the internal risk ratings assigned to each credit as of March 31, 2021 and December 31, 2020 (dollars in thousands). There were no loans rated “Doubtful” as of either period.

 

March 31, 2021

 

Excellent

 

 

Good

 

 

Pass

 

 

Watch

 

 

Special

Mention

 

 

Sub-

standard

 

 

TOTAL

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial - organic

 

$

1,688

 

 

$

12,556

 

 

$

12,371

 

 

$

44

 

 

$

-

 

 

$

94

 

 

$

26,753

 

Commercial and industrial - Paycheck Protection Program

 

 

68,254

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

68,254

 

Commercial and industrial - government guaranteed

 

 

29,027

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

29,027

 

Commercial and industrial - syndicated

 

 

-

 

 

 

-

 

 

 

6,354

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,354

 

Real estate construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction

 

 

-

 

 

 

-

 

 

 

3,544

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,544

 

Commercial construction

 

 

-

 

 

 

-

 

 

 

17,109

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,109

 

Land and land development

 

 

-

 

 

 

-

 

 

 

5,411

 

 

 

-

 

 

 

-

 

 

 

190

 

 

 

5,601

 

Real estate mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential, first lien investment

 

 

-

 

 

 

-

 

 

 

72,558

 

 

 

1,910

 

 

 

268

 

 

 

652

 

 

 

75,388

 

1-4 family residential, first lien, owner occupied

 

 

-

 

 

 

-

 

 

 

17,400

 

 

 

889

 

 

 

96

 

 

 

210

 

 

 

18,595

 

1-4 family residential, junior lien

 

 

-

 

 

 

-

 

 

 

1,651

 

 

 

-

 

 

 

11

 

 

 

106

 

 

 

1,768

 

1-4 family residential, first lien - purchased

 

 

-

 

 

 

-

 

 

 

16,097

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

16,097

 

Home equity lines of credit, first lien

 

 

-

 

 

 

-

 

 

 

9,237

 

 

 

62

 

 

 

-

 

 

 

-

 

 

 

9,299

 

Home equity lines of credit, junior lien

 

 

-

 

 

 

-

 

 

 

7,897

 

 

 

95

 

 

 

-

 

 

 

82

 

 

 

8,074

 

Farm

 

 

-

 

 

 

-

 

 

 

5,313

 

 

 

292

 

 

 

-

 

 

 

 

 

 

5,605

 

Multifamily

 

 

-

 

 

 

-

 

 

 

45,860

 

 

 

795

 

 

 

-

 

 

 

163

 

 

 

46,818

 

Commercial owner occupied

 

 

-

 

 

 

-

 

 

 

72,086

 

 

 

4,856

 

 

 

-

 

 

 

14,502

 

 

 

91,444

 

Commercial non-owner occupied

 

 

-

 

 

 

-

 

 

 

132,453

 

 

 

152

 

 

 

-

 

 

 

3,743

 

 

 

136,348

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer revolving credit

 

 

323

 

 

 

16,372

 

 

 

297

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

16,992

 

Consumer all other credit

 

 

184

 

 

 

1,692

 

 

 

448

 

 

 

-

 

 

 

-

 

 

 

3

 

 

 

2,327

 

Student loans purchased

 

 

-

 

 

 

-

 

 

 

35,133

 

 

 

398

 

 

 

88

 

 

 

52

 

 

 

35,671

 

Total Loans

 

$

99,476

 

 

$

30,620

 

 

$

461,219

 

 

$

9,493

 

 

$

463

 

 

$

19,797

 

 

$

621,068

 

18


 

 

 

December 31, 2020

 

Excellent

 

 

Good

 

 

Pass

 

 

Watch

 

 

Special

Mention

 

 

Sub-

standard

 

 

TOTAL

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial - organic

 

$

1,918

 

 

$

14,336

 

 

$

9,772

 

 

$

485

 

 

$

-

 

 

$

727

 

 

$

27,238

 

Commercial and industrial - Paycheck Protection Program

 

 

54,176

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

54,176

 

Commercial and industrial - government guaranteed

 

 

30,920

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

30,920

 

Commercial and industrial - syndicated

 

 

-

 

 

 

-

 

 

 

6,354

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,354

 

Real estate construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction

 

 

-

 

 

 

-

 

 

 

2,238

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,238

 

Commercial construction

 

 

-

 

 

 

-

 

 

 

14,302

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

14,302

 

Land and land development

 

 

-

 

 

 

-

 

 

 

5,765

 

 

 

-

 

 

 

-

 

 

 

204

 

 

 

5,969

 

Real estate mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential, first lien, investment

 

 

-

 

 

 

-

 

 

 

66,336

 

 

 

2,149

 

 

 

704

 

 

 

662

 

 

 

69,851

 

1-4 family residential, first lien, owner occupied

 

 

-

 

 

 

-

 

 

 

18,010

 

 

 

1,002

 

 

 

640

 

 

 

212

 

 

 

19,864

 

1-4 family residential, junior lien

 

 

-

 

 

 

-

 

 

 

2,788

 

 

 

28

 

 

 

13

 

 

 

109

 

 

 

2,938

 

1-4 family residential, first lien - purchased

 

 

-

 

 

 

-

 

 

 

18,534

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

18,534

 

Home equity lines of credit, first lien

 

 

-

 

 

 

-

 

 

 

8,653

 

 

 

62

 

 

 

-

 

 

 

-

 

 

 

8,715

 

Home equity lines of credit, junior lien

 

 

-

 

 

 

-

 

 

 

7,214

 

 

 

96

 

 

 

-

 

 

 

82

 

 

 

7,392

 

Farm

 

 

-

 

 

 

-

 

 

 

5,375

 

 

 

297

 

 

 

-

 

 

 

-

 

 

 

5,672

 

Multifamily

 

 

-

 

 

 

-

 

 

 

42,525

 

 

 

801

 

 

 

-

 

 

 

164

 

 

 

43,490

 

Commercial owner occupied

 

 

-

 

 

 

-

 

 

 

82,629

 

 

 

4,898

 

 

 

-

 

 

 

8,199

 

 

 

95,726

 

Commercial non-owner occupied

 

 

-

 

 

 

-

 

 

 

136,509

 

 

 

155

 

 

 

-

 

 

 

1,229

 

 

 

137,893

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

Consumer revolving credit

 

 

845

 

 

 

16,489

 

 

 

290

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,624

 

Consumer all other credit

 

 

167

 

 

 

2,440

 

 

 

464

 

 

 

-

 

 

 

-

 

 

 

3

 

 

 

3,074

 

Student loans purchased

 

 

-

 

 

 

-

 

 

 

35,819

 

 

 

1,373

 

 

 

64

 

 

 

180

 

 

 

37,436

 

Total Loans

 

$

88,026

 

 

$

33,265

 

 

$

463,577

 

 

$

11,346

 

 

$

1,421

 

 

$

11,771

 

 

$

609,406

 

 

In addition, the adequacy of the Company’s allowance for loan losses is evaluated through reference to eight qualitative factors, listed below and ranked in order of importance:

 

1)

Changes in national and local economic conditions, including the condition of various market segments;

 

2)

Changes in the value of underlying collateral;

 

3)

Changes in volume of classified assets, measured as a percentage of capital;

 

4)

Changes in volume of delinquent loans;

 

5)

The existence and effect of any concentrations of credit and changes in the level of such concentrations;

 

6)

Changes in lending policies and procedures, including underwriting standards;

 

7)

Changes in the experience, ability and depth of lending management and staff; and

 

8)

Changes in the level of policy exceptions.

It has been the Company’s experience that the first five factors drive losses to a much greater extent than the last three factors; therefore, the first five factors are weighted more heavily. Qualitative factors are not assessed against loans rated “Excellent” or “Good,” as the Company has never experienced a loss within these categories.

As of March 31, 2020 and June 30, 2020, the Company downgraded the economic qualitative factors within its ALLL model in light of the effects of COVID-19 on the economy.  No additional downgrades of such factors were taken during the quarters ended September 30, 2020, December 31, 2020 or March 31, 2021.  If economic conditions improve or worsen, the Company could experience changes in the required ALLL.  It is possible that asset quality metrics could decline in the future if the effects of COVID-19 are sustained.

19


 

For each segment and class of loans, management must exercise significant judgment to determine the estimation method that fits the credit risk characteristics of its various segments. Although this evaluation is inherently subjective, qualified management utilizes its significant knowledge and experience related to both the Company’s markets and the history of the Company’s loan losses.

Impaired loans are individually evaluated and, if deemed appropriate, a specific allocation is made for these loans. In reviewing the loans classified as impaired loans totaling $1.2 million at March 31, 2021, a specific valuation allowance was recognized after consideration was given for each borrowing as to the fair value of the collateral on the loan or the present value of expected future cash flows from the borrower.  The $6 thousand in the allowance total shown below as individually evaluated for impairment was attributed to the impaired student loans that required an allowance as of March 31, 2021 due to the loss of the insurance on this portfolio as discussed previously.

A summary of the transactions in the Allowance for Loan Losses by loan portfolio segment for the three months ended March 31, 2021 and the year ended December 31, 2020 appears below (dollars in thousands):

 

Allowance for Loan Losses Rollforward by Portfolio Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the period ended March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

Loans

 

 

Real Estate

Construction

and Land

 

 

Real Estate

Mortgages

 

 

Consumer

Loans

 

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of beginning of year

 

$

209

 

 

$

160

 

 

$

3,897

 

 

$

1,189

 

 

$

5,455

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(241

)

 

 

(241

)

Recoveries

 

 

6

 

 

 

-

 

 

 

2

 

 

 

42

 

 

 

50

 

Provision for (recovery of) loan losses

 

 

(52

)

 

 

20

 

 

 

155

 

 

 

228

 

 

 

351

 

Ending Balance

 

$

163

 

 

$

180

 

 

$

4,054

 

 

$

1,218

 

 

$

5,615

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

-

 

 

$

-

 

 

$

-

 

 

$

6

 

 

$

6

 

Collectively evaluated for impairment

 

 

163

 

 

 

180

 

 

 

4,054

 

 

 

1,212

 

 

 

5,609

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

-

 

 

$

5

 

 

$

106

 

 

$

1,053

 

 

$

1,164

 

Collectively evaluated for impairment

 

 

130,388

 

 

 

26,249

 

 

 

409,330

 

 

 

53,937

 

 

 

619,904

 

Ending Balance

 

$

130,388

 

 

$

26,254

 

 

$

409,436

 

 

$

54,990

 

 

 

621,068

 

 

As of and for the period ended December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

Loans

 

 

Real Estate

Construction

and Land

 

 

Real Estate

Mortgages

 

 

Consumer

Loans

 

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of beginning of year

 

$

302

 

 

$

109

 

 

$

2,684

 

 

$

1,114

 

 

$

4,209

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(805

)

 

 

(805

)

Recoveries

 

 

28

 

 

 

-

 

 

 

1

 

 

 

400

 

 

 

429

 

Provision for (recovery of) loan losses

 

 

(121

)

 

 

51

 

 

 

1,212

 

 

 

480

 

 

 

1,622

 

Ending Balance

 

$

209

 

 

$

160

 

 

$

3,897

 

 

$

1,189

 

 

$

5,455

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

-

 

 

$

-

 

 

$

-

 

 

$

4

 

 

$

4

 

Collectively evaluated for impairment

 

 

209

 

 

 

160

 

 

 

3,897

 

 

 

1,185

 

 

 

5,451

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

-

 

 

$

8

 

 

$

109

 

 

$

1,156

 

 

$

1,273

 

Collectively evaluated for impairment

 

 

118,688

 

 

 

22,501

 

 

 

409,966

 

 

 

56,978

 

 

 

608,133

 

Ending Balance

 

$

118,688

 

 

$

22,509

 

 

$

410,075

 

 

$

58,134

 

 

$

609,406

 

 

20


 

 

As previously mentioned, one of the major factors that the Company uses in evaluating the adequacy of its allowance for loan losses is changes in the volume of delinquent loans.  Management monitors payment activity on a regular basis.  For all classes of loans, the Company considers the entire balance of the loan to be contractually delinquent if the minimum payment is not received by the due date.  Interest and fees continue to accrue on past due loans until they are placed in nonaccrual or charged off.

The following tables show the aging of past due loans as of March 31, 2021 and December 31, 2020 (dollars below reported in thousands).

 

Past Due Aging as of

March 31, 2021

 

30-59

Days Past

Due

 

 

60-89

Days Past

Due

 

 

90 Days or

More Past

Due

 

 

Total Past

Due

 

 

Current

 

 

Total

Loans

 

 

90 Days

Past Due

and Still

Accruing

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial - organic

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

26,753

 

 

$

26,753

 

 

$

-

 

Commercial and industrial - Paycheck Protection Program

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

68,254

 

 

 

68,254

 

 

 

-

 

Commercial and industrial - government guaranteed

 

 

1,347

 

 

 

-

 

 

 

382

 

 

 

1,729

 

 

 

27,298

 

 

 

29,027

 

 

 

382

 

Commercial and industrial - syndicated

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,354

 

 

 

6,354

 

 

 

-

 

Real estate construction and land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,544

 

 

 

3,544

 

 

 

-

 

Commercial construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,109

 

 

 

17,109

 

 

 

-

 

Land and land development

 

 

10

 

 

 

-

 

 

 

-

 

 

 

10

 

 

 

5,591

 

 

 

5,601

 

 

 

-

 

Real estate mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential, first lien, investment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

75,388

 

 

 

75,388

 

 

 

-

 

1-4 family residential, first lien, owner occupied

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

18,595

 

 

 

18,595

 

 

 

-

 

1-4 family residential, junior lien

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,768

 

 

 

1,768

 

 

 

-

 

1-4 family residential - purchased

 

 

500

 

 

 

-

 

 

 

-

 

 

 

500

 

 

 

15,597

 

 

 

16,097

 

 

 

-

 

Home equity lines of credit, first lien

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,299

 

 

 

9,299

 

 

 

-

 

Home equity lines of credit, junior lien

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,074

 

 

 

8,074

 

 

 

-

 

Farm

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,605

 

 

 

5,605

 

 

 

-

 

Multifamily

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

46,818

 

 

 

46,818

 

 

 

-

 

Commercial owner occupied

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

91,444

 

 

 

91,444

 

 

 

-

 

Commercial non-owner occupied

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

136,348

 

 

 

136,348

 

 

 

-

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer revolving credit

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

16,992

 

 

 

16,992

 

 

 

-

 

Consumer all other credit

 

 

-

 

 

 

1

 

 

 

-

 

 

 

1

 

 

 

2,326

 

 

 

2,327

 

 

 

-

 

Student loans purchased

 

 

268

 

 

 

88

 

 

 

17

 

 

 

373

 

 

 

35,298

 

 

 

35,671

 

 

 

17

 

Total Loans

 

$

2,125

 

 

$

89

 

 

$

399

 

 

$

2,613

 

 

$

618,455

 

 

$

621,068

 

 

$

399

 

21


 

 

 

Past Due Aging as of

December 31, 2020

 

30-59

Days Past

Due

 

 

60-89

Days Past

Due

 

 

90 Days or

More Past

Due

 

 

Total Past

Due

 

 

Current

 

 

Total

Loans

 

 

90 Days

Past Due

and Still

Accruing

 

Commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial - organic

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

27,238

 

 

$

27,238

 

 

$

-

 

Commercial and industrial - Paycheck Protection Program

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

54,176

 

 

 

54,176

 

 

 

-

 

Commercial and industrial - government guaranteed

 

 

1,130

 

 

 

470

 

 

 

-

 

 

 

1,600

 

 

 

29,320

 

 

 

30,920

 

 

 

-

 

Commercial and industrial - syndicated

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,354

 

 

 

6,354

 

 

 

-

 

Real estate construction and land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,238

 

 

 

2,238

 

 

 

-

 

Commercial construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

14,302

 

 

 

14,302

 

 

 

-

 

Land and land development

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,969

 

 

 

5,969

 

 

 

-

 

Real estate mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential, first lien, investment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

69,851

 

 

 

69,851

 

 

 

-

 

1-4 family residential, first lien, owner occupied

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

19,864

 

 

 

19,864

 

 

 

-

 

1-4 family residential, junior lien

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,938

 

 

 

2,938

 

 

 

-

 

1-4 family residential - purchased

 

 

501

 

 

 

-

 

 

 

-

 

 

 

501

 

 

 

18,033

 

 

 

18,534

 

 

 

-

 

Home equity lines of credit, first lien

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,715

 

 

 

8,715

 

 

 

-

 

Home equity lines of credit, junior lien

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,392

 

 

 

7,392

 

 

 

-

 

Farm

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,672

 

 

 

5,672

 

 

 

-

 

Multifamily

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

43,490

 

 

 

43,490

 

 

 

-

 

Commercial owner occupied

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

95,726

 

 

 

95,726

 

 

 

-

 

Commercial non-owner occupied

 

 

46

 

 

 

-

 

 

 

-

 

 

 

46

 

 

 

137,847

 

 

 

137,893

 

 

 

-

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer revolving credit

 

 

3

 

 

 

-

 

 

 

-

 

 

 

3

 

 

 

17,621

 

 

 

17,624

 

 

 

-

 

Consumer all other credit

 

 

39

 

 

 

1

 

 

 

-

 

 

 

40

 

 

 

3,034

 

 

 

3,074

 

 

 

-

 

Student loans purchased

 

 

256

 

 

 

65

 

 

 

137

 

 

 

458

 

 

 

36,978

 

 

 

37,436

 

 

 

137

 

Total Loans

 

$

1,975

 

 

$

536

 

 

$

137

 

 

$

2,648

 

 

$

606,758

 

 

$

609,406

 

 

$

137

 

 

 

 


22


 

 

Note 5.  Net Income Per Share

The table below shows the weighted average number of shares used in computing net income per common share and the effect of the weighted average number of shares of potential dilutive common stock for the three months ended March 31, 2021 and 2020. Diluted net income per share is computed based on the weighted average number of shares of common stock equivalents outstanding, to the extent dilutive.  The Company’s common stock equivalents relate to outstanding common stock options. Unvested restricted stock as noted in the Consolidated Balance Sheets as of March 31, 2021 and March 31, 2020 is included in the calculation of basic and diluted net income per share (dollars below reported in thousands except per share data).

 

Three Months Ended

 

March 31, 2021

 

 

March 31, 2020

 

 

 

Net

Income

 

 

Weighted

Average

Shares

 

 

Per

Share

Amount

 

 

Net

Income

 

 

Weighted

Average

Shares

 

 

Per

Share

Amount

 

Basic net income per share

 

$

1,505

 

 

 

2,719,840

 

 

$

0.55

 

 

$

1,404

 

 

 

2,692,803

 

 

$

0.52

 

Effect of dilutive stock options

 

 

-

 

 

 

7,608

 

 

 

-

 

 

 

-

 

 

 

1,287

 

 

 

-

 

Diluted net income per share

 

$

1,505

 

 

 

2,727,448

 

 

$

0.55

 

 

$

1,404

 

 

 

2,694,090

 

 

$

0.52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2021, there were 78,301 option shares considered anti-dilutive and excluded from this calculation. For the three months ended March 31, 2020, there were 104,301 option shares considered anti-dilutive and excluded from this calculation.

Note 6.  Stock Incentive Plans

At the Annual Shareholders Meeting on May 21, 2014, shareholders approved the Virginia National Bankshares Corporation 2014 Stock Incentive Plan (“2014 Plan”). The 2014 Plan makes available up to 275,625 shares of the Company’s common stock, as adjusted by prior issued stock dividends, to be issued to plan participants. The 2014 Plan provides for granting of both incentive and nonqualified stock options, as well as restricted stock, unrestricted stock and other stock based awards.  No new grants will be issued under the 2005 Stock Incentive Plan (“2005 Plan”) as this plan has expired.

For the 2014 Plan and the 2005 Plan (the “Plans”), the option price of incentive stock options cannot be less than the fair value of the stock at the time an option is granted. Nonqualified stock options may be granted at prices established by the Board of Directors, including prices less than the fair value on the date of grant. Outstanding stock options generally expire ten years from the grant date. Stock options generally vest by the fourth or fifth anniversary of the date of the grant.

23


 

A summary of the shares issued and available under each of the Plans is shown below as of March 31, 2021.  Share data and exercise price range per share have been adjusted to reflect prior issued stock dividends.  Although the 2005 Plan has expired and no new grants will be issued under this plan, there were options issued before the plan expired that are still outstanding as shown below.

 

 

 

2005 Plan

 

 

2014 Plan

 

Aggregate shares issuable

 

 

253,575

 

 

 

275,625

 

Options issued, net of forfeited and expired options

 

 

(59,870

)

 

 

(146,506

)

Unrestricted stock issued

 

 

-

 

 

 

(11,535

)

Restricted stock grants issued

 

 

-

 

 

 

(39,770

)

Cancelled due to Plan expiration

 

 

(193,705

)

 

 

-

 

Remaining available for grant

 

 

-

 

 

 

77,814

 

 

 

 

 

 

 

 

 

 

Stock grants issued and outstanding:

 

 

 

 

 

 

 

 

Total vested and unvested shares

 

 

 

 

 

51,306

 

Fully vested shares

 

 

 

 

 

15,127

 

 

 

 

 

 

 

 

 

 

Option grants issued and outstanding:

 

 

 

 

 

 

 

 

Total vested and unvested shares

 

 

1,379

 

 

 

144,853

 

Fully vested shares

 

 

1,379

 

 

 

34,578

 

 

 

 

 

 

 

 

 

 

Exercise price range

 

$13.69 to $13.69

 

 

$23.75 to $42.62

 

 

The Company accounts for all of its stock incentive plans under recognition and measurement accounting principles which require that the compensation cost relating to stock-based payment transactions be recognized in the financial statements. Stock-based compensation arrangements include stock options and restricted stock. All stock-based payments to employees are required to be valued at a fair value on the date of grant and expensed based on that fair value over the applicable vesting period.

Stock Options

Changes in the stock options outstanding related to the Plans are summarized below (dollars in thousands except per share data):

 

 

 

March 31, 2021

 

 

 

Number of Options

 

 

Weighted Average

Exercise Price

 

 

Aggregate

Intrinsic Value

 

Outstanding at January 1, 2021

 

 

146,783

 

 

$

33.51

 

 

$

184

 

Issued

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(551

)

 

 

27.39

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2021

 

 

146,232

 

 

$

33.51

 

 

$

403

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at March 31, 2021

 

 

35,957

 

 

$

38.05

 

 

$

49

 

 

For the three months ended March 31, 2021 and 2020, the Company recognized $34 thousand and $24 thousand, respectively, in compensation expense for stock options.  As of March 31, 2021, there was $361 thousand in unrecognized compensation expense remaining to be recognized in future reporting periods through 2025. The fair value of any stock option grant is estimated at the grant date using the Black-Scholes pricing model.  No stock option grants were issued during the three months ended March 31, 2021.  Stock option grants for 26,000 shares were issued during the three months ended March 31, 2020.

 

24


 

 

The fair value of each option granted in the first three months of 2021 and 2020 was estimated based on the assumptions noted in the following table:

 

 

 

For the three months ended

 

 

 

March 31, 2021

 

March 31, 2020

 

Expected volatility1

 

N/A

 

22.97%

 

Expected dividends2

 

N/A

 

4.75%

 

Expected term (in years)3

 

N/A

 

 

6.50

 

Risk-free rate4

 

N/A

 

0.68%

 

 

 

1

Based on the monthly historical volatility of the Company’s stock price over the expected life of the options.

 

 

2

Calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant.

 

 

3

Based on the average of the contractual life and vesting period for the respective option.

 

 

4

Based upon an interpolated U.S. Treasury yield curve interest rate that corresponds to the contractual life of the option, in effect at the time of the grant.

 

Summary information pertaining to options outstanding at March 31, 2021 is shown below. Share and per share data have been adjusted to reflect the prior stock dividends issued.

 

 

 

Options Outstanding

 

 

Options Exercisable

 

Exercise Price

 

Number of

Options

Outstanding

 

 

Weighted-

Average

Remaining

Contractual Life

 

Weighted-

Average

Exercise

Price

 

 

Number of

Options

Exercisable

 

 

Weighted-

Average

Exercise

Price

 

$10.65 to $20.00

 

 

1,379

 

 

1.9 Years

 

$

13.69

 

 

 

1,379

 

 

$

13.69

 

$20.01 to $30.00

 

 

66,552

 

 

9.3 Years

 

 

24.66

 

 

 

5,752

 

 

 

26.13

 

$30.01 to $40.00

 

 

20,820

 

 

7.9 Years

 

 

38.14

 

 

 

5,844

 

 

 

38.54

 

$40.01 to $42.62

 

 

57,481

 

 

7.1 Years

 

 

42.62

 

 

 

22,982

 

 

 

42.62

 

Total

 

 

146,232

 

 

8.2 Years

 

$

33.54

 

 

 

35,957

 

 

$

38.21

 

 

Stock Grants

Restricted stock grants – In February 2021, 13,503 restricted shares were granted to employee and non-employee directors, vesting over a four-year period.  In March 2020, 10,368 restricted shares were granted to non-employee directors, vesting over a four-year period. For the three months ended March 31, 2021, $61 thousand was expensed as a result of restricted stock grants.  As of March 31, 2021, there was $898 thousand in unrecognized compensation expense for restricted stock grants remaining to be recognized in future reporting periods through 2025. For the three months ended March 31, 2020, $15 thousand in expense was incurred.  

Changes in the restricted stock grants outstanding during the three months ended March 31, 2021 are summarized below (dollars in thousands except per share data):

 

 

 

March 31, 2021

 

 

 

Number of Shares

 

 

Weighted Average

Grant Date

Fair Value

Per Share

 

 

Aggregate

Intrinsic Value

 

Nonvested as of January 1, 2021

 

 

25,268

 

 

$

26.60

 

 

$

767

 

Issued

 

 

13,503

 

 

 

29.85

 

 

410

 

Vested

 

 

(2,592

)

 

 

26.00

 

 

 

(79

)

Nonvested at March 31, 2021

 

 

36,179

 

 

$

27.86

 

 

$

1,098

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25


 

 

 

Note 7.  Fair Value Measurements

Determination of Fair Value

The Company follows ASC 820, “Fair Value Measurements and Disclosures,” to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. This codification clarifies that the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 

 

Level 1 –

 

Valuation is based on quoted prices in active markets for identical assets and liabilities.

 

 

 

 

 

Level 2 –

 

Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

 

 

 

 

 

Level 3 –

 

Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market

 

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:

Securities available for sale

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).


26


 

 

 

The following tables present the balances measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020 (dollars in thousands):

 


 

 

 

 

 

 

Fair Value Measurements at March 31, 2021 Using:

 

 

 

 

 

 

 

Quoted Prices

in Active

Markets for

Identical Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

Description

 

Balance

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

32,561

 

 

$

-

 

 

$

32,561

 

 

$

-

 

Mortgage-backed securities/CMOs

 

 

72,328

 

 

 

-

 

 

 

72,328

 

 

 

-

 

Municipal bonds

 

 

68,199

 

 

 

-

 

 

 

68,199

 

 

 

-

 

Total securities available for sale

 

$

173,088

 

 

$

-

 

 

$

173,088

 

 

$

-

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2020 Using:

 

 

 

 

 

 

 

Quoted Prices

in Active

Markets for

Identical Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

Description

 

Balance

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

25,305

 

 

$

-

 

 

$

25,305

 

 

$

-

 

Mortgage-backed securities/CMOs

 

 

78,100

 

 

 

-

 

 

 

78,100

 

 

 

-

 

Municipal bonds

 

 

70,681

 

 

 

-

 

 

 

70,681

 

 

 

-

 

Total securities available for sale

 

$

174,086

 

 

$

-

 

 

$

174,086

 

 

$

-

 

 

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write downs of individual assets. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

Other Real Estate Owned

Other real estate owned (“OREO”) is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the Allowance for Loan Losses.  Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Consolidated Statements of Income. As of March 31, 2021 and December 31, 2020, the Company had no OREO property.

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either (a) the observable market price of the loan or the fair value of the collateral, or (b) using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data

27


 

(Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3.

Impaired loans that are measured based on expected future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest are not recorded at fair value, and are therefore excluded from fair value disclosure requirements.

The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).

Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The Company had impaired loans of $1.2 million as of March 31, 2021 and $1.3 million as of December 31, 2020. All impaired loans were measured based on expected future cash flows discounted at the loan’s effective interest rate, or fair value of collateral, as noted above.

ASC 825, “Financial Instruments,” requires disclosures about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.  

The carrying values and estimated fair values of the Company's financial instruments as of March 31, 2021 and December 31, 2020 are as follows (dollars in thousands):

 

 

 

 

 

 

 

Fair Value Measurements at March 31, 2021 Using:

 

 

 

 

 

 

 

Quoted Prices

in Active

Markets for

Identical Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

 

 

 

 

 

 

Carrying value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalent

 

$

94,496

 

 

$

94,496

 

 

$

-

 

 

$

-

 

 

$

94,496

 

Available for sale securities

 

 

173,088

 

 

 

-

 

 

 

173,088

 

 

 

-

 

 

 

173,088

 

Loans, net

 

 

615,453

 

 

 

-

 

 

 

-

 

 

 

610,410

 

 

 

610,410

 

Bank owned life insurance

 

 

16,956

 

 

 

-

 

 

 

16,956

 

 

 

-

 

 

 

16,956

 

Accrued interest receivable

 

 

2,691

 

 

 

-

 

 

 

695

 

 

 

1,996

 

 

 

2,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest-bearing transaction, money market, and savings accounts

 

$

703,316

 

 

$

-

 

 

$

703,316

 

 

$

-

 

 

$

703,316

 

Certificates of deposit and other time deposits

 

 

100,844

 

 

 

-

 

 

 

101,144

 

 

 

-

 

 

 

101,144

 

Borrowings

 

 

30,000

 

 

 

-

 

 

 

30,000

 

 

 

-

 

 

 

30,000

 

Accrued interest payable

 

 

150

 

 

 

-

 

 

 

150

 

 

 

-

 

 

 

150

 

28


 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2020 Using:

 

 

 

 

 

 

 

Quoted Prices

in Active

Markets for

Identical Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

 

 

 

 

 

 

Carrying value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalent

 

$

34,695

 

 

$

34,695

 

 

$

-

 

 

$

-

 

 

$

34,695

 

Available for sale securities

 

 

174,086

 

 

 

-

 

 

 

174,086

 

 

 

-

 

 

 

174,086

 

Loans, net

 

 

603,951

 

 

 

-

 

 

 

-

 

 

 

602,859

 

 

 

602,859

 

Bank owned life insurance

 

 

16,849

 

 

 

-

 

 

 

16,849

 

 

 

-

 

 

 

16,849

 

Accrued interest receivable

 

 

2,904

 

 

 

-

 

 

 

729

 

 

 

2,175

 

 

 

2,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest-bearing transaction and money market accounts

 

$

631,662

 

 

$

-

 

 

$

631,662

 

 

$

-

 

 

$

631,662

 

Certificates of deposit and other time deposits

 

 

99,102

 

 

 

-

 

 

 

99,580

 

 

 

-

 

 

 

99,580

 

Borrowings

 

 

30,000

 

 

 

-

 

 

 

30,000

 

 

 

-

 

 

 

30,000

 

Accrued interest payable

 

 

159

 

 

 

-

 

 

 

159

 

 

 

-

 

 

 

159

 

 

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. Consequently, the fair values of the Company’s financial instruments will fluctuate when interest rate levels change, and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk; however, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Note 8.  Other Comprehensive Income

A component of the Company’s other comprehensive income, in addition to net income from operations, is the recognition of the unrealized gains and losses on available for sale securities, net of income taxes.  Reclassifications of realized gains and losses on available for sale securities are reported in the income statement as “Gains on sales of securities” with the corresponding income tax effect reflected as a component of income tax expense.  There were no sales of securities in the first quarter of 2021.  Amounts reclassified out of accumulated other comprehensive income are presented below for the three months ended March 31, 2021 and 2020 (dollars in thousands)

 

 

 

Three Months Ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

Available for sale securities

 

 

 

 

 

 

 

 

Realized gains on sales of securities

 

$

 

 

$

53

 

Tax effect

 

---

 

 

 

(11

)

Realized gains, net of tax

 

$

 

 

$

42

 

 

 

 


29


 

 

Note 9.  Segment Reporting

The Company has four reportable segments.  Each reportable segment is a strategic business unit that offers different products and services.  They are managed separately, because each segment appeals to different markets and, accordingly, require different technology and marketing strategies.  The accounting policies of the segments are the same as those described in the summary of significant accounting policies provided earlier in this report.  

The four reportable segments are:

 

Bank - The commercial banking segment involves making loans and generating deposits from individuals, businesses and charitable organizations.  Loan fee income, service charges from deposit accounts, and other non-interest-related fees, such as fees for debit cards and ATM usage and fees for treasury management services, generate additional income for the Bank segment.

 

Sturman Wealth Advisors – Sturman Wealth Advisors, formerly known as VNB Investment Services, offers wealth management and investment advisory services.  Revenue for this segment is generated primarily from investment advisory and financial planning fees, with a small and decreasing portion attributable to brokerage commissions.  

 

VNB Trust & Estate Services – VNB Trust & Estate Services offers corporate trustee services, trust and estate administration, IRA administration and custody services.  Revenue for this segment is generated from administration, service and custody fees, as well as management fees that are derived from Assets Under Management and, prior to 2020, incentive income that was based on the investment returns generated on performance-based Assets Under Management.  Investment management services currently are offered through in-house and third-party managers.  In addition, royalty income, in the form of fixed and incentive fees, from the sale of Swift Run Capital Management, LLC in 2013 is reported as income of VNB Trust & Estate Services.  More information on royalty income and the related sale can be found under Summary of Significant Accounting Policies in Note 1 of the notes to consolidated financial statements, which is found in Item 8. Financial Statements and Supplementary Data, in the Company’s Form 10-K Report for December 31, 2019.

 

Masonry Capital - Masonry Capital offers investment management services for separately managed accounts and a private investment fund employing a value-based, catalyst-driven investment strategy.  Revenue for this segment is generated from management fees that are derived from Assets Under Management and incentive income that is based on the investment returns generated on performance-based Assets Under Management.

A management fee for administrative and technology support services provided by the Bank is allocated to the other three lines of business.  For both the three months ended March 31, 2021 and 2020, management fees totaling $25 thousand were charged by the Bank and eliminated in consolidated totals.  

Segment information for the three months ended March 31, 2021 and 2020 is shown in the following tables (dollars in thousands). Note that asset information is not reported below, as the assets of Sturman Wealth Advisors and VNB Trust & Estate Services are reported at the Bank level; also, assets specifically allocated to the lines of business other than the Bank are insignificant and are no longer provided to the chief operating decision maker.  

 

Three months ended March 31, 2021

 

Bank

 

 

Sturman Wealth Advisors

 

 

VNB Trust &

Estate

Services

 

 

Masonry

Capital

 

 

Consolidated

 

Net interest income

 

$

5,974

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

5,974

 

Provision for loan losses

 

 

351

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

351

 

Noninterest income

 

 

514

 

 

 

191

 

 

 

201

 

 

 

133

 

 

 

1,039

 

Noninterest expense

 

 

4,255

 

 

 

160

 

 

 

206

 

 

 

160

 

 

 

4,781

 

Income (loss) before income taxes

 

 

1,882

 

 

 

31

 

 

 

(5

)

 

 

(27

)

 

 

1,881

 

Provision for (benefit from) income taxes

 

 

376

 

 

 

7

 

 

 

(1

)

 

 

(6

)

 

 

376

 

Net income (loss)

 

$

1,506

 

 

$

24

 

 

$

(4

)

 

$

(21

)

 

$

1,505

 

 

 

30


 

 

Three months ended March 31, 2020

 

Bank

 

 

Sturman Wealth Advisors

 

 

VNB Trust &

Estate

Services

 

 

Masonry

Capital

 

 

Consolidated

 

Net interest income

 

$

5,375

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

5,375

 

Provision for loan losses

 

 

765

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

765

 

Noninterest income

 

 

1,135

 

 

 

178

 

 

 

258

 

 

 

98

 

 

 

1,669

 

Noninterest expense

 

 

3,963

 

 

 

174

 

 

 

238

 

 

 

168

 

 

 

4,543

 

Income (loss) before income taxes

 

 

1,782

 

 

 

4

 

 

 

20

 

 

 

(70

)

 

 

1,736

 

Provision for (benefit from) income taxes

 

 

342

 

 

 

1

 

 

 

4

 

 

 

(15

)

 

 

332

 

Net income (loss)

 

$

1,440

 

 

$

3

 

 

$

16

 

 

$

(55

)

 

$

1,404

 

 

 

Note 10.  Leases

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows.  Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease for a term similar to the length of the lease, including any probable renewal options available.  Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term.  Payments for leases with terms longer than twelve months are included in the determination of the lease liability. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.

Each of the Company’s long-term lease agreements are classified as operating leases.  Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised.  The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

The following tables present information about the Company’s leases (dollars in thousands):

 

 

 

March 31, 2021

 

 

March 31, 2020

 

Lease liability

 

$

3,392

 

 

$

3,430

 

Right-of-use asset

 

$

3,327

 

 

$

3,397

 

Weighted average remaining lease term

 

4.97 years

 

 

4.81 years

 

Weighted average discount rate

 

 

2.53

%

 

 

2.83

%

 

 

 

Three Months Ended March 31,

 

Lease Expense

 

2021

 

 

2020

 

Operating lease expense

 

$

222

 

 

$

204

 

Short-term lease expense

 

 

29

 

 

 

28

 

Total lease expense

 

$

251

 

 

$

232

 

Cash paid for amounts included in lease liabilities

 

$

219

 

 

$

199

 

 

31


 

 

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):

 

Undiscounted Cash Flow

 

March 31, 2021

 

Nine months ending December 31, 2021

 

$

658

 

Twelve months ending December 31, 2022

 

 

839

 

Twelve months ending December 31, 2023

 

 

753

 

Twelve months ending December 31, 2024

 

 

544

 

Twelve months ending December 31, 2025

 

 

430

 

Twelve months ending December 31, 2026

 

 

77

 

Thereafter

 

 

295

 

Total undiscounted cash flows

 

$

3,596

 

Less:  Discount

 

 

(204

)

Lease liability

 

$

3,392

 

Note 11.  Mergers and Acquisitions

On April 1, 2021, the Company completed the Merger with Fauquier, a bank holding company based in Warrenton, Virginia, in an all-stock transaction.  Fauquier shareholders received 0.675 shares of Company common stock for each share of Fauquier common stock they own, resulting in the Company issuing 2,571,213 shares of common stock at a fair value of $78.0 million. As a result of the transaction and on the same date, Fauquier’s former bank subsidiary, The Fauquier Bank, merged with and into the Company’s wholly-owned bank subsidiary, Virginia National Bank. The Company’s balance sheet and results of operations as of and for the period ended March 31, 2021 do not include the impact of Fauquier’s financial position and results of operations for the first quarter of 2021.  

 

 

 

32


 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the unaudited consolidated financial statements, and notes thereto, of Virginia National Bankshares Corporation (the “Company”) included in this report and the audited consolidated financial statements, and notes thereto, of the Company included in the Company’s Form 10-K for the year ended December 31, 2020. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results for the year ending December 31, 2021 or any future period.

FORWARD-LOOKING STATEMENTS AND FACTORS THAT COULD AFFECT FUTURE RESULTS

Certain statements contained or incorporated by reference in this quarterly report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, statements with respect to the Company’s operations, performance, future strategy and goals, and are often characterized by use of qualified words such as “expect,” “believe,” “estimate,” “project,” “anticipate,” “intend,” “will,” “should,” or words of similar meaning or other statements concerning the opinions or judgement of the Company and its management about future events. While Company management believes such statements to be reasonable, future events and predictions are subject to circumstances that are not within the control of the Company and its management.  Actual results may differ materially from those included in the forward-looking statements due to a number of factors, including, without limitation, the effects of and changes in: general economic and market conditions, including the effects of declines in real estate values, an increase in unemployment levels and general economic contraction as a result of COVID-19 or other pandemics; fluctuations in interest rates, deposits, loan demand, and asset quality; assumptions that underlie the Company’s allowance for loan losses (“ALLL”); the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (e.g., COVID-19 or other pandemics), and of governmental and societal responses thereto; the performance of vendors or other parties with which the Company does business; competition; technology; changes in laws, regulations and guidance; changes in accounting principles or guidelines; performance of assets under management;  expected revenue synergies and cost savings from the recently completed merger with Fauquier Bankshares, Inc. (“Fauquier”) may not be fully realized or realized within the expected timeframe; the businesses of the Company and Fauquier may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; revenues following the merger may be lower than expected; customer and employee relationships and business operations may be disrupted by the merger; and other factors impacting financial services businesses.  Many of these factors and additional risks and uncertainties are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and other reports filed from time to time by the Company with the Securities and Exchange Commission (“SEC”). These statements speak only as of the date made, and the Company does not undertake to update any forward-looking statements to reflect changes or events that may occur after this release.

MERGER WITH FAUQUIER BANKSHARES, INC., AND THE FAUQUIER BANK

On April 1, 2021, the Company completed its merger with Fauquier. The merger of Fauquier with and into the Company (the “Merger”) was effected pursuant to the terms and conditions of the Agreement and Plan of Reorganization, dated as of September 30, 2020, between the Company and Fauquier, and a related Plan of Merger (together, the “Merger Agreement”). Immediately after the Merger, The Fauquier Bank, Fauquier’s wholly-owned bank subsidiary, merged with and into Virginia National Bank (the “Bank”), the Company’s wholly-owned bank subsidiary.

Pursuant to the Merger Agreement, former holders of shares of Fauquier common stock received 0.675 shares of the Company’s common stock for each share of Fauquier common stock held immediately prior to the Merger, with cash paid in lieu of fractional shares. Each share of common stock of the Company outstanding immediately prior to the Merger remained outstanding and was unaffected by the Merger.

The Company’s balance sheet and results of operations as of and for the period ended March 31, 2021 do not include the impact of Fauquier’s financial position and results of operations for the first quarter of 2021.  At March 31, 2021, Fauquier had total assets of $911.3 million, net loans of $616.4 million and total deposits of $817.5 million.


33


 

 

IMPACT OF COVID-19

The COVID-19 pandemic has caused, and will likely continue to cause, economic and social disruption, significantly affecting many industries, including many of our clients.  Significant uncertainty exists regarding the magnitude of the impact and duration of this pandemic.  Following are brief descriptions of areas within our Company that have been or may be impacted.  

Financial Condition and Results of Operations

The Company’s consolidated financial statements include estimates and assumptions made by management which affect the reported amounts of assets and liabilities, including the level of the ALLL that is established.  The ALLL calculation and resulting provision for loan losses are impacted by changes in economic conditions.  As of March 31, 2020 and June 30, 2020, the Company downgraded the economic qualitative factors within its ALLL model in light of the effects of COVID-19 on the economy. No additional downgrades of such factors were taken during the quarter ended September 30, 2020, December 31, 2020 or March 31, 2021. If economic conditions improve or worsen, the Company could experience further changes in the required ALLL.  It is possible that asset quality metrics could decline in the future if the effects of COVID-19 are sustained.  

While most industries have been adversely impacted by COVID-19, the Company has exposures on its balance sheet as of March 31, 2021 in the following categories of loans that are considered to have higher risk of significant impact:

 

Travel accommodations (hotels/motels/B&B) – $16.6 million, or 3.0% of loans

 

Retail trade - $12.3 million, or 2.2% of loans

 

Restaurants - $7.5 million, or 1.4% of loans

 

Wholesale trade - $7.3 million, or 1.3% of loans

 

Arts, entertainment and recreation - $6.5 million, or 1.2% of loans, and

 

Caterers - $5.8 million, or 1.1% of loans

Note that the loan balances and percentages above do not include Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans made to entities within such categories.  

Interest income could be reduced due to the economic impact of COVID-19.  In accordance with guidance from regulators, we worked with borrowers who were adversely affected by COVID-19 to defer principal only, or principal and interest.  While interest will continue to accrue to income, in accordance with accounting principles generally accepted in the United States (“GAAP”), if the Company ultimately incurs a credit loss on these deferred payments, interest income would need to be reversed and therefore, interest income in future periods could be negatively affected.  Since the beginning of the pandemic, the Company has accommodated 193 deferrals on outstanding loan balances of $59.0 million (of which 131 deferrals on outstanding loan balances of $1.8 million were related to student loans).  As of March 31, 2021, $57.5 million in loan balances, or 97.4% of the total loan deferments approved, have returned to normal payment schedules and are now current, leaving a remaining balance of deferments of $1.5 million.  Of this remaining balance, $1.2 million, or 77.3%, are 100% government-guaranteed loans for which the deferrals were approved by the United States Department of Agriculture; and $349 thousand, or 22.7%, are student loans, which are private student loans not subject to potential federal forgiveness. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (“TDRs”).

Primarily within the second quarter of 2020 and the first quarter of 2021, the Company devoted significant resources to accept PPP applications, a program designed to provide a direct incentive for small businesses to keep employees on their payroll.  In total, the Company has closed 924 loans representing $123.1 million in funding, with average origination fees of 3.9%, assisting many nonprofits and local businesses through this program.  As of March 31, 2021, 43% of the total dollars of PPP loans had been forgiven by the SBA, with $70.2 million outstanding. Loans funded through the PPP are fully guaranteed by the U.S. government.  The Company performed the required due diligence pursuant to the established SBA criteria; nonetheless, if a determination was made that certain loans did not meet the criteria established for the program, the Company may be required to establish additional ALLL through provision for loan loss expense which will negatively impact net income.

Throughout the onset of this pandemic, the Company has maintained its high standards of credit quality on organic loan funding to limit credit risk exposure.

Capital and Liquidity

As of March 31, 2021, capital ratios of the Company were in excess of regulatory requirements.  While currently included in the category of “well capitalized” by bank regulators, a prolonged economic recession could adversely impact reported and regulatory capital ratios.  

34


 

The Company maintains access to multiple sources of liquidity.  Management has also revisited its capital and liquidity stress tests, as well as capital and liquidity contingency plans to validate how the Company can react effectively to the economic downturn caused by this pandemic and to gauge the amount of SBA PPP loans the Company could and should accept.

Goodwill

As of March 31, 2021, the goodwill on our balance sheet was not deemed to be impaired.  However, management may determine that goodwill is required to be evaluated for impairment in the future due to the presence of a triggering event, which may have a negative impact on the Company’s results of operations.  

Operations, Processes, Controls and Business Continuity Plan

The Company reacted quickly to the COVID-19 pandemic.  We began internal social distancing in mid-March of 2020, as well as distancing from the public by keeping our drive-thru services available, and encouraging customers to conduct transactions at ATMs, through online banking and/or the mobile app.  The Company also increased consumer and business mobile deposit limits to encourage customers to make deposits remotely from the safety of their home or business. The Company implemented a schedule whereby most staff members are working remotely at any given time, allowing the remaining essential staff to create more distance between each other within the offices.  We temporarily increased the number of staff in the client service center to assist more customers by telephone and encourage them to utilize online and mobile banking.  The client service center was also temporarily moved to a larger location to allow for appropriate social distancing.  In addition, the Company enhanced disinfecting procedures to include hospital-grade cleaning solution and foggers, increased the frequency of cleaning and issued personal protective equipment, including N-95 and disposable face masks, face shields, sneeze guards, gloves and thermometers, to employees, along with specific instructions for use, to enhance their safety.  We also installed disinfecting protective strips to high touch areas and placed free-standing air filter machines throughout our facilities. We purchased COVID-19 instant test kits that we have on-site, ready to be deployed when needed, and we provided antibody testing options to all employees.  Management provides frequent email communications and social media updates regarding COVID-19, helpful tips and status of Company initiatives, as well as warning customers of potential scams during this pandemic.  Beginning mid-July of 2020, the Company took steps to resume normal branch activities with specific guidelines in place to continue protecting our customers and employees.

The Company’s preparedness resulted in minimal impact to the Company’s operations as a result of COVID-19.  Business continuity planning allowed for successful deployment of most of our employees to work in a remote environment.  No material operational or internal control risks have been identified to date, and the Company has enhanced fraud-related controls.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accounting and reporting policies followed by the Company conform, in all material respects, to GAAP and to general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

The Company considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s consolidated financial statements. The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations.

For additional information regarding critical accounting policies, refer to the Application of Critical Accounting Policies and Critical Accounting Estimates section under Item 7 in the Company’s 2020 Form 10-K.  There have been no significant changes in the Company’s application of critical accounting policies since December 31, 2020.

 

35


 

 

FINANCIAL CONDITION

Total assets

The total assets of the Company as of March 31, 2021 were $918.4 million. This is a $70.0 million, or 8.2%, increase from the $848.4 million total assets reported at December 31, 2020 and a $201.3 million, or 28.1%, increase from the $717.1 million reported at March 31, 2020. The year-over-year increase was funded by a $169.0 million increase in deposits.

Federal funds sold

The Company had overnight federal funds sold of $77.1 million as of March 31, 2021, compared to $26.6 million as of December 31, 2020 and $12.3 million as of March 31, 2020. Any excess funds are sold on a daily basis in the federal funds market.  The Company intends to maintain sufficient liquidity at all times to meet its funding commitments.

The Company continues to participate in the Excess Balance Account (“EBA”) of the Federal Reserve Bank of Richmond (“FRB”). The EBA is a limited-purpose account at the FRB for the maintenance of excess cash balances held by financial institutions. The EBA eliminates the potential of concentration risk that comes with depositing excess balances with one or multiple correspondent banks.

Securities

The Company’s investment securities portfolio as of March 31, 2021 totaled $175.7 million, a decrease of $1.4 million compared with the $177.1 million reported at December 31, 2020 and an increase of $71.9 million from the $103.8 million reported at March 31, 2020.  Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company.  At March 31, 2021 and December 31, 2020, the investment securities holdings represented 19.1% and 20.9% of the Company’s total assets, respectively.

The Company’s investment securities portfolio included restricted securities totaling $2.7 million as of March 31, 2021, compared to $3.0 million as of December 31, 2020 and $1.7 million as of March 31, 2020. These securities represent stock in the FRB, the Federal Home Loan Bank of Atlanta (“FHLB”), and CBB Financial Corporation, the holding company for Community Bankers Bank. The level of FRB and FHLB stock that the Company is required to hold is determined in accordance with membership guidelines provided by the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the FHLB, respectively. Stock ownership in the bank holding company for Community Bankers’ Bank provides the Company with several benefits that are not available to non-shareholder correspondent banks. None of these restricted securities are traded on the open market and can only be redeemed by the respective issuer.

At March 31, 2021, the unrestricted securities portfolio totaled $173.1 million. The following table summarizes the Company's available for sale securities by type as of March 31, 2021, December 31, 2020, and March 31, 2020 (dollars in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

March 31, 2020

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

Balance

 

 

of Total

 

 

Balance

 

 

of Total

 

 

Balance

 

 

of Total

 

U.S. Government agencies

 

$

32,561

 

 

 

18.8

%

 

$

25,305

 

 

 

14.5

%

 

$

13,013

 

 

 

12.8

%

Mortgage-backed securities/CMOs

 

 

72,328

 

 

 

41.8

%

 

 

78,100

 

 

 

44.9

%

 

 

67,394

 

 

 

66.0

%

Municipal bonds

 

 

68,199

 

 

 

39.4

%

 

 

70,681

 

 

 

40.6

%

 

 

21,647

 

 

 

21.2

%

Total available for sale securities

 

$

173,088

 

 

 

100.0

%

 

$

174,086

 

 

 

100.0

%

 

$

102,054

 

 

 

100.0

%

 

The securities are held primarily for earnings, liquidity, and asset/liability management purposes and are reviewed quarterly for possible other-than-temporary impairments.  During this review, management analyzes the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer, and the Company’s intent and ability to hold the security to recovery or maturity.  These factors are analyzed for each individual security.

Loan portfolio

A management objective is to grow loan balances while maintaining the asset quality of the loan portfolio. The Company seeks to achieve this objective by maintaining rigorous underwriting standards coupled with regular evaluation of the creditworthiness of, and the designation of lending limits for, each borrowing relationship. The portfolio strategies include seeking industry, loan size, and loan type diversification to minimize credit exposure and originating loans in markets with

36


 

which the Company is familiar. The predominant market area for the loans shown below includes Charlottesville, Albemarle County, Winchester, Frederick County, Richmond and areas in the Commonwealth of Virginia that are within a 75-mile radius of any office of the Company.

As of March 31, 2021, total loans were $621.1 million, compared to $609.4 million as of December 31, 2020 and $554.0 million at March 31, 2020. Loans as a percentage of total assets at March 31, 2021 were 67.6%, compared to 77.3% as of March 31, 2020. Loans as a percentage of deposits at March 31, 2021 were 77.2%, compared to 87.2% as of March 31, 2020.

The following table summarizes the Company's loan portfolio by type of loan as of March 31, 2021, December 31, 2020, and March 31, 2020 (dollars in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

March 31, 2020

 

 

 

Balance

 

 

Percent

of Total

 

 

Balance

 

 

Percent

of Total

 

 

Balance

 

 

Percent

of Total

 

Commercial and industrial

 

$

130,388

 

 

 

21.0

%

 

$

118,688

 

 

 

19.5

%

 

$

79,997

 

 

 

14.4

%

Real estate - commercial

 

 

280,215

 

 

 

45.1

%

 

 

282,781

 

 

 

46.4

%

 

 

259,277

 

 

 

46.8

%

Real estate - residential mortgage

 

 

129,221

 

 

 

20.8

%

 

 

127,294

 

 

 

20.9

%

 

 

121,601

 

 

 

22.0

%

Real estate - construction

 

 

26,254

 

 

 

4.2

%

 

 

22,509

 

 

 

3.7

%

 

 

25,105

 

 

 

4.5

%

Consumer loans

 

 

54,990

 

 

 

8.9

%

 

 

58,134

 

 

 

9.5

%

 

 

67,979

 

 

 

12.3

%

Total loans

 

$

621,068

 

 

 

100.0

%

 

$

609,406

 

 

 

100.0

%

 

$

553,959

 

 

 

100.0

%

 

Loan balances increased $11.7 million, or 1.9%, since December 31, 2020 and increased $67.1 million, or 12.1%, from March 31, 2020.  The increases are largely due to the origination of PPP loans of $86.9 million in 2020, as well as $36.2 million during the first quarter of 2021.  As of March 31, 2021, 43% of the total dollars of PPP loans had been forgiven by the SBA, with $70.2 million outstanding.

The purchase of loans is considered a secondary strategy, which allows the Company to supplement organic loan growth. Balances in purchased loans were $113.7 million as of March 31, 2020 and have declined $26.6 million compared to $87.1 million as of March 31, 2021 Balances outstanding in purchased loans as of March 31, 2021 were comprised of:

 

Student loans totaling $35.7 million. The Company purchased two student loan packages in 2015, a third tranche in the fourth quarter of 2016, and a fourth tranche in the fourth quarter of 2017. Along with the purchase of these four packages of student loans, the Company purchased surety bonds to fully insure this portion of the Company’s consumer portfolio.  However, during June 2018, ReliaMax Surety, the insurance company which issued the surety bonds, was placed into liquidation due to insolvency.  Loss claims were filed for loans in default as of July 27, 2018, when the surety bonds were terminated, and the Company received payment in the fourth quarter of 2019 on the balance of the claims approved by the liquidator.  Also, in 2020 the Company realized a partial recovery of unearned insurance premiums related to the loss of insurance on the student loan portfolio in the amount of $401 thousand.  The Company expects to receive the balance of unearned premiums of approximately $400 thousand.  Student loans continue to be profitable for the Company.

 

Loans guaranteed by a U.S. government agency (“government guaranteed”) totaling $29.0 million, inclusive of premium. During the fourth quarter of 2016, the Company began augmenting the commercial and industrial portfolio with government guaranteed loans which represent the portion of loans that are 100% guaranteed by either the United States Department of Agriculture or the SBA; the originating institution holds the unguaranteed portion of each loan and services it. These government guaranteed portions of loans are typically purchased at a premium. In the event of early prepayment, the Company may need to write off any unamortized premium.  

 

Mortgage loans totaling $16.1 million, inclusive of premium.  In each of the fourth quarters of 2019 and 2018, the Company purchased a package of 1-to-4 family residential mortgages.  Each of the adjustable rate loans purchased were individually underwritten by the Company prior to the closing of the purchases.  The collateral on these loans is located primarily on the East Coast of the United States.  The balance in purchased mortgage loans declined $13.6 million, or 45.8%, from March 31, 2020 to March 31, 2021, due to significant payoffs during this low rate environment.  

37


 

 

Syndicated loans totaling $6.4 million. Syndicated loans represent shared national credits in leveraged lending transactions and are included in the commercial and industrial portfolio. The Company has developed policies to limit overall credit exposure to the syndicated market, as well as limits by industry and amount per borrower.  Management proactively manages shared national credits and has opportunistically increased or decreased exposure over time.

Management will continue to evaluate loan purchase transactions to strengthen earnings, diversify the loan portfolio and supplement organic loan growth.  

Loan quality

Non-accrual loans totaled $5 thousand at March 31, 2021, compared to the $8 thousand and $273 thousand reported at December 31, 2020 and March 31, 2020, respectively. The March 31, 2020 non-accrual balance included a loan which was foreclosed upon during the second quarter of 2020, with the Company being made whole on the loan with the proceeds from a third-party bidder without the Company’s taking title to the property.

The Company had loans in its portfolio totaling $399 thousand, $137 thousand and $733 thousand, as of March 31, 2021, December 31, 2020 and March 31, 2020, respectively, that were 90 or more days past due, with all such loans still accruing interest as the Company deemed them to be collectible.  The balance as of March 31, 2021 consists of one government-guaranteed loan in the amount $382 thousand and one student loan in the amount of $17 thousand.  

At March 31, 2021, the Company had loans classified as impaired loans in the amount of $1.2 million, a decline compared to $1.3 million at December 31, 2020 and $2.4 million at March 31, 2020.  Based on regulatory guidance on student lending, the Company has classified 68 of its purchased student loans as TDRs for a total of $1.1 million as of March 31, 2021.  These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered TDRs.  Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance.  Management has evaluated these loans individually for impairment and included any probable loss in the allowance for loan loss; interest continues to accrue on these TDRs during any deferment and forbearance periods.

Management identifies potential problem loans through its periodic loan review process and considers potential problem loans as those loans classified as special mention, substandard, or doubtful.

Allowance for loan losses

In general, the Company determines the adequacy of its ALLL by considering the risk classification and delinquency status of loans and other factors.  Management may also establish specific allowances for loans which management believes require allowances greater than those allocated according to their risk classification.  The purpose of the allowance is to provide for losses inherent in the loan portfolio.  Since risks to the loan portfolio include general economic trends as well as conditions affecting individual borrowers, the allowance is an estimate.  The Company is committed to determining, on an ongoing basis, the adequacy of its ALLL.  The Company applies historical loss rates to various pools of loans based on risk rating classifications.  In addition, the adequacy of the ALLL is further evaluated by applying estimates of loss that could be attributable to any one of the following eight qualitative factors:

 

1)

Changes in national and local economic conditions, including the condition of various market segments;

 

2)

Changes in the value of underlying collateral;

 

3)

Changes in volume of classified assets, measured as a percentage of capital;

 

4)

Changes in volume of delinquent loans;

 

5)

The existence and effect of any concentrations of credit and changes in the level of such concentrations;

 

6)

Changes in lending policies and procedures, including underwriting standards;

 

7)

Changes in the experience, ability and depth of lending management and staff; and

 

8)

Changes in the level of policy exceptions.

As discussed earlier, the Company utilizes a loss migration model.  Migration analysis uses loan level attributes to track the movement of loans through various risk classifications in order to estimate the percentage of losses likely in the portfolio. As of March 31, 2020 and June 30, 2020, the Company downgraded the economic qualitative factors within its ALLL model in light of the effects of COVID-19 on the economy.  No additional downgrades of such factors were taken during the quarter

38


 

ended September 30, 2020, December 31, 2020 or March 31, 2021.  If economic conditions improve or worsen, the Company could experience changes in the required ALLL.  It is possible that asset quality metrics could decline in the future if the effects of COVID-19 are sustained.

The relationship of the ALLL to total loans appears below (dollars in thousands):

 

 

 

March 31,

2021

 

 

December 31,

2020

 

 

March 31,

2020

 

Loans held for investment at period-end

 

$

621,068

 

 

$

609,406

 

 

$

553,959

 

Allowance for loan losses

 

$

5,615

 

 

$

5,455

 

 

$

4,704

 

Allowance as a percent of period-end loans

 

 

0.90

%

 

 

0.90

%

 

 

0.85

%

The ALLL as a percentage of loans was 0.90% as of March 31, 2021 and December 31, 2020, and 0.85% as of March 31, 2020.  The percentage increase as compared to a year ago was primarily due to the increase in the necessary allowance on most of the Company’s loans due to worsening economic qualitative factors, as well as impact of the increase in substandard loans, partially offset by the SBA-guaranteed PPP loans not requiring an allowance.  The ALLL as a percentage of loans, excluding PPP loans (a non-GAAP financial measure), would have been 1.02% as of March 31, 2021 and 0.98% as of December 31, 2020.  Refer to the Reconciliation of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP ALLL as a percentage of loans.  

 

Provisions for loan losses totaling $351 thousand and $765 thousand were recorded in the three months ended March 31, 2021 and 2020, respectively.  The following is a summary of the changes in the ALLL for the three months ended March 31, 2021 and 2020 (dollars in thousands):

 

 

 

2021

 

 

2020

 

Allowance for loan losses, January 1

 

$

5,455

 

 

$

4,209

 

Charge-offs

 

 

(241

)

 

 

(388

)

Recoveries

 

 

50

 

 

 

118

 

Provision for loan losses

 

 

351

 

 

 

765

 

Allowance for loan losses, March 31

 

$

5,615

 

 

$

4,704

 

 

For additional insight into management’s approach and methodology in estimating the ALLL, please refer to the earlier discussion of “Allowance for Loan Losses” in Note 4 of the Notes to Consolidated Financial Statements.  In addition, Note 4 includes details regarding the rollforward of the allowance by loan portfolio segments. The rollforward tables indicate the activity for loans that are charged-off, amounts received from borrowers as recoveries of previously charged-off loan balances, and the allocation by loan portfolio segment of the provision made during the period. The events that can positively impact the amount of allowance in a given loan segment include any one or all of the following: the recovery of a previously charged-off loan balance; the decline in the amount of classified or delinquent loans in a loan segment from the previous period, which most commonly occurs when these loans are repaid or are foreclosed; or when there are improvements in the ratios used to estimate the probability of loan losses. Improvements to the ratios could include lower historical loss rates, improvements to any of the qualitative factors mentioned above, or reduced loss expectations for individually-classified loans.

Management reviews the ALLL on a quarterly basis to ensure it is adequate based upon the calculated probable losses inherent in the portfolio. Management believes the ALLL was adequately provided for as of March 31, 2021 and acknowledges that the ALLL may increase throughout the year as economic conditions may continue to deteriorate for the foreseeable future.   

Premises and equipment

The Company’s premises and equipment, net of depreciation, as of March 31, 2021 totaled $5.1 million compared to $5.2 million as of December 31, 2020 and $6.0 million as of March 31, 2020. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of assets. Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon disposition, assets and related accumulated depreciation are removed from the books, and any resulting gain or loss is charged to income.

39


 

As of March 31, 2021, the Company occupied five full-service banking facilities in the cities of Charlottesville and Winchester, as well as the county of Albemarle in Virginia. The Company also operates a drive-through location at 301 East Water Street, Charlottesville, Virginia. The Company entered into a lease for branch and office space in Richmond, Virginia during the first quarter of 2020 and anticipates opening the office during the second quarter of 2021, absent delays as a result of COVID-19.

The five-story office building at 404 People Place, Charlottesville, Virginia, located in Albemarle County, also serves as the Company’s corporate headquarters, operations center, and offices of both Masonry Capital and Sturman Wealth Advisors.  VNB Trust & Estate Services is located at 112 Third Street, SE, Charlottesville, Virginia, which is part of the same leased space that the Company uses to operate the drive-through location at 301 East Water Street, Charlottesville, Virginia.  

Both the Arlington Boulevard facility in Charlottesville and the People Place facility also contain office space that is currently under lease to tenants.

Leases

As of March 31, 2021, $3.3 million of right-of-use assets and $3.4 million of lease liabilities are included in Other Assets and Other Liabilities, respectively, in accordance with Accounting Standards Update 2016-02 “Leases” (Topic 842).  As of March 31, 2020, $3.4 million of right-of-use assets and lease liabilities were included in Other Assets and Other Liabilities.  Right-of-use assets are assets that represent the Company’s right to use, or control the use of, a specified asset for the lease term, offset by the lease liability, which is the Company’s obligation to make lease payments arising from a lease, measured on a discounted basis.  

Deposits

Deposit accounts represent the Company’s primary source of funds and are comprised of demand deposits, interest-bearing checking, money market, and savings accounts as well as time deposits. These deposits have been provided predominantly by individuals, businesses and charitable organizations in the Charlottesville/Albemarle County, Richmond and Winchester areas.

Total deposits as of March 31, 2021 were $804.2 million, an increase of $73.4 million compared to the balances of $730.8 million at December 31, 2020, and an increase of $169.1 million compared to the $635.1 million total as of March 31, 2020.  The primary reason for the increase since year-end is due to increased balances in PPP customer accounts.  

 

Deposit accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

March 31, 2021

 

 

December 31, 2020

 

 

March 31, 2020

 

 

 

Balance

 

 

% of Total

Deposits

 

 

Balance

 

 

% of Total

Deposits

 

 

Balance

 

 

% of Total

Deposits

 

No cost and low cost deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest demand deposits

 

$

248,212

 

 

 

30.9

%

 

$

209,772

 

 

 

28.71

%

 

$

190,618

 

 

 

30.0

%

Interest checking accounts

 

 

162,218

 

 

 

20.2

%

 

 

148,910

 

 

 

20.37

%

 

 

124,350

 

 

 

19.6

%

Money market and savings deposit accounts

 

 

292,886

 

 

 

36.4

%

 

 

272,980

 

 

 

37.36

%

 

 

218,432

 

 

 

34.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest and low cost deposit accounts

 

 

703,316

 

 

 

87.5

%

 

 

631,662

 

 

 

86.4

%

 

 

533,400

 

 

 

84.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposit accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

92,352

 

 

 

11.4

%

 

 

90,615

 

 

 

12.4

%

 

 

89,681

 

 

 

14.1

%

CDARS deposits

 

 

8,492

 

 

 

1.1

%

 

 

8,487

 

 

 

1.2

%

 

 

12,055

 

 

 

1.9

%

Total certificates of deposit and other time deposits

 

 

100,844

 

 

 

12.5

%

 

 

99,102

 

 

 

13.6

%

 

 

101,736

 

 

 

16.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposit account balances

 

$

804,160

 

 

 

100.0

%

 

$

730,764

 

 

 

100.0

%

 

$

635,136

 

 

 

100.0

%

 

Noninterest-bearing demand deposits on March 31, 2021 were $248.2 million, representing 30.9% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled $455.1 million, and represented 56.6% of total deposits at March 31, 2021. Collectively, noninterest-bearing and interest-bearing transaction and money market accounts

40


 

represented 87.5% of total deposit accounts at March 31, 2021. These account types are an excellent source of low-cost funding for the Company.

The Company also offers insured cash sweep (“ICS®”) deposit products.  ICS® deposit balances of $40.6 million and $88.0 million are included in the interest checking accounts and the money market and savings deposit accounts balances, respectively, in the table above, as of March 31, 2021.  As of December 31, 2020, ICS® deposit balances of $28.0 million and $81.1 million are included in the interest checking accounts and the money market and savings deposit account balances, respectively.  All ICS accounts consist of reciprocal balances for the Company’s customers.

The remaining 12.5% and 13.6% of total deposits consisted of certificates of deposit and other time deposit accounts totaling $100.8 million and $99.1 million at March 31, 2021 and December 31, 2020, respectively. Included in these deposit totals are Certificate of Deposit Account Registry Service CDs, known as CDARSTM, whereby depositors can obtain Federal Deposit Insurance Corporation (“FDIC”) deposit insurance on account balances of up to $50 million. CDARSTM deposits totaled $8.5 million as of March 31, 2021 and December 31, 2020, all of which were reciprocal balances for the Company’s customers.

Borrowings

Short-term borrowings, consisting primarily of FHLB advances and federal funds purchased, are additional sources of funds for the Company. The level of these borrowings is determined by various factors, including customer demand and the Company's ability to earn a favorable spread on the funds obtained.

The Company has a collateral dependent line of credit with the FHLB. As of March 31, 2021 and December 31, 2020, the Company had $30.0 million in outstanding balances from FHLB advances.  As of March 31, 2020, the Company had no outstanding balances from FHLB advances.  

Additional borrowing arrangements maintained by the Company include formal federal funds lines with four major regional correspondent banks and the Federal Reserve discount window. The Company had no outstanding balances on these lines or facilities as of March 31, 2021, December 31, 2020 or March 31, 2020.

Shareholders' equity and regulatory capital ratios

The following table displays the changes in shareholders' equity for the Company from December 31, 2019 to March 31, 2021 (dollars in thousands):

Equity, December 31, 2020

 

$

82,598

 

Net income

 

 

1,505

 

Other comprehensive loss

 

 

(3,387

)

Cash dividends declared

 

 

(814

)

Equity increase due to exercise of stock options

 

 

15

 

Equity increase due to expensing of stock options

 

 

34

 

Equity increase due to expensing of restricted stock

 

 

61

 

Equity, March 31, 2021

 

$

80,012

 

 

The Basel III capital rules require banks and bank holding companies to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%); (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%); and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).

The Company’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were 14.49%, 14.49%, 15.49% and 9.02%, respectively, as of March 31, 2021, thus exceeding the minimum requirements. The Bank’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were 14.35%, 14.35%, 15.35% and 8.94%, respectively, as of March 31, 2021, also exceeding the minimum requirements.

41


 

As of March 31, 2021, the Bank exceeded all of the following minimum capital ratios in order to be considered “well capitalized” under the “prompt corrective action” regulations, as revised: (i) a common equity Tier 1 capital ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%.

 

RESULTS OF OPERATIONS

Non-GAAP presentations

The Company, in referring to its net income and net interest income, is referring to income computed in accordance with GAAP, unless otherwise noted.  Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations also refer to various calculations that are non-GAAP presentations.  They include:

 

Fully taxable-equivalent (“FTE”) adjustments Net interest margin and efficiency ratios are presented on an FTE basis, consistent with SEC guidance in Industry Guide 3 which states that tax exempt income may be calculated on a tax equivalent basis.  This is a non-GAAP presentation. The FTE basis adjusts for the tax-exempt status of net interest income from certain investments using a federal tax rate of 21%, where applicable, to increase tax-exempt interest income to a taxable-equivalent basis.

 

Net interest margin Net interest margin (FTE) is calculated as net interest income, computed on an FTE basis, expressed as a percentage of average earning assets.  The Company believes this measure to be the preferred industry measurement of net interest margin and that it enhances comparability of net interest margin among peers in the industry.

 

Efficiency ratio – One of the ratios the Company monitors in its evaluation of operations is the efficiency ratio, which measures the cost to produce one dollar of revenue.  The Company computes its efficiency ratio (FTE) by dividing noninterest expense by the sum of net interest income (FTE) and noninterest income.  A lower ratio is an indicator of increased operational efficiency. This non-GAAP metric is used to assist investors in understanding how management assesses its ability to generate revenues from its non-funding-related expense base, as well as to align presentation of this financial measure with peers in the industry.  The Company believes this measure to be the preferred industry measurement of operational efficiency, which is consistent with FDIC studies.

 

Performance measures exclude nonrecurring merger expenses, which were incurred in connection with due diligence, legal and other professional fees associated with the proposed merger with Fauquier.  Management believes that the exclusion of the significant one-time effect of merger expenses provides users of the Company’s financial information a presentation of the Company’s financial results that is representative of its ongoing operations.  In this non-GAAP presentation, the merger expenses incurred is added to the Company’s net income.  

 

The allowance for loan losses as a percentage of loans, excluding PPP loans, measure eliminates the impact of PPP loans.  Management believes that the elimination of the impact of PPP loans provides users of the Company’s financial information a presentation of the Company’s allowance for loan loss percentage that is representative of its ongoing operations.

 

Tangible book value per share excludes the impact of the balances of goodwill and other intangibles.  Tangible book value per share is often regarded as a more meaningful comparative ratio than book value per share as calculated under GAAP, to evaluate use of equity, financial condition and capital strength.  

Management uses these non-GAAP measures to evaluate the Company’s operating performance on a basis comparable to other financial periods.  Net income is discussed in Management’s Discussion and Analysis on a GAAP basis unless noted as “non-GAAP.”

 

42


 

 

The reconcilement below shows how these non-GAAP measures are computed from their respective GAAP measures (dollars in thousands):

 

Reconcilement of Non-GAAP Measures:

 

Three Months Ended

 

 

 

March 31,

2021

 

 

March 31,

2020

 

Fully tax-equivalent measures

 

 

 

 

 

 

 

 

Net interest income

 

$

5,974

 

 

$

5,375

 

Fully tax-equivalent adjustment

 

 

47

 

 

 

20

 

Net interest income (FTE)

 

$

6,021

 

 

$

5,395

 

 

 

 

 

 

 

 

 

 

Efficiency ratio

 

 

68.2

%

 

 

64.5

%

Fully tax-equivalent adjustment

 

 

-0.5

%

 

 

-0.2

%

Efficiency ratio (FTE)

 

 

67.7

%

 

 

64.3

%

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

2.81

%

 

 

3.18

%

Fully tax-equivalent adjustment

 

 

0.02

%

 

 

0.02

%

Net interest margin (FTE)

 

 

2.83

%

 

 

3.20

%

 

 

 

 

 

 

 

 

 

Performance measures

 

 

 

 

 

 

 

 

Return on average assets

 

 

0.68

%

 

 

0.78

%

Impact of merger expenses

 

 

0.03

%

 

 

 

Operating return on average assets (non-GAAP)

 

 

0.71

%

 

 

0.78

%

 

 

 

 

 

 

 

 

 

Return on average equity

 

 

7.40

%

 

 

7.28

%

Impact of merger expenses

 

 

0.34

%

 

 

 

Operating return on average equity (non-GAAP)

 

 

7.74

%

 

 

7.28

%

 

 

 

 

 

 

 

 

 

Other financial measures

 

 

 

 

 

 

 

 

ALLL to total loans

 

 

0.90

%

 

 

0.85

%

Impact of PPP loans

 

 

0.12

%

 

 

 

ALLL to total loans, excluding PPP loans (non-GAAP)

 

 

1.02

%

 

 

0.85

%

 

 

 

 

 

 

 

 

 

Book value per share

 

$

29.33

 

 

$

28.23

 

Impact of intangibles

 

 

(0.26

)

 

 

(0.28

)

Tangible book value per share (non-GAAP)

 

$

29.07

 

 

$

27.95

 

 

Net income

Net income for the three months ended March 31, 2021 was $1.5 million, a $101 thousand or 7.2% increase compared to net income reported for the three months ended March 31, 2020.  Net income per diluted share was $0.55 for the quarter ended March 31, 2021 compared to $0.52 per diluted share for the same quarter in the prior year.  The increase in net income for the three months ended March 31, 2021, when compared to the same period of 2020, was attributable to the combination of: i) a $599 thousand increase in net interest income, primarily due to lower cost of funds; ii) a $414 thousand decrease in provision for loan losses, largely due to a larger provision taken in the first quarter of the prior year driven by deterioration in the economic outlook resulting from the initial onset of COVID-19, iii) a $630 thousand decrease in noninterest income, as explained in the Noninterest income section below; iv) a $238 thousand increase in noninterest expense, as explained in the Noninterest expense section below, and v) a $44 thousand increase in provision for income taxes.  

Net interest income

Net interest income (FTE) for the three months ended March 31, 2021 was $6.0 million, a $626 thousand or 11.6% increase compared to net interest income (FTE) of $5.4 million for the three months ended March 31, 2020.  Net interest income (FTE) was positively impacted by the decrease in rates paid on deposit accounts, which decreased interest expense by

43


 

$631 thousand, offset by the increased volume of deposits, which increased interest expense by $99 thousand. The increased volume of loans, increasing from an average of $535.8 million in the first quarter of 2020 to $618.9 million in the first quarter of 2021, positively impacted interest income by $847 thousand; however, the lower rate earned on loans, declining from 4.41% to 3.89% for the periods noted, negatively impacted interest income by $780 thousand, nearly offsetting the positive impact of the increase in volume.  The increase in volume of securities held, increasing from an average balance of $114.2 million for the first quarter of 2020 to $176.1 million for the first quarter of 2021, positively impacted net interest income by $325 thousand, while the decline in yield earned on such securities decreased from 2.20% to 1.74% for the periods noted, negatively impacted net interest income by $189 thousand.

Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets for the period. The level of interest rates, together with the volume and mix of earning assets and interest-bearing liabilities, impact net interest income (FTE) and net interest margin (FTE). The net interest margin (FTE) of 2.83% for the three months ended March 31, 2021 was 37 basis points lower than the 3.20% for the three months ended March 31, 2020.  Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP net interest margin.

Interest expense decreased $496 thousand for the three months ended March 31, 2021 compared to the same period in the prior year, due predominantly to rate decreases.  The rate paid on interest-bearing deposits averaged 50 basis points in the three months ended March 31, 2021, compared to 104 basis points for the three months ended March 31, 2020. Average balances of interest-bearing deposits increased from $460.6 million in the three months ended March 31, 2020 to $530.8 million in the three months ended March 31, 2021.  Average balances of borrowed funds, from FHLB advances, increased from zero in the three months ended March 31, 2020 to $30.0 million in the three months ended March 31, 2021, causing an increase in interest expense on borrowed funds of $36 thousand.  

The following table details the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest-bearing liabilities, for the three months ended March 31, 2021 and 2020.  This table also includes a rate/volume analysis for these same periods (dollars in thousands).


44


 

 

Consolidated Average Balance Sheet and Analysis of Net Interest Income

 

 

 

For the three months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

Change in Interest Income/ Expense

 

 

 

Average

 

 

Interest

 

 

Average

 

 

Average

 

 

Interest

 

 

Average

 

 

Change Due to : 4

 

 

Total

 

 

 

Balance

 

 

Income/

 

 

Yield/Cost

 

 

Balance

 

 

Income/

 

 

Yield/Cost

 

 

Volume

 

 

Rate

 

 

Increase/

 

(dollars in thousands)

 

 

 

 

 

Expense

 

 

 

 

 

 

 

 

 

 

Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Decrease)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable Securities

 

$

142,837

 

 

$

541

 

 

 

1.52

%

 

$

102,786

 

 

$

533

 

 

 

2.07

%

 

$

175

 

 

$

(167

)

 

$

8

 

Tax Exempt Securities 1

 

 

33,234

 

 

 

223

 

 

 

2.68

%

 

 

11,425

 

 

 

95

 

 

 

3.33

%

 

 

150

 

 

 

(22

)

 

 

128

 

Total Securities 1

 

 

176,071

 

 

 

764

 

 

 

1.74

%

 

 

114,211

 

 

 

628

 

 

 

2.20

%

 

 

325

 

 

 

(189

)

 

 

136

 

Total Loans

 

 

618,902

 

 

 

5,938

 

 

 

3.89

%

 

 

535,832

 

 

 

5,871

 

 

 

4.41

%

 

 

847

 

 

 

(780

)

 

 

67

 

Fed Funds Sold

 

 

67,400

 

 

 

12

 

 

 

0.07

%

 

 

28,898

 

 

 

85

 

 

 

1.18

%

 

 

51

 

 

 

(124

)

 

 

(73

)

Total Earning Assets

 

 

862,373

 

 

 

6,714

 

 

 

3.16

%

 

 

678,941

 

 

 

6,584

 

 

 

3.90

%

 

 

1,223

 

 

 

(1,093

)

 

 

130

 

Less: Allowance for Loan Losses

 

 

(5,476

)

 

 

 

 

 

 

 

 

 

 

(4,081

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Non-Earning Assets

 

 

45,619

 

 

 

 

 

 

 

 

 

 

 

45,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

902,516

 

 

 

 

 

 

 

 

 

 

$

720,380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Checking

 

$

146,781

 

 

$

26

 

 

 

0.07

%

 

$

122,719

 

 

$

31

 

 

 

0.10

%

 

 

5

 

 

$

(10

)

 

$

(5

)

Money Market and Savings Deposits

 

 

284,333

 

 

 

351

 

 

 

0.50

%

 

 

228,891

 

 

 

664

 

 

 

1.17

%

 

 

133

 

 

 

(446

)

 

 

(313

)

Time Deposits

 

 

99,692

 

 

 

280

 

 

 

1.14

%

 

 

108,941

 

 

 

494

 

 

 

1.82

%

 

 

(39

)

 

 

(175

)

 

 

(214

)

Total Interest-Bearing Deposits

 

 

530,806

 

 

 

657

 

 

 

0.50

%

 

 

460,551

 

 

 

1,189

 

 

 

1.04

%

 

 

99

 

 

 

(631

)

 

 

(532

)

Other borrowed funds

 

 

30,000

 

 

 

36

 

 

 

0.49

%

 

 

 

 

 

 

 

 

 

 

 

18

 

 

 

18

 

 

 

36

 

Total Interest-Bearing Liabilities

 

 

560,806

 

 

 

693

 

 

 

0.50

%

 

 

460,551

 

 

 

1,189

 

 

 

1.04

%

 

 

117

 

 

 

(613

)

 

 

(496

)

Non-Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

255,227

 

 

 

 

 

 

 

 

 

 

 

177,878

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

3,948

 

 

 

 

 

 

 

 

 

 

 

4,405

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

819,981

 

 

 

 

 

 

 

 

 

 

 

642,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

82,535

 

 

 

 

 

 

 

 

 

 

 

77,546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities & Shareholders' Equity

 

$

902,516

 

 

 

 

 

 

 

 

 

 

$

720,380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income (FTE)

 

 

 

 

 

$

6,021

 

 

 

 

 

 

 

 

 

 

$

5,395

 

 

 

 

 

 

$

1,106

 

 

$

(480

)

 

$

626

 

Interest Rate Spread 2

 

 

 

 

 

 

 

 

 

 

2.66

%

 

 

 

 

 

 

 

 

 

 

2.86

%

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense as a Percentage of Average Earning Assets

 

 

 

 

 

 

 

 

 

 

0.33

%

 

 

 

 

 

 

 

 

 

 

0.70

%

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Margin (FTE) 3

 

 

 

 

 

 

 

 

 

 

2.83

%

 

 

 

 

 

 

 

 

 

 

3.20

%

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 21%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP Presentations earlier in this section.

(2)

Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.

(3)

Net interest margin (FTE) is net interest income expressed as a percentage of average earning assets.

(4)

The impact on the net interest income (FTE) resulting from changes in average balances and average rates is shown for the period indicated. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

 

45


 

 

Provision for loan losses

A provision for loan losses of $351 thousand was recognized during the three months ended March 31, 2021 compared to a provision for loan losses of $765 thousand recognized during the three months ended March 31, 2020, primarily due to the deterioration in the economic outlook resulting from the impact of COVID-19.

The period-end ALLL as a percentage of assets was 0.90% as of March 31, 2021 and December 31, 2020 and 0.85% as of March 31, 2020.  The percentage increase as compared to the prior year was primarily due to the increase in the necessary allowance on most of the Company’s loans due to worsening economic qualitative factors later in 2020, which was partially offset by the SBA-guaranteed PPP loans not needing an allowance.  

Further discussion of management’s assessment of the ALLL is provided earlier in the report and in Note 4 – Allowance for Loan Losses, found in the Notes to the Consolidated Financial Statements.  In management’s opinion, the allowance was adequately provided for at March 31, 2021.  The ALLL calculation, provision for loan losses, asset quality and collateral values may be significantly impacted by deterioration in economic conditions.  We have downgraded the qualitative factors pertaining to economic conditions within our ALLL methodology; should economic conditions worsen, we could experience further increases in our required ALLL and record additional provision for loan loss exposure.

Noninterest income

The components of noninterest income for the three months ended March 31, 2021 and 2020 are shown below (dollars in thousands):

 

 

 

For the three months ended

 

 

Variance

 

 

 

March 31,

2021

 

 

March 31,

2020

 

 

$

 

 

%

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wealth management fees

 

$

329

 

 

$

310

 

 

$

19

 

 

 

6.1

%

Advisory and brokerage income

 

 

191

 

 

 

178

 

 

 

13

 

 

 

7.3

%

Royalty income

 

 

5

 

 

 

47

 

 

 

(42

)

 

 

-89.4

%

Deposit account fees

 

 

160

 

 

 

179

 

 

 

(19

)

 

 

-10.6

%

Debit/credit card and ATM fees

 

 

154

 

 

 

157

 

 

 

(3

)

 

 

-1.9

%

Earnings/increase in value of bank owned life insurance

 

 

107

 

 

 

107

 

 

 

0

 

 

 

0.0

%

Fees on mortgage sales

 

 

-

 

 

 

47

 

 

 

(47

)

 

 

-100.0

%

Gains on sales of securities

 

 

-

 

 

 

53

 

 

 

(53

)

 

 

-100.0

%

Loan swap fee income

 

 

15

 

 

 

509

 

 

 

(494

)

 

 

-97.1

%

Other

 

 

78

 

 

 

82

 

 

 

(4

)

 

 

-4.9

%

Total noninterest income

 

$

1,039

 

 

$

1,669

 

 

$

(630

)

 

 

-37.7

%

 

Noninterest income for the three months ended March 31, 2021 of $1.0 million was $630 thousand or 37.7% lower than the amount recorded for the three months ended March 31, 2020.  Noninterest income fell predominantly due to the decline in loan swap fee income of $494 thousand, as swap arrangements are less attractive to borrowers in the current interest rate environment.  Additionally, there were no sales of securities in the first quarter of 2021, compared to gains on sales of securities of $53 thousand for the first quarter of 2021, and there were no fees on mortgage sales earned in the first quarter of the current year due to elimination of the department.  

46


 

Noninterest expense

The components of noninterest expense for the three months ended March 31, 2021 and 2020 are shown below (dollars in thousands):

 

 

 

For the three months ended

 

 

Variance

 

 

 

March 31,

2021

 

 

March 31,

2020

 

 

$

 

 

%

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

2,402

 

 

$

2,424

 

 

$

(22

)

 

 

-0.9

%

Net occupancy

 

 

495

 

 

 

452

 

 

 

43

 

 

 

9.5

%

Equipment

 

 

116

 

 

 

131

 

 

 

(15

)

 

 

-11.5

%

ATM, debit and credit card

 

 

42

 

 

 

54

 

 

 

(12

)

 

 

-22.2

%

Bank franchise tax

 

 

173

 

 

 

163

 

 

 

10

 

 

 

6.1

%

Computer software

 

 

167

 

 

 

140

 

 

 

27

 

 

 

19.3

%

Data processing

 

 

289

 

 

 

328

 

 

 

(39

)

 

 

-11.9

%

FDIC deposit insurance assessment

 

 

63

 

 

 

0

 

 

 

63

 

 

N/A

 

Loan expenses

 

 

63

 

 

 

91

 

 

 

(28

)

 

 

-30.8

%

Marketing, advertising and promotion

 

 

137

 

 

 

139

 

 

 

(2

)

 

 

-1.4

%

Merger expenses

 

 

278

 

 

 

-

 

 

 

278

 

 

N/A

 

Professional fees

 

 

177

 

 

 

186

 

 

 

(9

)

 

 

-4.8

%

Other

 

 

379

 

 

 

435

 

 

 

(56

)

 

 

-12.9

%

Total noninterest expense

 

$

4,781

 

 

$

4,543

 

 

$

238

 

 

 

5.2

%

 

Noninterest expense for the quarter ended March 31, 2021 of $4.8 million was $238 thousand or 5.2% higher than the quarter ended March 31, 2020.  The predominant reason for the increase was that the Company incurred $278 thousand in merger-related expenses during the three months ended March 31, 2021.  During the three months ended March 31, 2021, the Company expensed $63 thousand related to FDIC deposit insurance assessment, compared to zero in the first quarter of the prior year.  

 

The efficiency ratio (FTE) of 67.7% for the three months ended March 31, 2021 was elevated compared to the 64.3% for the same quarter of 2020, due primarily to the decrease in noninterest income. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP efficiency ratio.

Provision for Income Taxes

For the three months ended March 31, 2021 and 2020, the Company provided $376 thousand and $332 thousand for Federal income taxes, respectively, resulting in an effective income tax rate of 20.0% and 19.1%, respectively. The effective income tax rates differed from the U.S. statutory rate of 21% primarily due to the effect of tax-exempt income from life insurance policies and municipal bonds, and the effective rate for the three months ended March 31, 2021 was higher than the prior year, as certain merger related expenses are non-deductible for tax purposes.

OTHER SIGNIFICANT EVENTS

None

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required

47


 

ITEM 4.  CONTROLS AND PROCEDURES

The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective at the reasonable assurance level. There was no change in the internal control over financial reporting that occurred during the quarter ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

PART II.  OTHER INFORMATION

None

ITEM 1A.  RISK FACTORS.

There have been no material changes from the risk factors described in the Company’s Form 10-K for the year ended December 31, 2020.  The risks described may not be the only risks facing us.  Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition and/or operating results.  

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4.  MINE SAFETY DISCLOSURES.

Not applicable

ITEM 5.  OTHER INFORMATION.

(a)

Required 8-K disclosures.

None

(b)

Changes in procedures for director nominations by security holders.

None

 

48


 

 

ITEM 6.  EXHIBITS.

 

Exhibit

Number

 

Description of Exhibit

 

 

 

 

 

 

31.1

 

302 Certification of Principal Executive Officer

 

 

 

31.2

 

302 Certification of Principal Financial Officer

 

 

 

32.1

 

906 Certification

 

 

 

101

 

The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline eXtensible Business Reporting Language, pursuant to Rule 405 of Regulation S-T (1): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) Consolidated Statements of Stockholders' Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited), tagged as blocks of text and including detailed tags

 

104

 

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101.0)

 

49


 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

VIRGINIA NATIONAL BANKSHARES CORPORATION

(Registrant)

 

 

 

By:

 

/s/ Glenn W. Rust

 

 

Glenn W. Rust

 

 

President and Chief Executive Officer

(principal executive officer)

 

 

 

Date:

 

May 10, 2021

 

 

 

By:

 

/s/ Tara Y. Harrison

 

 

Tara Y. Harrison

 

 

Executive Vice President and Chief Financial Officer

 

 

(principal financial and accounting officer)

 

Date:

 

May 10, 2021

 

50