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Virginia National Bankshares Corp - Quarter Report: 2022 September (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 September 30, 2022

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

As of October 31, 2022, the registrant had 5,327,271 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 4

Consolidated Balance Sheets (unaudited)

 

Page 4

Consolidated Statements of Income (unaudited)

 

Page 5

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

 

Page 6

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

 

Page 7

Consolidated Statements of Cash Flows (unaudited)

 

Page 8

Notes to Consolidated Financial Statements (unaudited)

 

Page 9

 

 

 

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

 

Page 36

Application of Critical Accounting Policies and Estimates

 

Page 38

Financial Condition

 

Page 38

Results of Operations

 

Page 45

 

 

 

Item 3 Quantitative and Qualitative Disclosures About Market Risk

 

Page 53

 

 

 

Item 4 Controls and Procedures

 

Page 53

 

 

 

Part II. Other Information

 

 

Item 1 Legal Proceedings

 

Page 54

Item 1A Risk Factors

 

Page 54

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

 

Page 54

Item 3 Defaults Upon Senior Securities

 

Page 54

Item 4 Mine Safety Disclosures

 

Page 54

Item 5 Other Information

 

Page 54

Item 6 Exhibits

 

Page 54

 

 

 

Signatures

 

Page 55

 

 

2


 

Glossary of Acronyms and Defined Terms

 

2005 Plan

-

2005 Stock Incentive Plan

2014 Plan

-

2014 Stock Incentive Plan

2022 Plan

-

2022 Stock Incentive Plan

ACL

-

Allowance for credit losses

Acquired Loans

-

Loans acquired from Fauquier

AFS

-

Available for sale

ALLL

-

Allowance for loan and lease losses

ASC

-

Accounting Standards Codification

ASU

-

Accounting Standards Update

the Bank

-

Virginia National Bank

bps

-

Basis points

CDARS™

-

Certificates of Deposit Account Registry Service

CECL

-

Current expected credit losses

CMO

-

Collateralized mortgage obligation

the Company

-

Virginia National Bankshares Corporation and its subsidiaries

COVID-19

-

Novel coronavirus disease

EBA

-

Excess Balance Account

Effective Date

-

April 1, 2021

EPS

-

Earnings per share or net income per share

Exchange Act

-

Securities Exchange Act of 1934, as amended

Fauquier

-

Fauquier Bankshares, Inc. and its subsidiaries

FASB

-

Financial Accounting Standards Board

Federal Reserve

-

Board of Governors of the Federal Reserve System

Federal Reserve Bank or FRB

-

Federal Reserve Bank of Richmond

FFS

 

Federal funds sold, or fed funds sold

FHLB

-

Federal Home Loan Bank of Atlanta

Form 10-K

-

Annual Report on Form 10-K for the year ended December 31, 2021

FTE

-

Fully taxable equivalent

GAAP or U.S. GAAP

-

Accounting principles generally accepted in the United States

ICS®

-

Insured Cash Sweep®

LIBOR

-

London Interbank Offering Rate

Masonry Capital

-

Masonry Capital Management, LLC

Merger

-

Mergers of Fauquier Bankshares, Inc. and The Fauquier Bank with and into the Company and the Bank, respectively

Merger Agreement

-

Agreement and Plan of Reorganization between the Company and Fauquier dated September 30, 2020, including a related Plan of Merger

NPA

-

Nonperforming assets

OCC

-

Office of the Comptroller of the Currency

OREO

-

Other real estate owned

OTTI

-

Other than temporary impairment

PCA

-

Prompt Corrective Action

PCI

-

Purchased credit impaired

PII

-

Personally identifiable information

the Plans

-

2005 Stock Incentive Plan, 2014 Stock Incentive Plan and 2022 Stock Incentive Plan

PPP

-

Paycheck Protection Program

ROAA

-

Return on Average Assets

ROAE

-

Return on Average Equity

SAB

-

Staff Accounting Bulletin

SBA

-

Small Business Administration

SEC

-

U.S. Securities and Exchange Commission

Securities Act

-

Securities Act of 1933, as amended

Sturman Wealth

-

Sturman Wealth Advisors

TDR

-

Troubled debt restructuring

TFB

-

The Fauquier Bank

VNBTrust

-

VNBTrust, National Association

 

3


 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

 

 

September 30, 2022

 

 

December 31, 2021 *

 

ASSETS

 

Unaudited

 

 

 

 

Cash and due from banks

 

$

15,773

 

 

$

20,345

 

Interest-bearing deposits in other banks

 

 

76,194

 

 

 

336,032

 

Federal funds sold

 

 

53,118

 

 

 

152,463

 

Securities:

 

 

 

 

 

 

Available for sale, at fair value

 

 

538,459

 

 

 

303,817

 

Restricted securities, at cost

 

 

5,138

 

 

 

4,950

 

Total securities

 

 

543,597

 

 

 

308,767

 

Loans, net of deferred fees and costs

 

 

942,347

 

 

 

1,061,211

 

Allowance for loan losses

 

 

(5,485

)

 

 

(5,984

)

Loans, net

 

 

936,862

 

 

 

1,055,227

 

Premises and equipment, net

 

 

18,817

 

 

 

25,093

 

Bank owned life insurance

 

 

38,298

 

 

 

31,234

 

Goodwill

 

 

8,140

 

 

 

8,140

 

Core deposit intangible, net

 

 

6,990

 

 

 

8,271

 

Other intangible assets, net

 

 

223

 

 

 

274

 

Other real estate owned, net

 

 

-

 

 

 

611

 

Right of use asset, net

 

 

6,941

 

 

 

7,583

 

Accrued interest receivable and other assets

 

 

28,803

 

 

 

18,144

 

Total assets

 

$

1,733,756

 

 

$

1,972,184

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Demand deposits:

 

 

 

 

 

 

Noninterest-bearing

 

$

539,134

 

 

$

522,281

 

Interest-bearing

 

 

417,530

 

 

 

446,314

 

Money market and savings deposit accounts

 

 

505,733

 

 

 

665,530

 

Certificates of deposit and other time deposits

 

 

134,250

 

 

 

162,045

 

Total deposits

 

 

1,596,647

 

 

 

1,796,170

 

Junior subordinated debt, net

 

 

3,401

 

 

 

3,367

 

Lease liability

 

 

6,551

 

 

 

7,108

 

Accrued interest payable and other liabilities

 

 

1,183

 

 

 

3,552

 

Total liabilities

 

 

1,607,782

 

 

 

1,810,197

 

Commitments and contingent liabilities

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

Preferred stock, $2.50 par value

 

 

-

 

 

 

-

 

Common stock, $2.50 par value

 

 

13,214

 

 

 

13,178

 

Capital surplus

 

 

105,095

 

 

 

104,584

 

Retained earnings

 

 

58,026

 

 

 

46,436

 

Accumulated other comprehensive loss

 

 

(50,361

)

 

 

(2,211

)

Total shareholders' equity

 

 

125,974

 

 

 

161,987

 

Total liabilities and shareholders' equity

 

$

1,733,756

 

 

$

1,972,184

 

Common shares outstanding

 

 

5,327,271

 

 

 

5,308,335

 

Common shares authorized

 

 

10,000,000

 

 

 

10,000,000

 

Preferred shares outstanding

 

 

-

 

 

 

-

 

Preferred shares authorized

 

 

2,000,000

 

 

 

2,000,000

 

 

* Derived from audited Consolidated Financial Statements

See Notes to Consolidated Financial Statements

4


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)

 

 

 

For the three months ended

 

 

For the nine months ended

 

 

 

September 30, 2022

 

 

September 30, 2021

 

 

September 30, 2022

 

 

September 30, 2021

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

11,024

 

 

$

12,957

 

 

$

32,403

 

 

$

31,904

 

Federal funds sold

 

 

299

 

 

 

45

 

 

 

662

 

 

 

78

 

Other interest-bearing deposits

 

 

618

 

 

 

55

 

 

 

973

 

 

 

94

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

2,626

 

 

 

742

 

 

 

5,300

 

 

 

2,006

 

Tax exempt

 

 

313

 

 

 

280

 

 

 

925

 

 

 

729

 

Dividends

 

 

66

 

 

 

55

 

 

 

192

 

 

 

121

 

Total interest and dividend income

 

 

14,946

 

 

 

14,134

 

 

 

40,455

 

 

 

34,932

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Demand and savings deposits

 

 

471

 

 

 

673

 

 

 

1,645

 

 

 

1,598

 

Certificates and other time deposits

 

 

147

 

 

 

282

 

 

 

499

 

 

 

886

 

Borrowings

 

 

51

 

 

 

(325

)

 

 

148

 

 

 

(181

)

Total interest expense

 

 

669

 

 

 

630

 

 

 

2,292

 

 

 

2,303

 

Net interest income

 

 

14,277

 

 

 

13,504

 

 

 

38,163

 

 

 

32,629

 

Provision for (recovery of) loan losses

 

 

39

 

 

 

267

 

 

 

(30

)

 

 

477

 

Net interest income after provision for (recovery of) loan losses

 

 

14,238

 

 

 

13,237

 

 

 

38,193

 

 

 

32,152

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Wealth management fees

 

 

590

 

 

 

744

 

 

 

1,719

 

 

 

2,053

 

Advisory and brokerage income

 

 

213

 

 

 

358

 

 

 

639

 

 

 

908

 

Deposit account fees

 

 

443

 

 

 

396

 

 

 

1,366

 

 

 

982

 

Debit/credit card and ATM fees

 

 

660

 

 

 

808

 

 

 

2,146

 

 

 

1,561

 

Bank owned life insurance income

 

 

252

 

 

 

201

 

 

 

709

 

 

 

507

 

Resolution of commercial dispute

 

 

-

 

 

 

-

 

 

 

2,400

 

 

 

-

 

Gains on sale of assets

 

 

4

 

 

 

-

 

 

 

1,117

 

 

 

-

 

Other

 

 

138

 

 

 

971

 

 

 

637

 

 

 

1,426

 

Total noninterest income

 

 

2,300

 

 

 

3,478

 

 

 

10,733

 

 

 

7,437

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,252

 

 

 

4,562

 

 

 

13,069

 

 

 

11,705

 

Net occupancy

 

 

1,318

 

 

 

1,039

 

 

 

3,797

 

 

 

2,643

 

Equipment

 

 

249

 

 

 

205

 

 

 

786

 

 

 

661

 

Bank franchise tax

 

 

304

 

 

 

320

 

 

 

912

 

 

 

922

 

Computer software

 

 

287

 

 

 

361

 

 

 

907

 

 

 

744

 

Data processing

 

 

712

 

 

 

1,114

 

 

 

2,149

 

 

 

2,397

 

FDIC deposit insurance assessment

 

 

70

 

 

 

349

 

 

 

421

 

 

 

594

 

Marketing, advertising and promotion

 

 

347

 

 

 

337

 

 

 

873

 

 

 

706

 

Merger and merger-related expenses

 

 

-

 

 

 

1,935

 

 

 

-

 

 

 

8,087

 

Debit/credit card and ATM expenses

 

 

91

 

 

 

212

 

 

 

322

 

 

 

589

 

Professional fees

 

 

310

 

 

 

186

 

 

 

1,051

 

 

 

873

 

Core deposit intangible amortization

 

 

415

 

 

 

417

 

 

 

1,281

 

 

 

845

 

Other

 

 

1,148

 

 

 

1,787

 

 

 

3,472

 

 

 

2,832

 

Total noninterest expense

 

 

9,503

 

 

 

12,824

 

 

 

29,040

 

 

 

33,598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

7,035

 

 

 

3,891

 

 

 

19,886

 

 

 

5,991

 

Provision for income taxes

 

 

1,263

 

 

 

753

 

 

 

3,505

 

 

 

1,201

 

Net income

 

$

5,772

 

 

$

3,138

 

 

$

16,381

 

 

$

4,790

 

Net income per common share, basic

 

$

1.08

 

 

$

0.59

 

 

$

3.08

 

 

$

1.08

 

Net income per common share, diluted

 

$

1.08

 

 

$

0.59

 

 

$

3.06

 

 

$

1.07

 

Weighted average common shares outstanding, basic

 

 

5,326,543

 

 

 

5,306,370

 

 

 

5,321,652

 

 

 

4,453,303

 

Weighted average common shares outstanding, diluted

 

 

5,348,900

 

 

 

5,338,872

 

 

 

5,347,878

 

 

 

4,478,779

 

 

See Notes to Consolidated Financial Statements

5


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

(Unaudited)

 

 

 

For the three months ended

 

 

For the nine months ended

 

 

 

September 30, 2022

 

 

September 30, 2021

 

 

September 30, 2022

 

 

September 30, 2021

 

Net income

 

$

5,772

 

 

$

3,138

 

 

$

16,381

 

 

$

4,790

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on securities, net of tax of ($3,416) and ($12,952) for the three and nine months ended September 30, 2022; and net of tax of ($94) and ($488) for the three and nine months ended September 30, 2021, respectively

 

 

(12,845

)

 

 

(352

)

 

 

(48,724

)

 

 

(1,836

)

Unrealized gains (losses) on interest rate swaps, net of tax of $49 and $153 for the three and nine months ended September 30, 2022; and net of tax of $7 and ($22) for the three and nine months ended September 30, 2021, respectively

 

 

179

 

 

 

27

 

 

 

574

 

 

 

(84

)

Total other comprehensive loss

 

 

(12,666

)

 

 

(325

)

 

 

(48,150

)

 

 

(1,920

)

Total comprehensive income (loss)

 

$

(6,894

)

 

$

2,813

 

 

$

(31,769

)

 

$

2,870

 

 

See Notes to Consolidated Financial Statements

6


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Dollars in thousands, except per share data)

(Unaudited)

 

 

 

Common Stock

 

 

Capital Surplus

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Total

 

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

 

Common stock issued in acquisition of Fauquier Bankshares, Inc.

 

 

6,428

 

 

 

71,608

 

 

 

 

 

 

 

 

 

78,036

 

Exercise of stock options

 

 

2

 

 

 

13

 

 

 

-

 

 

 

-

 

 

 

15

 

Stock option expense

 

 

-

 

 

 

31

 

 

 

-

 

 

 

-

 

 

 

31

 

Restricted stock grant expense

 

 

-

 

 

 

165

 

 

 

-

 

 

 

-

 

 

 

165

 

Vested stock grants

 

 

16

 

 

 

(16

)

 

 

-

 

 

 

-

 

 

 

-

 

Cash dividends declared ($0.30 per share)

 

 

-

 

 

 

-

 

 

 

(1,596

)

 

 

-

 

 

 

(1,596

)

Net income

 

 

-

 

 

 

-

 

 

 

147

 

 

 

-

 

 

 

147

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,792

 

 

 

1,792

 

Balance, June 30, 2021

 

$

13,176

 

 

$

104,360

 

 

$

41,201

 

 

$

(135

)

 

$

158,602

 

Stock option expense

 

 

-

 

 

 

31

 

 

 

-

 

 

 

-

 

 

 

31

 

Restricted stock grant expense

 

 

-

 

 

 

57

 

 

 

-

 

 

 

-

 

 

 

57

 

Vested stock grants

 

 

2

 

 

 

(2

)

 

 

-

 

 

 

-

 

 

 

-

 

Cash dividends declared ($0.30 per share)

 

 

-

 

 

 

-

 

 

 

(1,593

)

 

 

-

 

 

 

(1,593

)

Net income

 

 

-

 

 

 

-

 

 

 

3,138

 

 

 

-

 

 

 

3,138

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(325

)

 

 

(325

)

Balance, September 30, 2021

 

$

13,178

 

 

$

104,446

 

 

$

42,746

 

 

$

(460

)

 

$

159,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2021

 

$

13,178

 

 

$

104,584

 

 

$

46,436

 

 

$

(2,211

)

 

$

161,987

 

Stock option expense

 

 

-

 

 

 

41

 

 

 

-

 

 

 

-

 

 

 

41

 

Restricted stock grant expense

 

 

-

 

 

 

93

 

 

 

-

 

 

 

-

 

 

 

93

 

Vested stock grants

 

 

12

 

 

 

(12

)

 

 

-

 

 

 

-

 

 

 

-

 

Cash dividends declared ($0.30 per share)

 

 

-

 

 

 

-

 

 

 

(1,596

)

 

 

-

 

 

 

(1,596

)

Net income

 

 

-

 

 

 

-

 

 

 

4,924

 

 

 

-

 

 

 

4,924

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(19,430

)

 

 

(19,430

)

Balance, March 31, 2022

 

$

13,190

 

 

$

104,706

 

 

$

49,764

 

 

$

(21,641

)

 

$

146,019

 

Stock option expense

 

 

-

 

 

 

42

 

 

 

-

 

 

 

-

 

 

 

42

 

Restricted stock grant expense

 

 

-

 

 

 

121

 

 

 

-

 

 

 

-

 

 

 

121

 

Vested stock grants

 

 

11

 

 

 

(11

)

 

 

-

 

 

 

-

 

 

 

-

 

Cash dividends declared ($0.30 per share)

 

 

-

 

 

 

-

 

 

 

(1,597

)

 

 

-

 

 

 

(1,597

)

Net income

 

 

-

 

 

 

-

 

 

 

5,685

 

 

 

-

 

 

 

5,685

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(16,054

)

 

 

(16,054

)

Balance, June 30, 2022

 

$

13,201

 

 

$

104,858

 

 

$

53,852

 

 

$

(37,695

)

 

$

134,216

 

Exercise of stock options

 

 

3

 

 

 

21

 

 

 

-

 

 

 

-

 

 

 

24

 

Stock option expense

 

 

-

 

 

 

42

 

 

 

-

 

 

 

-

 

 

 

42

 

Restricted stock grant expense

 

 

-

 

 

 

184

 

 

 

-

 

 

 

-

 

 

 

184

 

Vested stock grants

 

 

10

 

 

 

(10

)

 

 

-

 

 

 

-

 

 

 

-

 

Cash dividends declared ($0.30 per share)

 

 

-

 

 

 

-

 

 

 

(1,598

)

 

 

-

 

 

 

(1,598

)

Net income

 

 

-

 

 

 

-

 

 

 

5,772

 

 

 

-

 

 

 

5,772

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(12,666

)

 

 

(12,666

)

Balance, September 30, 2022

 

$

13,214

 

 

$

105,095

 

 

$

58,026

 

 

$

(50,361

)

 

$

125,974

 

See Notes to Consolidated Financial Statements

 

7


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

 

For the nine months ended

 

 

 

September 30, 2022

 

 

September 30, 2021

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$

16,381

 

 

$

4,790

 

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

 

 

 

 

 

 

Provision for (recovery of) loan losses

 

 

(30

)

 

 

477

 

Net accretion of certain acquisition-related adjustments

 

 

(1,518

)

 

 

(2,474

)

Amortization of intangible assets

 

 

1,332

 

 

 

896

 

Net amortization and accretion of securities

 

 

317

 

 

 

1,100

 

Net gains on sale of other assets

 

 

(1,117

)

 

 

(65

)

Earnings on bank owned life insurance

 

 

(709

)

 

 

(507

)

Depreciation and other amortization

 

 

2,875

 

 

 

2,173

 

Stock option expense

 

 

125

 

 

 

96

 

Stock grant expense

 

 

398

 

 

 

283

 

Net change in:

 

 

 

 

 

 

Accrued interest receivable and other assets

 

 

1,509

 

 

 

(1,552

)

Accrued interest payable and other liabilities

 

 

(2,112

)

 

 

1,882

 

Net cash provided by operating activities

 

 

17,451

 

 

 

7,099

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Acquisition of Fauquier Bankshares

 

 

 

 

 

153,278

 

Net (increase) decrease in restricted investments

 

 

(188

)

 

 

2,019

 

Purchases of available for sale securities

 

 

(314,997

)

 

 

(36,127

)

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

 

 

18,365

 

 

 

22,876

 

Net decrease in loans

 

 

119,905

 

 

 

95,117

 

Purchase of bank owned life insurance

 

 

(6,354

)

 

 

 

Proceeds from sale of premises and equipment

 

 

6,211

 

 

 

34

 

Proceeds from sale of other real estate owned

 

 

610

 

 

 

 

Proceeds from sale of loans

 

 

 

 

 

6,126

 

Purchase of bank premises and equipment

 

 

(510

)

 

 

(1,055

)

Net cash (used in) provided by investing activities

 

 

(176,958

)

 

 

242,268

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Net (decrease) increase in demand deposits, interest checking, money market and savings accounts

 

 

(171,728

)

 

 

192,565

 

Net decrease in certificates of deposit and other time deposits

 

 

(27,753

)

 

 

(3,728

)

Net decrease in other borrowings

 

 

-

 

 

 

(42,582

)

Proceeds from stock options exercised

 

 

24

 

 

 

30

 

Cash dividends paid

 

 

(4,791

)

 

 

(4,817

)

Net cash (used in) provided by financing activities

 

 

(204,248

)

 

 

141,468

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

$

(363,755

)

 

$

390,835

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

 

Beginning of period

 

$

508,840

 

 

$

34,695

 

End of period

 

$

145,085

 

 

$

425,530

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

   Cash payments for:

 

 

 

 

 

 

Interest

 

$

2,344

 

 

$

2,289

 

Taxes

 

$

2,750

 

 

$

1,042

 

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
   ACTIVITIES

 

 

 

 

 

 

Unrealized losses on available for sale securities

 

$

(61,676

)

 

$

(2,324

)

Unrealized gains (losses) on interest rate swaps

 

$

727

 

 

$

(106

)

Initial right-of-use assets obtained in exchange for new operating lease liabilities

 

$

540

 

 

$

 

Assets acquired in business combination

 

$

 

 

$

909,736

 

Liabilities assumed in business combination

 

$

 

 

$

840,226

 

Change in goodwill

 

$

 

 

$

8,526

 

 

See Notes to Consolidated Financial Statements

8


 

VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2022

 

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation: The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 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, 2021.

Business Combination: On April 1, 2021, Virginia National Bankshares Corporation completed the merger with Fauquier Bankshares, Inc. with and into the Company for total consideration paid of $78.0 million. Additional information about this transaction is presented in Note 2 – Business Combinations.

Nature of Operations: The accompanying unaudited consolidated financial statements include the accounts of the Company, and its subsidiaries Virginia National Bank and Masonry Capital Management, LLC, a registered investment advisor. The Bank offers a full range of banking and related financial services to meet the needs of individuals, businesses and charitable organizations, including the fiduciary services of VNB Trust and Estate Services and, in 2021, of TFB Trust and Investment Management. The Bank also offers, through its networking agreements with third parties, investment advisory and other investment services under Sturman Wealth Advisors and, in 2021, TFB Investment Services. All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation: 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 ALLL, accounting for business combinations, including loans acquired in the business combination, impairment of loans, goodwill impairment, other-than-temporary impairment of securities, other intangible assets, and fair value measurements. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

Reclassifications: If needed, certain previously reported amounts have been reclassified to conform to current period presentation. No such reclassifications were significant.

Recent Significant Accounting Pronouncements

Financial Instruments – Credit Losses In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including 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, like the Company, who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The amendments of Topic 326, upon adoption, will be applied on a modified retrospective basis, with the cumulative effect of adopting the new standard being recorded as an adjustment to opening retained earnings in the period of adoption.

The Company established a cross-functional steering committee in 2017 to prepare for and implement changes related to Topic 326 and has gathered historical loan loss data for purposes of evaluating appropriate portfolio segmentation and modeling methods under the standard. The Company has performed procedures to validate the historical loan loss data to ensure its suitability and reliability for purposes of developing an estimate of expected credit losses under Topic 326. The Company has also engaged a vendor to assist in modeling expected lifetime losses under Topic 326, and is continuing to

9


 

develop and refine an approach to estimating the Allowance for Credit Losses (ACL). The adoption of Topic 326 may result in significant changes to the Company’s consolidated financial statements, which may include changes in the level of the ACL that will be considered adequate, a reduction in total equity and regulatory capital of the Bank, differences in the timing of recognizing changes to the ACL and expanded disclosures about the ACL. The Company has not yet determined an estimate of the effect of these changes. The adoption of the standard will also result in significant changes in the Company’s internal control over financial reporting related to the ACL.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin 119. SAB 119 updated portions of SEC interpretative guidance to align with Topic 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 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.

 

TDRs and Vintage Disclosures In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for TDRs by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.

 

10


 

Note 2. Business Combinations

On April 1, 2021, the Company completed the merger with Fauquier Bankshares, Inc. with and into the Company, with the Company surviving, pursuant to the terms of the Agreement and Plan of Reorganization, dated September 30, 2020, between the Company and Fauquier.

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. In connection with the transaction, the Company issued 2,571,213 shares of its common stock to the shareholders of Fauquier and paid $4 thousand in 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 Date 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 Company accounted for the Merger using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, the assets acquired and liabilities assumed in the Merger and the common stock of the Company issued as consideration were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is inherently subjective and involves significant judgment regarding the methods and assumptions used to estimate fair value. Under ASC 805, during the measurement period of up to one year, the acquirer shall adjust the amounts recognized at the acquisition date and may recognize additional assets or liabilities to reflect new information obtained from facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Measurement period adjustments are recognized in the reporting period in which they are determined. The measurement period may not exceed one year from the acquisition date.

The following table presents as of April 1, 2021 the total consideration paid by the Company in connection with the Merger, the fair values of the assets acquired and liabilities assumed, and the resulting goodwill (dollars in thousands):

 

 

As Recorded

 

 

 

 

 

As Recorded

 

 

 

by Fauquier

 

 

Fair Value

 

 

by Virginia National

 

 

 

Bankshares, Inc.

 

 

Adjustment

 

 

Bankshares

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

153,282

 

 

$

-

 

 

$

153,282

 

Securities available for sale

 

 

93,133

 

 

 

-

 

 

 

93,133

 

Restricted securities

 

 

1,619

 

 

 

-

 

 

 

1,619

 

Loans, net

 

 

615,766

 

 

 

(13,123

)

 

 

602,643

 

Premises and equipment

 

 

16,276

 

 

 

3,872

 

 

 

20,148

 

Other real estate owned

 

 

1,356

 

 

 

(745

)

 

 

611

 

Bank-owned life insurance

 

 

13,677

 

 

 

-

 

 

 

13,677

 

Right-of-use assets

 

 

4,355

 

 

 

1,077

 

 

 

5,432

 

Core deposit intangible

 

 

-

 

 

 

9,660

 

 

 

9,660

 

Other assets

 

 

11,298

 

 

 

(1,009

)

 

 

10,289

 

Total assets acquired

 

$

910,762

 

 

$

(268

)

 

$

910,494

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Deposits

 

 

817,499

 

 

 

191

 

 

 

817,690

 

Short-term borrowings

 

 

12,582

 

 

 

473

 

 

 

13,055

 

Junior subordinated debt

 

 

4,124

 

 

 

(790

)

 

 

3,334

 

Lease liability

 

 

4,440

 

 

 

352

 

 

 

4,792

 

Other liabilities

 

 

1,355

 

 

 

-

 

 

 

1,355

 

Total liabilities assumed

 

$

840,000

 

 

$

226

 

 

$

840,226

 

Net assets acquired

 

 

 

 

 

 

 

$

70,268

 

Total consideration paid

 

 

 

 

 

 

 

 

78,036

 

Goodwill

 

 

 

 

 

 

 

$

7,768

 

 

11


 

In connection with the Merger, the Company recorded approximately $7.8 million of goodwill and $9.7 million of other intangible assets related to the core deposits of Fauquier. The goodwill arising from the Merger with Fauquier is not deductible for income taxes. The core deposit intangible asset will be amortized over a period of seven years using the sum of years digits method.

The Acquired Loans had aggregate outstanding principal of $622.9 million and an estimated fair value of $602.6 million. The discount between the outstanding principal balance and fair value of $20.3 million represents expected credit losses and adjustments for market interest rates of $21.3 million, offset by elimination of net deferred fees/costs of $979 thousand. Under the acquisition method (ASC 805), the ALLL recorded in the books of Fauquier in the amount of $7.2 million was not carried over into the books of the Company.

As of the Effective Date, the fair value of the performing loans was $513.8 million, which was 1.7% less than the book value of the loans. The total fair value discount on performing loans of $9.0 million consisted of a credit discount of $8.4 million and an other fair value discount of $647 thousand. Loans that have evidence of deterioration in credit quality since origination are categorized as purchased credit impaired. As of the Effective Date, the fair value of PCI loans was $87.3 million, which was 12.3% below the book value of the loans. The total fair value mark on PCI loans of $12.3 million consisted of a credit discount of $11.2 million and an other fair value discount of $1.1 million.

Information about PCI acquired loans as of April 1, 2021 is as follows (dollars in thousands):

 

April 1, 2021

 

Contractual principal and interest at acquisition

$

136,476

 

Nonaccretable difference

 

(33,712

)

Expected cash flows at acquisition

 

102,764

 

Accretable yield

 

(15,499

)

Basis in PCI loans at acquisition, estimated fair value

$

87,265

 

Fair values of the major categories of assets acquired and liabilities assumed as part of the Merger were determined as follows:

Cash and due from banks: The carrying amount of cash and due from banks was used as a reasonable estimate of fair value.

Securities available for sale: The estimated fair value of investment securities AFS was based on quoted pricing from a third party portfolio accounting service vendor for the valuation of those securities.

Loans: The Acquired Loans were recorded at fair value at the Merger date without carryover of Fauquier's ALLL. The fair value of the Acquired Loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the Acquired Loans and then discounting those cash flows based on a discount rate that would be required by a market participant. In this regard, the Acquired Loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, loan purpose and loan structure. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), updated loan-to-value ratios and lien position, and past loan performance. For valuation purposes, these pools were further disaggregated by maturity and pricing characteristics (e.g., fixed-rate, adjustable-rate, balloon maturities).

Premises and equipment: The land and buildings acquired were recorded at fair value as determined by current appraisals by independent third parties and tax assessments at Effective Date.

Other real estate owned: Other real estate owned was recorded at fair value based on an existing purchase contract, less estimated selling costs. (Note that the OREO was sold during the second quarter of 2022.)

Bank owned life insurance: The carrying amount of bank owned life insurance was used as a reasonable estimate of fair value.

Right of use assets and lease liabilities: Lease liabilities were measured at the present value of the remaining lease payments, as if each acquired lease was a new lease of the Company at the Effective Date. Right-of-use assets were measured at the same amount as the lease liability as adjusted to reflect favorable or unfavorable terms of the lease when compared with market terms.

12


 

Core deposit intangible: The fair value of the CDI was determined based on a discounted cash flow analysis using a discount rate based on the estimated cost of equity capital for a market participant. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through the FHLB. The life of the deposit base and projected deposit attrition rates were determined using Fauquier’s historical deposit data. The CDI was estimated at $9.7 million or 1.3% of non-maturity deposits.

Deposits: The fair value adjustment of deposits represents a premium over the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar term certificates of deposit, using a discounted cash flow method. The resulting estimated fair value adjustment of certificates of deposit ranging in maturity from one month to three years is a $191 thousand premium and is being amortized into income over a period of thirty-six months.

Short-term borrowings: The fair value of borrowings was determined by comparison to current interest rates for similar borrowings. The resulting fair value adjustment to short-term borrowings is a $473 thousand premium, which was anticipated to be amortized into interest expense over the remaining life of the debt on a straight-line basis. (Note that such borrowings were repaid in the third quarter of 2021, and therefore, the premium was fully amortized during the quarter in which they were repaid.)

Junior subordinated debt: The fair value of the junior subordinated debt was determined by forecasting the cash flows at the stated coupon rate and discount at a prevailing market rate. The prevailing market rate was based on implied market yields for recently issued debt with similar duration, credit quality, seniority and structure, issued by institutions of similar asset size. The resulting estimated fair value adjustment of junior subordinated debt is a $790 thousand discount and is being accreted over the remaining life of the debt on a straight-line basis.

The revenue and earnings amounts specific to Fauquier since the Effective Date that are included in the consolidated results for 2021 are not readily determinable. The disclosures of these amounts are impracticable due to the merging of certain processes and systems at the Effective Date.

There were no merger and merger-related expenses incurred during the three and nine months ended September 30, 2022 and $1.9 million and $8.1 million incurred during the three and nine months ended September 30, 2021, respectively, primarily consisting of personnel and legal expenses.

Note 3. Securities

The amortized cost and fair values of securities available for sale as of September 30, 2022 and December 31, 2021 were as follows (dollars in thousands):

 

September 30, 2022

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Value

 

U.S. Government treasuries

 

$

244,646

 

 

$

-

 

 

$

(3,271

)

 

$

241,375

 

U.S. Government agencies

 

 

35,291

 

 

 

-

 

 

 

(6,386

)

 

 

28,905

 

Mortgage-backed securities/CMOs

 

 

188,029

 

 

 

-

 

 

 

(27,568

)

 

 

160,461

 

Corporate bonds

 

 

30,988

 

 

 

-

 

 

 

(1,693

)

 

 

29,295

 

Municipal bonds

 

 

103,898

 

 

 

-

 

 

 

(25,475

)

 

 

78,423

 

Total Securities Available for Sale

 

$

602,852

 

 

$

-

 

 

$

(64,393

)

 

$

538,459

 

 

December 31, 2021

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Value

 

U.S. Government agencies

 

$

32,424

 

 

$

24

 

 

$

(867

)

 

$

31,581

 

Mortgage-backed securities/CMOs

 

 

172,975

 

 

 

248

 

 

 

(2,259

)

 

 

170,964

 

Municipal bonds

 

 

101,136

 

 

 

1,162

 

 

 

(1,026

)

 

 

101,272

 

Total Securities Available for Sale

 

$

306,535

 

 

$

1,434

 

 

$

(4,152

)

 

$

303,817

 

 

As of September 30, 2022, there were $537.8 million or 291 issues of individual securities, held in an unrealized loss position. These securities have an unrealized loss of $64.4 million and consist of 113 mortgage-backed/collateralized mortgage obligations, 126 municipal bonds, 19 agency bonds, 14 treasury bonds and 19 corporate bonds.

13


 

The following table summarizes all securities with unrealized losses, segregated by length of time in a continuous unrealized loss position at September 30, 2022, and December 31, 2021 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

September 30, 2022

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

U.S. Government treasuries

 

$

241,375

 

 

$

(3,271

)

 

$

 

 

$

 

 

$

241,375

 

 

$

(3,271

)

U.S. Government agencies

 

 

6,017

 

 

 

(873

)

 

 

22,624

 

 

 

(5,513

)

 

 

28,641

 

 

 

(6,386

)

Mortgage-backed/CMOs

 

 

104,457

 

 

 

(15,751

)

 

 

56,004

 

 

 

(11,817

)

 

 

160,461

 

 

 

(27,568

)

Corporate bonds

 

 

21,959

 

 

 

(1,311

)

 

 

7,336

 

 

 

(382

)

 

 

29,295

 

 

 

(1,693

)

Municipal bonds

 

 

46,604

 

 

 

(11,239

)

 

 

31,382

 

 

 

(14,236

)

 

 

77,986

 

 

 

(25,475

)

 

 

$

420,412

 

 

$

(32,445

)

 

$

117,346

 

 

$

(31,948

)

 

$

537,758

 

 

$

(64,393

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2021

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

U.S. Government agencies

 

$

14,443

 

 

$

(340

)

 

$

15,220

 

 

$

(527

)

 

$

29,663

 

 

$

(867

)

Mortgage-backed/CMOs

 

 

131,876

 

 

 

(1,735

)

 

 

15,192

 

 

 

(524

)

 

 

147,068

 

 

 

(2,259

)

Municipal bonds

 

 

40,352

 

 

 

(722

)

 

 

10,409

 

 

 

(304

)

 

 

50,761

 

 

 

(1,026

)

 

 

$

186,671

 

 

$

(2,797

)

 

$

40,821

 

 

$

(1,355

)

 

$

227,492

 

 

$

(4,152

)

 

The Company’s securities portfolio is primarily made up of fixed rate instruments, 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 yields available at the time the underlying securities were purchased. The fair value is expected to recover as the instruments 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 September 30, 2022, 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” 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 September 30, 2022, 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 $5.1 million at September 30, 2022 were pledged as collateral to secure deposits and facilitate borrowing from the Federal Reserve Bank of Richmond. At December 31, 2021, securities having carrying values of $12.7 million were similarly pledged.

For the three and nine months ended September 30, 2022 and September 30, 2021, there were no sales of securities.

Restricted securities are securities with limited marketability and consist of stock in the FRB, the Federal Home Loan Bank of Atlanta, CBB Financial Corporation (the holding company for Community Bankers' Bank) and an investment in an SBA loan fund. These restricted securities, totaling $5.1 million and $5.0 million as of September 30, 2022 and December 31, 2021, are carried at cost.

 

14


 

The amortized cost and fair value of AFS debt securities at September 30, 2022 are presented below based upon contractual maturities, by major investment categories (dollars in thousands). Expected maturities may differ from contractual maturities because issuers have the right to call or prepay obligations.

 

 

 

Amortized Cost

 

 

Fair Value

 

U.S. Government treasuries

 

 

 

 

 

 

      One year or less

 

$

191,949

 

 

$

190,074

 

After one year to five years

 

 

52,697

 

 

 

51,301

 

 

 

$

244,646

 

 

$

241,375

 

U.S. Government agencies

 

 

 

 

 

 

After one year to five years

 

$

649

 

 

$

559

 

After five years to ten years

 

 

30,642

 

 

 

25,418

 

Ten years or more

 

 

4,000

 

 

 

2,928

 

 

 

$

35,291

 

 

$

28,905

 

Mortgage-backed securities/CMOs

 

 

 

 

 

 

After one year to five years

 

$

1,915

 

 

$

1,752

 

After five years to ten years

 

 

930

 

 

 

852

 

Ten years or more

 

 

185,184

 

 

 

157,857

 

 

 

$

188,029

 

 

$

160,461

 

Corporate bonds

 

 

 

 

 

 

      One year or less

 

$

1,525

 

 

$

1,484

 

After one year to five years

 

 

25,347

 

 

 

24,070

 

After five years to ten years

 

 

4,116

 

 

 

3,741

 

 

 

$

30,988

 

 

$

29,295

 

Municipal bonds

 

 

 

 

 

 

After one year to five years

 

$

610

 

 

$

585

 

After five years to ten years

 

 

18,085

 

 

 

16,251

 

Ten years or more

 

 

85,203

 

 

 

61,587

 

 

 

$

103,898

 

 

$

78,423

 

 

 

 

 

 

 

 

Total Debt Securities Available for Sale

 

$

602,852

 

 

$

538,459

 

 

 

Note 4. Loans

The composition of the loan portfolio by major loan classifications at September 30, 2022 and December 31, 2021 appears below (dollars in thousands).

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Commercial

 

$

72,685

 

 

$

96,696

 

Real estate construction and land

 

 

49,668

 

 

 

79,331

 

1-4 family residential mortgages

 

 

324,891

 

 

 

358,148

 

Commercial mortgages

 

 

447,185

 

 

 

473,632

 

Consumer

 

 

47,918

 

 

 

53,404

 

Total loans

 

 

942,347

 

 

 

1,061,211

 

Less: Allowance for loan losses

 

 

(5,485

)

 

 

(5,984

)

Net loans

 

$

936,862

 

 

$

1,055,227

 

 

Primarily within the second quarter of 2020 and the first quarter of 2021, the Company and Fauquier, prior to the Merger, assisted nonprofit organizations and local businesses by funding a combined total of $207.5 million of SBA PPP loans, which were designed to provide economic relief to small businesses adversely impacted by COVID-19. As of September 30, 2022, the Company had PPP loans of $254 thousand outstanding on its balance sheet, with the remainder having been forgiven by the SBA.

The balances in the table above include unamortized premiums and net deferred loan costs and fees. As of September 30, 2022 and December 31, 2021, unamortized premiums on loans purchased prior to the Merger were $1.1 million and $1.1 million, respectively. Net deferred loan fees totaled $636 thousand and $865 thousand as of September 30, 2022 and December 31, 2021, respectively.

15


 

Loans acquired in business combinations are recorded in the Consolidated Balance Sheets at fair value at the acquisition date under the acquisition method of accounting. The fair value mark as of the Effective Date was $23.1 million. The table above includes a net fair value mark of $12.1 million on the purchased impaired loans and $5.0 million on the purchased performing loans as of September 30, 2022 on the Acquired Loans. See Note 2 – Business Combinations for more information on fair value of loan balances acquired in the Merger.

The outstanding principal balance and the carrying amount at September 30, 2022 on these Acquired Loans were as follows (dollars in thousands):

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

Acquired Loans -
Purchased
Credit Impaired

 

 

Acquired Loans - Purchased Performing

 

 

Acquired
Loans -
Total

 

 

Acquired Loans -
Purchased
Credit Impaired

 

 

Acquired Loans - Purchased Performing

 

 

Acquired
Loans -
Total

 

Outstanding principal balance

 

$

49,265

 

 

$

302,578

 

 

$

351,843

 

 

$

76,608

 

 

$

372,172

 

 

$

448,780

 

Carrying amount:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

659

 

 

$

14,350

 

 

$

15,009

 

 

$

994

 

 

$

28,065

 

 

$

29,059

 

Real estate construction and land

 

 

4,310

 

 

 

8,862

 

 

 

13,172

 

 

 

18,576

 

 

 

14,297

 

 

 

32,873

 

1-4 family residential mortgages

 

 

10,445

 

 

 

168,603

 

 

 

179,048

 

 

 

16,020

 

 

 

194,708

 

 

 

210,728

 

Commercial mortgages

 

 

21,711

 

 

 

104,355

 

 

 

126,066

 

 

 

28,675

 

 

 

126,638

 

 

 

155,313

 

Consumer

 

 

81

 

 

 

1,421

 

 

 

1,502

 

 

 

118

 

 

 

2,224

 

 

 

2,342

 

Total acquired loans

 

$

37,206

 

 

$

297,591

 

 

$

334,797

 

 

$

64,383

 

 

$

365,932

 

 

$

430,315

 

 

The following table presents a summary of the changes in the accretable yield of loans classified as purchased credit impaired (dollars in thousands):

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Accretable yield, beginning of period

$

11,667

 

 

$

14,641

 

 

$

13,742

 

 

$

 

Additions

 

 

 

 

 

 

 

 

 

 

15,499

 

Accretion

 

(828

)

 

 

(773

)

 

 

(2,327

)

 

 

(1,631

)

Reclassification from nonaccretable difference

 

6,829

 

 

 

 

 

 

9,021

 

 

 

 

Other changes, net

 

(734

)

 

 

 

 

 

(3,502

)

 

 

 

Accretable yield, end of period

$

16,934

 

 

$

13,868

 

 

$

16,934

 

 

$

13,868

 

 

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

 

16


 

The following tables reflect the breakdown by class of the Company’s loans classified as impaired loans, excluding PCI loans, as of September 30, 2022 and December 31, 2021. 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 nine months ended September 30, 2022 or the twelve months ended December 31, 2021. Interest income recognized is for the nine months ended September 30, 2022 or the twelve months ended December 31, 2021 (dollars in thousands).

 

September 30, 2022

 

Recorded
Investment

 

 

Unpaid
Principal
Balance

 

 

Associated
Allowance

 

 

Average
Recorded
Investment

 

 

Interest
Income
Recognized

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

$

698

 

 

$

725

 

 

$

-

 

 

$

619

 

 

$

7

 

Total impaired loans without a valuation allowance

 

 

698

 

 

 

725

 

 

 

-

 

 

 

619

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

756

 

 

 

756

 

 

 

16

 

 

 

812

 

 

 

38

 

Total impaired loans with a valuation allowance

 

 

756

 

 

 

756

 

 

 

16

 

 

 

812

 

 

 

38

 

Total impaired loans

 

$

1,454

 

 

$

1,481

 

 

$

16

 

 

$

1,431

 

 

$

45

 

 

December 31, 2021

 

Recorded
Investment

 

 

Unpaid
Principal
Balance

 

 

Associated
Allowance

 

 

Average
Recorded
Investment

 

 

Interest
Income
Recognized

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate construction and land

 

$

-

 

 

$

37

 

 

$

-

 

 

$

2

 

 

$

-

 

1-4 family residential mortgages

 

 

594

 

 

 

600

 

 

 

-

 

 

 

269

 

 

 

24

 

Total impaired loans without a valuation allowance

 

 

594

 

 

 

637

 

 

 

-

 

 

 

271

 

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

935

 

 

 

935

 

 

 

6

 

 

 

974

 

 

 

54

 

Total impaired loans with a valuation allowance

 

 

935

 

 

 

935

 

 

 

6

 

 

 

974

 

 

 

54

 

Total impaired loans

 

$

1,529

 

 

$

1,572

 

 

$

6

 

 

$

1,245

 

 

$

78

 

 

Included in the impaired loans 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):

 

 

 

September 30, 2022

 

 

December 31, 2021

 

1-4 family residential mortgages

 

$

607

 

 

$

495

 

Total non-accrual loans

 

$

607

 

 

$

495

 

 

Additionally, 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.

In accordance with regulatory guidance, the Company 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. COVID-19 related loan deferrals declined to zero as of September 30, 2022, from $1.2 million as of December 31, 2021 and September 30, 2021.

17


 

Based on regulatory guidance on student lending, the Company has classified 48 of its student loans purchased (“Purchased Student Loans”), as TDRs for a total of $756 thousand as of September 30, 2022. 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. Management evaluates these loans individually for impairment and includes any expected loss in the ALLL; 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

 

September 30, 2022

 

 

December 31, 2021

 

 

 

No. of

 

 

Recorded

 

 

No. of

 

 

Recorded

 

 

 

Loans

 

 

Investment

 

 

Loans

 

 

Investment

 

Performing TDRs

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

1

 

 

$

91

 

 

 

1

 

 

$

99

 

Consumer

 

 

48

 

 

 

756

 

 

 

58

 

 

 

935

 

Total performing TDRs

 

 

49

 

 

$

847

 

 

 

59

 

 

$

1,034

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming TDRs

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

2

 

 

$

503

 

 

 

1

 

 

$

495

 

Total nonperforming TDRs

 

 

2

 

 

 

503

 

 

 

1

 

 

 

495

 

Total TDRs

 

 

51

 

 

$

1,350

 

 

 

60

 

 

$

1,529

 

 

A summary of loans shown above that were modified under the terms of a TDR during the three and nine months ended September 30, 2022 and 2021 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 the three months ended

 

 

For the three months ended

 

 

 

September 30, 2022

 

 

September 30, 2021

 

 

 

Number
of Loans

 

 

Pre-
Modification
Recorded
Balance

 

 

Post-
Modification
Recorded
Balance

 

 

Number
of Loans

 

 

Pre-
Modification
Recorded
Balance

 

 

Post-
Modification
Recorded
Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

0

 

 

$

 

 

$

 

 

 

1

 

 

$

501

 

 

$

501

 

Total loans modified
   during the period

 

 

0

 

 

$

 

 

$

 

 

 

1

 

 

$

501

 

 

$

501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

 

 

For the nine months ended

 

 

 

September 30, 2022

 

 

September 30, 2021

 

 

 

Number
of Loans

 

 

Pre-
Modification
Recorded
Balance

 

 

Post-
Modification
Recorded
Balance

 

 

Number
of Loans

 

 

Pre-
Modification
Recorded
Balance

 

 

Post-
Modification
Recorded
Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

--

 

 

$

 

 

$

 

 

 

6

 

 

$

63

 

 

$

63

 

1-4 family residential mortgages

 

 

1

 

 

 

54

 

 

 

54

 

 

 

1

 

 

 

501

 

 

 

501

 

Total loans modified
   during the period

 

 

1

 

 

$

54

 

 

$

54

 

 

 

7

 

 

$

564

 

 

$

564

 

 

 

18


 

During the three and nine months ended September 30, 2022, there were no loans modified as a TDR that subsequently defaulted which had been modified as a TDR during the twelve months prior to default. There were five loans modified as a TDR that subsequently defaulted during the year ended December 31, 2021 which had been modified as a TDR during the twelve months prior to default. These student loans had balances totaling $56 thousand prior to being charged off.

There were no loans secured by 1-4 family residential property that were in the process of foreclosure at September 30, 2022 or December 31, 2021.

Note 5. Allowance for Loan Losses

The ALLL 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 ALLL, 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 ALLL on the outstanding loans that were not Acquired Loans, the Company has segmented certain loans in the portfolio by product type. Within these segments, the Company has sub-segmented its portfolio by classes, based on the associated risks within these classes. Non-PCI acquired loan pools are also evaluated for additional required ALLL.

Note that under the acquisition method of accounting (ASC 805), the ALLL recorded in the books of Fauquier was not carried over into the books of the Company; however the Acquired Loans were subject to net fair value marks.

 

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 pools except for the following:

All pools with a risk classification of excellent or good, as noted in the Risk Ratings and Historical Loss Factor Assigned section as follows.
Student loans purchased - The loss rate methodology for student loans is based on the average historical loss rate for each tranche of loans, using a twelve-quarter lookback period. Due to the declining balances in these pools, a balance weighted loss rate weight is used. In addition, qualitative factors are applied.
Commercial and industrial government guaranteed loans and PPP loans - These loans require no reserve as these are 100% guaranteed by either the SBA or the United States Department of Agriculture.
Minute Lender Loans – Commercial and Consumer - Minute Lender loans were acquired in the Merger and were historically assigned a loss rate of 4%, which was a recommendation of the vendor that administers the program. A 4% loss rate will be utilized until such time that a historical loss rate is available.

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.

 

19


 

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

These loans represent a low risk and are secured by marketable collateral within margin. In an abundance of caution, a nominal loss reserve of 0.15% 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.

 

20


 

The following represents the loan portfolio designated by the internal risk ratings assigned to each credit as of September 30, 2022 and December 31, 2021 (dollars in thousands). There were no loans rated “Doubtful” as of either period.

 

September 30, 2022

 

Excellent

 

 

Good

 

 

Pass

 

 

Watch

 

 

Special
Mention

 

 

Sub-
standard

 

 

TOTAL

 

Commercial

 

$

24,802

 

 

$

16,641

 

 

$

29,016

 

 

$

1,070

 

 

$

16

 

 

$

1,140

 

 

$

72,685

 

Real estate construction and land

 

 

-

 

 

 

-

 

 

 

43,774

 

 

 

342

 

 

 

817

 

 

 

4,735

 

 

 

49,668

 

1-4 family residential mortgages

 

 

-

 

 

 

-

 

 

 

308,834

 

 

 

7,620

 

 

 

5,605

 

 

 

2,832

 

 

 

324,891

 

Commercial mortgages

 

 

-

 

 

 

-

 

 

 

388,167

 

 

 

42,279

 

 

 

5,669

 

 

 

11,070

 

 

 

447,185

 

Consumer

 

 

464

 

 

 

18,785

 

 

 

27,449

 

 

 

1,105

 

 

 

63

 

 

 

52

 

 

 

47,918

 

Total Loans

 

$

25,266

 

 

$

35,426

 

 

$

797,240

 

 

$

52,416

 

 

$

12,170

 

 

$

19,829

 

 

$

942,347

 

 

December 31, 2021

 

Excellent

 

 

Good

 

 

Pass

 

 

Watch

 

 

Special
Mention

 

 

Sub-
standard

 

 

TOTAL

 

Commercial

 

$

45,862

 

 

$

13,920

 

 

$

32,460

 

 

$

732

 

 

$

1,645

 

 

$

2,077

 

 

$

96,696

 

Real estate construction and land

 

 

-

 

 

 

-

 

 

 

51,098

 

 

 

7,360

 

 

 

2,849

 

 

 

18,024

 

 

 

79,331

 

1-4 family residential mortgages

 

 

-

 

 

 

2,030

 

 

 

334,300

 

 

 

5,013

 

 

 

1,520

 

 

 

15,285

 

 

 

358,148

 

Commercial mortgages

 

 

-

 

 

 

-

 

 

 

382,108

 

 

 

61,563

 

 

 

8,530

 

 

 

21,431

 

 

 

473,632

 

Consumer

 

 

524

 

 

 

18,535

 

 

 

32,821

 

 

 

1,225

 

 

 

179

 

 

 

120

 

 

 

53,404

 

Total Loans

 

$

46,386

 

 

$

34,485

 

 

$

832,787

 

 

$

75,893

 

 

$

14,723

 

 

$

56,937

 

 

$

1,061,211

 

 

In addition, the adequacy of the Company’s ALLL 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.

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 $1.5 million at September 30, 2022, 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 $16 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 September 30, 2022.

21


 

A summary of the transactions in the Allowance for Loan Losses by major loan portfolio segment for the nine months ended September 30, 2022 and the year ended December 31, 2021 appears below (dollars in thousands):

 

As of and for the period ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Commercial
Loans

 

 

Real Estate
Construction
and Land

 

 

Real Estate
Mortgages

 

 

Consumer
Loans

 

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of beginning of year

 

$

252

 

 

$

399

 

 

$

4,478

 

 

$

855

 

 

$

5,984

 

Charge-offs

 

 

(243

)

 

 

-

 

 

 

-

 

 

 

(540

)

 

 

(783

)

Recoveries

 

 

151

 

 

 

9

 

 

 

8

 

 

 

146

 

 

 

314

 

Provision for (recovery of) loan losses

 

 

80

 

 

 

(81

)

 

 

(297

)

 

 

268

 

 

 

(30

)

Ending Balance

 

$

240

 

 

$

327

 

 

$

4,189

 

 

$

729

 

 

$

5,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

-

 

 

$

-

 

 

$

-

 

 

$

16

 

 

$

16

 

Collectively evaluated for impairment

 

 

240

 

 

 

327

 

 

 

4,189

 

 

 

713

 

 

 

5,469

 

Acquired loans - purchased credit
   impaired

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

-

 

 

$

-

 

 

$

594

 

 

$

756

 

 

$

1,350

 

Collectively evaluated for impairment

 

 

72,026

 

 

 

45,358

 

 

 

739,326

 

 

 

47,081

 

 

 

903,791

 

Acquired loans - purchased credit impaired

 

 

659

 

 

 

4,310

 

 

 

32,156

 

 

 

81

 

 

 

37,206

 

Ending Balance

 

$

72,685

 

 

$

49,668

 

 

$

772,076

 

 

$

47,918

 

 

$

942,347

 

 

As of and for the period ended December 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

 

 

(147

)

 

 

-

 

 

 

-

 

 

 

(688

)

 

 

(835

)

Recoveries

 

 

191

 

 

 

12

 

 

 

6

 

 

 

141

 

 

 

350

 

Provision for (recovery of) loan losses

 

 

(1

)

 

 

227

 

 

 

575

 

 

 

213

 

 

 

1,014

 

Ending Balance

 

$

252

 

 

$

399

 

 

$

4,478

 

 

$

855

 

 

$

5,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

-

 

 

$

-

 

 

$

-

 

 

$

6

 

 

$

6

 

Collectively evaluated for impairment

 

 

252

 

 

 

399

 

 

 

4,478

 

 

 

849

 

 

 

5,978

 

Acquired loans - purchased credit
   impaired

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

-

 

 

$

-

 

 

$

594

 

 

$

935

 

 

$

1,529

 

Collectively evaluated for impairment

 

 

95,702

 

 

 

60,755

 

 

 

786,491

 

 

 

52,351

 

 

 

995,299

 

Acquired loans - purchased credit impaired

 

 

994

 

 

 

18,576

 

 

 

44,695

 

 

 

118

 

 

 

64,383

 

Ending Balance

 

$

96,696

 

 

$

79,331

 

 

$

831,780

 

 

$

53,404

 

 

$

1,061,211

 

 

As previously mentioned, one of the major factors that the Company uses in evaluating the adequacy of its ALLL 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.

22


 

The following tables show the aging of past due loans as of September 30, 2022 and December 31, 2021 (dollars in thousands).

 

Past Due Aging as of
September 30, 2022

 

30-59 Days

 

 

60-89 Days

 

 

90 Days or More

 

 

Total
Past
Due

 

 

PCI

 

 

Current

 

 

Total
Loans

 

 

90 Days Past Due and Still Accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

9

 

 

$

-

 

 

$

709

 

 

$

718

 

 

$

659

 

 

$

71,308

 

 

$

72,685

 

 

$

709

 

Real estate construction and land

 

 

5

 

 

 

-

 

 

 

-

 

 

 

5

 

 

 

4,310

 

 

 

45,353

 

 

 

49,668

 

 

 

-

 

1-4 family residential mortgages

 

 

831

 

 

 

324

 

 

 

129

 

 

 

1,284

 

 

 

10,445

 

 

 

313,162

 

 

 

324,891

 

 

 

129

 

Commercial mortgages

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

21,711

 

 

 

425,474

 

 

 

447,185

 

 

 

-

 

Consumer loans

 

 

361

 

 

 

78

 

 

 

21

 

 

 

460

 

 

 

81

 

 

 

47,377

 

 

 

47,918

 

 

 

21

 

Total Loans

 

$

1,206

 

 

$

402

 

 

$

859

 

 

$

2,467

 

 

$

37,206

 

 

$

902,674

 

 

$

942,347

 

 

$

859

 

 

Past Due Aging as of
December 31, 2021

 

30-59 Days

 

 

60-89 Days

 

 

90 Days or More

 

 

Total
Past
Due

 

 

PCI

 

 

Current

 

 

Total
Loans

 

 

90 Days Past Due and Still Accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

385

 

 

$

355

 

 

$

718

 

 

$

1,458

 

 

$

994

 

 

$

94,244

 

 

$

96,696

 

 

$

718

 

Real estate construction and land

 

 

873

 

 

 

1,283

 

 

 

-

 

 

 

2,156

 

 

 

18,576

 

 

 

58,599

 

 

 

79,331

 

 

 

-

 

1-4 family residential mortgages

 

 

1,508

 

 

 

100

 

 

 

495

 

 

 

2,103

 

 

 

16,020

 

 

 

340,025

 

 

 

358,148

 

 

 

-

 

Commercial mortgages

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

28,675

 

 

 

444,957

 

 

 

473,632

 

 

 

-

 

Consumer loans

 

 

345

 

 

 

196

 

 

 

83

 

 

 

624

 

 

 

118

 

 

 

52,662

 

 

 

53,404

 

 

 

83

 

Total Loans

 

$

3,111

 

 

$

1,934

 

 

$

1,296

 

 

$

6,341

 

 

$

64,383

 

 

$

990,487

 

 

$

1,061,211

 

 

$

801

 

 

Note 6. Goodwill and Other Intangible Assets

The carrying amount of goodwill was $8.1 million at September 30, 2022 and December 31, 2021.

The Company had $7.2 million, $8.5 million and $8.1 million of other intangible assets as of September 30, 2022, December 31, 2021 and September 30, 2021, respectively. Other intangible assets were recognized in connection with (i) the book of business, including interest in the client relationships of an officer, acquired by VNB Wealth in 2016, now referred to as Sturman Wealth Advisors, and (ii) the core deposits acquired from Fauquier in 2021. The following table summarizes the gross carrying amounts and accumulated amortization of other intangible assets (dollars in thousands):

 

September 30, 2022

 

 

December 31, 2021

 

 

Gross Carrying Amount

 

Accumulated Amortization

 

 

Gross Carrying Amount

 

Accumulated Amortization

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

Core deposit intangible

$

9,660

 

$

(2,670

)

 

$

9,660

 

$

(1,389

)

Customer relationships intangible

 

773

 

 

(550

)

 

 

773

 

 

(499

)

Total

$

10,433

 

$

(3,220

)

 

$

10,433

 

$

(1,888

)

 

23


 

Amortization expense was $432 thousand and $434 thousand for the three months ended September 30, 2022 and 2021, respectively and $1.3 million and $896 thousand for the nine months ended September 30, 2022 and 2021, respectively.

Estimated future amortization expense as of September 30, 2022 is as follows (dollars in thousands):

 

Core

 

Customer

 

 

Deposit

 

Relationships

 

 

Intangible

 

Intangible

 

For the three months ending December 31, 2022

$

404

 

$

16

 

For the year ending December 31, 2023

 

1,493

 

 

67

 

For the year ending December 31, 2024

 

1,301

 

 

67

 

For the year ending December 31, 2025

 

1,110

 

 

67

 

For the year ending December 31, 2026

 

918

 

 

6

 

Thereafter

 

1,764

 

 

-

 

Total

$

6,990

 

$

223

 

 

Note 7. 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.

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):

 

 

 

September 30, 2022

 

 

September 30, 2021

 

Lease liability

 

$

6,551

 

 

$

7,463

 

Right-of-use asset

 

$

6,941

 

 

$

7,970

 

Weighted average remaining lease term

 

5.68 years

 

 

6.19 years

 

Weighted average discount rate

 

 

1.97

%

 

 

1.98

%

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Lease Expense:

 

2022

 

 

2021

 

 

 

 

 

2021

 

Operating lease expense

 

$

437

 

 

$

420

 

 

$

1,331

 

 

$

1,069

 

Short-term lease expense

 

 

196

 

 

 

127

 

 

 

387

 

 

 

188

 

Total lease expense

 

$

633

 

 

$

547

 

 

$

1,718

 

 

$

1,257

 

Cash paid for amounts included in
   lease liabilities

 

$

408

 

 

$

390

 

 

$

1,240

 

 

$

998

 

 

24


 

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

 

September 30, 2022

 

Three months ending December 31, 2022

 

$

409

 

Twelve months ending December 31, 2023

 

 

1,567

 

Twelve months ending December 31, 2024

 

 

1,296

 

Twelve months ending December 31, 2025

 

 

1,091

 

Twelve months ending December 31, 2026

 

 

748

 

Thereafter

 

 

1,791

 

Total undiscounted cash flows

 

$

6,902

 

Less: Discount

 

 

(351

)

Lease liability

 

$

6,551

 

 

 

Note 8. 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 and nine months ended September 30, 2022 and 2021. 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. The recipients of unvested restricted shares have full voting and dividend rights, and as such, unvested restricted stock as of September 30, 2022 and September 30, 2021 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

 

September 30, 2022

 

 

September 30, 2021

 

 

 

Net
Income

 

 

Weighted
Average
Shares

 

 

Per
Share
Amount

 

 

Net
Income

 

 

Weighted
Average
Shares

 

 

Per
Share
Amount

 

Basic net income per share

 

$

5,772

 

 

 

5,326,543

 

 

$

1.08

 

 

$

3,138

 

 

 

5,306,370

 

 

$

0.59

 

Effect of dilutive stock options

 

 

-

 

 

 

22,357

 

 

 

-

 

 

 

-

 

 

 

32,502

 

 

 

-

 

Diluted net income per share

 

$

5,772

 

 

 

5,348,900

 

 

$

1.08

 

 

$

3,138

 

 

 

5,338,872

 

 

$

0.59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30, 2022

 

 

September 30, 2021

 

 

 

Net
Income

 

 

Weighted
Average
Shares

 

 

Per
Share
Amount

 

 

Net
Income

 

 

Weighted
Average
Shares

 

 

Per
Share
Amount

 

Basic net income per share

 

$

16,381

 

 

 

5,321,652

 

 

$

3.08

 

 

$

4,790

 

 

 

4,453,303

 

 

$

1.08

 

Effect of dilutive stock options

 

 

-

 

 

 

26,226

 

 

 

(0.02

)

 

 

-

 

 

 

25,476

 

 

 

(0.01

)

Diluted net income per share

 

$

16,381

 

 

$

5,347,878

 

 

$

3.06

 

 

$

4,790

 

 

 

4,478,779

 

 

$

1.07

 

 

For the three and nine months ended September 30, 2022, there were 101,901 option shares considered anti-dilutive and excluded from this calculation. For the three and nine months ended September 30, 2021, there were 91,501 option shares considered anti-dilutive and excluded from this calculation.

 

25


 

 

Note 9. Stock Incentive Plans

At the Annual Shareholders Meeting on June 23, 2022, shareholders approved the Virginia National Bankshares Corporation 2022 Stock Incentive Plan. The 2022 Plan made available up to 150,000 shares of the Company’s common stock to be issued to plan participants. The 2014 Plan made 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 2022 Plan and the 2014 Plan provide for granting of both incentive and nonqualified stock options, as well as restricted stock, unrestricted stock and other stock based awards. No new grants can be issued under the 2005 Stock Incentive Plan as this plan has expired.

For the 2022 Plan, the option price for any stock options cannot be less that the fair value of the Company’s stock on the grant date. In addition, 95% of the common stock authorized for issuance must have a vesting or exercise schedule of at least one year. For the 2014 Plan and the 2005 Plan, the option price of incentive stock options cannot be less than the fair value of the stock at the time an option is granted and 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.

A summary of the shares issued and available under each of the Plans is shown below as of September 30, 2022. 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. No grants have been issued under the 2022 Plan.

 

 

 

2022 Plan

 

 

2014 Plan

 

 

2005 Plan

 

Aggregate shares issuable

 

 

150,000

 

 

 

275,625

 

 

 

253,575

 

Options issued, net of forfeited and expired
   options

 

 

 

 

 

(170,106

)

 

 

(59,870

)

Unrestricted stock issued

 

 

 

 

 

(11,635

)

 

 

 

Restricted stock grants issued, net of forfeited

 

 

 

 

 

(65,853

)

 

 

 

Cancelled due to Plan expiration

 

 

 

 

 

 

 

 

(193,705

)

Remaining available for grant

 

 

150,000

 

 

 

28,031

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

Stock grants issued and outstanding:

 

 

 

 

 

 

 

 

 

Total vested and unvested shares

 

 

 

 

 

77,488

 

 

 

 

Fully vested shares

 

 

 

 

 

35,724

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Option grants issued and outstanding:

 

 

 

 

 

 

 

 

 

Total vested and unvested shares

 

 

 

 

 

166,901

 

 

 

1,379

 

Fully vested shares

 

 

 

 

 

87,548

 

 

 

1,379

 

 

 

 

 

 

 

 

 

 

 

Exercise price range

 

 

 

 

$23.75 to $42.62

 

 

$13.69

 

 

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.

26


 

Stock Options

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

 

 

 

September 30, 2022

 

 

 

Number of Options

 

 

Weighted
Average
Exercise Price

 

 

Aggregate
Intrinsic Value

 

Outstanding at January 1, 2022

 

 

169,280

 

 

$

33.89

 

 

$

962

 

Issued

 

 

 

 

 

 

 

 

 

Exercised

 

 

(1,000

)

 

 

(23.75

)

 

 

 

Expired

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2022

 

 

168,280

 

 

$

33.95

 

 

$

532

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at September 30, 2022

 

 

88,927

 

 

$

36.18

 

 

$

223

 

 

For the three months ended September 30, 2022 and 2021, the Company recognized $42 thousand and $31 thousand, respectively, in compensation expense for stock options. For the nine months ended September 30, 2022 and 2021, the Company recognized $125 thousand and $96 thousand, respectively, in compensation expense for stock options. As of September 30, 2022, there was $262 thousand in unrecognized compensation expense remaining to be recognized in future reporting periods through 2026. The fair value of any stock option grant is estimated at the grant date using the Black-Scholes pricing model. There were no stock option grants issued during the three and nine months ended September 30, 2022 and 2021.

Summary information pertaining to options outstanding at September 30, 2022 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

 

$13.69 to $20.00

 

 

1,379

 

 

0.4 Years

 

$

13.69

 

 

 

1,379

 

 

$

13.69

 

$20.01 to $30.00

 

 

65,000

 

 

7.8 Years

 

 

24.65

 

 

 

25,400

 

 

 

24.67

 

$30.01 to $40.00

 

 

44,420

 

 

7.8 Years

 

 

36.97

 

 

 

16,172

 

 

 

37.87

 

$40.01 to $42.62

 

 

57,481

 

 

5.6 Years

 

 

42.62

 

 

 

45,976

 

 

 

42.62

 

Total

 

 

168,280

 

 

7.0 Years

 

$

33.95

 

 

 

88,927

 

 

$

36.18

 

 

Stock Grants

Unrestricted stock grant - During the nine months ended September 30, 2022, 100 shares of unrestricted stock were granted to an employee for a total expense of $4 thousand. No unrestricted stock grants were awarded during the three months ended September 30, 2022 or during the year ended December 31, 2021.

Restricted stock grants – During the nine months ended September 30, 2022, 5,580 and 12,856 restricted shares, were granted to employees and non-employee directors, respectively, vesting over a four-year or five-year period. (Note that all such shares were granted during the first quarter of 2022 with no shares granted during the second or third quarter of 2022.) During the three and nine months ended September 30, 2021, 5,730 and 19,233 restricted shares, respectively, were granted. For the three and nine months ended September 30, 2022, $184 thousand and $398 thousand, respectively, was expensed as a result of restricted stock grants. As of September 30, 2022, there was $1.1 million in unrecognized compensation expense for all restricted stock grants remaining to be recognized in future reporting periods through 2027.

27


 

Changes in the restricted stock grants outstanding during the nine months ended September 30, 2022 are summarized below (dollars in thousands except per share data):

 

 

September 30, 2022

 

 

 

Number of
Shares

 

 

Weighted
Average
Grant Date
Fair Value
Per Share

 

 

Aggregate
Intrinsic Value

 

Nonvested as of January 1, 2022

 

 

37,011

 

 

$

28.98

 

 

$

1,165

 

Issued

 

 

18,536

 

 

 

35.62

 

 

601

 

Vested

 

 

(13,183

)

 

 

(29.04

)

 

 

(392

)

Forfeited

 

 

(600

)

 

 

(33.74

)

 

 

(19

)

Nonvested at September 30, 2022

 

 

41,764

 

 

$

31.82

 

 

$

1,355

 

 

 

 

 

 

 

 

 

 

 

 

Note 10. 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

 

28


 

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 AFS 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).

Interest rate swaps

The Company recognizes interest rate swaps at fair value. The Company has contracted with a third-party to provide valuations for interest rate swaps using standard valuation techniques. The Company’s interest rate swaps are classified as Level 2.

The following tables present the balances measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 (dollars in thousands):

 

 

 

 

 

 

Fair Value Measurements at September 30, 2022 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 treasuries

 

$

241,375

 

 

$

-

 

 

$

241,375

 

 

$

-

 

U.S. Government agencies

 

 

28,905

 

 

 

-

 

 

 

28,905

 

 

 

-

 

Mortgage-backed securities/CMOs

 

 

160,461

 

 

 

-

 

 

 

160,461

 

 

 

-

 

Corporate bonds

 

 

29,295

 

 

 

-

 

 

 

29,295

 

 

 

-

 

Municipal bonds

 

 

78,423

 

 

 

-

 

 

 

78,423

 

 

 

-

 

Total securities available for sale

 

$

538,459

 

 

$

-

 

 

$

538,459

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap asset

 

 

538

 

 

 

-

 

 

 

538

 

 

 

-

 

Total assets at fair value

 

$

538,997

 

 

$

-

 

 

$

538,997

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 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

 

$

31,581

 

 

$

-

 

 

$

31,581

 

 

$

-

 

Mortgage-backed securities/CMOs

 

 

170,964

 

 

 

-

 

 

 

170,964

 

 

 

-

 

Municipal bonds

 

 

101,272

 

 

 

-

 

 

 

101,272

 

 

 

-

 

Total securities available for sale

 

$

303,817

 

 

$

-

 

 

$

303,817

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap liabilities

 

$

197

 

 

$

-

 

 

$

197

 

 

$

-

 

Total liabilities at fair value

 

$

197

 

 

$

-

 

 

$

197

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29


 

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 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 ALLL. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Consolidated Statements of Income. As of December 31, 2021, the Company had one OREO property acquired through the Merger which was carried at a fair value of $611 thousand. The Company sold this OREO property during the second quarter of the current year and therefore had a zero balance in OREO as of September 30, 2022.

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 (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 ALLL 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, excluding PCI loans, of $1.5 million as of September 30, 2022 and $1.5 million as of December 31, 2021. 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.

The following table presents the Company’s assets that were measured at fair value on a nonrecurring basis as of December 31, 2021. There were no such assets to report as of September 30, 2022.

 

 

 

 

 

 

Fair Value Measurements at December 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:

 

 

 

 

 

 

 

 

 

 

 

 

Other Real Estate Owned

 

$

611

 

 

$

-

 

 

$

-

 

 

$

611

 

 

30


 

For the assets measured at fair value on a nonrecurring basis as of December 31, 2021, the following table displays quantitative information about Level 3 Fair Value Measurements (dollars in thousands). There were no such assets to report as of September 30, 2022.

Description

 

Fair Value

 

 

Valuation Technique

 

Unobservable Inputs

 

Weighted Average

 

Assets:

 

 

 

 

 

 

 

 

 

 

Other Real Estate Owned

 

$

611

 

 

Market comparables

 

Discount applied to bonafide offer *

 

 

6.0

%

* A discount percentage is applied based on estimated cost to sell.

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2022 and December 31, 2021 are as follows (dollars in thousands):

 

 

 

 

 

 

Fair Value Measurements at September 30, 2022 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

 

$

145,085

 

 

$

145,085

 

 

$

-

 

 

$

-

 

 

$

145,085

 

Available for sale securities

 

 

538,459

 

 

 

-

 

 

 

538,459

 

 

 

-

 

 

 

538,459

 

Loans, net

 

 

936,862

 

 

 

-

 

 

 

-

 

 

 

901,051

 

 

 

901,051

 

Bank owned life insurance

 

 

38,298

 

 

 

-

 

 

 

38,298

 

 

 

-

 

 

 

38,298

 

Accrued interest receivable

 

 

4,351

 

 

 

-

 

 

 

2,114

 

 

 

2,237

 

 

 

4,351

 

Interest rate swap asset

 

 

538

 

 

 

-

 

 

 

538

 

 

 

-

 

 

 

538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits and interest-bearing transaction and money market accounts

 

$

1,462,397

 

 

$

-

 

 

$

1,462,397

 

 

$

-

 

 

$

1,462,397

 

Certificates of deposit

 

 

134,250

 

 

 

-

 

 

 

133,741

 

 

 

-

 

 

 

133,741

 

Junior subordinated debt, net

 

 

3,401

 

 

 

-

 

 

 

3,158

 

 

 

-

 

 

 

3,158

 

Accrued interest payable

 

 

123

 

 

 

-

 

 

 

123

 

 

 

-

 

 

 

123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31


 

 

 

 

 

 

 

Fair Value Measurements at December 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

 

$

508,840

 

 

$

508,840

 

 

$

-

 

 

$

-

 

 

$

508,840

 

Available for sale securities

 

 

303,817

 

 

 

-

 

 

 

303,817

 

 

 

-

 

 

 

303,817

 

Loans, net

 

 

1,055,227

 

 

 

-

 

 

 

-

 

 

 

1,059,650

 

 

 

1,059,650

 

Bank owned life insurance

 

 

31,234

 

 

 

-

 

 

 

31,234

 

 

 

-

 

 

 

31,234

 

Other real estate owned, net

 

 

611

 

 

 

-

 

 

 

-

 

 

 

611

 

 

 

611

 

Accrued interest receivable

 

 

3,778

 

 

 

-

 

 

 

1,252

 

 

 

2,526

 

 

 

3,778

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits and interest-bearing transaction and money market accounts

 

$

1,634,125

 

 

$

-

 

 

$

1,634,125

 

 

$

-

 

 

$

1,634,125

 

Certificates of deposit

 

 

162,045

 

 

 

-

 

 

 

161,850

 

 

 

-

 

 

 

161,850

 

Junior subordinated debt

 

 

3,367

 

 

 

-

 

 

 

3,367

 

 

 

-

 

 

 

3,367

 

Accrued interest payable

 

 

174

 

 

 

-

 

 

 

174

 

 

 

-

 

 

 

174

 

Interest rate swap liabilities

 

 

205

 

 

 

-

 

 

 

205

 

 

 

-

 

 

 

205

 

 

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.

 

32


 

 

Note 11. Other Comprehensive Income (Loss)

A component of the Company’s other comprehensive income (loss), in addition to net income from operations, is the recognition of the unrealized gains and losses on AFS securities, net of income taxes. Reclassifications of realized gains and losses on AFS 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 three and nine months ended September 30, 2022 and 2021.

 

The following table presents the cumulative balances of the components of accumulated other comprehensive income (loss), net of deferred taxes of $10.6 million and $464 thousand, as of September 30, 2022 and December 31, 2021, respectively (dollars in thousands).

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Accumulated other comprehensive loss on securities

 

$

(50,871

)

 

$

(2,164

)

Accumulated other comprehensive income (loss) on interest rate swap

 

 

510

 

 

 

(47

)

Total accumulated other comprehensive loss

 

$

(50,361

)

 

$

(2,211

)

 

Note 12. Derivative Instruments and Hedging Activities

 

The Company uses derivative financial instruments primarily to manage risks to the Company associated with changing interest rates, and to assist customers with their risk management objectives. The Company designates certain interest rate swaps as hedging instruments in qualifying cash flow hedges. The changes in fair value of these designated hedging instruments is reported as a component of other comprehensive income. Customer accommodation loan swaps are derivative contracts that are not designated in a qualifying hedging relationship.

Cash flow hedges. The Company designates interest rate swaps as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Company’s junior subordinated debt. These interest rate swaps are derivative financial instruments that manage the risk of variability in cash flows by exchanging variable-rate interest payments on a notional amount of the Company’s borrowings for fixed-rate interest payments. Interest rate swaps designated as cash flow hedges are expected to be highly effective in offsetting the effect of changes in interest rates on the amount of variable-rate interest payments, and the Company assesses the effectiveness of each hedging relationship quarterly. If the Company determines that a cash flow hedge is no longer highly effective, future changes in the fair value of the hedging instrument would be reported in earnings. As of September 30, 2022 and December 31, 2021, the Company had designated cash flow hedges to manage its exposure to variability in cash flows on certain variable rate borrowings through 2036.

Unrealized gains or losses recorded in other comprehensive income (loss) related to cash flow hedges are reclassified into earnings in the same period(s) during which the hedged interest payments affect earnings. When a designated hedging instrument is terminated and the hedged interest payments remain probable of occurring, any remaining unrecognized gain or loss in other comprehensive income is reclassified into earnings in the period(s) during which the forecasted interest payments affect earnings. Amounts reclassified into earnings and interest receivable or payable under designated interest rate swaps are reported in interest expense. The Company does not expect any unrealized losses related to cash flow hedges to be reclassified into earnings in the next twelve months.

Cash collateral held at other banks for swaps was $575 thousand as of September 30, 2022 and $570 thousand as of December 31, 2021. Collateral is dependent on the market valuation of the underlying hedges.

 

33


 

The follow table summarizes the Company’s derivative instruments as of September 30, 2022 and December 31, 2021 (dollars in thousands):

 

 

September 30, 2022

Derivatives designated as hedging instruments

 

Notional/ Contract Amount

 

 

Fair Value

 

 

Fair Value Balance Sheet Location

 

Expiration Date

Interest rate forward swap - cash flow

 

$

4,000

 

 

$

538

 

 

Other Liabilities

 

6/15/2031

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

Derivatives designated as hedging instruments

 

Notional/ Contract Amount

 

 

Fair Value

 

 

Fair Value Balance Sheet Location

 

Expiration Date

Interest rate forward swap - cash flow

 

$

4,000

 

 

$

(197

)

 

Other Liabilities

 

6/15/2031

Interest rate swap - fair value

 

$

3,940

 

 

$

(8

)

 

Other Liabilities

 

2/12/2022

 

Note 13. 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. Investment management services currently are offered through in-house and third-party managers.
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 September 30, 2022 and 2021, management fees totaling $25 thousand were charged by the Bank and eliminated in consolidated totals. For both the nine months ended September 30, 2022 and 2021, management fees totaling $75 thousand were charged by the Bank and eliminated in consolidated totals.

34


 

Segment information for the three and nine months ended September 30, 2022 and 2021 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 September 30, 2022

 

Bank

 

 

Sturman Wealth Advisors

 

 

VNB Trust &
Estate
Services

 

 

Masonry
Capital

 

 

Consolidated

 

Net interest income

 

$

14,277

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

14,277

 

Provision for loan losses

 

 

39

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

39

 

Noninterest income

 

 

1,486

 

 

 

212

 

 

 

435

 

 

 

167

 

 

 

2,300

 

Noninterest expense

 

 

8,833

 

 

 

154

 

 

 

324

 

 

 

192

 

 

 

9,503

 

Income (loss) before income taxes

 

 

6,891

 

 

 

58

 

 

 

111

 

 

 

(25

)

 

 

7,035

 

Provision for (benefit from) income
   taxes

 

 

1,233

 

 

 

12

 

 

 

23

 

 

 

(5

)

 

 

1,263

 

Net income (loss)

 

$

5,658

 

 

$

46

 

 

$

88

 

 

$

(20

)

 

$

5,772

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2022

 

Bank

 

 

Sturman Wealth Advisors

 

 

VNB Trust &
Estate
Services

 

 

Masonry
Capital

 

 

Consolidated

 

Net interest income

 

$

38,163

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

38,163

 

Provision for (recovery of) loan losses

 

 

(30

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(30

)

Noninterest income

 

 

5,871

 

 

 

639

 

 

 

3,631

 

 

 

592

 

 

 

10,733

 

Noninterest expense

 

 

26,370

 

 

 

482

 

 

 

1,621

 

 

 

567

 

 

 

29,040

 

Income before income taxes

 

 

17,694

 

 

 

157

 

 

 

2,010

 

 

 

25

 

 

 

19,886

 

Provision for income taxes

 

 

3,045

 

 

 

33

 

 

 

422

 

 

 

5

 

 

 

3,505

 

Net income

 

$

14,649

 

 

$

124

 

 

$

1,588

 

 

$

20

 

 

$

16,381

 

 

 

Three months ended September 30, 2021

 

Bank

 

 

Sturman Wealth Advisors

 

 

VNB Trust &
Estate
Services

 

 

Masonry
Capital

 

 

Consolidated

 

Net interest income

 

$

13,504

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

13,504

 

Provision for loan losses

 

 

267

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

267

 

Noninterest income

 

 

2,890

 

 

 

209

 

 

 

203

 

 

 

176

 

 

 

3,478

 

Noninterest expense

 

 

12,183

 

 

 

163

 

 

 

315

 

 

 

163

 

 

 

12,824

 

Income (loss) before income taxes

 

 

3,944

 

 

 

46

 

 

 

(112

)

 

 

13

 

 

 

3,891

 

Provision for (benefit from) income
   taxes

 

 

763

 

 

 

10

 

 

 

(23

)

 

 

3

 

 

 

753

 

Net income (loss)

 

$

3,181

 

 

$

36

 

 

$

(89

)

 

$

10

 

 

$

3,138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2021

 

Bank

 

 

Sturman Wealth Advisors

 

 

VNB Trust &
Estate
Services

 

 

Masonry
Capital

 

 

Consolidated

 

Net interest income

 

$

32,629

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

32,629

 

Provision for loan losses

 

 

477

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

477

 

Noninterest income

 

 

5,760

 

 

 

602

 

 

 

607

 

 

 

468

 

 

 

7,437

 

Noninterest expense

 

 

31,854

 

 

 

490

 

 

 

736

 

 

 

518

 

 

 

33,598

 

Income (loss) before income taxes

 

 

6,058

 

 

 

112

 

 

 

(129

)

 

 

(50

)

 

 

5,991

 

Provision for (benefit from) income
   taxes

 

 

1,214

 

 

 

24

 

 

 

(27

)

 

 

(10

)

 

 

1,201

 

Net income (loss)

 

$

4,844

 

 

$

88

 

 

$

(102

)

 

$

(40

)

 

$

4,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35


 

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 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, 2021. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results for the year ending December 31, 2022 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 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 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, 2021 and other reports filed from time to time by the Company with the Securities and Exchange Commission. 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 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. Immediately after the Merger, The Fauquier Bank, Fauquier’s wholly-owned bank subsidiary, merged with and into Virginia National 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.

Refer to Note 2 - Business Combinations, in the Notes to Consolidated Financial Statements, for further detail on the accounting policy for business combinations, fair values of assets and liabilities assumed, assumptions used in determining the fair values of assets and liabilities and the resulting goodwill.

 

36


 

OVERVIEW

Our primary financial goal is to maximize the Company’s earnings to increase long-term shareholder value. We monitor three key financial performance measures to determine our success in realizing this goal: 1) return on average assets, 2) return on average equity, and 3) net income per share. (Refer to Reconcilement of Non-GAAP Measures within the Non-GAAP presentations section for further detail and calculation of amounts labeled as "Non-GAAP.")

ROAA for the three months ended September 30, 2022 was 1.30% compared to 0.65% (0.96% excluding merger and merger-related expenses, a non-GAAP measure) realized in the same period in the prior year, as the increase in net income was significantly higher in the current period and no merger or merger-related expenses were incurred in the current period. ROAA for the nine months ended September 30, 2022 was 1.20% compared to 0.41% (0.94% excluding merger and merger-related expenses, a non-GAAP measure) realized in the same period in the prior year.
ROAE for the three months ended September 30, 2022 was 16.50% compared to 7.70% (11.29% excluding merger and merger-related expenses, a non-GAAP measure) realized in same period in the prior year. ROAE for the nine months ended September 30, 2022 was 14.98% compared to 4.80% (11.00% excluding merger and merger-related expenses, a non-GAAP measure) realized in same period in the prior year.
Net income per diluted share was $1.08 for the three months ended September 30, 2022, compared to $0.59 ($0.86 excluding merger and merger-related expenses, a non-GAAP measure) for the same period in the prior year, due to the increase of $2.6 million in net income. Net income per diluted share was $3.06 for the nine months ended September 30, 2022, compared to $1.07 ($2.45 excluding merger and merger-related expenses, a non-GAAP measure) for the same period in the prior year, due to the increase of $11.6 million in net income.

We also manage our capital levels through growth, quarterly cash dividends, periodic stock dividends and share repurchases, when prudent, while maintaining a strong capital position. Refer to the Results of Operations, Non-GAAP Presentation section, later in this Management’s Discussion and Analysis for more discussion on these financial performance measures.

IMPACT OF COVID-19

The Company’s financial performance generally, and in particular the ability of its borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is dependent on the business environment in its primary markets. COVID-19 has had, and may have in the future, a wide range of economic impacts nationally and in the Company’s primary markets. Continuing cases of COVID-19, including the emergence of variants of the COVID-19 virus, continue to be a public health concern in the Company’s markets. There have been encouraging signs of strength in the economic recovery, including growth in consumer spending and improvement in the labor market, but many businesses continue to face difficulty in hiring desirable employees and meeting consumer demand, and certain portions of the global supply chain remain challenged by shortages and delays that first occurred due to the initial COVID-19 outbreak. There remains uncertainty about the pace of economic recovery, including uncertainty related to the labor market, inflation and fiscal and monetary policy responses from the federal government. There remains a risk that consumers and borrowers who have been supported during the pandemic by government stimulus measures may not return to employment and may not be able to repay debts as agreed following the cessation of government stimulus programs, including expanded unemployment benefits.

Management will carefully monitor any future impacts attributable to the COVID-19 pandemic and its impact on the Company’s markets, customers and employees, and believes that the pandemic continues to present risks of elevated loan losses, sustained net interest margin compression and falling demand for loans; however, at this time management cannot determine the ultimate impact of the pandemic on the results of operations of the Company.

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. There were no COVID-19 related loan deferrals as of September 30, 2022.

As of September 30, 2022, 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. The Company maintains access to multiple sources of liquidity. Management also revisited its capital and liquidity stress tests, as well as capital and liquidity contingency plans, to validate that the Company can react effectively to an economic downturn.

 

37


 

Operations, Processes, Controls and Business Continuity Plan

The Company reacted quickly to the COVID-19 pandemic. Since the start of the pandemic, the Company has taken and is continuing to take precautions to protect the safety and well-being of the Bank’s employees and customers. 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 temporary schedule whereby most staff members worked remotely, 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 moved on a short-term basis 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. The Bank remains very focused on the safety and well-being of its employees and customers during COVID-19 and is committed to safely and responsibly operating its branches and operating facilities, as all branches have reopened and work schedules have returned to normal.

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 2021 Form 10-K. There have been no significant changes in the Company’s application of critical accounting policies since December 31, 2021.

FINANCIAL CONDITION

Total assets

The total assets of the Company as of September 30, 2022 were $1.7 billion. This is a $238 million, or 12.1%, decrease from total assets reported at December 31, 2021 and a $178.1 million, or 9.3%, decrease from total assets reported at September 30, 2021. The decreases were substantially within gross loans, as legacy organic loan balances declined due to business sales, property sales, loan refinances and participation fluctuations, Acquired Loan balances declined due to successful execution of paydowns to improve asset quality, SBA PPP loans were forgiven, and other curtailments (see more detail in the Loan portfolio section following).

38


 

Interest-bearing deposits in other banks

The Company had $76.2 million of interest-bearing deposits in other banks as of September 30, 2022, compared to $336.0 million as of December 31, 2021 and $254.2 million as of September 30, 2021. Significant excess liquidity has been deployed into short-term investment securities in the nine months ended September 30, 2022 to earn a higher yield.

Federal funds sold

The Company had overnight federal funds sold of $53.1 million as of September 30, 2022, $152.5 million as of December 31, 2021 and $152.4 million as of September 30, 2021. 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 of the Federal Reserve Bank of Richmond. 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 September 30, 2022 totaled $543.6 million, an increase of $234.8 million compared with the $308.8 million reported at December 31, 2021 and an increase of $263.9 million from the $279.7 million reported at September 30, 2021. The increase from year-end and the same period in the prior year is the result of deploying excess funds into higher yielding assets. Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company. At September 30, 2022 and December 31, 2021, the investment securities holdings represented 31.4% and 15.7% of the Company’s total assets, respectively.

The Company’s investment securities portfolio included restricted securities totaling $5.1 million as of September 30, 2022, compared to $5.0 million as of December 31, 2021 and $2.6 million as of September 30, 2021. These securities represent stock in the FRB, the FHLB, CBB Financial Corporation (the holding company for Community Bankers' Bank), and an investment in an SBA loan fund. The level of FRB and FHLB stock that the Company is required to hold is determined in accordance with membership guidelines provided by the 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 September 30, 2022, the unrestricted securities portfolio totaled $538.5 million. The following table summarizes the Company's AFS securities by type as of September 30, 2022, December 31, 2021, and September 30, 2021 (dollars in thousands):

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

September 30, 2021

 

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

Balance

 

 

Total

 

 

Balance

 

 

Total

 

 

Balance

 

 

Total

 

U.S. Government treasuries

 

$

241,375

 

 

 

44.8

%

 

$

 

 

 

 

 

$

 

 

 

 

U.S. Government agencies

 

 

28,905

 

 

 

5.4

%

 

 

31,581

 

 

 

10.4

%

 

 

32,538

 

 

 

11.7

%

Mortgage-backed securities/CMOs

 

 

160,461

 

 

 

29.8

%

 

 

170,964

 

 

 

56.3

%

 

 

145,998

 

 

 

52.7

%

Corporate bonds

 

 

29,295

 

 

 

5.4

%

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

 

78,423

 

 

 

14.6

%

 

 

101,272

 

 

 

33.3

%

 

 

98,510

 

 

 

35.6

%

Total available for sale securities

 

$

538,459

 

 

 

100.0

%

 

$

303,817

 

 

 

100.0

%

 

$

277,046

 

 

 

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.

 

39


 

 

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 which the Company is familiar. The Company's geographical trade area includes localities in Virginia, Maryland and the District of Columbia that are within a 100-mile radius of any office of the Company.

As of September 30, 2022, total loans were $942.3 million, compared to $1.1 billion as of December 31, 2021 and $1.1 billion at September 30, 2021. Loans as a percentage of total assets at September 30, 2022 were 54.4%, compared to 58.2% as of September 30, 2021. Loans as a percentage of deposits at September 30, 2022 were 59.0%, compared to 64.0% as of September 30, 2021.

The following table summarizes the Company's loan portfolio by type of loan as of September 30, 2022, December 31, 2021, and September 30, 2021 (dollars in thousands):

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

September 30, 2021

 

 

 

Balance

 

 

% of
Total

 

 

Balance

 

 

% of
Total

 

 

Balance

 

 

% of
Total

 

Commercial loans

 

$

72,685

 

 

 

7.7

%

 

$

96,696

 

 

 

9.1

%

 

$

119,959

 

 

 

10.8

%

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Construction and land

 

 

49,668

 

 

 

5.3

%

 

 

79,331

 

 

 

7.5

%

 

 

92,082

 

 

 

8.3

%

    1-4 family residential mortgages

 

 

324,891

 

 

 

34.5

%

 

 

358,148

 

 

 

33.8

%

 

 

372,474

 

 

 

33.5

%

    Commercial

 

 

447,185

 

 

 

47.5

%

 

 

473,632

 

 

 

44.6

%

 

 

464,866

 

 

 

41.8

%

       Total real estate mortgage

 

 

821,744

 

 

 

87.3

%

 

 

911,111

 

 

 

85.9

%

 

 

929,422

 

 

 

83.6

%

Consumer

 

 

47,918

 

 

 

5.0

%

 

 

53,404

 

 

 

5.0

%

 

 

63,069

 

 

 

5.6

%

Total loans

 

$

942,347

 

 

 

100.0

%

 

$

1,061,211

 

 

 

100.0

%

 

$

1,112,450

 

 

 

100.0

%

 

The Company's planned strategy to further improve asset quality through negotiation of loan paydowns and PPP forgiveness resulted in a decrease in loan balances from September 30, 2021 and December 31, 2021 to September 30, 2022. The decrease from December 31, 2021 is due predominantly to: 1) paydowns of legacy organic loans due mainly to business sales, property sales, refinances and participation fluctuations of $59.3 million, 2) workouts and paydowns of Acquired Loans of $51.9 million, and 3) the forgiveness of SBA PPP loans in the amount of $24.2 million. As of September 30, 2022, only $254 thousand of PPP loans remain outstanding on the Bank's balance sheet.

Loan quality

Non-accrual loans, comprised of only three loans to two borrowers, totaled $607 thousand at September 30, 2022, compared to balances of $495 thousand and $777 thousand reported at December 31, 2021 and September 30, 2021, respectively. PCI loans which otherwise would be in non-accrual status are not included in the balances, as they earn interest through the yield accretion.

The Company had loans in its portfolio totaling $859 thousand, $801 thousand and $678 thousand, as of September 30, 2022, December 31, 2021 and September 30, 2021, respectively, that were 90 or more days past due and still accruing interest as the Company deemed them to be collectible. The balance as of September 30, 2022 includes a government-guaranteed loan in the amount of $709 thousand. The portfolio includes three non-insured student loans that are 90 days or more past due and still accruing interest, amounting to $21 thousand.

40


 

The Company had loans classified as impaired loans in the amount of $1.5 million as of September 30, 2022, $1.5 million as of December 31, 2021, and $1.6 million at September 30, 2021. Based on regulatory guidance on student lending, the Company has classified 48 of its Purchased Student Loans as TDRs for a total of $756 thousand as of September 30, 2022. 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.

The Company utilizes a loss migration model, which 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. 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 there are further challenges to the economic recovery, including a resurgence in COVID-19 cases or the emergence of variants of the COVID-19 virus.

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

 

 

September 30, 2022

 

 

December 31, 2021

 

 

September 30, 2021

 

Total loans

 

$

942,347

 

 

$

1,061,211

 

 

$

1,112,450

 

Nonaccrual loans

 

$

607

 

 

$

495

 

 

$

777

 

Allowance for loan losses

 

$

5,485

 

 

$

5,984

 

 

$

5,623

 

Nonaccrual loans to total loans

 

 

0.06

%

 

 

0.05

%

 

 

0.07

%

ALLL to total loans

 

 

0.58

%

 

 

0.56

%

 

 

0.51

%

ALLL to nonaccrual loans

 

 

903.62

%

 

 

1208.89

%

 

 

723.68

%

The ALLL as a percentage of loans was 0.58% as of September 30, 2022, 0.56% as of December 31, 2021, and 0.51% as of September 30, 2021. The ALLL as a percentage of gross loans, excluding the impact of the Acquired loans and fair value mark (a non-GAAP financial measure), would have been 0.90% as of September 30, 2022, unchanged from 0.90% as of September 30, 2021. The total of the ALLL and the fair value mark as a percentage of gross loans (a non-GAAP financial measure) amounted to 2.38% as of September 30, 2022, compared to 2.24% as of September 30, 2021. The fair value mark that was allocated to the acquired loans was $21.3 million as of the Effective Date, with a remaining balance of

41


 

$17.0 million as of September 30, 2022. Refer to the Reconcilement 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.

A recovery of provision for loan losses totaling $30 thousand and a provision for loan losses totaling $477 thousand were recorded in the nine months ended September 30, 2022 and 2021, respectively. The following is a summary of the changes in the ALLL for the nine months ended September 30, 2022 and 2021 (dollars in thousands):

 

 

 

2022

 

 

2021

 

Allowance for loan losses, January 1

 

$

5,984

 

 

$

5,455

 

Charge-offs

 

 

(783

)

 

 

(605

)

Recoveries

 

 

314

 

 

 

296

 

Provision for (recovery of) loan losses

 

 

(30

)

 

 

477

 

Allowance for loan losses, September 30

 

$

5,485

 

 

$

5,623

 

 

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 5 of the Notes to Consolidated Financial Statements. In addition, Note 5 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 September 30, 2022 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 September 30, 2022 totaled $18.8 million compared to $25.1 million as of December 31, 2021 and $25.2 million as of September 30, 2021, decreasing due to the sale of two buildings during the current year. 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.

As of September 30, 2022, the Company occupied sixteen full-service banking facilities throughout Albemarle, Fauquier and Prince William counties and the cities of Charlottesville, Richmond, Manassas and Winchester, Virginia. The Company also operates a drive-through location at 301 East Water Street, Charlottesville, Virginia.

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 103 Third Street, SE, Charlottesville, Virginia.

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

42


 

Leases

As of September 30, 2022, the Company has recorded $6.9 million of right-of-use assets and $6.6 million of lease liabilities, in accordance with ASU 2016-02 “Leases” (Topic 842). As of December 31, 2021, $7.6 million of right-of-use assets and $7.1 million of lease liabilities were included on the balance sheet. 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 Commonwealth of Virginia.

Total deposits as of September 30, 2022 were $1.6 billion, a decrease of $199.5 million compared to December 31, 2021, and a decrease of $140.5 million compared to September 30, 2021 (dollars in thousands).

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

September 30, 2021

 

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

Balance

 

 

Total

 

 

Balance

 

 

Total

 

 

Balance

 

 

Total

 

No cost and low cost deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest demand deposits

 

$

539,134

 

 

 

33.8

%

 

$

522,281

 

 

 

29.1

%

 

$

504,696

 

 

 

29.1

%

Interest checking accounts

 

 

417,530

 

 

 

26.2

%

 

 

446,314

 

 

 

24.8

%

 

 

424,642

 

 

 

24.4

%

Money market and savings deposit accounts

 

 

505,733

 

 

 

31.7

%

 

 

665,530

 

 

 

37.1

%

 

 

642,788

 

 

 

37.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest and low cost deposit accounts

 

 

1,462,397

 

 

 

91.7

%

 

 

1,634,125

 

 

 

91.0

%

 

 

1,572,126

 

 

 

90.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposit accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

129,038

 

 

 

8.0

%

 

 

155,901

 

 

 

8.7

%

 

 

158,113

 

 

 

9.1

%

CDARS deposits

 

 

5,212

 

 

 

0.3

%

 

 

6,144

 

 

 

0.3

%

 

 

6,944

 

 

 

0.4

%

Total certificates of deposit and other time deposits

 

 

134,250

 

 

 

8.3

%

 

 

162,045

 

 

 

9.0

%

 

 

165,057

 

 

 

9.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposit account balances

 

$

1,596,647

 

 

 

100.0

%

 

$

1,796,170

 

 

 

100.0

%

 

$

1,737,183

 

 

 

100.0

%

 

Noninterest-bearing demand deposits on September 30, 2022 were $539.1 million, representing 33.8% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled $923.3 million, and represented 57.9% of total deposits at September 30, 2022. Collectively, noninterest-bearing and interest-bearing transaction, money market and savings accounts represented 91.7% of total deposit accounts at September 30, 2022. These account types are an excellent source of low-cost funding for the Company.

The Company also offers insured cash sweep deposit products. ICS® deposit balances of $28.4 million and $110.1 million are included in the interest checking accounts and the money market and savings deposit accounts balances, respectively, in the table above, as of September 30, 2022. As of December 31, 2021, ICS® deposit balances of $39.2 million and $225.9 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 8.3% of total deposits consisted of certificates of deposit and other time deposit accounts totaling $134.3 million at September 30, 2022. Included in these deposit totals are CDARSTM, whereby depositors can obtain FDIC deposit insurance on account balances of up to $50 million. CDARSTM deposits totaled $5.2 million as of September 30, 2022 and $6.1 million as of December 31, 2021, all of which were reciprocal balances for the Company’s customers.

43


 

Borrowings

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, with no outstanding borrowings as of September 30, 2022 or December 31, 2021. The Company has an off-balance sheet letter of credit in the amount of $30 million as of September 30, 2022 and $60 million as of December 31, 2021, issued in favor of the Commonwealth of Virginia Department of the Treasury to secure public fund depository accounts. This letter of credit is secured by commercial mortgages.

Additional borrowing arrangements maintained by the Company include formal federal funds lines with five major regional correspondent banks and the Federal Reserve discount window. The Company had no outstanding balances on these lines or facilities as of September 30, 2022, December 31, 2021 or September 30, 2021.

Junior Subordinated Debt

In 2006, a subsidiary of Fauquier, Fauquier Statutory Trust II, privately issued $4.0 million face amount of the trust’s Floating Rate Capital Securities in a pooled capital securities offering. Simultaneously, the trust used the proceeds of that sale to purchase $4.0 million principal amount of the Fauquier’s Floating Rate Junior Subordinated Deferrable Interest Debentures due 2036. As of September 30, 2022 and December 31, 2021, total capital securities were $3.4 million, as adjusted to fair value as of the date of the Merger. The interest rate on the capital security resets every three months at 1.70% above the then current three-month LIBOR and is paid quarterly. Management is in communication with the issuer regarding the alternative reference rate that will apply after the discontinuance of LIBOR.

The Trust II issuance of capital securities and the respective subordinated debentures are callable at any time. The subordinated debentures are an unsecured obligation of the Company and are junior in right of payment to all present and future senior indebtedness of the Company. The capital securities are guaranteed by the Company on a subordinated basis.

 

Shareholders' equity and regulatory capital ratios

The following table displays the changes in shareholders' equity for the Company from December 31, 2021 to September 30, 2022 (dollars in thousands):

Equity, December 31, 2021

 

$

161,987

 

Net income

 

 

16,381

 

Other comprehensive loss

 

 

(48,150

)

Cash dividends declared

 

 

(4,791

)

Exercise of stock options

 

 

24

 

Equity increase due to expensing of stock options

 

 

125

 

Equity increase due to expensing of restricted stock

 

 

398

 

Equity, September 30, 2022

 

$

125,974

 

 

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 16.41%, 16.41%, 16.97% and 9.17%, respectively, as of September 30, 2022, thus exceeding the minimum requirements. The Bank’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were 16.18%, 16.18%, 16.73% and 9.04%, respectively, as of September 30, 2022, also exceeding the minimum requirements.

44


 

As of September 30, 2022, the Bank exceeded all of the following minimum capital ratios in order to be considered “well capitalized” under the PCA 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 accounting and reporting policies of the Company conform to GAAP and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Company’s performance. These include adjusted ROAA, adjusted ROAE, adjusted net income, adjusted earnings per share, adjusted ALLL to total loans, tangible book value per share and the following fully-taxable equivalent measures: net interest income-FTE, efficiency ratio-FTE and net interest margin-FTE. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented.

Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods, other financial institutions, and between different sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of (1) items that do not reflect ongoing operating performance, (2) items that do not reflect the implicit percentage of the ALLL to total loans, such as the impact of fair value adjustment, (3) balances of intangible assets, including goodwill, that vary significantly between institutions, and (4) tax benefits that are not consistent across different opportunities for investment. These non-GAAP financial measures should not be considered an alternative to GAAP-basis financial statements, and other banks and bank holding companies may define or calculate these or similar measures differently. Net income is discussed in Management’s Discussion and Analysis on a GAAP basis unless noted as “non-GAAP.”

 

45


 

A reconcilement of the non-GAAP financial measures used by the Company to evaluate and measure the Company's performance to the most directly comparable GAAP financial measures is presented below (dollars in thousands):

 

 

 

For the three months ended

 

 

For the nine months ended

 

 

 

September 30,
2022

 

 

September 30,
2021

 

 

September 30,
2022

 

 

September 30,
2021

 

Performance measures

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets ("ROAA")

 

 

1.30

%

 

 

0.65

%

 

 

1.20

%

 

 

0.41

%

Impact of merger and merger related expenses, net of tax

 

 

0.00

%

 

 

0.31

%

 

 

0.00

%

 

 

0.53

%

ROAA, excluding merger and merger related expenses (non-GAAP)

 

 

1.30

%

 

 

0.96

%

 

 

1.20

%

 

 

0.94

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average equity ("ROAE")

 

 

16.50

%

 

 

7.70

%

 

 

14.98

%

 

 

4.80

%

Impact of merger and merger related expenses, net of tax

 

 

0.00

%

 

 

3.59

%

 

 

0.00

%

 

 

6.20

%

ROAE, excluding merger and merger related expenses (non-GAAP)

 

 

16.50

%

 

 

11.29

%

 

 

14.98

%

 

 

11.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,772

 

 

$

3,138

 

 

$

16,381

 

 

$

4,790

 

Impact of merger and merger related expenses, net of tax

 

 

-

 

 

 

1,465

 

 

 

-

 

 

 

6,188

 

Net income, excluding merger and merger related expenses (non-GAAP)

 

$

5,772

 

 

$

4,603

 

 

$

16,381

 

 

$

10,978

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share, diluted

 

$

1.08

 

 

$

0.59

 

 

$

3.06

 

 

$

1.07

 

Impact of merger and merger related expenses, net of tax

 

 

-

 

 

 

0.27

 

 

 

-

 

 

 

1.38

 

Net income per share, excluding merger and merger related expenses (non-GAAP), diluted

 

$

1.08

 

 

$

0.86

 

 

$

3.06

 

 

$

2.45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fully tax-equivalent measures

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

14,277

 

 

$

13,504

 

 

$

38,163

 

 

$

32,629

 

Fully tax-equivalent adjustment

 

 

84

 

 

 

77

 

 

 

245

 

 

 

194

 

Net interest income (FTE)

 

$

14,361

 

 

$

13,581

 

 

$

38,408

 

 

$

32,823

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio

 

 

57.3

%

 

 

75.5

%

 

 

59.4

%

 

 

83.9

%

Fully tax-equivalent adjustment

 

 

-0.3

%

 

 

-0.3

%

 

 

-0.3

%

 

 

-0.4

%

Efficiency ratio (FTE)

 

 

57.0

%

 

 

75.2

%

 

 

59.1

%

 

 

83.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

3.45

%

 

 

3.06

%

 

 

2.98

%

 

 

3.01

%

Fully tax-equivalent adjustment

 

 

0.02

%

 

 

0.02

%

 

 

0.02

%

 

 

0.02

%

Net interest margin (FTE)

 

 

3.47

%

 

 

3.08

%

 

 

3.00

%

 

 

3.03

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

 

 

September 30,
2022

 

 

December 31,
2021

 

 

September 30,
2021

 

 

 

 

Other financial measures:

 

 

 

 

 

 

 

 

 

 

 

 

ALLL to total loans

 

 

0.58

%

 

 

0.56

%

 

 

0.51

%

 

 

 

Impact of acquired loans and fair value mark

 

 

0.32

%

 

 

0.39

%

 

 

0.39

%

 

 

 

ALLL to total loans, excluding acquired loans and fair value mark (non-GAAP)

 

 

0.90

%

 

 

0.95

%

 

 

0.90

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLL to total loans

 

 

0.58

%

 

 

0.56

%

 

 

0.51

%

 

 

 

Fair value mark to total loans

 

 

1.80

%

 

 

1.74

%

 

 

1.73

%

 

 

 

ALLL + fair value mark to total loans (non-GAAP)

 

 

2.38

%

 

 

2.30

%

 

 

2.24

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book value per share

 

$

23.65

 

 

$

30.50

 

 

$

30.13

 

 

 

 

Impact of intangible assets

 

 

(2.88

)

 

 

(3.14

)

 

 

(3.21

)

 

 

 

Tangible book value per share (non-GAAP)

 

$

20.77

 

 

$

27.36

 

 

$

26.92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity

 

$

125,974

 

 

$

161,987

 

 

$

159,910

 

 

 

 

Impact of intangible assets

 

 

(15,353

)

 

 

(16,685

)

 

 

(17,043

)

 

 

 

Tangible equity

 

$

110,621

 

 

$

145,302

 

 

$

142,867

 

 

 

 

 

 

46


 

Net income

Net income for the three months ended September 30, 2022 was $5.8 million, a $2.6 million increase compared to net income reported for the three months ended September 30, 2021. Net income per diluted share was $1.08 for the quarter ended September 30, 2022 compared to $0.59 ($0.86 excluding the impact of merger and merger related expenses, net of tax, a non-GAAP financial measure) per diluted share for the same quarter in the prior year.

Net income for the nine months ended September 30, 2022 was $16.4 million, compared to $4.8 million for the nine months ended September 30, 2021. Net income per diluted share was $3.06 for the nine months ended September 30, 2022, compared to $1.07 ($2.45 excluding the impact of merger and merger related expenses, net of tax, a non-GAAP financial measure) per diluted share for the same period in the prior year.

Net interest income

Net interest income (FTE) for the three months ended September 30, 2022 was $14.4 million, a $780 thousand increase compared to net interest income (FTE) of $13.6 million for the three months ended September 30, 2021. Net interest income (FTE) increased primarily due to the increased volume of securities, increasing from an average of $274.1 million in the three months ended September 30, 2021 to $511.7 million in the three months ended September 30, 2022, positively impacting interest income by $1.2 million. The increase in yield earned on such securities over the same period positively impacted interest income by $698 thousand, increasing from 1.68% for the three months ended September 30, 2021 to 2.41% for the three months ended September 30, 2022. FFS and interest bearing deposits in other banks contributed an additional $254 thousand and $563 thousand, respectively, to net interest income (FTE) for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The decline in average loan balances, from $1.1 billion for the three months ended September 30, 2021 to $959.1 million for the three months ended September 30, 2022, negatively impacted interest income by $2.1 million. The fair value accretion on Acquired Loans positively impacted net interest income by 12 bps during the three months ended September 30, 2022. Net interest income (FTE) was mildly impacted by the $39 thousand increase in interest expense, as described below.

Net interest income (FTE) for the nine months ended September 30, 2022 was $38.4 million, a $5.6 million increase compared to net interest income (FTE) of $32.8 million for the nine months ended September 30, 2021. The increase in volume of securities held, from an average balance of $239.8 million for the nine months ended September 30, 2021 to $406.1 million for the nine months ended September 30, 2022, positively impacted net interest income by $2.4 million, and the yield on such securities increased from 1.70% to 2.19% for the periods noted, positively impacting net interest income by $1.2 million. FFS and interest bearing deposits in other banks contributed an additional $584 thousand and $879 thousand, respectively, to net interest income (FTE) for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Net interest income (FTE) was also positively impacted by the improved loan yields which increased from 4.28% for the nine months ended September 30, 2021 to 4.37% for the nine months ended September 30, 2022, positively impacting net interest income by $846 thousand. The decrease in volume of loans negatively impacted interest income by $347 thousand. The fair value accretion on Acquired Loans positively impacted net interest income by 12 bps during the nine months ended September 30, 2022. Net interest income (FTE) was slightly impacted by the $11 thousand decrease in interest expense, as described below.

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 3.47% for the three months ended September 30, 2022 was 39 bps higher than the 3.08% for the three months ended September 30, 2021. The net interest margin (FTE) of 3.00% for the nine months ended September 30, 2022 was 3 bps lower than the 3.03% for the nine months ended September 30, 2021. 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.

 

47


 

Interest expense increased $39 thousand for the three months ended September 30, 2022 compared to the same period in the prior year. Overall, the cost of interest-bearing deposits declined period over period, from a cost of 31 bps to 22 bps, due to decreased volume of interest-bearing deposits, declining $111.0 million for the period noted, positively impacting interest expense by $109 thousand, coupled with lower rates paid on deposits, positively impacting interest expense by $228 thousand. The slight increase in total interest expense is due to the impact of the Company prepaying 100% of its outstanding FHLB advances during the quarter ending September 30, 2021, which positively impacted interest expense by $416 thousand as a result of accelerating the fair value accretion on such TFB debt. During the three months ended September 30, 2021, the Bank's average outstanding borrowing with the FHLB prior to repayment was $22.3 million, incurring interest expense of $41 thousand. No such borrowings were outstanding during the three months ended September 30, 2022.

Interest expense decreased $11 thousand for the nine months ended September 30, 2022 compared to the same period in the prior year, primarily due to the decline in rates paid on deposits, from 34 bps to 25 bps, lowering interest expense by $659 thousand. The increase in the volume of interest-bearing deposits from period to period negatively impacted interest expense by $319 thousand. The prepayment of 100% of outstanding FHLB advances, as noted above, positively impacted interest expense by $416 thousand as a result of accelerating the fair value accretion on such TFB debt, offsetting the interest expense incurred during the nine months ended September 30, 2021 of $136 thousand, netting to a positive impact on interest expense during the prior period presented of $280 thousand.

 

48


 

The following tables detail the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest-bearing liabilities, for the three and nine months ended September 30, 2022 and 2021. These tables also include rate/volume analyses for these same periods (dollars in thousands).

Consolidated Average Balance Sheet and Analysis of Net Interest Income

 

 

For the Three Months Ended

 

 

 

 

 

 

 

 

September 30, 2022

 

September 30, 2021

 

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/

 

 

 

 

Expense

 

 

 

 

 

Expense

 

 

 

 

 

 

 

(Decrease)

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable Securities

 

$445,854

 

$2,692

 

2.42%

 

$214,194

 

$797

 

1.49%

 

$1,203

 

$692

 

$1,895

Tax Exempt Securities 1

 

  65,836

 

  397

 

2.41%

 

  59,869

 

  355

 

2.37%

 

  36

 

  6

 

  42

Total Securities 1

 

  511,690

 

  3,089

 

2.41%

 

  274,063

 

  1,152

 

1.68%

 

  1,239

 

  698

 

  1,937

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

  834,323

 

  9,485

 

4.51%

 

  929,017

 

  10,005

 

4.27%

 

  (1,056)

 

  538

 

  (518)

Commercial

 

  74,970

 

  846

 

4.48%

 

  141,388

 

  1,810

 

5.08%

 

  (770)

 

  (194)

 

  (964)

Consumer

 

  49,793

 

  693

 

5.52%

 

  69,876

 

  1,144

 

6.50%

 

  (296)

 

  (155)

 

  (451)

      Total Loans

 

  959,086

 

  11,024

 

4.56%

 

  1,140,281

 

  12,959

 

4.51%

 

  (2,122)

 

  189

 

  (1,933)

Fed Funds Sold

 

  52,908

 

  299

 

2.24%

 

  137,472

 

  45

 

0.13%

 

  (44)

 

  298

 

  254

Other interest-bearing deposits

 

  120,440

 

  618

 

2.04%

 

  198,983

 

  55

 

0.11%

 

  (30)

 

  593

 

  563

Total Earning Assets

 

  1,644,124

 

  15,030

 

3.63%

 

  1,750,799

 

  14,211

 

3.22%

 

  (957)

 

  1,778

 

  821

Less: Allowance for Loan Losses

 

  (5,530)

 

 

 

 

 

  (5,607)

 

 

 

 

 

 

 

 

 

 

Total Non-Earning Assets

 

  124,247

 

 

 

 

 

  159,106

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$1,762,841

 

 

 

 

 

$1,904,298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Checking

 

$401,886

 

$56

 

0.06%

 

$410,504

 

$72

 

0.07%

 

$(1)

 

$(15)

 

$(16)

Money Market and Savings Deposits

 

  547,878

 

  415

 

0.30%

 

  621,211

 

  601

 

0.38%

 

  (66)

 

  (120)

 

  (186)

Time Deposits

 

  142,195

 

  147

 

0.41%

 

  171,256

 

  282

 

0.65%

 

  (42)

 

  (93)

 

  (135)

Total Interest-Bearing Deposits

 

  1,091,959

 

  618

 

0.22%

 

  1,202,971

 

  955

 

0.31%

 

  (109)

 

  (228)

 

  (337)

Borrowings

 

  —

 

  —

 

  —

 

  22,260

 

  (375)

 

-6.68%

 

  375

 

  —

 

                       375

Junior subordinated debt

 

  3,394

 

  51

 

5.96%

 

  3,349

 

  50

 

  —

 

  1

 

  —

 

  1

Total Interest-Bearing Liabilities

 

  1,095,353

 

  669

 

0.24%

 

  1,228,580

 

  630

 

0.20%

 

  267

 

  (228)

 

  39

Non-Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

  519,759

 

 

 

 

 

  499,068

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

  8,932

 

 

 

 

 

  15,003

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

  1,624,044

 

 

 

 

 

  1,742,651

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

  138,797

 

 

 

 

 

  161,647

 

 

 

 

 

 

 

 

 

 

Total Liabilities & Shareholders' Equity

 

$1,762,841

 

 

 

 

 

$1,904,298

 

 

 

 

 

 

 

 

 

 

Net Interest Income (FTE)

 

 

 

$14,361

 

 

 

 

 

$13,581

 

 

 

$(1,224)

 

$2,006

 

$782

Interest Rate Spread 2

 

 

 

 

 

3.38%

 

 

 

 

 

3.02%

 

 

 

 

 

 

Cost of Funds

 

 

 

 

 

0.16%

 

 

 

 

 

0.14%

 

 

 

 

 

 

Interest Expense as a Percentage of Average
   Earning Assets

 

 

 

 

 

0.16%

 

 

 

 

 

0.14%

 

 

 

 

 

 

Net Interest Margin (FTE) 3

 

 

 

 

 

3.47%

 

 

 

 

 

3.08%

 

 

 

 

 

 

 

(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.

49


 

Consolidated Average Balance Sheet and Analysis of Net Interest Income

 

 

For the Nine Months Ended

 

 

 

 

 

 

 

 

September 30, 2022

 

September 30, 2021

 

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/

 

 

 

 

Expense

 

 

 

 

 

Expense

 

 

 

 

 

 

 

(Decrease)

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable Securities

 

$340,692

 

$5,492

 

2.15%

 

$189,250

 

$2,127

 

1.50%

 

$2,181

 

$1,184

 

$3,365

Tax Exempt Securities 1

 

  65,447

 

  1,170

 

2.38%

 

  50,559

 

  923

 

2.43%

 

  267

 

  (19)

 

  248

Total Securities 1

 

  406,139

 

  6,662

 

2.19%

 

  239,809

 

  3,050

 

1.70%

 

  2,448

 

  1,165

 

  3,613

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

  855,632

 

  27,567

 

4.31%

 

  771,407

 

  24,284

 

4.21%

 

  2,703

 

  580

 

  3,283

Commercial

 

  85,148

 

  2,930

 

4.60%

 

  158,691

 

  4,967

 

4.18%

 

  (2,490)

 

  453

 

  (2,037)

Consumer

 

  50,808

 

  1,906

 

5.02%

 

  65,426

 

  2,653

 

5.42%

 

  (560)

 

  (187)

 

  (747)

      Total Loans

 

  991,588

 

  32,403

 

4.37%

 

  995,524

 

  31,904

 

4.28%

 

  (347)

 

  846

 

  499

Fed Funds Sold

 

  118,228

 

  662

 

0.75%

 

  94,502

 

  78

 

0.11%

 

  24

 

  560

 

  584

Other interest-bearing deposits

 

  196,801

 

  973

 

0.66%

 

  118,331

 

  94

 

0.11%

 

  99

 

  780

 

  879

Total Earning Assets

 

  1,712,756

 

  40,700

 

3.18%

 

  1,448,166

 

  35,126

 

3.24%

 

  2,224

 

  3,351

 

  5,575

Less: Allowance for Loan Losses

 

  (5,806)

 

 

 

 

 

  (5,618)

 

 

 

 

 

 

 

 

 

 

Total Non-Earning Assets

 

  124,518

 

 

 

 

 

  104,539

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$1,831,468

 

 

 

 

 

$1,547,087

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Checking

 

$411,504

 

$175

 

0.06%

 

$333,193

 

$191

 

0.08%

 

$39

 

$(55)

 

$(16)

Money Market and Savings Deposits

 

  584,597

 

  1,470

 

0.34%

 

  484,742

 

  1,407

 

0.39%

 

  266

 

  (203)

 

  63

Time Deposits

 

  151,045

 

  499

 

0.44%

 

  148,715

 

  886

 

0.80%

 

  14

 

  (401)

 

  (387)

Total Interest-Bearing Deposits

 

  1,147,146

 

  2,144

 

0.25%

 

  966,650

 

  2,484

 

0.34%

 

  319

 

  (659)

 

  (340)

Borrowings

 

  —

 

  —

 

  —

 

  31,967

 

  (280)

 

-1.17%

 

  280

 

  —

 

                    280

Junior subordinated debt

 

  3,383

 

  148

 

5.85%

 

  2,324

 

  99

 

  —

 

  46

 

  3

 

  49

Total Interest-Bearing Liabilities

 

  1,150,529

 

  2,292

 

0.27%

 

  1,000,941

 

  2,303

 

0.31%

 

  645

 

  (656)

 

  (11)

Non-Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

  524,592

 

 

 

 

 

  402,163

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

  10,107

 

 

 

 

 

  10,617

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

  1,685,228

 

 

 

 

 

  1,413,721

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

  146,240

 

 

 

 

 

  133,366

 

 

 

 

 

 

 

 

 

 

Total Liabilities & Shareholders' Equity

 

$1,831,468

 

 

 

 

 

$1,547,087

 

 

 

 

 

 

 

 

 

 

Net Interest Income (FTE)

 

 

 

$38,408

 

 

 

 

 

$32,823

 

 

 

$1,579

 

$4,007

 

$5,586

Interest Rate Spread 2

 

 

 

 

 

2.91%

 

 

 

 

 

2.94%

 

 

 

 

 

 

Cost of Funds

 

 

 

 

 

0.18%

 

 

 

 

 

0.22%

 

 

 

 

 

 

Interest Expense as a Percentage of Average
   Earning Assets

 

 

 

 

 

0.18%

 

 

 

 

 

0.21%

 

 

 

 

 

 

Net Interest Margin (FTE) 3

 

 

 

 

 

3.00%

 

 

 

 

 

3.03%

 

 

 

 

 

 

(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.

50


 

Provision for loan losses

A provision for loan losses of $39 thousand was recognized during the three months ended September 30, 2022 compared to $267 thousand recognized during the three months ended September 30, 2021. A recovery of provision for loan losses of $30 thousand was recognized during the nine months ended September 30, 2022 compared to a provision for loan losses recognized of $477 thousand during the nine months ended September 30, 2021. The period-end ALLL as a percentage of total loans was 0.58% as of September 30, 2022, 0.56% as of December 31, 2021 and 0.51% as of September 30, 2021. The total of the ALLL and the fair value mark as a percentage of gross loans (a non-GAAP financial measure) amounted to 2.38% as of September 30, 2022, compared to 2.30% as of December 31, 2021 and 2.24% as of September 30, 2021.

Further discussion of management’s assessment of the ALLL is provided earlier in the report and in Note 5 – Allowance for Loan Losses, found in the Notes to the Consolidated Financial Statements. In management’s opinion, the allowance was adequately provided for at September 30, 2022. The ALLL calculation, provision for loan losses, asset quality and collateral values may be significantly impacted by deterioration in economic conditions. We have downgraded, then upgraded slightly, 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 September 30, 2022 and 2021 are shown below (dollars in thousands):

 

 

For the Three Months Ended

 

 

Variance

 

 

 

September 30,
2022

 

 

September 30,
2021

 

 

$

 

 

%

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Wealth management fees

 

$

590

 

 

$

744

 

 

$

(154

)

 

 

-20.7

%

Advisory and brokerage income

 

 

213

 

 

 

358

 

 

 

(145

)

 

 

-40.5

%

Deposit account fees

 

 

443

 

 

 

396

 

 

 

47

 

 

 

11.9

%

Debit/credit card and ATM fees

 

 

660

 

 

 

808

 

 

 

(148

)

 

 

-18.3

%

Bank owned life insurance income

 

 

252

 

 

 

201

 

 

 

51

 

 

 

25.4

%

Gains on sale of assets

 

 

4

 

 

 

-

 

 

 

4

 

 

 

100.0

%

Other

 

 

138

 

 

 

971

 

 

 

(833

)

 

 

-85.8

%

Total noninterest income

 

$

2,300

 

 

$

3,478

 

 

$

(1,178

)

 

 

-33.9

%

 

Noninterest income for the three months ended September 30, 2022 of $2.3 million was $1.2 million or 33.9% lower than the amount recorded for the three months ended September 30, 2021. Noninterest income decreased predominantly due to the prior period Other Income, as reported on the consolidated statements of income, including a second partial recovery of $401 thousand of unearned insurance premiums related to the loss of insurance on the student loan portfolio and a recovery of $312 thousand from a TFB loan that was charged off prior to April 1, 2021. In addition, wealth management fees, advisory and brokerage fees and debit/credit card/ATM fees have each decreased approximately $150 thousand over the prior period due to an anticipated reduction in the number of accounts in each area.

The components of noninterest income for the nine months ended September 30, 2022 and 2021 are shown below (dollars in thousands):

 

 

For the Nine Months Ended

 

 

Variance

 

 

 

September 30,
2022

 

 

September 30,
2021

 

 

$

 

 

%

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Wealth management fees

 

$

1,719

 

 

$

2,053

 

 

$

(334

)

 

 

-16.3

%

Advisory and brokerage income

 

 

639

 

 

 

908

 

 

 

(269

)

 

 

-29.6

%

Deposit account fees

 

 

1,366

 

 

 

982

 

 

 

384

 

 

 

39.1

%

Debit/credit card and ATM fees

 

 

2,146

 

 

 

1,561

 

 

 

585

 

 

 

37.5

%

Bank owned life insurance income

 

 

709

 

 

 

507

 

 

 

202

 

 

 

39.8

%

Resolution of commercial dispute

 

 

2,400

 

 

 

-

 

 

 

2,400

 

 

N/A

 

Gain on sale of assets

 

 

1,117

 

 

 

-

 

 

 

1,117

 

 

N/A

 

Other

 

 

637

 

 

 

1,426

 

 

 

(789

)

 

 

-55.3

%

Total noninterest income

 

$

10,733

 

 

$

7,437

 

 

$

3,296

 

 

 

44.3

%

 

51


 

Noninterest income for the nine months ended September 30, 2022 of $10.7 million was $3.3 million or 44.3% higher than the amount recorded for the nine months ended September 30, 2021. Noninterest income increased predominantly due to the receipt and recognition of a $2.4 million one-time payment to resolve a commercial dispute, the $1.1 million gain on the sale of two buildings and an increase of $585 thousand of debit/credit card and ATM fees due to increased number of retail accounts as a result of the Merger.

Noninterest expense

The components of noninterest expense for the three months ended September 30, 2022 and 2021 are shown below (dollars in thousands):

 

 

For the Three Months Ended

 

 

Variance

 

 

 

September 30,
2022

 

 

September 30,
2021

 

 

$

 

 

%

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

4,252

 

 

$

4,562

 

 

$

(310

)

 

 

-6.8

%

Net occupancy

 

 

1,318

 

 

 

1,039

 

 

 

279

 

 

 

26.9

%

Equipment

 

 

249

 

 

 

205

 

 

 

44

 

 

 

21.5

%

Bank franchise tax

 

 

304

 

 

 

320

 

 

 

(16

)

 

 

-5.0

%

Computer software

 

 

287

 

 

 

361

 

 

 

(74

)

 

 

-20.5

%

Data processing

 

 

712

 

 

 

1,114

 

 

 

(402

)

 

 

-36.1

%

FDIC deposit insurance assessment

 

 

70

 

 

 

349

 

 

 

(279

)

 

 

-79.9

%

Marketing, advertising and promotion

 

 

347

 

 

 

337

 

 

 

10

 

 

 

3.0

%

Merger and merger-related expenses

 

 

-

 

 

 

1,935

 

 

 

(1,935

)

 

 

-100.0

%

Debit/credit card and ATM expenses

 

 

91

 

 

 

212

 

 

 

(121

)

 

 

-57.1

%

Professional fees

 

 

310

 

 

 

186

 

 

 

124

 

 

 

66.7

%

Core deposit intangible amortization

 

 

415

 

 

 

417

 

 

 

(2

)

 

 

-0.5

%

Other

 

 

1,148

 

 

 

1,787

 

 

 

(639

)

 

 

-35.8

%

Total noninterest expense

 

$

9,503

 

 

$

12,824

 

 

$

(3,321

)

 

 

-25.9

%

 

Noninterest expense for the quarter ended September 30, 2022 of $9.5 million was $3.3 million or 25.9% lower than the quarter ended September 30, 2021. This decrease is due to merger and merger-related expenses incurred during the nine months ended September 30, 2021 of $1.9 million, a reduction in salaries and employee benefits of $310 thousand as a result of reduced headcount and a $402 thousand reduction in data processing costs as a result of efficiencies gained in connection with the Merger.

The components of noninterest expense for the nine months ended September 30, 2022 and 2021 are shown below (dollars in thousands):

 

 

For the Nine Months Ended

 

 

Variance

 

 

 

September 30,
2022

 

 

September 30,
2021

 

 

$

 

 

%

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

13,069

 

 

$

11,705

 

 

$

1,364

 

 

 

11.7

%

Net occupancy

 

 

3,797

 

 

 

2,643

 

 

 

1,154

 

 

 

43.7

%

Equipment

 

 

786

 

 

 

661

 

 

 

125

 

 

 

18.9

%

Bank franchise tax

 

 

912

 

 

 

922

 

 

 

(10

)

 

 

-1.1

%

Computer software

 

 

907

 

 

 

744

 

 

 

163

 

 

 

21.9

%

Data processing

 

 

2,149

 

 

 

2,397

 

 

 

(248

)

 

 

-10.3

%

FDIC deposit insurance assessment

 

 

421

 

 

 

594

 

 

 

(173

)

 

 

-29.1

%

Marketing, advertising and promotion

 

 

873

 

 

 

706

 

 

 

167

 

 

 

23.7

%

Merger and merger-related expenses

 

 

-

 

 

 

8,087

 

 

 

(8,087

)

 

 

-100.0

%

Debit/credit card and ATM expenses

 

 

322

 

 

 

589

 

 

 

(267

)

 

 

-45.3

%

Professional fees

 

 

1,051

 

 

 

873

 

 

 

178

 

 

 

20.4

%

Core deposit intangible amortization

 

 

1,281

 

 

 

845

 

 

 

436

 

 

 

51.6

%

Other

 

 

3,472

 

 

 

2,832

 

 

 

640

 

 

 

22.6

%

Total noninterest expense

 

$

29,040

 

 

$

33,598

 

 

$

(4,558

)

 

 

-13.6

%

 

52


 

 

Noninterest expense for the nine months ended September 30, 2022 of $29.0 million was $4.6 million or 13.6% lower than the nine months ended September 30, 2021. This decrease is due to merger and merger-related expenses incurred during the nine months ended September 30, 2021 of $8.1 million, offset by increases in the following areas due to the Merger being effective April 1, 2021: 1) salaries and employee benefits increased $1.4 million, 2) net occupancy increased $1.2 million, and 3) core deposit intangible amortization increased $436 thousand. In addition, the Company incurred $685 thousand in expenses in the first quarter of 2022, included in other noninterest expense, related to the one-time payment to resolve a commercial dispute noted in the Noninterest income section earlier.

 

The efficiency ratio (FTE) of 57.0% for the three months ended September 30, 2022 compared favorably to the 75.2% for the same quarter of 2021, due to the increase in net interest income (FTE) and the decrease in noninterest expense, as described above. The efficiency ratio (FTE) of 59.1% for the nine months ended September 30, 2022 also compared favorably to the 83.5% for the nine months ended September 30, 2021 for the same reasons. 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 September 30, 2022 and 2021, the Company provided $1.3 million and $753 thousand for Federal income taxes, respectively, resulting in effective income tax rates of 18.0% and 19.4%, respectively. For the nine months ended September 30, 2022 and 2021, the Company provided $3.5 million and $1.2 million for Federal income taxes, respectively, resulting in effective income tax rates of 17.6% and 20.0%, respectively. The effective income tax rate for the current quarter and current year-to-date was lower than the prior year, due to the non-deductibility of certain merger and merger-related expenses in the prior year. For all periods, the effective income tax rate differed from the U.S. statutory rate of 21% due to the effect of tax-exempt income from life insurance policies and municipal bonds and the recognition of low-income housing tax credits.

OTHER SIGNIFICANT EVENTS

None

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under 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 September 30, 2022 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

 

53


 

PART II. OTHER INFORMATION

None

ITEM 1A. RISK FACTORS.

During the quarter ended September 30, 2022, there have been no material changes from the risk factors described in the Company’s Form 10-K for the year ended December 31, 2021. 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 not to 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

 

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 September 30, 2022, 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 Shareholders' 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 September 30, 2022, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101.0)

 

54


 

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)

 

 

 

 

 

/s/ Glenn W. Rust

 

 

Glenn W. Rust

 

 

President and Chief Executive Officer

(principal executive officer)

 

 

 

Date:

 

November 2, 2022

 

 

 

 

 

/s/ Tara Y. Harrison

 

 

Tara Y. Harrison

 

 

Executive Vice President and Chief Financial Officer

 

 

(principal financial and accounting officer)

 

Date:

 

November 2, 2022

 

55