Virginia National Bankshares Corp - Quarter Report: 2023 June (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 June 30, 2023
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) |
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Name of each exchange on which registered |
Common Stock |
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VABK |
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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 |
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☐ |
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Accelerated filer |
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☐ |
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Non-accelerated filer |
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☒ |
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Smaller reporting company |
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☒ |
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Emerging growth company |
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☐ |
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 August 10, 2023, the registrant had 5,365,982 shares of common stock, $2.50 par value per share, outstanding.
VIRGINIA NATIONAL BANKSHARES CORPORATION
FORM 10-Q
TABLE OF CONTENTS
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Page 4 |
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Page 4 |
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Page 5 |
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Consolidated Statements of Comprehensive Income (Loss) (unaudited) |
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Page 6 |
Consolidated Statements of Changes in Shareholders’ Equity (unaudited) |
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Page 7 |
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Page 8 |
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Page 9 |
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Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Page 37 |
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Page 38 |
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Page 39 |
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Page 45 |
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Item 3 Quantitative and Qualitative Disclosures About Market Risk |
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Page 53 |
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Page 53 |
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Page 53 |
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Page 53 |
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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds |
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Page 53 |
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Page 53 |
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Page 53 |
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Page 54 |
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Page 54 |
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Page 55 |
2
Glossary of Acronyms and Defined Terms |
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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 |
ALM |
- |
Asset liability management |
ASC |
- |
Accounting Standards Codification |
ASC 326 |
- |
ASU 2016-13, Financial Instruments and Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments |
ASC 820 |
- |
ASC 820, Fair Value Measurements and Disclosures |
ASU |
- |
Accounting Standards Update |
ATM |
- |
Automated teller machine |
the Bank |
- |
Virginia National Bank |
bps |
- |
Basis points |
CD |
- |
Certificate of deposit |
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 |
CRE |
- |
Commercial real estate |
DCF |
|
Discounted cash flow |
EBA |
- |
Excess Balance Account |
Effective Date |
- |
April 1, 2021 |
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 |
FHLB |
- |
Federal Home Loan Bank of Atlanta |
Form 10-K |
- |
Annual Report on Form 10-K for the year ended December 31, 2022 |
FTE |
- |
Fully taxable equivalent |
GAAP or U.S. GAAP |
- |
Accounting principles generally accepted in the United States |
ICS® |
- |
Insured Cash Sweep® |
IRR |
- |
Interest rate risk |
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 |
NPA |
- |
Nonperforming assets |
OREO |
- |
Other real estate owned |
OTTI |
- |
Other than temporary impairment |
PCA |
- |
Prompt Corrective Action |
PCD |
- |
Purchased loan with credit deterioration |
PCI |
- |
Purchased credit impaired |
PITI |
- |
Principal, interest, taxes and insurance |
the Plans |
- |
2005 Stock Incentive Plan, 2014 Stock Incentive Plan and 2022 Stock Incentive Plan |
PPP |
- |
Paycheck Protection Program |
Reorganization |
- |
Reorganization Agreement Plan of Share Exchange dated March 6, 2013 between the Bank and the Company |
ROAA |
- |
Return on Average Assets |
ROAE |
- |
Return on Average Equity |
SBA |
- |
Small Business Administration |
SEC |
- |
U.S. Securities and Exchange Commission |
Sturman Wealth |
- |
Sturman Wealth Advisors |
TDR |
- |
Troubled debt restructuring |
TLM |
- |
Troubled loan modification |
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIRGINIA NATIONAL BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
|
|
June 30, 2023 |
|
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December 31, 2022 * |
|
||
ASSETS |
|
Unaudited |
|
|
|
|
||
Cash and due from banks |
|
$ |
9,714 |
|
|
$ |
20,993 |
|
Interest-bearing deposits in other banks |
|
|
20,225 |
|
|
|
19,098 |
|
Federal funds sold |
|
|
- |
|
|
|
45 |
|
Securities: |
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|
|
|
|
|
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Available for sale, at fair value |
|
|
473,868 |
|
|
|
538,186 |
|
Restricted securities, at cost |
|
|
7,438 |
|
|
|
5,137 |
|
Total securities |
|
|
481,306 |
|
|
|
543,323 |
|
Loans, net of deferred fees and costs |
|
|
973,348 |
|
|
|
936,415 |
|
Allowance for credit losses |
|
|
(7,863 |
) |
|
|
(5,552 |
) |
Loans, net |
|
|
965,485 |
|
|
|
930,863 |
|
Premises and equipment, net |
|
|
17,564 |
|
|
|
17,808 |
|
Assets held for sale |
|
|
- |
|
|
|
965 |
|
Bank owned life insurance |
|
|
39,065 |
|
|
|
38,552 |
|
Goodwill |
|
|
7,768 |
|
|
|
7,768 |
|
Core deposit intangible, net |
|
|
5,815 |
|
|
|
6,586 |
|
Right of use asset, net |
|
|
6,634 |
|
|
|
6,536 |
|
Deferred tax asset, net |
|
|
16,961 |
|
|
|
17,315 |
|
Accrued interest receivable and other assets |
|
|
13,551 |
|
|
|
13,507 |
|
Total assets |
|
$ |
1,584,088 |
|
|
$ |
1,623,359 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
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Liabilities: |
|
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|
|
|
|
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Demand deposits: |
|
|
|
|
|
|
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Noninterest-bearing |
|
$ |
412,273 |
|
|
$ |
495,649 |
|
Interest-bearing |
|
|
312,773 |
|
|
|
399,983 |
|
Money market and savings deposit accounts |
|
|
398,074 |
|
|
|
467,600 |
|
Certificates of deposit and other time deposits |
|
|
224,956 |
|
|
|
115,106 |
|
Total deposits |
|
|
1,348,076 |
|
|
|
1,478,338 |
|
Federal funds purchased |
|
|
20,503 |
|
|
|
- |
|
Short-term borrowings |
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59,666 |
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|
- |
|
Junior subordinated debt, net |
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3,436 |
|
|
|
3,413 |
|
Lease liability |
|
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6,301 |
|
|
|
6,173 |
|
Accrued interest payable and other liabilities |
|
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3,667 |
|
|
|
2,019 |
|
Total liabilities |
|
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1,441,649 |
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1,489,943 |
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Shareholders' equity: |
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|
|
|
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Preferred stock, $2.50 par value |
|
|
|
|
|
|
||
Common stock, $2.50 par value |
|
|
13,250 |
|
|
|
13,214 |
|
Capital surplus |
|
|
105,667 |
|
|
|
105,344 |
|
Retained earnings |
|
|
69,502 |
|
|
|
63,482 |
|
Accumulated other comprehensive loss |
|
|
(45,980 |
) |
|
|
(48,624 |
) |
Total shareholders' equity |
|
|
142,439 |
|
|
|
133,416 |
|
Total liabilities and shareholders' equity |
|
$ |
1,584,088 |
|
|
$ |
1,623,359 |
|
Common shares outstanding |
|
|
5,365,982 |
|
|
|
5,337,271 |
|
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 six months ended |
|
||||||||||
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|
June 30, 2023 |
|
|
June 30, 2022 |
|
|
June 30, 2023 |
|
|
June 30, 2022 |
|
||||
Interest and dividend income: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loans, including fees |
|
$ |
14,894 |
|
|
$ |
10,610 |
|
|
$ |
27,661 |
|
|
$ |
21,379 |
|
Federal funds sold |
|
|
10 |
|
|
|
302 |
|
|
|
10 |
|
|
|
363 |
|
Other interest-bearing deposits |
|
|
119 |
|
|
|
219 |
|
|
|
378 |
|
|
|
355 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Taxable |
|
|
2,876 |
|
|
|
1,662 |
|
|
|
5,826 |
|
|
|
2,674 |
|
Tax exempt |
|
|
329 |
|
|
|
308 |
|
|
|
656 |
|
|
|
612 |
|
Dividends |
|
|
104 |
|
|
|
64 |
|
|
|
171 |
|
|
|
126 |
|
Total interest and dividend income |
|
|
18,332 |
|
|
|
13,165 |
|
|
|
34,702 |
|
|
|
25,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Demand deposits |
|
|
106 |
|
|
|
58 |
|
|
|
195 |
|
|
|
119 |
|
Money market and savings deposits |
|
|
2,197 |
|
|
|
440 |
|
|
|
3,970 |
|
|
|
1,055 |
|
Certificates and other time deposits |
|
|
1,776 |
|
|
|
157 |
|
|
|
2,424 |
|
|
|
352 |
|
Federal funds purchased |
|
|
32 |
|
|
|
- |
|
|
|
91 |
|
|
|
- |
|
Short-term borrowings |
|
|
439 |
|
|
|
- |
|
|
|
766 |
|
|
|
- |
|
Junior subordinated debt |
|
|
79 |
|
|
|
49 |
|
|
|
140 |
|
|
|
97 |
|
Total interest expense |
|
|
4,629 |
|
|
|
704 |
|
|
|
7,586 |
|
|
|
1,623 |
|
Net interest income |
|
|
13,703 |
|
|
|
12,461 |
|
|
|
27,116 |
|
|
|
23,886 |
|
Provision for (recovery of) credit losses |
|
|
261 |
|
|
|
(217 |
) |
|
|
13 |
|
|
|
(69 |
) |
Net interest income after provision for (recovery of) credit losses |
|
|
13,442 |
|
|
|
12,678 |
|
|
|
27,103 |
|
|
|
23,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Wealth management fees |
|
|
397 |
|
|
|
572 |
|
|
|
801 |
|
|
|
1,129 |
|
Advisory and brokerage income |
|
|
- |
|
|
|
210 |
|
|
|
- |
|
|
|
426 |
|
Deposit account fees |
|
|
399 |
|
|
|
458 |
|
|
|
800 |
|
|
|
923 |
|
Debit/credit card and ATM fees |
|
|
636 |
|
|
|
779 |
|
|
|
1,207 |
|
|
|
1,486 |
|
Bank owned life insurance income |
|
|
261 |
|
|
|
246 |
|
|
|
513 |
|
|
|
457 |
|
Resolution of commercial dispute |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,400 |
|
Gains on sale of assets |
|
|
- |
|
|
|
1,113 |
|
|
|
- |
|
|
|
1,113 |
|
Gain on termination of interest swap |
|
|
- |
|
|
|
- |
|
|
|
460 |
|
|
|
- |
|
Loss on sales of AFS, net |
|
|
- |
|
|
|
- |
|
|
|
(206 |
) |
|
|
- |
|
Other |
|
|
352 |
|
|
|
268 |
|
|
|
746 |
|
|
|
499 |
|
Total noninterest income |
|
|
2,045 |
|
|
|
3,646 |
|
|
|
4,321 |
|
|
|
8,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Salaries and employee benefits |
|
|
4,062 |
|
|
|
4,086 |
|
|
|
8,113 |
|
|
|
8,817 |
|
Net occupancy |
|
|
929 |
|
|
|
1,282 |
|
|
|
2,108 |
|
|
|
2,479 |
|
Equipment |
|
|
176 |
|
|
|
254 |
|
|
|
394 |
|
|
|
537 |
|
Bank franchise tax |
|
|
313 |
|
|
|
304 |
|
|
|
637 |
|
|
|
608 |
|
Computer software |
|
|
203 |
|
|
|
357 |
|
|
|
405 |
|
|
|
620 |
|
Data processing |
|
|
806 |
|
|
|
699 |
|
|
|
1,548 |
|
|
|
1,437 |
|
FDIC deposit insurance assessment |
|
|
220 |
|
|
|
125 |
|
|
|
320 |
|
|
|
351 |
|
Marketing, advertising and promotion |
|
|
275 |
|
|
|
259 |
|
|
|
650 |
|
|
|
526 |
|
Plastics expense |
|
|
30 |
|
|
|
92 |
|
|
|
78 |
|
|
|
231 |
|
Professional fees |
|
|
198 |
|
|
|
404 |
|
|
|
390 |
|
|
|
741 |
|
Core deposit intangible amortization |
|
|
379 |
|
|
|
427 |
|
|
|
770 |
|
|
|
866 |
|
Other |
|
|
973 |
|
|
|
1,153 |
|
|
|
2,012 |
|
|
|
2,324 |
|
Total noninterest expense |
|
|
8,564 |
|
|
|
9,442 |
|
|
|
17,425 |
|
|
|
19,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income before income taxes |
|
|
6,923 |
|
|
|
6,882 |
|
|
|
13,999 |
|
|
|
12,851 |
|
Provision for income taxes |
|
|
1,272 |
|
|
|
1,197 |
|
|
|
2,557 |
|
|
|
2,242 |
|
Net income |
|
$ |
5,651 |
|
|
$ |
5,685 |
|
|
$ |
11,442 |
|
|
$ |
10,609 |
|
Net income per common share, basic |
|
$ |
1.05 |
|
|
$ |
1.07 |
|
|
$ |
2.14 |
|
|
$ |
1.99 |
|
Net income per common share, diluted |
|
$ |
1.05 |
|
|
$ |
1.06 |
|
|
$ |
2.13 |
|
|
$ |
1.98 |
|
Weighted average common shares outstanding, basic |
|
|
5,357,873 |
|
|
|
5,326,271 |
|
|
|
5,348,040 |
|
|
|
5,319,166 |
|
Weighted average common shares outstanding, diluted |
|
|
5,375,073 |
|
|
|
5,347,008 |
|
|
|
5,375,545 |
|
|
|
5,345,242 |
|
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 six months ended |
|
||||||||||
|
|
June 30, 2023 |
|
|
June 30, 2022 |
|
|
June 30, 2023 |
|
|
June 30, 2022 |
|
||||
Net income |
|
$ |
5,651 |
|
|
$ |
5,685 |
|
|
$ |
11,442 |
|
|
$ |
10,609 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Unrealized losses on securities, net of tax of ($831) and $766 for the three and six months ended June 30, 2023; and net of tax benefit of ($4,308) and ($9,536) for the three and six months ended June 30, 2022; respectively |
|
|
(3,127 |
) |
|
|
(16,214 |
) |
|
|
2,881 |
|
|
|
(35,879 |
) |
Reclassification adjustment for realized gain on termination of interest rate swap, net of tax benefit of $0 and ($97) for the three and six months ended June 30, 2023, respectively |
|
|
— |
|
|
|
— |
|
|
|
(363 |
) |
|
|
— |
|
Reclassification adjustment for realized losses on securities, net of tax of $0 and $43 for the three and six months ended June 30, 2023, respectively |
|
|
— |
|
|
|
— |
|
|
|
163 |
|
|
|
— |
|
Unrealized gains (losses) on interest rate swaps, net of tax benefit of $0 and ($9) for the three and six months ended June 30, 2023; and net of tax of $42 and $104 for the three and six months ended June 30, 2022; respectively |
|
|
- |
|
|
|
160 |
|
|
|
(37 |
) |
|
|
395 |
|
Total other comprehensive income (loss) |
|
|
(3,127 |
) |
|
|
(16,054 |
) |
|
|
2,644 |
|
|
|
(35,484 |
) |
Total comprehensive income (loss) |
|
$ |
2,524 |
|
|
$ |
(10,369 |
) |
|
$ |
14,086 |
|
|
$ |
(24,875 |
) |
See Notes to Consolidated Financial Statements
6
VIRGINIA NATIONAL BANKSHARES CORPORATION
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(Dollars in thousands, except per share data)
(Unaudited)
|
|
Common Stock |
|
|
Capital Surplus |
|
|
Retained Earnings |
|
|
Accumulated Other Comprehensive Loss |
|
|
Total |
|
|||||
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance, December 31, 2022 |
|
$ |
13,214 |
|
|
$ |
105,344 |
|
|
$ |
63,482 |
|
|
$ |
(48,624 |
) |
|
$ |
133,416 |
|
Exercise of stock options |
|
|
3 |
|
|
|
15 |
|
|
|
- |
|
|
|
- |
|
|
|
18 |
|
Stock option expense |
|
|
- |
|
|
|
42 |
|
|
|
- |
|
|
|
- |
|
|
|
42 |
|
Restricted stock grant expense |
|
|
- |
|
|
|
111 |
|
|
|
- |
|
|
|
- |
|
|
|
111 |
|
Vested restricted stock grants |
|
|
21 |
|
|
|
(21 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Cash dividends declared ($0.33 per share) |
|
|
- |
|
|
|
- |
|
|
|
(1,762 |
) |
|
|
- |
|
|
|
(1,762 |
) |
Impact of adoption of CECL |
|
|
- |
|
|
|
- |
|
|
|
(1,890 |
) |
|
|
- |
|
|
|
(1,890 |
) |
Net income |
|
|
- |
|
|
|
- |
|
|
|
5,791 |
|
|
|
- |
|
|
|
5,791 |
|
Other comprehensive income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,771 |
|
|
|
5,771 |
|
Balance, March 31, 2023 |
|
$ |
13,238 |
|
|
$ |
105,491 |
|
|
$ |
65,621 |
|
|
$ |
(42,853 |
) |
|
$ |
141,497 |
|
Stock option expense |
|
|
- |
|
|
|
68 |
|
|
|
- |
|
|
|
- |
|
|
|
68 |
|
Restricted stock grant expense |
|
|
- |
|
|
|
120 |
|
|
|
- |
|
|
|
- |
|
|
|
120 |
|
Vested restricted stock grants |
|
|
12 |
|
|
|
(12 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Cash dividends declared ($0.33 per share) |
|
|
- |
|
|
|
- |
|
|
|
(1,770 |
) |
|
|
- |
|
|
|
(1,770 |
) |
Net income |
|
|
- |
|
|
|
- |
|
|
|
5,651 |
|
|
|
- |
|
|
|
5,651 |
|
Other comprehensive loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,127 |
) |
|
|
(3,127 |
) |
Balance, June 30, 2023 |
|
$ |
13,250 |
|
|
$ |
105,667 |
|
|
$ |
69,502 |
|
|
$ |
(45,980 |
) |
|
$ |
142,439 |
|
See Notes to Consolidated Financial Statements
7
VIRGINIA NATIONAL BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
|
For the six months ended |
|
|||||
|
|
June 30, 2023 |
|
|
June 30, 2022 |
|
||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
||
Net income |
|
$ |
11,442 |
|
|
$ |
10,609 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
||
Provision for (recovery of) credit losses |
|
|
13 |
|
|
|
(69 |
) |
Net accretion of certain acquisition-related adjustments |
|
|
(4,671 |
) |
|
|
(1,023 |
) |
Amortization of intangible assets |
|
|
770 |
|
|
|
900 |
|
Net amortization and (accretion) of securities |
|
|
(1,117 |
) |
|
|
539 |
|
Net losses on sale of AFS |
|
|
206 |
|
|
|
— |
|
Net gains on sale of other assets |
|
|
— |
|
|
|
(1,113 |
) |
Earnings on bank owned life insurance |
|
|
(513 |
) |
|
|
(457 |
) |
Depreciation and other amortization |
|
|
1,654 |
|
|
|
1,921 |
|
Stock option expense |
|
|
110 |
|
|
|
83 |
|
Stock grant expense |
|
|
231 |
|
|
|
214 |
|
Net change in: |
|
|
|
|
|
|
||
Accrued interest receivable and other assets |
|
|
344 |
|
|
|
94 |
|
Accrued interest payable and other liabilities |
|
|
1,648 |
|
|
|
(2,032 |
) |
Net cash provided by operating activities |
|
|
10,117 |
|
|
|
9,666 |
|
|
|
|
|
|
|
|
||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
||
Net increase in restricted investments |
|
|
(2,301 |
) |
|
|
(188 |
) |
Purchases of available for sale securities |
|
|
(10,000 |
) |
|
|
(216,525 |
) |
Proceeds from maturities, calls, sales and principal payments of available for sale securities |
|
|
78,930 |
|
|
|
12,558 |
|
Net change in loans |
|
|
(34,282 |
) |
|
|
101,621 |
|
Purchase of bank owned life insurance |
|
|
— |
|
|
|
(6,355 |
) |
Proceeds from sale of premises and equipment |
|
|
962 |
|
|
|
6,207 |
|
Proceeds from sale of other real estate owned |
|
|
— |
|
|
|
610 |
|
Purchase of bank premises and equipment |
|
|
(501 |
) |
|
|
(334 |
) |
Net cash provided by (used in) investing activities |
|
|
32,808 |
|
|
|
(102,406 |
) |
|
|
|
|
|
|
|
||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
||
Net change in demand deposits, interest checking, money market and savings accounts |
|
|
(240,112 |
) |
|
|
(185,348 |
) |
Net change in certificates of deposit and other time deposits |
|
|
109,856 |
|
|
|
(11,892 |
) |
Net change in federal funds purchased |
|
|
20,503 |
|
|
|
— |
|
Net change in other borrowings |
|
|
59,666 |
|
|
|
— |
|
Proceeds from termination of interest swap |
|
|
479 |
|
|
|
— |
|
Proceeds from stock options exercised |
|
|
18 |
|
|
|
— |
|
Cash dividends paid |
|
|
(3,532 |
) |
|
|
(3,193 |
) |
Net cash used in financing activities |
|
|
(53,122 |
) |
|
|
(200,433 |
) |
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
$ |
(10,197 |
) |
|
$ |
(293,173 |
) |
|
|
|
|
|
|
|
||
CASH AND CASH EQUIVALENTS: |
|
|
|
|
|
|
||
Beginning of period |
|
$ |
40,136 |
|
|
$ |
508,840 |
|
End of period |
|
$ |
29,939 |
|
|
$ |
215,667 |
|
|
|
|
|
|
|
|
||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
||
Cash payments for: |
|
|
|
|
|
|
||
Interest |
|
$ |
2,705 |
|
|
$ |
1,664 |
|
Taxes |
|
$ |
2,134 |
|
|
$ |
1,500 |
|
|
|
|
|
|
|
|
||
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING |
|
|
|
|
|
|
||
Unrealized losses on available for sale securities |
|
$ |
3,852 |
|
|
$ |
(45,415 |
) |
Unrealized gains on interest rate swaps |
|
$ |
— |
|
|
$ |
499 |
|
Initial right-of-use assets obtained in exchange for new operating lease liabilities |
|
$ |
— |
|
|
$ |
540 |
|
See Notes to Consolidated Financial Statements
8
VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2023
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, 2022.
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. Until the sale of the business line on December 19, 2022, the Bank also offered, through networking agreements with third parties, investment advisory and other investment services under Sturman Wealth Advisors. 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 ACL, accounting for business combinations, including loans acquired in the business combination, ACL on individually evaluated loans, goodwill impairment, credit losses of securities, other intangible assets, and fair value measurements. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
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 Statement Presentation - In July 2023, the FASB issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)”. This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 Emerging Issues Task Force Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.
Investments in Tax Credit Structures - In March 2023, the FASB issued ASU 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The Company does not expect the adoption of ASU 2023-02 to have a material impact on its consolidated financial statements.
9
LIBOR and Other Reference Rates - In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”. ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the LIBOR would cease being published. In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.
To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective for all entities upon issuance.
In March 2020, the FASB issued ASU No. 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 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 No. 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 No. 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 No. 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.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not currently expected to have a material effect on the Company's financial position, results of operations or cash flows.
Note 2. Adoption of New Accounting Standards
Financial Instruments – Credit Losses - On January 1, 2023, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments," and ASU 2022-02, “Financial Instruments-Credit Losses, Troubled Debt Restructurings and Vintage Disclosures,” collectively referred to as ASC 326. This standard, in part, replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology. ASC 326 requires an estimate of credit losses for the remaining estimated life of the financial assets using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit deteriorated loans will receive an initial allowance at the acquisition date that represents an adjustment to the amortized cost basis of the loan, with no impact to earnings.
In addition, ASU 326 made changes to the accounting for available-for-sale debt securities. One change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell.
The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption included an increase in the ACL on loans of $2.5 million, which is presented as a reduction to net loans outstanding, and an increase in the ACL for unfunded loan commitments of $252 thousand, which is recorded within Accrued interest payable and other liabilities on the consolidated balance sheets. The Company recorded a net decrease to opening retained earnings as of January 1, 2023 of $1.9 million, for the cumulative effect of adopting ASC 326, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable accounting standards ("Incurred Loss"). Subsequent to adoption, the Company will record adjustments to its ACL and reserve for unfunded commitments through the provision for credit losses in the consolidated statements of income.
10
ASC 326 also replaced the Company's previous accounting policies for PCI loans and TDRs. With the adoption of ASC 326, loans previously designated as PCI loans were designated as purchased loans with credit deterioration (PCD loans). The Company adopted ASC 326 using the prospective transition approach for PCD loans that were previously identified as PCI and accounted for under ASC 310-30. On January 1, 2023, the Company's PCD loans were adjusted to reflect the addition of $355 thousand of expected credit losses to the amortized cost basis of the loans and a corresponding increase to the ACL. The remaining noncredit discount, the difference between the adjusted amortized cost basis and the outstanding principal balance on PCD loans, will be accreted into interest income over the estimated remaining lives of the loans using the effective interest rate method. The evaluation of the ACL will include PCD loans together with other loans that share similar risk characteristics, rather than using the separate pools that were used under PCI accounting. The adoption of ASC 326 also replaced previous TDR accounting guidance, and the evaluation of the ACL will include loans previously designated as TDRs together with other loans that share similar risk characteristics.
The adoption of ASC 326 did not affect the carrying value of debt securities or the amount of unrealized gains and losses recorded in accumulated other comprehensive loss. Upon adoption of ASC 326, the Company did not have any securities included in its portfolio where OTTI had previously been recognized or that required an ACL. Therefore, the Company determined that an ACL on AFS securities was not deemed material.
The following table illustrates the impact of adopting ASC 326 (dollars in thousands):
|
|
December 31, 2022 |
|
|
January 1, 2023 |
|
|
January 1, 2023 |
|
|||
|
|
As Previously Reported |
|
|
Impact of |
|
|
As Reported Under ASC 326 |
|
|||
Assets: |
|
|
|
|
|
|
|
|
|
|||
Loans, gross |
|
$ |
936,415 |
|
|
$ |
355 |
|
|
$ |
936,770 |
|
|
|
|
|
|
|
|
|
|
|
|||
Allowance for credit losses: |
|
|
|
|
|
|
|
|
|
|||
Commercial |
|
|
194 |
|
|
|
(11 |
) |
|
|
183 |
|
Real estate construction and land |
|
|
221 |
|
|
|
440 |
|
|
|
661 |
|
1-4 family residential mortgages |
|
|
1,618 |
|
|
|
14 |
|
|
|
1,632 |
|
Commercial mortgages |
|
|
2,820 |
|
|
|
1,577 |
|
|
|
4,397 |
|
Consumer |
|
|
699 |
|
|
|
471 |
|
|
|
1,171 |
|
Allowance for credit losses |
|
$ |
5,552 |
|
|
$ |
2,491 |
|
|
$ |
8,044 |
|
|
|
|
|
|
|
|
|
|
|
|||
Loans, net |
|
$ |
930,863 |
|
|
$ |
(2,136 |
) |
|
$ |
928,726 |
|
|
|
|
|
|
|
|
|
|
|
|||
Net deferred tax asset |
|
$ |
17,315 |
|
|
$ |
499 |
|
|
$ |
17,814 |
|
|
|
|
|
|
|
|
|
|
|
|||
Liabilities: |
|
|
|
|
|
|
|
|
|
|||
Reserve for credit losses on unfunded commitments |
|
|
60 |
|
|
|
253 |
|
|
|
313 |
|
|
|
|
|
|
|
|
|
|
|
|||
Total equity |
|
$ |
133,416 |
|
|
$ |
(1,890 |
) |
|
$ |
131,526 |
|
Available for Sale Securities - For AFS securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.
If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an ACL, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an ACL is recognized in other comprehensive income.
Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the ACL when management believes an AFS security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At June 30, 2023, there was no ACL related to the AFS securities portfolio.
11
Loans - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $2.9 million at June 30, 2023 and was reported in Accrued interest receivable and other assets on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments.
The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days after the contractual due date.
All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured.
Allowance for Credit Losses - Purchased Credit Deteriorated Loans - Upon adoption of ASC 326, loans that were designated as PCI loans under the previous accounting guidance were classified as PCD loans without reassessment.
In future acquisitions, the Company may purchase loans, some of which may have experienced more than insignificant credit deterioration since origination. In those cases, the Company will consider internal loan grades, delinquency status and other relevant factors in assessing whether purchased loans are PCD. PCD loans are recorded at the amount paid. An initial ACL is determined using the same methodology as other loans held for investment, but with no impact to earnings. The initial ACL determined on a collective basis is allocated to individual loans. The sum of the loan's purchase price and ACL becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent to initial recognition, PCD loans are subject to the same interest income recognition and impairment model as non-PCD loans, with changes to the ACL recorded through provision expense.
Allowance for Credit Losses - Loans - The ACL is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses.
The ACL represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The ACL is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified ten portfolio segments and calculates the ACL for each using the methodology specified below (with the major classification noted in italics):
Discounted cash flow methodology:
Remaining life methodology:
12
Additionally, the ACL calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase reserve levels and include: adjustments for changes in lending policies and procedures and underwriting practices; changes in national, regional and local economic conditions; changes in the nature and volume of the portfolio and terms of loans; changes in the experience, depth and ability of credit and loan operations staff; changes in the volume and severity of past due, special mention and substandard loans; changes in the quality of the loan review system; changes in the value of underlying collateral for loans that are not collateral dependent; the existence and effect of any concentrations of credit and changes in the levels of such concentrations, and the effect of other external factors such as competition, legal and regulatory requirements, on the level of estimated credit losses.
Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective analysis. The ACL on loans that are individually evaluated may be estimated based on their expected cash flows, or, in the case of loans for which repayment is expected substantially through the sale of collateral, the expected credit losses are based on the fair value of collateral at the reporting dated adjusted for selling costs as appropriate.
Allowance for Credit Losses – Reserve for Unfunded Commitments - The Company records an ACL for off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for credit losses in the Company’s consolidated statements of income. The ACL for off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in Accrued interest and other liabilities on the Company’s consolidated balance sheets.
Accrued Interest Receivable - The Company elected not to measure an ACL for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.
Note 3. Securities
The amortized cost and fair values of securities available for sale as of June 30, 2023 and December 31, 2022 were as follows (dollars in thousands):
June 30, 2023 |
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
||||
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
||||
|
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Value |
|
||||
U.S. Government treasuries |
|
$ |
177,277 |
|
|
$ |
- |
|
|
$ |
(1,726 |
) |
|
$ |
175,551 |
|
U.S. Government agencies |
|
|
45,179 |
|
|
|
- |
|
|
|
(6,340 |
) |
|
|
38,839 |
|
Mortgage-backed securities/CMOs |
|
|
185,436 |
|
|
|
- |
|
|
|
(27,648 |
) |
|
|
157,788 |
|
Corporate bonds |
|
|
19,630 |
|
|
|
- |
|
|
|
(928 |
) |
|
|
18,702 |
|
Municipal bonds |
|
|
104,550 |
|
|
|
- |
|
|
|
(21,562 |
) |
|
|
82,988 |
|
Total Securities Available for Sale |
|
$ |
532,072 |
|
|
$ |
- |
|
|
$ |
(58,204 |
) |
|
$ |
473,868 |
|
December 31, 2022 |
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
||||
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
||||
|
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Value |
|
||||
U.S. Government treasuries |
|
$ |
245,583 |
|
|
$ |
- |
|
|
$ |
(3,113 |
) |
|
$ |
242,470 |
|
U.S. Government agencies |
|
|
35,283 |
|
|
|
- |
|
|
|
(6,528 |
) |
|
|
28,755 |
|
Mortgage-backed securities/CMOs |
|
|
194,964 |
|
|
|
- |
|
|
|
(27,888 |
) |
|
|
167,076 |
|
Corporate bonds |
|
|
19,581 |
|
|
|
- |
|
|
|
(852 |
) |
|
|
18,729 |
|
Municipal bonds |
|
|
104,831 |
|
|
|
- |
|
|
|
(23,675 |
) |
|
|
81,156 |
|
Total Securities Available for Sale |
|
$ |
600,242 |
|
|
$ |
- |
|
|
$ |
(62,056 |
) |
|
$ |
538,186 |
|
As of June 30, 2023, there were $471.8 million or 288 issues of individual securities, held in an unrealized loss position. These securities have an unrealized loss of $58.2 million and consist of 120 mortgage-backed/collateralized mortgage obligations, 125 municipal bonds, 21 agency bonds, 11 treasury bonds and 11 corporate bonds.
Accrued interest receivable on AFS securities as of June 30, 2023 amounted to $2.1 million.
13
The following table summarizes all securities with unrealized losses, segregated by length of time in a continuous unrealized loss position, for which no allowance for credit losses was recorded, at June 30, 2023, and December 31, 2022 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|||||||||||||||
June 30, 2023 |
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
||||||
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
||||||
U.S. Government treasuries |
|
$ |
84,250 |
|
|
$ |
(238 |
) |
|
$ |
91,301 |
|
|
$ |
(1,488 |
) |
|
$ |
175,551 |
|
|
$ |
(1,726 |
) |
U.S. Government agencies |
|
|
10,107 |
|
|
|
(53 |
) |
|
|
28,731 |
|
|
|
(6,287 |
) |
|
|
38,838 |
|
|
|
(6,340 |
) |
Mortgage-backed/CMOs |
|
|
13,028 |
|
|
|
(730 |
) |
|
|
144,760 |
|
|
|
(26,918 |
) |
|
|
157,788 |
|
|
|
(27,648 |
) |
Corporate bonds |
|
|
9,628 |
|
|
|
(403 |
) |
|
|
9,075 |
|
|
|
(525 |
) |
|
|
18,703 |
|
|
|
(928 |
) |
Municipal bonds |
|
|
3,123 |
|
|
|
(102 |
) |
|
|
77,843 |
|
|
|
(21,460 |
) |
|
|
80,966 |
|
|
|
(21,562 |
) |
|
|
$ |
120,136 |
|
|
$ |
(1,526 |
) |
|
$ |
351,710 |
|
|
$ |
(56,678 |
) |
|
$ |
471,846 |
|
|
$ |
(58,204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|||||||||||||||
December 31, 2022 |
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
||||||
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
||||||
U.S. Government treasuries |
|
$ |
242,470 |
|
|
$ |
(3,113 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
242,470 |
|
|
$ |
(3,113 |
) |
U.S. Government agencies |
|
|
4,285 |
|
|
|
(620 |
) |
|
|
24,218 |
|
|
|
(5,908 |
) |
|
|
28,503 |
|
|
|
(6,528 |
) |
Mortgage-backed/CMOs |
|
|
55,396 |
|
|
|
(6,010 |
) |
|
|
111,689 |
|
|
|
(21,878 |
) |
|
|
167,085 |
|
|
|
(27,888 |
) |
Corporate bonds |
|
|
18,729 |
|
|
|
(852 |
) |
|
|
- |
|
|
|
- |
|
|
|
18,729 |
|
|
|
(852 |
) |
Municipal bonds |
|
|
44,117 |
|
|
|
(8,001 |
) |
|
|
35,964 |
|
|
|
(15,674 |
) |
|
|
80,081 |
|
|
|
(23,675 |
) |
|
|
$ |
364,997 |
|
|
$ |
(18,596 |
) |
|
$ |
171,871 |
|
|
$ |
(43,460 |
) |
|
$ |
536,868 |
|
|
$ |
(62,056 |
) |
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.
Impairment of debt securities occurs when the fair value of a security is less than its amortized cost. The Company has elected to exclude accrued interest receivable from the amortized cost basis. For debt securities AFS, impairment is recognized in its entirety in net income if either (i) we intend to sell the security or (ii) it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-likely-than-not that the Company will be required to sell the security before recovery, the Company evaluates unrealized losses to determine whether a decline in fair value below amortized cost basis is a result of a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security, or other factors such as changes in market interest rates. If a credit loss exists, an ACL is recorded that reflects the amount of the impairment related to credit losses, limited by the amount by which the security’s amortized cost basis exceeds its fair value. Changes in the ACL are recorded in net income in the period of change and are included in provision for credit losses. Changes in the fair value of debt securities AFS not resulting from credit losses are recorded in other comprehensive income (loss). The Company regularly reviews unrealized losses in its investments in securities and cash flows expected to be collected from impaired securities based on criteria including the extent to which market value is below amortized cost, the financial health of and specific prospects for the issuer, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.
Management does not believe any of the securities in an unrealized loss position are impaired due to credit quality. In addition, issuers have continued to make timely payments of principal and interest. Accordingly, as of June 30, 2023, management believes the impairments detailed in the table above are temporary, and no credit loss has been realized in the Company’s consolidated income statement. 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 $3.1 million and $3.0 million at June 30, 2023 and December 31, 2022, respectively, were pledged as collateral to facilitate borrowing from the Federal Reserve Bank of Richmond. Securities having carrying values of $18.2 million and $2.1 million at June 30, 2023 and December 31, 2022, respectively, were pledged to the Commonwealth of Virginia Department of the Treasury to secure public funds depository accounts.
14
During the six months ended June 30, 2023, the Company sold AFS securities with a total book value of $49.9 million, incurring a pre-tax loss of $206 thousand, and used the net proceeds to fund normal daily operating demands. There were no sales of securities during the three months ended June 30, 2023 or the three and six months ending June 30, 2022.
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 $7.4 million and $5.1 million as of June 30, 2023 and December 31, 2022, respectively, are carried at cost.
The amortized cost and fair value of AFS debt securities at June 30, 2023 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 |
|
$ |
165,818 |
|
|
$ |
164,439 |
|
After one year to five years |
|
|
11,459 |
|
|
|
11,112 |
|
|
|
$ |
177,277 |
|
|
$ |
175,551 |
|
U.S. Government agencies |
|
|
|
|
|
|
||
One year or less |
|
$ |
10,000 |
|
|
$ |
9,948 |
|
After one year to five years |
|
|
5,802 |
|
|
|
5,049 |
|
After five years to ten years |
|
|
25,377 |
|
|
|
20,918 |
|
Ten years or more |
|
|
4,000 |
|
|
|
2,924 |
|
|
|
$ |
45,179 |
|
|
$ |
38,839 |
|
Mortgage-backed securities/CMOs |
|
|
|
|
|
|
||
One year or less |
|
$ |
2,954 |
|
|
$ |
2,890 |
|
After one year to five years |
|
|
6,452 |
|
|
|
6,051 |
|
After five years to ten years |
|
|
3,185 |
|
|
|
2,878 |
|
Ten years or more |
|
|
172,845 |
|
|
|
145,969 |
|
|
|
$ |
185,436 |
|
|
$ |
157,788 |
|
Corporate bonds |
|
|
|
|
|
|
||
One year or less |
|
$ |
1,002 |
|
|
$ |
977 |
|
After one year to five years |
|
|
18,628 |
|
|
|
17,725 |
|
|
|
$ |
19,630 |
|
|
$ |
18,702 |
|
Municipal bonds |
|
|
|
|
|
|
||
After one year to five years |
|
$ |
3,060 |
|
|
$ |
2,922 |
|
After five years to ten years |
|
|
19,892 |
|
|
|
18,089 |
|
Ten years or more |
|
|
81,598 |
|
|
|
61,977 |
|
|
|
$ |
104,550 |
|
|
$ |
82,988 |
|
|
|
|
|
|
|
|
||
Total Debt Securities Available for Sale |
|
$ |
532,072 |
|
|
$ |
473,868 |
|
15
Note 4. Loans
On January 1, 2023, the Company adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable. For further information and discussion regarding the Company's accounting policies and policy elections related to the accounting standard update, see Note 1 - Summary of Significant Accounting Policies. All loan information presented as of June 30, 2023 is in accordance with ASC 326. All loan information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP.
The composition of the loan portfolio by major loan classifications at June 30, 2023 and December 31, 2022, stated at their face amount, net of deferred fees and costs and discounts, including fair value marks, appears below (dollars in thousands). The Company has elected to exclude accrued interest receivable, totaling $2.9 million as of June 30, 2023, from the amortized cost basis of loans.
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
Commercial |
|
$ |
98,312 |
|
|
$ |
71,139 |
|
Real estate construction and land |
|
|
29,825 |
|
|
|
37,541 |
|
1-4 family residential mortgages |
|
|
317,330 |
|
|
|
323,185 |
|
Commercial mortgages |
|
|
486,643 |
|
|
|
459,125 |
|
Consumer |
|
|
41,238 |
|
|
|
45,425 |
|
Total loans |
|
|
973,348 |
|
|
|
936,415 |
|
Less: Allowance for credit losses |
|
|
(7,863 |
) |
|
|
(5,552 |
) |
Net loans |
|
$ |
965,485 |
|
|
$ |
930,863 |
|
The balances in the table above include unamortized premiums and net deferred loan costs and fees. As of June 30, 2023 and December 31, 2022, unamortized premiums from purchases of loans (excluding loans acquired during the Merger) were $1.8 million, remaining rather consistent due to purchases of loans with premiums, offset by amortization of existing premiums. Net deferred loan fees totaled $1.7 million and $755 thousand as of June 30, 2023 and December 31, 2022, respectively.
Consumer loans include $58 thousand and $180 thousand of demand deposit overdrafts as of June 30, 2023 and December 31, 2022, respectively.
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 remaining net fair value mark of $11.0 million as of June 30, 2023 on the Acquired Loans.
The following table shows the aging of the Company's loan portfolio, by class, at June 30, 2023 (dollars in thousands):
|
|
30-59 Days |
|
|
60-89 Days |
|
|
90 Days or More Past Due and Still Accruing |
|
|
Nonaccrual Loans |
|
|
Current Loans |
|
|
Total Loans |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Commercial |
|
$ |
793 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
97,519 |
|
|
$ |
98,312 |
|
Real estate construction and land |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
29,825 |
|
|
|
29,825 |
|
1-4 family residential mortgages |
|
|
292 |
|
|
|
59 |
|
|
|
- |
|
|
|
713 |
|
|
|
316,266 |
|
|
|
317,330 |
|
Commercial mortgages |
|
|
439 |
|
|
|
|
|
|
- |
|
|
|
472 |
|
|
|
485,732 |
|
|
|
486,643 |
|
|
Consumer loans |
|
|
264 |
|
|
|
1 |
|
|
|
107 |
|
|
|
- |
|
|
|
40,866 |
|
|
|
41,238 |
|
Total Loans |
|
$ |
1,788 |
|
|
$ |
60 |
|
|
$ |
107 |
|
|
$ |
1,185 |
|
|
$ |
970,208 |
|
|
$ |
973,348 |
|
16
The following table shows the Company's amortized cost basis of loans on nonaccrual status as of June 30, 2023 and December 31, 2022 (dollars in thousands). All nonaccrual loans are evaluated for an ACL on an individual basis. Only one nonaccrual loan required an ACL, in the amount of $19 thousand, due to collateral value shortfall. The adoption of CECL altered the manner in which purchased loans that were in non-accrual status are presented, and as a result, two such loans totaling $534 thousand are included in this figure in 2023 and not included in 2022.
|
|
CECL |
|
|
Incurred Loss |
|
||||||||||
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||||||||||
|
|
Nonaccrual Loans with No Allowance |
|
|
Nonaccrual Loans with an Allowance |
|
|
Total Nonaccrual Loans |
|
|
Nonaccrual Loans |
|
||||
Commercial |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Real estate construction and land |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
1-4 family residential mortgages |
|
|
233 |
|
|
|
480 |
|
|
|
713 |
|
|
|
673 |
|
Commercial mortgages |
|
|
472 |
|
|
|
|
|
|
472 |
|
|
|
|
||
Consumer |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total Loans |
|
$ |
705 |
|
|
$ |
480 |
|
|
$ |
1,185 |
|
|
$ |
673 |
|
From time to time, the Company modifies loans to borrowers who are experiencing financial difficulties by providing term extensions, interest rate reductions or other-than-insignificant payment delays. As the effect of most modifications is already included in the ACL due to the measurement methodologies used in its estimate, the ACL is typically not adjusted upon modification. During the three and six months ended June 30, 2023, no loans were modified for borrowers experiencing financial difficulties.
The Company closely monitors the performance of all modified loans to understand the effectiveness of its modification efforts. Upon determination, if applicable, that all or a portion of a modified loan is uncollectible, that amount is charged against the ACL. There were no payment defaults during the three months ended June 30, 2023 of modified loans that were modified during the previous twelve months and all are current as of June 30, 2023.
17
Prior to the adoption of ASC 326
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 outstanding principal balance and the carrying amount at December 31, 2022 of loans acquired in business combinations were as follows (dollars in thousands):
|
|
December 31, 2022 |
|
|||||||||
|
|
Acquired Loans - |
|
|
Acquired Loans - Purchased Performing |
|
|
Acquired |
|
|||
Outstanding principal balance |
|
$ |
43,250 |
|
|
$ |
290,604 |
|
|
$ |
333,854 |
|
Carrying amount: |
|
|
|
|
|
|
|
|
|
|||
Commercial |
|
$ |
630 |
|
|
$ |
12,606 |
|
|
$ |
13,236 |
|
Real estate construction and land |
|
|
1,461 |
|
|
|
8,530 |
|
|
|
9,991 |
|
1-4 family residential mortgages |
|
|
9,076 |
|
|
|
164,280 |
|
|
|
173,356 |
|
Commercial mortgages |
|
|
20,828 |
|
|
|
99,206 |
|
|
|
120,034 |
|
Consumer |
|
|
72 |
|
|
|
1,277 |
|
|
|
1,349 |
|
Total acquired loans |
|
$ |
32,067 |
|
|
$ |
285,899 |
|
|
$ |
317,966 |
|
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 June 30, |
|
|
Six Months Ended June 30, |
|
||
|
2022 |
|
|
2022 |
|
||
Accretable yield, beginning of period |
|
12,428 |
|
|
|
13,742 |
|
Accretion |
|
(761 |
) |
|
|
(1,500 |
) |
Reclassification from nonaccretable difference |
|
- |
|
|
|
2,193 |
|
Other changes, net |
|
- |
|
|
|
(2,768 |
) |
Accretable yield, end of period |
|
11,667 |
|
|
|
11,667 |
|
The past due status of loans as of December 31, 2022 was as follows (dollars in thousands):
|
|
30-59 Days |
|
|
60-89 Days |
|
|
90 Days or More |
|
|
Total |
|
|
PCI |
|
|
Current |
|
|
Total |
|
|
90 Days Past Due and Still Accruing |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Commercial |
|
$ |
- |
|
|
$ |
24 |
|
|
$ |
|
|
$ |
24 |
|
|
$ |
630 |
|
|
$ |
70,485 |
|
|
$ |
71,139 |
|
|
$ |
- |
|
|
Real estate construction and land |
|
|
287 |
|
|
|
- |
|
|
|
75 |
|
|
|
362 |
|
|
|
1,461 |
|
|
|
35,718 |
|
|
|
37,541 |
|
|
|
- |
|
1-4 family residential mortgages |
|
|
1,176 |
|
|
|
191 |
|
|
|
598 |
|
|
|
1,965 |
|
|
|
9,076 |
|
|
|
312,144 |
|
|
|
323,185 |
|
|
|
- |
|
Commercial mortgages |
|
|
330 |
|
|
|
- |
|
|
|
646 |
|
|
|
976 |
|
|
|
20,828 |
|
|
|
437,321 |
|
|
|
459,125 |
|
|
|
646 |
|
Consumer loans |
|
|
315 |
|
|
|
41 |
|
|
|
59 |
|
|
|
415 |
|
|
|
72 |
|
|
|
44,938 |
|
|
|
45,425 |
|
|
|
59 |
|
Total Loans |
|
$ |
2,108 |
|
|
$ |
256 |
|
|
$ |
1,378 |
|
|
$ |
3,742 |
|
|
$ |
32,067 |
|
|
$ |
900,606 |
|
|
$ |
936,415 |
|
|
$ |
705 |
|
18
The following table provides a summary, by class, of TDRs as of December 31, 2022 that continued to accrue interest under the terms of the restructuring agreement, which were considered to be performing, and TDRs that were placed in nonaccrual status which were considered to be nonperforming (dollars in thousands):
Troubled debt restructurings |
|
December 31, 2022 |
|
|||||
|
|
No. of |
|
|
Recorded |
|
||
|
|
Loans |
|
|
Investment |
|
||
Performing TDRs |
|
|
|
|
|
|
||
1-4 family residential mortgages |
|
|
1 |
|
|
$ |
88 |
|
Consumer |
|
|
46 |
|
|
|
700 |
|
Total performing TDRs |
|
|
47 |
|
|
$ |
788 |
|
|
|
|
|
|
|
|
||
Nonperforming TDRs |
|
|
|
|
|
|
||
1-4 family residential mortgages |
|
|
2 |
|
|
$ |
495 |
|
Consumer |
|
|
- |
|
|
|
- |
|
Total nonperforming TDRs |
|
|
2 |
|
|
|
495 |
|
Total TDRs |
|
|
49 |
|
|
$ |
1,283 |
|
There were no defaults in the three months ended June 30, 2022 on loans modified in the previous twelve months.
Note 5. Allowance for Credit Losses
On January 1, 2023, the Company adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost. For further information and discussion regarding the Company's accounting policies and policy elections related to the accounting standard update, see Note 1 - Summary of Significant Accounting Policies. All ACL information presented as of June 30, 2023 is in accordance with ASC 326. All ALLL information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP.
The ACL on the loan portfolio is a material estimate for the Company. The Company estimates is ACL on its loan portfolio on a quarterly basis. The Company utilizes two methodologies in its development of the ACL, discounted cash flow and remaining life.
19
Maximum Loss Rate - Management utilizes the same model to calculate maximum loss rates and expected loss rates for each segment. No additional models or methodologies were used to quantify the maximum loss rate, rather, a worst-case economic environment is utilized in the models. This process ensures symmetry between the maximum loss rate and the quantified loss rate. This process also leverages the well-documented regression models used in model development.
The process for deriving the maximum loss rate is outlined below:
Qualitative Factors - ASC 326 requires an entity to adjust historical loss information to reflect the extent to which management expects reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The adjustments for reasonable and supportable forecasts may be qualitative in nature and should reflect changes related to relevant data.
The Company utilizes a scorecard approach to assign qualitative factors. The scorecard approach is in alignment with the AICPA audit considerations for CECL which states:
These adjustments should be grounded in a methodology that is subject to appropriate governance, challenge, and periodic controlled reevaluation. Such methodology will generally require significant management judgment. The information used to support management’s adjustments may be publicly available information, information specifically developed for the entity via management’s specialist (internal or external), or other relevant and reliable information.
The purpose of the qualitative scorecard is to provide a qualitative estimate of the expected credit losses of the current loan portfolio in response to potential limitations of the quantitative model. It is used to aid in the assessment of the unquantifiable factors affecting expected credit losses in the loan portfolio. Benefits of the scorecard include directional consistency, objectivity, controls and quantification framework (auditable).
For each segment, the scorecard calculates the difference between the quantitative expected credit loss and the maximum loss rate. This difference represents all available qualitative adjustment that can be applied to that segment.
Individual Evaluation - In accordance with ASC 326, the Company will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis. Loans will not be included in both collective and individual analysis. Individual analysis will establish a specific reserve for each loan, using one of four methods: 1) Fair Value of Collateral Method (Collateral Relationship); 2) Cash Flow Method; 3) Advanced Cash Flow Method; or 4) Loan Pricing Method.
Management has elected to perform an individual evaluation on all loans in non-accrual status. As of June 30, 2023, after reviewing each loan in non-accrual status, a specific reserve of $19 thousand was established.
The primary driver in the increase in reserves from adoption date of January 1, 2023 to June 30, 2023 was the increase in outstanding loan balances.
20
The following table shows the ACL activity by loan portfolio for the three and six months ended June 30, 2023 (dollars in thousands):
|
|
Commercial |
|
|
Real Estate |
|
|
1-4 family residential mortgages |
|
|
Commercial mortgages |
|
|
Consumer |
|
|
Total |
|
||||||
Allowance for Credit Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance as of December 31, 2022 |
|
$ |
194 |
|
|
$ |
221 |
|
|
$ |
1,618 |
|
|
$ |
2,820 |
|
|
$ |
699 |
|
|
$ |
5,552 |
|
Impact of ASC 326 adoption |
|
|
(11 |
) |
|
|
440 |
|
|
|
14 |
|
|
|
1,577 |
|
|
|
471 |
|
|
|
2,491 |
|
Charge-offs |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(142 |
) |
|
|
(142 |
) |
Recoveries |
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
41 |
|
|
|
62 |
|
|
|
106 |
|
Provision for (recovery of) credit |
|
|
(7 |
) |
|
|
(90 |
) |
|
|
(75 |
) |
|
|
33 |
|
|
|
(96 |
) |
|
|
(235 |
) |
Balance as of March 31, 2023 |
|
$ |
176 |
|
|
$ |
571 |
|
|
$ |
1,560 |
|
|
$ |
4,471 |
|
|
$ |
994 |
|
|
$ |
7,772 |
|
Charge-offs |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(180 |
) |
|
|
(180 |
) |
Recoveries |
|
|
20 |
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
33 |
|
|
|
55 |
|
Provision for (recovery of) credit |
|
|
19 |
|
|
|
(107 |
) |
|
|
715 |
|
|
|
(516 |
) |
|
|
105 |
|
|
|
216 |
|
Balance as of June 30, 2023 |
|
$ |
215 |
|
|
$ |
464 |
|
|
$ |
2,277 |
|
|
$ |
3,955 |
|
|
$ |
952 |
|
|
$ |
7,863 |
|
The following table presents a breakdown of the provision for credit losses for the periods indicated (dollars in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, 2023 |
|
|
June 30, 2022 |
|
|
June 30, 2023 |
|
|
June 30, 2022 |
|
||||
Provision for credit losses: |
|
|
|
|
|
|
|
|
|
|
|
||||
Provision (recovery) for loans |
$ |
216 |
|
|
$ |
(217 |
) |
|
$ |
(19 |
) |
|
$ |
(69 |
) |
Provision for unfunded commitments |
|
45 |
|
|
|
- |
|
|
|
32 |
|
|
|
- |
|
Total |
$ |
261 |
|
|
$ |
(217 |
) |
|
$ |
13 |
|
|
$ |
(69 |
) |
The following table presents the Company's amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated to those loans as of June 30, 2023 (dollars in thousands):
|
|
June 30, 2023 |
|
|||||
|
|
Real Estate Secured Loans |
|
|
Allowance for Credit Losses -Loans |
|
||
Commercial real estate - non owner occupied |
|
$ |
698 |
|
|
$ |
- |
|
Residential 1-4 family real estate |
|
|
741 |
|
|
|
19 |
|
Total |
|
$ |
1,439 |
|
|
$ |
19 |
|
21
The following table presents the Company's recorded investment in loans by credit quality indicators by year of origination as of June 30, 2023 (dollars in thousands). Current period gross write-off amounts represent write-offs for the six months ended June 30, 2023 (dollars in thousands):
|
|
June 30, 2023 |
|
|||||||||||||||||||||||||||||||||
|
|
Term Loans Amortized Cost Basis by Origination Year |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|
Prior |
|
|
Revolving Loans |
|
|
Loans Converted to Term |
|
|
Total |
|
|||||||||
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Pass |
|
$ |
28,457 |
|
|
$ |
12,818 |
|
|
$ |
3,101 |
|
|
$ |
5,959 |
|
|
$ |
8,560 |
|
|
$ |
15,005 |
|
|
$ |
22,694 |
|
|
$ |
14 |
|
|
$ |
96,608 |
|
Watch |
|
|
- |
|
|
|
44 |
|
|
|
- |
|
|
|
- |
|
|
|
122 |
|
|
|
7 |
|
|
|
7 |
|
|
|
- |
|
|
|
180 |
|
Special Mention |
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
93 |
|
|
|
215 |
|
|
|
- |
|
|
|
309 |
|
Substandard |
|
|
- |
|
|
|
73 |
|
|
|
10 |
|
|
|
40 |
|
|
|
344 |
|
|
|
261 |
|
|
|
- |
|
|
|
487 |
|
|
|
1,215 |
|
Total commercial |
|
$ |
28,457 |
|
|
$ |
12,935 |
|
|
$ |
3,112 |
|
|
$ |
5,999 |
|
|
$ |
9,026 |
|
|
$ |
15,366 |
|
|
$ |
22,916 |
|
|
$ |
501 |
|
|
$ |
98,312 |
|
Current period gross write-off |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Real estate construction and land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Pass |
|
$ |
3,665 |
|
|
$ |
13,539 |
|
|
$ |
4,512 |
|
|
$ |
1,754 |
|
|
$ |
940 |
|
|
$ |
2,932 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
27,342 |
|
Watch |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
329 |
|
|
|
- |
|
|
|
- |
|
|
|
329 |
|
Special Mention |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
750 |
|
|
|
- |
|
|
|
- |
|
|
|
750 |
|
Substandard |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
364 |
|
|
|
1,040 |
|
|
|
- |
|
|
|
- |
|
|
|
1,404 |
|
Total real estate construction and land |
|
$ |
3,665 |
|
|
$ |
13,539 |
|
|
$ |
4,512 |
|
|
$ |
1,754 |
|
|
$ |
1,304 |
|
|
$ |
5,051 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
29,825 |
|
Current period gross write-off |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
1-4 family residential mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Pass |
|
$ |
9,025 |
|
|
$ |
14,994 |
|
|
$ |
57,925 |
|
|
$ |
77,837 |
|
|
$ |
25,810 |
|
|
$ |
93,193 |
|
|
$ |
23,425 |
|
|
$ |
387 |
|
|
$ |
302,596 |
|
Watch |
|
|
- |
|
|
|
1,396 |
|
|
|
125 |
|
|
|
1,449 |
|
|
|
- |
|
|
|
6,025 |
|
|
|
470 |
|
|
|
- |
|
|
|
9,465 |
|
Special Mention |
|
|
- |
|
|
|
853 |
|
|
|
127 |
|
|
|
- |
|
|
|
- |
|
|
|
1,389 |
|
|
|
78 |
|
|
|
- |
|
|
|
2,447 |
|
Substandard |
|
|
- |
|
|
|
- |
|
|
|
55 |
|
|
|
507 |
|
|
|
99 |
|
|
|
2,161 |
|
|
|
- |
|
|
|
- |
|
|
|
2,822 |
|
Total 1-4 family residential mortgage |
|
$ |
9,025 |
|
|
$ |
17,243 |
|
|
$ |
58,232 |
|
|
$ |
79,793 |
|
|
$ |
25,909 |
|
|
$ |
102,768 |
|
|
$ |
23,973 |
|
|
$ |
387 |
|
|
$ |
317,330 |
|
Current period gross write-off |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Commercial mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Pass |
|
$ |
48,144 |
|
|
$ |
40,929 |
|
|
$ |
48,145 |
|
|
$ |
105,357 |
|
|
$ |
36,869 |
|
|
$ |
168,088 |
|
|
$ |
2,518 |
|
|
$ |
- |
|
|
$ |
450,050 |
|
Watch |
|
|
- |
|
|
|
- |
|
|
|
265 |
|
|
|
178 |
|
|
|
7,311 |
|
|
|
13,216 |
|
|
|
- |
|
|
|
- |
|
|
|
20,970 |
|
Special Mention |
|
|
- |
|
|
|
- |
|
|
|
394 |
|
|
|
291 |
|
|
|
- |
|
|
|
4,257 |
|
|
|
- |
|
|
|
- |
|
|
|
4,942 |
|
Substandard |
|
|
156 |
|
|
|
- |
|
|
|
1,860 |
|
|
|
2,838 |
|
|
|
- |
|
|
|
5,827 |
|
|
|
- |
|
|
|
- |
|
|
|
10,681 |
|
Total commercial mortgages |
|
$ |
48,300 |
|
|
$ |
40,929 |
|
|
$ |
50,664 |
|
|
$ |
108,664 |
|
|
$ |
44,180 |
|
|
$ |
191,388 |
|
|
$ |
2,518 |
|
|
$ |
- |
|
|
$ |
486,643 |
|
Current period gross write-off |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Pass |
|
$ |
76 |
|
|
$ |
237 |
|
|
$ |
587 |
|
|
$ |
412 |
|
|
$ |
179 |
|
|
$ |
24,303 |
|
|
$ |
14,389 |
|
|
|
|
|
$ |
40,183 |
|
|
Watch |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15 |
|
|
|
12 |
|
|
|
825 |
|
|
|
- |
|
|
|
|
|
|
852 |
|
|
Special Mention |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
75 |
|
|
|
1 |
|
|
|
9 |
|
|
|
85 |
|
Substandard |
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
|
8 |
|
|
|
107 |
|
|
|
- |
|
|
|
|
|
|
118 |
|
|
Total consumer |
|
$ |
76 |
|
|
$ |
237 |
|
|
$ |
590 |
|
|
$ |
427 |
|
|
$ |
199 |
|
|
$ |
25,310 |
|
|
$ |
14,390 |
|
|
$ |
9 |
|
|
$ |
41,238 |
|
Current period gross write-off |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
17 |
|
|
$ |
1 |
|
|
$ |
27 |
|
|
$ |
273 |
|
|
$ |
4 |
|
|
$ |
- |
|
|
$ |
322 |
|
22
Credit Quality Indicators
The Company utilizes the following credit quality indicators:
Pass
Loans with the following risk ratings are pooled by class and considered together as “Pass”:
Excellent – minimal risk loans secured by cash or fully guaranteed by a U.S. government agency
Good – low risk loans secured by marketable collateral within margin
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.
Special Mention
These potential problem loans are currently protected but are potentially weak.
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.
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.
23
Prior to the adoption of ASC 326
The following table presents the changes in the ACL by major classification during the year ended December 31, 2022 (dollars in thousands):
|
|
Commercial |
|
|
Real Estate |
|
|
Real Estate |
|
|
Consumer |
|
|
Total |
|
|||||
Allowance for Credit Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance as of beginning of year |
|
$ |
252 |
|
|
$ |
399 |
|
|
$ |
4,478 |
|
|
$ |
855 |
|
|
$ |
5,984 |
|
Charge-offs |
|
|
(600 |
) |
|
|
- |
|
|
|
- |
|
|
|
(655 |
) |
|
|
(1,255 |
) |
Recoveries |
|
|
519 |
|
|
|
9 |
|
|
|
11 |
|
|
|
178 |
|
|
|
717 |
|
Provision for (recovery of) loan losses |
|
|
23 |
|
|
|
(187 |
) |
|
|
(51 |
) |
|
|
321 |
|
|
|
106 |
|
Ending Balance |
|
$ |
194 |
|
|
$ |
221 |
|
|
$ |
4,438 |
|
|
$ |
699 |
|
|
$ |
5,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Ending Balance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Individually evaluated for impairment |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
23 |
|
|
$ |
23 |
|
Collectively evaluated for impairment |
|
|
194 |
|
|
|
221 |
|
|
|
4,438 |
|
|
|
676 |
|
|
|
5,529 |
|
Acquired loans - purchased credit |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Individually evaluated for impairment |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
583 |
|
|
$ |
700 |
|
|
$ |
1,283 |
|
Collectively evaluated for impairment |
|
|
70,509 |
|
|
|
36,080 |
|
|
|
751,823 |
|
|
|
44,653 |
|
|
|
903,065 |
|
Acquired loans - purchased credit impaired |
|
|
630 |
|
|
|
1,461 |
|
|
|
29,904 |
|
|
|
72 |
|
|
|
32,067 |
|
Ending Balance |
|
$ |
71,139 |
|
|
$ |
37,541 |
|
|
$ |
782,310 |
|
|
$ |
45,425 |
|
|
$ |
936,415 |
|
The following represents the loan portfolio designated by the internal risk ratings assigned to each credit as of December 31, 2022 (dollars in thousands). There were no loans rated “Doubtful” as December 31, 2022.
December 31, 2022 |
|
Excellent |
|
|
Good |
|
|
Pass |
|
|
Watch |
|
|
Special |
|
|
Sub- |
|
|
TOTAL |
|
|||||||
Commercial |
|
$ |
30,121 |
|
|
$ |
16,058 |
|
|
$ |
22,853 |
|
|
$ |
992 |
|
|
$ |
122 |
|
|
$ |
993 |
|
|
$ |
71,139 |
|
Real estate construction and land |
|
|
- |
|
|
|
- |
|
|
|
35,258 |
|
|
|
342 |
|
|
|
532 |
|
|
|
1,409 |
|
|
$ |
37,541 |
|
1-4 family residential mortgages |
|
|
- |
|
|
|
- |
|
|
|
308,041 |
|
|
|
7,935 |
|
|
|
5,431 |
|
|
|
1,778 |
|
|
$ |
323,185 |
|
Commercial mortgages |
|
|
- |
|
|
|
- |
|
|
|
408,513 |
|
|
|
34,828 |
|
|
|
3,872 |
|
|
|
11,912 |
|
|
$ |
459,125 |
|
Consumer |
|
|
461 |
|
|
|
17,544 |
|
|
|
26,326 |
|
|
|
977 |
|
|
|
22 |
|
|
|
95 |
|
|
$ |
45,425 |
|
Total Loans |
|
$ |
30,582 |
|
|
$ |
33,602 |
|
|
$ |
800,991 |
|
|
$ |
45,074 |
|
|
$ |
9,979 |
|
|
$ |
16,187 |
|
|
$ |
936,415 |
|
24
Note 6. Goodwill and Other Intangible Assets
The carrying amount of goodwill was $7.8 million at June 30, 2023 and December 31, 2022 and $8.1 million as of June 30, 2022. The reduction from June 30, 2022 to the other periods presented resulted from the sale of Sturman Wealth Advisors in December of 2022 and the elimination of associated goodwill of $372 thousand.
The Company had $5.8 million, $6.6 million and $7.6 million of other intangible assets as of June 30, 2023, December 31, 2022 and June 30, 2022, respectively. Other intangible assets were recognized in connection with (i) the book of business, including interest in the client relationships of an officer, in connection with the acquisition of Sturman Wealth Advisors in 2016, and (ii) the core deposits acquired from Fauquier in 2021. The other intangible assets related to Sturman Wealth Advisors were eliminated from the balance sheet in December of 2022 upon sale of the business line. The following table summarizes the gross carrying amounts and accumulated amortization of other intangible assets (dollars in thousands):
|
June 30, 2023 |
|
|
December 31, 2022 |
|
|
June 30, 2022 |
|
||||||||||||
|
Gross Carrying Amount |
|
Accumulated Amortization |
|
|
Gross Carrying Amount |
|
Accumulated Amortization |
|
|
Gross Carrying Amount |
|
Accumulated Amortization |
|
||||||
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Core deposit intangible |
$ |
9,660 |
|
$ |
(3,845 |
) |
|
$ |
9,660 |
|
$ |
(3,074 |
) |
|
$ |
9,660 |
|
$ |
(2,255 |
) |
Customer relationships intangible |
|
- |
|
|
- |
|
|
|
- |
|
|
- |
|
|
|
773 |
|
|
(533 |
) |
Total |
$ |
9,660 |
|
$ |
(3,845 |
) |
|
$ |
9,660 |
|
$ |
(3,074 |
) |
|
$ |
10,433 |
|
$ |
(2,788 |
) |
Amortization expense was $379 thousand and $444 thousand for the three months ended June 30, 2023 and 2022, respectively and $770 thousand and $900 thousand for the six months ended June 30, 2023 and 2022, respectively. Note that the amortization expense amounts for 2022 included intangible amortization expense of Sturman Wealth.
Estimated future amortization expense as of June 30, 2023 is as follows (dollars in thousands):
|
Core |
|
|
|
|
Deposit |
|
|
|
|
Intangible |
|
|
|
For the six months ending December 31, 2023 |
$ |
722 |
|
|
For the year ending December 31, 2024 |
|
1,301 |
|
|
For the year ending December 31, 2025 |
|
1,110 |
|
|
For the year ending December 31, 2026 |
|
918 |
|
|
For the year ending December 31, 2027 |
|
726 |
|
|
Thereafter |
|
1,038 |
|
|
Total |
$ |
5,815 |
|
|
25
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 is classified as an operating lease. 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):
|
|
June 30, 2023 |
|
|
June 30, 2022 |
|
||
Lease liability |
|
$ |
6,301 |
|
|
$ |
6,925 |
|
Right-of-use asset |
|
$ |
6,634 |
|
|
$ |
7,343 |
|
Weighted average remaining lease term |
|
5.03 years |
|
|
5.84 years |
|
||
Weighted average discount rate |
|
|
2.07 |
% |
|
|
1.97 |
% |
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
Lease Expense: |
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Operating lease expense |
|
$ |
395 |
|
|
$ |
449 |
|
|
$ |
906 |
|
|
$ |
894 |
|
Short-term lease expense |
|
|
81 |
|
|
|
139 |
|
|
|
204 |
|
|
|
191 |
|
Total lease expense |
|
$ |
476 |
|
|
$ |
588 |
|
|
$ |
1,110 |
|
|
$ |
1,085 |
|
Cash paid for amounts included in |
|
$ |
336 |
|
|
$ |
418 |
|
|
$ |
848 |
|
|
$ |
832 |
|
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 |
|
June 30, 2023 |
|
|
Six months ending December 31, 2023 |
|
$ |
694 |
|
Twelve months ending December 31, 2024 |
|
|
1,332 |
|
Twelve months ending December 31, 2025 |
|
|
1,248 |
|
Twelve months ending December 31, 2026 |
|
|
907 |
|
Twelve months ending December 31, 2027 |
|
|
811 |
|
Thereafter |
|
|
1,665 |
|
Total undiscounted cash flows |
|
$ |
6,657 |
|
Less: Discount |
|
|
(356 |
) |
Lease liability |
|
$ |
6,301 |
|
26
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 six months ended June 30, 2023 and 2022. 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 June 30, 2023 and June 30, 2022 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 |
|
June 30, 2023 |
|
|
June 30, 2022 |
|
||||||||||||||||||
|
|
Net |
|
|
Weighted |
|
|
Per |
|
|
Net |
|
|
Weighted |
|
|
Per |
|
||||||
Basic net income per share |
|
$ |
5,651 |
|
|
|
5,357,873 |
|
|
$ |
1.05 |
|
|
$ |
5,685 |
|
|
|
5,326,271 |
|
|
$ |
1.07 |
|
Effect of dilutive stock options |
|
|
- |
|
|
|
17,200 |
|
|
|
- |
|
|
|
- |
|
|
|
20,737 |
|
|
|
(0.01 |
) |
Diluted net income per share |
|
$ |
5,651 |
|
|
|
5,375,073 |
|
|
$ |
1.05 |
|
|
$ |
5,685 |
|
|
|
5,347,008 |
|
|
$ |
1.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Six Months Ended |
|
June 30, 2023 |
|
|
June 30, 2022 |
|
||||||||||||||||||
|
|
Net |
|
|
Weighted |
|
|
Per |
|
|
Net |
|
|
Weighted |
|
|
Per |
|
||||||
Basic net income per share |
|
$ |
11,442 |
|
|
|
5,348,040 |
|
|
$ |
2.14 |
|
|
$ |
10,609 |
|
|
|
5,319,166 |
|
|
$ |
1.99 |
|
Effect of dilutive stock options |
|
|
- |
|
|
|
27,505 |
|
|
|
(0.01 |
) |
|
|
- |
|
|
|
26,076 |
|
|
|
(0.01 |
) |
Diluted net income per share |
|
$ |
11,442 |
|
|
$ |
5,375,545 |
|
|
$ |
2.13 |
|
|
$ |
10,609 |
|
|
|
5,345,242 |
|
|
$ |
1.98 |
|
For the three and six months ended June 30, 2023, there were 105,501 option shares considered anti-dilutive and excluded from this calculation. For the three and six months ended June 30, 2022, there were 101,901 option shares considered anti-dilutive and excluded from this calculation.
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.
27
A summary of the shares issued and available under each of the Plans is shown below as of June 30, 2023. 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.
|
|
2022 Plan |
|
|
2014 Plan |
|
|
2005 Plan |
|
|||
Aggregate shares issuable |
|
|
150,000 |
|
|
|
275,625 |
|
|
|
253,575 |
|
Options issued, net of forfeited and expired |
|
|
- |
|
|
|
(173,706 |
) |
|
|
(59,870 |
) |
Unrestricted stock issued |
|
|
- |
|
|
|
(11,635 |
) |
|
|
- |
|
Restricted stock grants issued, net of forfeited |
|
|
(18,932 |
) |
|
|
(84,253 |
) |
|
|
- |
|
Cancelled due to Plan expiration |
|
|
- |
|
|
|
- |
|
|
|
(193,705 |
) |
Remaining available for grant |
|
|
131,068 |
|
|
|
6,031 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|||
Stock grants issued and outstanding: |
|
|
|
|
|
|
|
|
|
|||
Total vested and unvested shares |
|
|
18,932 |
|
|
|
95,888 |
|
|
|
- |
|
Fully vested shares |
|
|
- |
|
|
|
48,675 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|||
Option grants issued and outstanding: |
|
|
|
|
|
|
|
|
|
|||
Total vested and unvested shares |
|
|
- |
|
|
|
170,501 |
|
|
|
- |
|
Fully vested shares |
|
|
- |
|
|
|
109,616 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|||
Exercise price range |
|
$ |
- |
|
|
$23.75 to $42.62 |
|
|
$ |
- |
|
The Company accounts for all of its stock incentive plans under recognition and measurement accounting principles which require that the compensation cost relating to stock-based payment transactions be recognized in the financial statements. Stock-based compensation arrangements include stock options and restricted stock. All stock-based payments to employees are required to be valued at a fair value on the date of grant and expensed based on that fair value over the applicable vesting period.
Stock Options
Changes in the stock options outstanding related to the Plans are summarized below (dollars in thousands except per share data):
|
|
June 30, 2023 |
|
|||||||||
|
|
Number of Options |
|
|
Weighted |
|
|
Aggregate |
|
|||
Outstanding at January 1, 2023 |
|
|
168,280 |
|
|
$ |
33.95 |
|
|
$ |
830 |
|
Issued |
|
|
3,600 |
|
|
$ |
35.13 |
|
|
|
|
|
Exercised |
|
|
(1,379 |
) |
|
$ |
(13.69 |
) |
|
|
|
|
Expired |
|
|
- |
|
|
$ |
- |
|
|
|
|
|
Outstanding at June 30, 2023 |
|
|
170,501 |
|
|
$ |
34.14 |
|
|
$ |
488 |
|
|
|
|
|
|
|
|
|
|
|
|||
Options exercisable at June 30, 2023 |
|
|
109,616 |
|
|
$ |
36.72 |
|
|
$ |
222 |
|
For the three months ended June 30, 2023 and 2022, the Company recognized $68 thousand and $41 thousand, respectively, in compensation expense for stock options. For the six months ended June 30, 2023 and 2022, the Company recognized $110 thousand and $83 thousand, respectively, in compensation expense for stock options. As of June 30, 2023, there was $153 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 stock options grants of 3,600 issued during the three months ended June 30, 2023 and none granted during the first quarter of 2023. There were no stock option grants issued during the three and six months ended June 30, 2022.
28
Summary information pertaining to options outstanding at June 30, 2023 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 |
|
|
Weighted- |
|
Weighted- |
|
|
Number of |
|
|
Weighted- |
|
||||
$23.75 to $30.00 |
|
|
65,000 |
|
|
7.0 Years |
|
$ |
24.65 |
|
|
|
30,600 |
|
|
$ |
24.90 |
|
$30.01 to $40.00 |
|
|
48,020 |
|
|
7.3 Years |
|
$ |
36.83 |
|
|
|
21,536 |
|
|
$ |
37.79 |
|
$40.01 to $42.62 |
|
|
57,481 |
|
|
4.9 Years |
|
$ |
42.62 |
|
|
|
57,480 |
|
|
$ |
42.62 |
|
Total |
|
|
170,501 |
|
|
6.4 Years |
|
$ |
34.14 |
|
|
|
109,616 |
|
|
$ |
36.72 |
|
Stock Grants
Unrestricted stock grant – No unrestricted stock grants were awarded during the six months ended June 30, 2023. During the six months ended June 30, 2022, 100 shares of unrestricted stock were granted to an employee for a total expense of $3 thousand.
Restricted stock grants – 8,400 and 18,932 restricted shares were granted to employees and non-employee directors, respectively, vesting over a four-year period, during the six months ended June 30, 2023. (Note that all such shares were granted during the second quarter of 2023 with no shares granted during the first quarter of 2023.) During the six months ended June 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 quarter of 2022.) For the three and six months ended June 30, 2023, $120 and $231 thousand, respectively, was expensed as a result of restricted stock grants. As of June 30, 2023, there was $1.9 million in unrecognized compensation expense for all restricted stock grants remaining to be recognized in future reporting periods through 2027.
Changes in the restricted stock grants outstanding during the six months ended June 30, 2023 are summarized below (dollars in thousands except per share data):
|
|
June 30, 2023 |
|
|||||||||
|
|
Number of |
|
|
Weighted |
|
|
Aggregate |
|
|||
Nonvested as of January 1, 2023 |
|
|
51,664 |
|
|
$ |
32.05 |
|
|
$ |
1,661 |
|
Issued |
|
|
27,332 |
|
|
$ |
32.73 |
|
|
$ |
879 |
|
Vested |
|
|
(12,851 |
) |
|
$ |
30.40 |
|
|
$ |
(413 |
) |
Forfeited |
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
Nonvested at June 30, 2023 |
|
|
66,145 |
|
|
$ |
32.65 |
|
|
$ |
2,127 |
|
|
|
|
|
|
|
|
|
|
|
29
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 |
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). Additional information on interest rate swaps is presented in Note 12 – Derivative Instruments and Hedging Activities.
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. Additional information on interest rate swaps is presented in Note 12 – Derivative Instruments and Hedging Activities.
30
The following tables present the balances measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022 (dollars in thousands):
|
|
|
|
|
Fair Value Measurements at June 30, 2023 Using: |
|
||||||||||
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
Significant |
|
||||
Description |
|
Balance |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government treasuries |
|
$ |
175,551 |
|
|
$ |
- |
|
|
$ |
175,551 |
|
|
$ |
- |
|
U.S. Government agencies |
|
|
38,839 |
|
|
|
- |
|
|
|
38,839 |
|
|
|
- |
|
Mortgage-backed securities/CMOs |
|
|
157,788 |
|
|
|
- |
|
|
|
157,788 |
|
|
|
- |
|
Corporate bonds |
|
|
18,702 |
|
|
|
- |
|
|
|
18,702 |
|
|
|
- |
|
Municipal bonds |
|
|
82,988 |
|
|
|
- |
|
|
|
82,988 |
|
|
|
- |
|
Total securities available for sale |
|
$ |
473,868 |
|
|
$ |
- |
|
|
$ |
473,868 |
|
|
$ |
- |
|
|
|
|
|
|
Fair Value Measurements at December 31, 2022 Using: |
|
||||||||||
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
Significant |
|
||||
Description |
|
Balance |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government treasuries |
|
$ |
242,470 |
|
|
$ |
- |
|
|
$ |
242,470 |
|
|
$ |
- |
|
U.S. Government agencies |
|
|
28,755 |
|
|
|
- |
|
|
|
28,755 |
|
|
|
- |
|
Mortgage-backed securities/CMOs |
|
|
167,076 |
|
|
|
- |
|
|
|
167,076 |
|
|
|
- |
|
Corporate bonds |
|
|
18,729 |
|
|
|
- |
|
|
|
18,729 |
|
|
|
|
|
Municipal bonds |
|
|
81,156 |
|
|
|
- |
|
|
|
81,156 |
|
|
|
- |
|
Total securities available for sale |
|
$ |
538,186 |
|
|
$ |
- |
|
|
$ |
538,186 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate swap liabilities |
|
$ |
506 |
|
|
$ |
- |
|
|
$ |
506 |
|
|
$ |
- |
|
Total liabilities at fair value |
|
$ |
538,692 |
|
|
$ |
- |
|
|
$ |
538,692 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain financial 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:
Collateral Dependent Loans with an ACL
In accordance with ASC 326, we may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the ACL are determined by analyzing the borrower's ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower's industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice.
31
The following table presents the Company's assets that were measured at fair value on a nonrecurring basis as of June 30, 2023 (dollars in thousands). There were no such assets to report as of December 31, 2022.
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
Significant |
|
||||
Description |
|
Balance |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Individually evaluated loans |
|
$ |
461 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Description |
|
Fair Value |
|
|
Valuation Technique |
|
|
Unobservable Inputs |
|
|
Discount Rate |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Individually evaluated loans |
|
$ |
461 |
|
|
Market comparables |
|
|
Discount applied to recent appraisal |
|
|
|
20.0 |
% |
||
|
|
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.
32
The carrying values and estimated fair values of the Company's financial instruments as of June 30, 2023 and December 31, 2022 are as follows (dollars in thousands):
|
|
|
|
|
Fair Value Measurements at June 30, 2023 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 |
|
$ |
29,939 |
|
|
$ |
29,939 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
29,939 |
|
Available for sale securities |
|
|
473,868 |
|
|
|
- |
|
|
|
473,868 |
|
|
|
- |
|
|
|
473,868 |
|
Restricted securities |
|
|
7,438 |
|
|
|
- |
|
|
|
7,438 |
|
|
|
- |
|
|
|
7,438 |
|
Loans, net |
|
|
965,485 |
|
|
|
- |
|
|
|
- |
|
|
|
902,429 |
|
|
|
902,429 |
|
Bank owned life insurance |
|
|
39,065 |
|
|
|
- |
|
|
|
39,065 |
|
|
|
- |
|
|
|
39,065 |
|
Accrued interest receivable |
|
|
5,092 |
|
|
|
- |
|
|
|
2,137 |
|
|
|
2,955 |
|
|
|
5,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Demand deposits and interest-bearing transaction and money market accounts |
|
$ |
1,123,120 |
|
|
$ |
- |
|
|
$ |
1,123,120 |
|
|
$ |
- |
|
|
$ |
1,123,120 |
|
Certificates of deposit |
|
|
224,956 |
|
|
|
- |
|
|
|
224,677 |
|
|
|
- |
|
|
|
224,677 |
|
Federal funds purchased |
|
|
20,503 |
|
|
$ |
- |
|
|
|
20,503 |
|
|
$ |
- |
|
|
|
20,503 |
|
FHLB Borrowings |
|
|
59,666 |
|
|
|
- |
|
|
|
59,717 |
|
|
|
- |
|
|
|
59,717 |
|
Junior subordinated debt, net |
|
|
3,436 |
|
|
|
- |
|
|
|
3,436 |
|
|
|
- |
|
|
|
3,436 |
|
Accrued interest payable |
|
|
1,059 |
|
|
|
- |
|
|
|
1,059 |
|
|
|
- |
|
|
|
1,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 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 |
|
$ |
40,136 |
|
|
$ |
40,136 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
40,136 |
|
Available for sale securities |
|
|
538,186 |
|
|
|
- |
|
|
|
538,186 |
|
|
|
- |
|
|
|
538,186 |
|
Restricted securities |
|
|
5,137 |
|
|
|
- |
|
|
|
5,137 |
|
|
|
- |
|
|
|
5,137 |
|
Loans, net |
|
|
930,863 |
|
|
|
- |
|
|
|
- |
|
|
|
890,929 |
|
|
|
890,929 |
|
Assets held for sale |
|
|
965 |
|
|
|
- |
|
|
|
965 |
|
|
|
- |
|
|
|
965 |
|
Bank owned life insurance |
|
|
38,552 |
|
|
|
- |
|
|
|
38,552 |
|
|
|
- |
|
|
|
38,552 |
|
Accrued interest receivable |
|
|
4,879 |
|
|
|
- |
|
|
|
2,265 |
|
|
|
2,614 |
|
|
|
4,879 |
|
Interest rate swap asset |
|
|
506 |
|
|
|
- |
|
|
|
506 |
|
|
|
- |
|
|
|
506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Demand deposits and interest-bearing transaction and money market accounts |
|
$ |
1,363,232 |
|
|
$ |
- |
|
|
$ |
1,363,232 |
|
|
$ |
- |
|
|
$ |
1,363,232 |
|
Certificates of deposit |
|
|
115,106 |
|
|
|
- |
|
|
|
109,260 |
|
|
|
- |
|
|
|
109,260 |
|
Junior subordinated debt, net |
|
|
3,413 |
|
|
|
- |
|
|
|
3,413 |
|
|
|
- |
|
|
|
3,413 |
|
Accrued interest payable |
|
|
157 |
|
|
|
- |
|
|
|
157 |
|
|
|
- |
|
|
|
157 |
|
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.
33
Note 11. Other Comprehensive Income (Loss)
The following table presents the changes in each component of accumulated other comprehensive income (loss) as of June 30, 2023 and June 30, 2022 (dollars in thousands).
|
|
AFS Securities |
|
|
Interest Rate Swap |
|
|
Total |
|
|||
Accumulated other comprehensive income (loss) at December 31, 2022 |
|
$ |
(49,024 |
) |
|
$ |
400 |
|
|
$ |
(48,624 |
) |
|
|
|
|
|
|
|
|
|
|
|||
Other comprehensive income (loss) arising during the period |
|
|
3,647 |
|
|
|
(46 |
) |
|
|
3,601 |
|
Related income tax effects |
|
|
(766 |
) |
|
|
9 |
|
|
|
(757 |
) |
|
|
|
2,881 |
|
|
|
(37 |
) |
|
|
2,844 |
|
|
|
|
|
|
|
|
|
|
|
|||
Reclassification into net income |
|
|
206 |
|
|
|
(460 |
) |
|
|
(254 |
) |
Related income tax effects |
|
|
(43 |
) |
|
|
97 |
|
|
|
54 |
|
|
|
|
163 |
|
|
|
(363 |
) |
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
|||
Accumulated other comprehensive loss at June 30, 2023 |
|
$ |
(45,980 |
) |
|
$ |
— |
|
|
$ |
(45,980 |
) |
|
|
|
|
|
|
|
|
|
|
|||
|
|
AFS Securities |
|
|
Interest Rate Swap |
|
|
Total |
|
|||
Accumulated other comprehensive loss at December 31, 2021 |
|
$ |
(2,164 |
) |
|
$ |
(47 |
) |
|
$ |
(2,211 |
) |
|
|
|
|
|
|
|
|
|
|
|||
Other comprehensive income (loss) arising during the period |
|
|
(45,415 |
) |
|
|
499 |
|
|
|
(44,916 |
) |
Related income tax effects |
|
|
9,536 |
|
|
|
(104 |
) |
|
|
9,432 |
|
|
|
|
(35,879 |
) |
|
|
395 |
|
|
|
(35,484 |
) |
|
|
|
|
|
|
|
|
|
|
|||
Accumulated other comprehensive income (loss) at June 30, 2022 |
|
$ |
(38,043 |
) |
|
$ |
348 |
|
|
$ |
(37,695 |
) |
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. At December 31, 2022, the Company had a designated cash flow hedge to manage its exposure to variability in cash flows on one variable rate borrowing through 2036. In anticipation of terminating the borrowing position, such hedge position was liquidated in the first quarter of 2023 for a gain of $479 thousand. There are no other hedges in place as of June 30, 2023.
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.
34
Cash collateral held at other banks for swaps was $580 thousand as of December 31, 2022. Related to the liquidation of the hedge as noted above, the cash collateral was returned to the Company. Collateral was dependent on the market valuation of the underlying hedges.
The follow table summarizes the Company’s derivative instruments as of December 31, 2022 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
||
|
|
December 31, 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 |
|
|
$ |
506 |
|
|
Junior subordinated debt |
|
6/15/2031 |
Note 13. Segment Reporting
For the financial periods noted in this report, 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:
35
Segment information for the three and six months ended June 30, 2023 and 2022 is shown in the following tables (dollars in thousands). Note that asset information is not reported below, as the assets of VNB Trust & Estate Services are reported at the Bank level and the assets of Sturman Wealth Advisors were reported at the Bank level prior to the sale of the business line on December 19, 2022; 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 June 30, 2023 |
|
Bank |
|
|
VNB Trust & |
|
|
Masonry |
|
|
Consolidated |
|
||||
Net interest income |
|
$ |
13,703 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
13,703 |
|
Provision for credit losses |
|
|
261 |
|
|
|
- |
|
|
|
- |
|
|
|
261 |
|
Noninterest income |
|
|
1,637 |
|
|
|
250 |
|
|
|
158 |
|
|
|
2,045 |
|
Noninterest expense |
|
|
7,987 |
|
|
|
361 |
|
|
|
216 |
|
|
|
8,564 |
|
Income (loss) before income taxes |
|
|
7,092 |
|
|
|
(111 |
) |
|
|
(58 |
) |
|
|
6,923 |
|
Provision for (benefit from) income |
|
|
1,308 |
|
|
|
(24 |
) |
|
|
(12 |
) |
|
|
1,272 |
|
Net income (loss) |
|
$ |
5,784 |
|
|
$ |
(87 |
) |
|
$ |
(46 |
) |
|
$ |
5,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Six months ended June 30, 2023 |
|
Bank |
|
|
VNB Trust & |
|
|
Masonry |
|
|
Consolidated |
|
||||
Net interest income |
|
$ |
27,116 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
27,116 |
|
Provision for credit losses |
|
|
13 |
|
|
|
- |
|
|
|
- |
|
|
|
13 |
|
Noninterest income |
|
|
3,492 |
|
|
|
510 |
|
|
|
319 |
|
|
|
4,321 |
|
Noninterest expense |
|
|
16,355 |
|
|
|
672 |
|
|
|
398 |
|
|
|
17,425 |
|
Income (loss) before income taxes |
|
|
14,240 |
|
|
|
(162 |
) |
|
|
(79 |
) |
|
|
13,999 |
|
Provision for (benefit from) income taxes |
|
|
2,607 |
|
|
|
(34 |
) |
|
|
(16 |
) |
|
|
2,557 |
|
Net income (loss) |
|
$ |
11,633 |
|
|
$ |
(128 |
) |
|
$ |
(63 |
) |
|
$ |
11,442 |
|
Three months ended June 30, 2022 |
|
Bank |
|
|
Sturman Wealth Advisors |
|
|
VNB Trust & |
|
|
Masonry |
|
|
Consolidated |
|
|||||
Net interest income |
|
$ |
12,461 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
12,461 |
|
Provision for (recovery of) credit losses |
|
|
(217 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(217 |
) |
Noninterest income |
|
|
2,851 |
|
|
|
210 |
|
|
|
365 |
|
|
|
220 |
|
|
|
3,646 |
|
Noninterest expense |
|
|
8,717 |
|
|
|
161 |
|
|
|
376 |
|
|
|
188 |
|
|
|
9,442 |
|
Income (loss) before income taxes |
|
|
6,812 |
|
|
|
49 |
|
|
|
(11 |
) |
|
|
32 |
|
|
|
6,882 |
|
Provision for (benefit from) income |
|
|
1,181 |
|
|
|
11 |
|
|
|
(2 |
) |
|
|
7 |
|
|
|
1,197 |
|
Net income (loss) |
|
$ |
5,631 |
|
|
$ |
38 |
|
|
$ |
(9 |
) |
|
$ |
25 |
|
|
$ |
5,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Six months ended June 30, 2022 |
|
Bank |
|
|
Sturman Wealth Advisors |
|
|
VNB Trust & |
|
|
Masonry |
|
|
Consolidated |
|
|||||
Net interest income |
|
$ |
23,886 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
23,886 |
|
Provision for (recovery of) credit losses |
|
|
(69 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(69 |
) |
Noninterest income |
|
|
4,385 |
|
|
|
426 |
|
|
|
3,196 |
|
|
|
426 |
|
|
|
8,433 |
|
Noninterest expense |
|
|
17,538 |
|
|
|
327 |
|
|
|
1,298 |
|
|
|
374 |
|
|
|
19,537 |
|
Income before income taxes |
|
|
10,802 |
|
|
|
99 |
|
|
|
1,898 |
|
|
|
52 |
|
|
|
12,851 |
|
Provision for income taxes |
|
|
1,811 |
|
|
|
21 |
|
|
|
399 |
|
|
|
11 |
|
|
|
2,242 |
|
Net income |
|
$ |
8,991 |
|
|
$ |
78 |
|
|
$ |
1,499 |
|
|
$ |
41 |
|
|
$ |
10,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
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, 2022. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results for the year ending December 31, 2023 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 judgment 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: inflation, interest rates, market and monetary fluctuations; liquidity and capital requirements; market disruptions including pandemics or significant health hazards, severe weather conditions, natural disasters, terrorist activities, financial crises, political crises, war and other military conflicts (including the ongoing military conflict between Russia and Ukraine) or other major events, the governmental and societal responses thereto, or the prospect of these events; changes, particularly declines, in general economic and market conditions in the local economies in which the Company operates, including the effects of declines in real estate values; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; the impact of changes in laws, regulations and guidance related to financial services including, but not limited to, taxes, banking, securities and insurance; changes in accounting principles, policies and guidelines; the financial condition of the Company’s borrowers; the Company's ability to attract, hire, train and retain qualified employees; an increase in unemployment levels; competitive pressures on loan and deposit pricing and demand; fluctuation in asset quality; assumptions that underlie the Company’s ACL; the value of securities held in the Company's investment portfolio; performance of assets under management; cybersecurity threats or attacks and the development and maintenance of reliable electronic systems; changes in technology and their impact on the marketing of new products and services and the acceptance of these products and services by new and existing customers; the willingness of customers to substitute competitors’ products and services for the Company’s products and services; the risks and uncertainties described from time to time in the Company’s press releases and filings with the SEC; and the Company’s performance in managing the risks involved in any of the foregoing. 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, 2022 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.
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.
37
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. During the second quarter of 2023, the Board of Directors approved a share repurchase plan of up to 5% of outstanding common stock, subject to consultation with the Federal Reserve.
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.
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 2022 Form 10-K. The significant change in the Company’s application of critical accounting policies since December 31, 2022 relates to the estimate of the allowance for credit losses, described as follows:
Allowance for credit losses - The Company establishes the ACL through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the allowance for credit losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the ACL. The ACL represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. Management’s judgment in determining the level of the ACL is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. The measurement of the ACL on all loans is based in part on forecasts of the national unemployment rate, which we believe to be indicative of risk factors related to the collectability of the loans. In addition, management’s estimate of expected credit losses is based on the remaining life of certain consumer loans held for investment, and changes in expected prepayment behavior may result in changes in the remaining life of loans and expected credit losses. Management also assesses the risk of credit losses arising from changes in general market, economic and business conditions; the nature and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances and the value of underlying collateral in determining the recorded balance of the ACL. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. In evaluating the level of the ACL, we consider a range of possible assumptions and outcomes related to the various factors identified above. The level of the allowance is particularly sensitive to changes in the actual and forecasted national unemployment rate and changes in current conditions or reasonably expected future conditions affecting the collectability of loans.
38
FINANCIAL CONDITION
Total assets
The total assets of the Company as of June 30, 2023 were $1.6 billion. This is a $39.3 million, or 2.4%, decrease from total assets reported at December 31, 2022 and a $160.8 million, or 9.2%, decrease from total assets reported at June 30, 2022. During 2022, the Company made a strategic decision to delay increasing rates paid on deposit accounts. As a result, the Company has experienced expected declines in deposit balances through the second quarter of 2023, which resulted in decreases within overnight investments and in the securities portfolio in order to provide necessary funding.
Interest-bearing deposits in other banks
The Company had $20.2 million of interest-bearing deposits in other banks as of June 30, 2023, compared to $19.1 million as of December 31, 2022 and $145.2 million as of June 30, 2022. During 2022, significant excess liquidity was deployed into short-term investment securities. During the first six months of 2023, customer deposit balances declined $130.3 million, which was largely funded by interest-bearing deposits in other banks.
Federal funds sold
The Company had no overnight federal funds sold as of June 30, 2023, $45 thousand as of December 31, 2022 and $52.8 million as of June 30, 2022. Any excess funds are sold on a daily basis in the federal funds market. The Company monitors liquidity on a daily basis to ensure that it maintains sufficient liquidity to meet its funding commitments at all times.
The Company participates 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 June 30, 2023 totaled $481.3 million, a decrease of $62.0 million compared with the $543.3 million reported at December 31, 2022 and an increase of $14.3 million from the $467.0 million reported at June 30, 2022. The decrease from year-end is due to sales from lower yielding AFS securities to meet funding demands discussed earlier, while the increase during 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 June 30, 2023 and December 31, 2022, the investment securities holdings represented 30.4% and 33.5% of the Company’s total assets, respectively.
The Company’s investment securities portfolio included restricted securities totaling $7.4 million as of June 30, 2023, compared to $5.1 million as of December 31, 2022 and $5.1 million as of June 30, 2022. 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 June 30, 2023, the unrestricted securities portfolio totaled $473.9 million. The following table summarizes the Company's AFS securities by type as of June 30, 2023, December 31, 2022, and June 30, 2022 (dollars in thousands):
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
|
June 30, 2022 |
|
|||||||||||||||
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
||||||
|
|
Balance |
|
|
Total |
|
|
Balance |
|
|
Total |
|
|
Balance |
|
|
Total |
|
||||||
U.S. Government treasuries |
|
$ |
175,551 |
|
|
|
37.0 |
% |
|
$ |
242,470 |
|
|
|
45.1 |
% |
|
$ |
161,009 |
|
|
|
34.9 |
% |
U.S. Government agencies |
|
|
38,839 |
|
|
|
8.2 |
% |
|
|
28,755 |
|
|
|
5.4 |
% |
|
|
30,532 |
|
|
|
6.6 |
% |
Mortgage-backed securities/CMOs |
|
|
157,788 |
|
|
|
33.3 |
% |
|
|
167,076 |
|
|
|
31.0 |
% |
|
|
175,962 |
|
|
|
38.1 |
% |
Corporate bonds |
|
|
18,702 |
|
|
|
4.0 |
% |
|
|
18,729 |
|
|
|
3.5 |
% |
|
|
11,154 |
|
|
|
2.4 |
% |
Municipal bonds |
|
|
82,988 |
|
|
|
17.5 |
% |
|
|
81,156 |
|
|
|
15.1 |
% |
|
|
83,173 |
|
|
|
18.0 |
% |
Total available for sale securities |
|
$ |
473,868 |
|
|
|
100.0 |
% |
|
$ |
538,186 |
|
|
|
100.0 |
% |
|
$ |
461,830 |
|
|
|
100.0 |
% |
39
The unrestricted 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. Refer to Note 2. Adoption of New Accounting Standards for discussion on the impact of CECL to the evaluation of securities for ACL.
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 well as the counties of Jefferson and Berkeley in West Virginia.
As of June 30, 2023, total loans were $973.3 million, compared to $936.4 million as of December 31, 2022 and $960.2 million at June 30, 2022. Loans as a percentage of total assets at June 30, 2023 were 61.4%, compared to 55.0% as of June 30, 2022. Loans as a percentage of deposits at June 30, 2023 were 72.2%, compared to 60.1% as of June 30, 2022.
The following table summarizes the Company's loan portfolio by type of loan as of June 30, 2023, December 31, 2022, and June 30, 2022 (dollars in thousands):
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
|
June 30, 2022 |
|
|||||||||||||||
|
|
Balance |
|
|
% of |
|
|
Balance |
|
|
% of |
|
|
Balance |
|
|
% of |
|
||||||
Commercial loans |
|
$ |
98,312 |
|
|
|
10.1 |
% |
|
$ |
71,139 |
|
|
|
7.6 |
% |
|
$ |
77,599 |
|
|
|
8.1 |
% |
Real estate mortgage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Construction and land |
|
|
29,825 |
|
|
|
3.1 |
% |
|
|
37,541 |
|
|
|
4.0 |
% |
|
|
55,140 |
|
|
|
5.7 |
% |
1-4 family residential mortgages |
|
|
317,330 |
|
|
|
32.6 |
% |
|
|
323,185 |
|
|
|
34.5 |
% |
|
|
329,920 |
|
|
|
34.4 |
% |
Commercial |
|
|
486,643 |
|
|
|
50.0 |
% |
|
|
459,125 |
|
|
|
49.0 |
% |
|
|
446,282 |
|
|
|
46.5 |
% |
Total real estate mortgage |
|
|
833,798 |
|
|
|
85.7 |
% |
|
|
819,851 |
|
|
|
87.6 |
% |
|
|
831,342 |
|
|
|
86.6 |
% |
Consumer |
|
|
41,238 |
|
|
|
4.2 |
% |
|
|
45,425 |
|
|
|
4.9 |
% |
|
|
51,251 |
|
|
|
5.3 |
% |
Total loans |
|
$ |
973,348 |
|
|
|
100.0 |
% |
|
$ |
936,415 |
|
|
|
100.0 |
% |
|
$ |
960,192 |
|
|
|
100.0 |
% |
Loan balances increased by $36.9 million or 3.9% from December 31, 2022 to June 30, 2023. During the first half of 2023, the Company funded $62.3 million in organic loan production and purchased $27.7 million in government guaranteed loans. Paydowns and normal amortization of $53.1 million significantly impacted gross loan balances during the first half of 2023. As of June 30, 2023, only $196 thousand of PPP loans remain outstanding on the Bank's balance sheet.
The following table details the Company's levels of non-owner occupied commercial real estate as of June 30, 2023, along with the average loan size and % of risk ratings for each category (dollars in thousands):
Loan Type |
|
Balance |
|
% of Total CRE |
|
|
Average Loan Size |
|
Special Mention |
|
|
Sub- |
|
|
Non-accrual |
|
||||||
Hotels |
|
$ |
13,005 |
|
|
5.37 |
% |
|
$ |
2,601 |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Office Building |
|
|
70,969 |
|
|
29.32 |
% |
|
$ |
835 |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Warehouses/Industrial |
|
|
47,409 |
|
|
19.58 |
% |
|
$ |
1,823 |
|
|
0.00 |
% |
|
|
1.42 |
% |
|
|
0.99 |
% |
Retail |
|
|
84,631 |
|
|
34.96 |
% |
|
$ |
1,387 |
|
|
0.06 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Day Cares / Schools |
|
|
15,735 |
|
|
6.50 |
% |
|
$ |
1,574 |
|
|
2.26 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
All Other Commercial Buildings |
|
|
10,330 |
|
|
4.27 |
% |
|
$ |
795 |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Total Non-Owner Occupied CRE |
|
$ |
242,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Loan quality
The Company continues to experience extremely low levels of NPAs, as a result of strict underwriting standards and practices. However, the economic environment in the Company's lending footprint could be impacted as persistent inflation, higher interest rates, and other signs of recession materialize, which could increase NPAs in future periods.
Nonaccruals - Nonaccrual loans, comprised of six loans to five borrowers, totaled $1.2 million at June 30, 2023, compared to balances of $673 thousand and $511 thousand reported at December 31, 2022 and June 30, 2022, respectively. The adoption of CECL altered the manner in which purchased loans that were in nonaccrual status are presented, and as a result, two such loans totaling $534 thousand are now included in this figure.
Past Due Loans - The Company had loans in its portfolio totaling $107 thousand, $705 thousand and $626 thousand, as of June 30, 2023, December 31, 2022 and June 30, 2022, respectively, that were 90 or more days past due and still accruing interest as the Company deemed them to be collectible.
Troubled Loan Modifications - The Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, effective January 1, 2023 on a prospective basis. Refer to Note 1. Summary of Significant Accounting Policies in Part I, Item 1, Notes to Consolidated Financial Statements for information on the Company's accounting policy for loan modifications to borrowers experiencing financial difficulty and how the Company defines TLMs. As of June 30, 2023, the Company had TLMs totaling $1.1 million.
Troubled Debt Restructurings - After the adoption of ASU 2022-02, the Company no longer has TDRs. The below information is presented for December 31, 2022, prior to the adoption of ASU 2022-02.
As of December 31, 2022, the Company had a total of $1.3 million of loans classified as TDRs. Of this balance only one loan in the amount of $495 thousand was a nonperforming TDR. The remaining $788 thousand, of which $700 thousand were student loans, were classified as performing. Based on regulatory guidance on student lending, the Company classified 46 of its Purchased Student Loans as TDRs for a total of $700 thousand as of December 31, 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 evaluated these loans individually for impairment and included any probable loss in the allowance for loan loss; interest continued 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 Credit Losses
The relationship of the ACL to total loans and nonaccrual loans appears below (dollars in thousands):
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
|
June 30, 2022 |
|
|||
Total loans |
|
$ |
973,348 |
|
|
$ |
936,415 |
|
|
$ |
960,192 |
|
Nonaccrual loans |
|
$ |
1,185 |
|
|
$ |
673 |
|
|
$ |
511 |
|
Allowance for credit losses |
|
$ |
7,863 |
|
|
$ |
5,552 |
|
|
$ |
5,503 |
|
Nonaccrual loans to total loans |
|
|
0.12 |
% |
|
|
0.07 |
% |
|
|
0.05 |
% |
ACL to total loans |
|
|
0.81 |
% |
|
|
0.59 |
% |
|
|
0.57 |
% |
ACL to nonaccrual loans |
|
|
663.54 |
% |
|
|
824.96 |
% |
|
|
1076.91 |
% |
The ACL on loans as a percentage of loans was 0.81% as of June 30, 2023, 0.59% as of December 31, 2022, and 0.57% as of June 30, 2022. The total of the ACL and the fair value mark as a percentage of gross loans (a non-GAAP financial measure) amounted to 1.94% as of June 30, 2023, compared to 2.29% as of December 31, 2022. 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 $11.0 million as
41
of June 30, 2023. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP ACL as a percentage of loans.
A recovery of provision for credit losses totaling $19 thousand and a provision for loan losses totaling $148 thousand were recorded in the six months ended June 30, 2023 and 2022, respectively. The following is a summary of the changes in the ACL for the six months ended June 30, 2023 and 2022 (dollars in thousands):
|
|
2023 |
|
|
2022 |
|
||
Allowance for loan losses, December 31 of prior year |
|
$ |
5,552 |
|
|
$ |
5,984 |
|
Impact of adoption of CECL, January 1, 2023 |
|
|
2,491 |
|
|
|
- |
|
Charge-offs |
|
|
(322 |
) |
|
|
(664 |
) |
Recoveries |
|
|
161 |
|
|
|
252 |
|
Provision for (recovery of) credit losses |
|
|
(19 |
) |
|
|
(69 |
) |
Allowance for credit losses, June 30 |
|
$ |
7,863 |
|
|
$ |
5,503 |
|
For additional insight into management’s approach and methodology in estimating the ACL, please refer to the earlier discussion of “Allowance for Credit 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 ACL on a quarterly basis to ensure it is adequate based upon the calculated probable losses inherent in the portfolio. Management believes the ACL was adequately provided for as of June 30, 2023 and acknowledges that the ACL 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 June 30, 2023 totaled $17.6 million compared to $17.8 million as of December 31, 2022 and $19.2 million as of June 30, 2022, decreasing from prior year second quarter due to the sale of a branch building in the first quarter of 2023. 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 June 30, 2023, the Company occupied fourteen 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 the office of Masonry Capital. Sturman Wealth currently leases space in the 404 People Place office building. 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.
Assets held for sale of $965 thousand as of December 31, 2022 were sold during the three months ended March 31, 2023.
42
Leases
As of June 30, 2023, the Company has recorded $6.6 million of right-of-use assets and $6.3 million of lease liabilities, in accordance with ASU 2016-02 “Leases” (Topic 842). As of December 31, 2022, $6.5 million of right-of-use assets and $6.2 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 June 30, 2023 were $1.3 billion, a decrease of $130.3 million compared to December 31, 2022, and a decrease of $250.8 million compared to June 30, 2022 (dollars in thousands). As stated above, during 2022, the Company made a strategic decision to delay increasing rates paid on deposit accounts. As a result, the Company has experienced expected declines during 2022 and the first half of 2023 in deposit balances.
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
|
June 30, 2022 |
|
|||||||||||||||
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
||||||
|
|
Balance |
|
|
Total |
|
|
Balance |
|
|
Total |
|
|
Balance |
|
|
Total |
|
||||||
No cost and low cost deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Noninterest demand deposits |
|
$ |
412,273 |
|
|
|
30.6 |
% |
|
$ |
495,649 |
|
|
|
33.5 |
% |
|
$ |
512,889 |
|
|
|
32.1 |
% |
Interest checking accounts |
|
|
312,773 |
|
|
|
23.2 |
% |
|
|
399,983 |
|
|
|
27.1 |
% |
|
|
399,930 |
|
|
|
25.0 |
% |
Money market and savings deposit accounts |
|
|
398,074 |
|
|
|
29.5 |
% |
|
|
467,600 |
|
|
|
31.6 |
% |
|
|
535,958 |
|
|
|
33.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total noninterest and low cost deposit accounts |
|
|
1,123,120 |
|
|
|
83.3 |
% |
|
|
1,363,232 |
|
|
|
92.2 |
% |
|
|
1,448,777 |
|
|
|
90.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Time deposit accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Certificates of deposit |
|
|
218,630 |
|
|
|
16.2 |
% |
|
|
111,134 |
|
|
|
7.5 |
% |
|
|
144,913 |
|
|
|
9.1 |
% |
CDARS deposits |
|
|
6,326 |
|
|
|
0.5 |
% |
|
|
3,972 |
|
|
|
0.3 |
% |
|
|
5,208 |
|
|
|
0.3 |
% |
Total certificates of deposit and other time deposits |
|
|
224,956 |
|
|
|
16.7 |
% |
|
|
115,106 |
|
|
|
7.8 |
% |
|
|
150,121 |
|
|
|
9.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total deposit account balances |
|
$ |
1,348,076 |
|
|
|
100.0 |
% |
|
$ |
1,478,338 |
|
|
|
100.0 |
% |
|
$ |
1,598,898 |
|
|
|
100.0 |
% |
Noninterest-bearing demand deposits on June 30, 2023 were $412.3 million, representing 30.6% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled $710.8 million, and represented 52.7% of total deposits at June 30, 2023. Collectively, noninterest-bearing and interest-bearing transaction, money market and savings accounts represented 83.3% of total deposit accounts at June 30, 2023. 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 $104.4 million are included in the interest checking accounts and in the money market and savings deposit accounts balances, respectively, in the table above, as of June 30, 2023. As of December 31, 2022, ICS® deposit balances of $28.8 million and $128.6 million are included in the interest checking accounts and in the money market and savings deposit account balances, respectively. All ICS® accounts consist of reciprocal balances for the Company’s customers. The Company currently holds no brokered or specialty CDs.
The remaining 16.7% of total deposits consisted of certificates of deposit and other time deposit accounts totaling $225.0 million at June 30, 2023, increasing over the balances as of December 31, 2022 as a result of several interest rate promotions put into place in the second quarter of 2023. 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 $6.3 million as of June 30, 2023 and $4.0 million as of December 31, 2022, all of which were reciprocal balances for the Company’s customers.
43
As of June 30, 2023 and December 31, 2022, the estimated amounts of uninsured deposits were $311.6 million, or 23.1% and $459.4 million, or 31.1% of total deposits, respectively.
Federal funds purchased
The Company purchased $20.5 million in federal funds as of June 30, 2023, (comprised of $10.5 million in overnight federal funds purchased and $10 million in an unsecured federal funds line of credit), compared to no such purchases as of December 31, 2022 or June 30, 2022. As noted in the Federal funds sold section previously, any excess funds are sold on a daily basis in the federal funds market and Federal funds are purchased as needed to meet liquidity needs.
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.
As of June 30, 2023, based on the FHLB’s evaluation, the Company has an available credit position of $393 million, for which access can be negotiated based on multiple factors. The Company currently has a collateral dependent line of credit with the FHLB for $67.7 million, secured by commercial mortgages, with borrowings of $59.7 million as of June 30, 2023. As of December 31, 2022, there were no outstanding borrowings with the FHLB and the Company had an off-balance sheet letter of credit in the amount of $30.0 million, issued in favor of the Commonwealth of Virginia Department of the Treasury to secure public fund depository accounts. The letter of credit was secured under the collateral dependent line of credit described above and was retired in the second quarter of 2023.
Additional borrowing arrangements maintained by the Company include formal unsecured federal funds lines with six major regional correspondent banks for a total of $114.0 million and a secured line with the Federal Reserve discount window in the amount of $4.0 million, based on the market value of the collateral. The Company had $10.0 million in outstanding balances on these lines or facilities, as noted in the federal funds purchased section above, as of June 30, 2023, but no outstanding balance as of December 31, 2022 or June 30, 2022.
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 June 30, 2023 and December 31, 2022, 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.
44
Shareholders' equity and regulatory capital ratios
The following table displays the changes in shareholders' equity for the Company from December 31, 2022 to June 30, 2023 (dollars in thousands):
Equity, December 31, 2022 |
|
$ |
133,416 |
|
Net income |
|
|
11,442 |
|
Other comprehensive income |
|
|
2,644 |
|
Impact of adoption of CECL |
|
|
(1,890 |
) |
Cash dividends declared |
|
|
(3,532 |
) |
Exercise of stock options |
|
|
18 |
|
Equity increase due to expensing of stock options |
|
|
110 |
|
Equity increase due to expensing of restricted stock |
|
|
231 |
|
Equity, June 30, 2023 |
|
$ |
142,439 |
|
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 17.97%, 17.97%, 18.80% and 11.20%, respectively, as of June 30, 2023, thus exceeding the minimum requirements. The Bank’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were 17.73%, 17.73%, 18.56% and 11.05%, respectively, as of June 30, 2023, also exceeding the minimum requirements.
As of June 30, 2023, 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 ACL to total loans, tangible book value per share, tangible equity 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 ACL 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, except for the per share data):
|
|
As of or for the Three Months Ended |
|
|
For the Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
||||
Fully tax-equivalent measures |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net interest income |
|
$ |
13,703 |
|
|
$ |
12,461 |
|
|
$ |
27,116 |
|
|
$ |
23,886 |
|
Fully tax-equivalent adjustment |
|
|
86 |
|
|
|
82 |
|
|
|
175 |
|
|
|
164 |
|
Net interest income (FTE) |
|
$ |
13,789 |
|
|
$ |
12,543 |
|
|
$ |
27,291 |
|
|
$ |
24,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Efficiency ratio |
|
|
54.4 |
% |
|
|
58.6 |
% |
|
|
55.4 |
% |
|
|
60.5 |
% |
Fully tax-equivalent adjustment |
|
|
-0.3 |
% |
|
|
-0.3 |
% |
|
|
-0.3 |
% |
|
|
-0.4 |
% |
Efficiency ratio (FTE) |
|
|
54.1 |
% |
|
|
58.3 |
% |
|
|
55.1 |
% |
|
|
60.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net interest margin |
|
|
3.81 |
% |
|
|
3.00 |
% |
|
|
3.75 |
% |
|
|
2.76 |
% |
Fully tax-equivalent adjustment |
|
|
0.02 |
% |
|
|
0.02 |
% |
|
|
0.02 |
% |
|
|
0.02 |
% |
Net interest margin (FTE) |
|
|
3.83 |
% |
|
|
3.02 |
% |
|
|
3.77 |
% |
|
|
2.78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other financial measures |
|
|
|
|
|
|
|
|
|
|
|
|
||||
ACL to total loans |
|
|
0.81 |
% |
|
|
0.57 |
% |
|
|
|
|
|
|
||
Fair value mark to total loans |
|
|
1.13 |
% |
|
|
1.82 |
% |
|
|
|
|
|
|
||
ACL + fair value mark to total loans (non-GAAP) |
|
|
1.94 |
% |
|
|
2.39 |
% |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Book value per share |
|
$ |
26.54 |
|
|
$ |
25.20 |
|
|
|
|
|
|
|
||
Impact of intangible assets |
|
|
(2.53 |
) |
|
|
(2.96 |
) |
|
|
|
|
|
|
||
Tangible book value per share (non-GAAP) |
|
$ |
24.01 |
|
|
$ |
22.24 |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total equity |
|
$ |
142,439 |
|
|
$ |
134,216 |
|
|
|
|
|
|
|
||
Impact of intangible assets |
|
|
(13,583 |
) |
|
|
(15,785 |
) |
|
|
|
|
|
|
||
Tangible equity |
|
$ |
128,856 |
|
|
$ |
118,431 |
|
|
|
|
|
|
|
Net income
Net income for the three months ended June 30, 2023 was $5.7 million, a $34 thousand decrease compared to $5.7 million reported for the three months ended June 30, 2022. Net income per diluted share was $1.05 for the three months ended June 30, 2023 compared to $1.06 per diluted share for the same period in the prior year.
Net income for the six months ended June 30, 2023 was $11.4 million, compared to $10.6 million for the six months ended June 30, 2022. Net income per diluted share was $2.13 for the six months ended June 30, 2023,compared to $1.98 per diluted share for the same period in the prior year.
Net interest income
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).
Quarterly overview - Net interest income (FTE) for the three months ended June 30, 2023 was $13.8 million, a $1.2 million increase compared to net interest income (FTE) of $12.5 million for the three months ended June 30, 2022. Net interest income (FTE) increased primarily due to the increased yield earned on loans, from 4.32% to 6.35%, positively impacting interest income by $4.8 million. This metric was also positively impacted by the volume of securities, increasing from an average of $391.2 million in the three months ended June 30, 2022 to $488.1 million in the three months ended June 30, 2023, positively impacting interest income by $594 thousand. The increase in yield earned on such securities over the same period positively impacted interest income by $685 thousand, increasing from 2.16% for the three months ended June 30, 2022 to 2.78% for the three months ended June 30, 2023. The decline in average loan balances, from $984.9 million for the three months ended June 30, 2022 to $940.3 million for the three months ended June 30, 2023, negatively impacted interest income by $527 thousand. The fair value accretion on Acquired Loans positively impacted net interest income (FTE) by 88 bps during the three months ended June 30, 2023. Interest expense increased $3.9 million for the three months ended June 30, 2023, negatively impacting net interest margin (FTE), compared to the same period in the prior year. The
46
net interest margin (FTE) of 3.83% for the three months ended June 30, 2023 was 81 bps higher than the 3.02% for the three months ended June 30, 2022. Overall, the cost of interest-bearing deposits increased period over period, from a cost of 24 bps to 174 bps, increasing interest expense by $3.5 million. The cost of short-term borrowings negatively impacted net interest margin (FTE) by $439 thousand as compared to the prior year.
Year-to-date overview - Net interest income (FTE) for the six months ended June 30, 2023 was $27.3 million, a $3.2 million increase compared to net interest income (FTE) of $24.1 million for the six months ended June 30, 2022. Net interest income (FTE) increased primarily due to the increased yield earned on loans, from 4.28% to 5.96%, positively impacting interest income by $7.9 million. The decrease in volume of loans, from an average balance of $1.0 billion for the six months ended June 30, 2022 to $936.6 million for the six months ended June 30, 2023, negatively impacted interest income (FTE) by $1.7 million. The fair value accretion on Acquired Loans positively impacted net interest income (FTE) by 32 bps during the six months ended June 30, 2023. The increase in volume of securities held, from an average balance of $352.5 million for the six months ended June 30, 2022 to $501.2 million for the six months ended June 30, 2023, positively impacted net interest income (FTE) by $1.8 million, and the increase in yield earned on such securities increased from 2.03% to 2.72% for the periods noted, positively impacting net interest income (FTE) by $1.5 million. Interest expense increased $6.0 million for the six months ended June 30, 2023, negatively impacting net interest margin (FTE), compared to the same period in the prior year. The net interest margin (FTE) of 3.77% for the six months ended June 30, 2023 was 99 bps higher than the 2.78% for the six months ended June 30, 2022.Overall, the cost of interest-bearing deposits increased period over period, from a cost of 26 bps to 141 bps, increasing interest expense by $5.1 million. The cost of short-term borrowings negatively impacted net interest margin (FTE) by $766 thousand as compared to the prior year.
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
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 six months ended June 30, 2023 and 2022. 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 |
|
|
|
|
|
|
||||||||||
|
|
June 30, 2023 |
|
June 30, 2022 |
|
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 |
|
$421,156 |
|
$2,980 |
|
2.83% |
|
$325,833 |
|
$1,726 |
|
2.12% |
|
$584 |
|
$670 |
|
$1,254 |
Tax Exempt Securities 1 |
|
66,956 |
|
415 |
|
2.48% |
|
65,352 |
|
390 |
|
2.39% |
|
10 |
|
15 |
|
25 |
Total Securities 1 |
|
488,112 |
|
3,395 |
|
2.78% |
|
391,185 |
|
2,116 |
|
2.16% |
|
594 |
|
685 |
|
1,279 |
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate |
|
823,289 |
|
13,167 |
|
6.41% |
|
847,661 |
|
8,988 |
|
4.25% |
|
(265) |
|
4,444 |
|
4,179 |
Commercial |
|
74,665 |
|
969 |
|
5.21% |
|
86,394 |
|
995 |
|
4.62% |
|
(144) |
|
118 |
|
(26) |
Consumer |
|
42,310 |
|
758 |
|
7.19% |
|
50,828 |
|
627 |
|
4.95% |
|
(118) |
|
249 |
|
131 |
Total Loans |
|
940,264 |
|
14,894 |
|
6.35% |
|
984,883 |
|
10,610 |
|
4.32% |
|
(527) |
|
4,811 |
|
4,284 |
Fed Funds Sold |
|
895 |
|
10 |
|
4.48% |
|
150,393 |
|
302 |
|
0.81% |
|
(545) |
|
253 |
|
(292) |
Other interest-bearing deposits |
|
13,777 |
|
119 |
|
3.46% |
|
142,010 |
|
219 |
|
0.62% |
|
(347) |
|
247 |
|
(100) |
Total Earning Assets |
|
1,443,048 |
|
18,418 |
|
5.12% |
|
1,668,471 |
|
13,247 |
|
3.18% |
|
(825) |
|
5,996 |
|
5,171 |
Less: Allowance for Credit Losses |
|
(7,805) |
|
|
|
|
|
(5,866) |
|
|
|
|
|
|
|
|
|
|
Total Non-Earning Assets |
|
113,883 |
|
|
|
|
|
133,526 |
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$1,549,126 |
|
|
|
|
|
$1,796,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Checking |
|
$331,523 |
|
$106 |
|
0.13% |
|
$411,374 |
|
$58 |
|
0.06% |
|
$(13) |
|
$61 |
|
$48 |
Money Market and Savings Deposits |
|
415,015 |
|
2,197 |
|
2.12% |
|
550,883 |
|
440 |
|
0.32% |
|
(134) |
|
1,891 |
|
1,757 |
Time Deposits |
|
194,736 |
|
1,776 |
|
3.66% |
|
152,695 |
|
157 |
|
0.41% |
|
55 |
|
1,564 |
|
1,619 |
Total Interest-Bearing Deposits |
|
941,274 |
|
4,079 |
|
1.74% |
|
1,114,952 |
|
655 |
|
0.24% |
|
(92) |
|
3,516 |
|
3,424 |
Federal funds purchased |
|
2,392 |
|
32 |
|
5.37% |
|
— |
|
— |
|
— |
|
32 |
|
— |
|
32 |
Short-term borrowings |
|
34,265 |
|
439 |
|
5.14% |
|
— |
|
— |
|
— |
|
439 |
|
— |
|
439 |
Junior subordinated debt |
|
3,430 |
|
79 |
|
9.24% |
|
3,383 |
|
49 |
|
5.81% |
|
1 |
|
29 |
|
30 |
Total Interest-Bearing Liabilities |
|
981,361 |
|
4,629 |
|
1.89% |
|
1,118,335 |
|
704 |
|
0.25% |
|
380 |
|
3,545 |
|
3,925 |
Non-Interest-Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
416,039 |
|
|
|
|
|
527,008 |
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
9,853 |
|
|
|
|
|
10,067 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
1,407,253 |
|
|
|
|
|
1,655,410 |
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity |
|
141,873 |
|
|
|
|
|
140,721 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Shareholders' Equity |
|
$1,549,126 |
|
|
|
|
|
$1,796,131 |
|
|
|
|
|
|
|
|
|
|
Net Interest Income (FTE) |
|
|
|
$13,789 |
|
|
|
|
|
$12,543 |
|
|
|
$(1,205) |
|
$2,451 |
|
$1,246 |
Interest Rate Spread 2 |
|
|
|
|
|
3.23% |
|
|
|
|
|
2.93% |
|
|
|
|
|
|
Cost of Funds |
|
|
|
|
|
1.33% |
|
|
|
|
|
0.17% |
|
|
|
|
|
|
Interest Expense as a Percentage of Average |
|
|
|
|
|
1.29% |
|
|
|
|
|
0.17% |
|
|
|
|
|
|
Net Interest Margin (FTE) 3 |
|
|
|
|
|
3.83% |
|
|
|
|
|
3.02% |
|
|
|
|
|
|
48
Consolidated Average Balance Sheet and Analysis of Net Interest Income
|
|
For the Six Months Ended |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
|
June 30, 2023 |
|
|
June 30, 2022 |
|
|
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 |
|
$ |
434,219 |
|
|
$ |
5,997 |
|
|
|
2.76 |
% |
|
$ |
287,241 |
|
|
$ |
2,800 |
|
|
|
1.95 |
% |
|
$ |
1,762 |
|
|
$ |
1,435 |
|
|
$ |
3,197 |
|
Tax Exempt Securities 1 |
|
|
67,019 |
|
|
|
831 |
|
|
|
2.48 |
% |
|
|
65,249 |
|
|
|
775 |
|
|
|
2.38 |
% |
|
|
21 |
|
|
|
35 |
|
|
|
56 |
|
Total Securities 1 |
|
|
501,238 |
|
|
|
6,828 |
|
|
|
2.72 |
% |
|
|
352,490 |
|
|
|
3,575 |
|
|
|
2.03 |
% |
|
|
1,783 |
|
|
|
1,470 |
|
|
|
3,253 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Real Estate |
|
|
820,033 |
|
|
|
24,032 |
|
|
|
5.91 |
% |
|
|
866,863 |
|
|
|
18,082 |
|
|
|
4.21 |
% |
|
|
(1,023 |
) |
|
|
6,973 |
|
|
|
5,950 |
|
Commercial |
|
|
73,357 |
|
|
|
2,098 |
|
|
|
5.77 |
% |
|
|
89,944 |
|
|
|
2,084 |
|
|
|
4.67 |
% |
|
|
(424 |
) |
|
|
438 |
|
|
|
14 |
|
Consumer |
|
|
43,179 |
|
|
|
1,531 |
|
|
|
7.15 |
% |
|
|
51,302 |
|
|
|
1,213 |
|
|
|
4.77 |
% |
|
|
(215 |
) |
|
|
533 |
|
|
|
318 |
|
Total Loans |
|
|
936,569 |
|
|
|
27,661 |
|
|
|
5.96 |
% |
|
|
1,008,109 |
|
|
|
21,379 |
|
|
|
4.28 |
% |
|
|
(1,662 |
) |
|
|
7,944 |
|
|
|
6,282 |
|
Fed Funds Sold |
|
|
455 |
|
|
|
10 |
|
|
|
4.43 |
% |
|
|
151,429 |
|
|
|
363 |
|
|
|
0.48 |
% |
|
|
(683 |
) |
|
|
330 |
|
|
|
(353 |
) |
Other interest-bearing deposits |
|
|
20,789 |
|
|
|
378 |
|
|
|
3.67 |
% |
|
|
235,418 |
|
|
|
356 |
|
|
|
0.30 |
% |
|
|
(598 |
) |
|
|
620 |
|
|
|
22 |
|
Total Earning Assets |
|
|
1,459,051 |
|
|
|
34,877 |
|
|
|
4.82 |
% |
|
|
1,747,446 |
|
|
|
25,673 |
|
|
|
2.96 |
% |
|
|
(1,160 |
) |
|
|
10,364 |
|
|
|
9,204 |
|
Less: Allowance for Credit Losses |
|
|
(7,947 |
) |
|
|
|
|
|
|
|
|
(5,946 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total Non-Earning Assets |
|
|
114,372 |
|
|
|
|
|
|
|
|
|
124,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total Assets |
|
$ |
1,565,476 |
|
|
|
|
|
|
|
|
$ |
1,866,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Interest Bearing Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Interest Checking |
|
$ |
346,625 |
|
|
$ |
195 |
|
|
|
0.11 |
% |
|
$ |
416,393 |
|
|
$ |
119 |
|
|
|
0.06 |
% |
|
$ |
(23 |
) |
|
$ |
99 |
|
|
$ |
76 |
|
Money Market and Savings Deposits |
|
|
431,849 |
|
|
|
3,970 |
|
|
|
1.85 |
% |
|
|
603,259 |
|
|
|
1,055 |
|
|
|
0.35 |
% |
|
|
(380 |
) |
|
|
3,295 |
|
|
|
2,915 |
|
Time Deposits |
|
|
161,247 |
|
|
|
2,424 |
|
|
|
3.03 |
% |
|
|
155,544 |
|
|
|
352 |
|
|
|
0.46 |
% |
|
|
13 |
|
|
|
2,059 |
|
|
|
2,072 |
|
Total Interest-Bearing Deposits |
|
|
939,721 |
|
|
|
6,589 |
|
|
|
1.41 |
% |
|
|
1,175,196 |
|
|
|
1,526 |
|
|
|
0.26 |
% |
|
|
(390 |
) |
|
|
5,453 |
|
|
|
5,063 |
|
Federal funds purchased |
|
|
3,754 |
|
|
|
91 |
|
|
|
4.89 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
91 |
|
|
|
— |
|
|
|
91 |
|
Short-term borrowings |
|
|
31,074 |
|
|
|
766 |
|
|
|
4.97 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
766 |
|
|
|
— |
|
|
|
766 |
|
Junior subordinated debt |
|
|
3,423 |
|
|
|
140 |
|
|
|
8.25 |
% |
|
|
3,377 |
|
|
|
97 |
|
|
|
0.00 |
% |
|
|
1 |
|
|
|
42 |
|
|
|
43 |
|
Total Interest-Bearing Liabilities |
|
|
977,972 |
|
|
|
7,586 |
|
|
|
1.56 |
% |
|
|
1,178,573 |
|
|
|
1,623 |
|
|
|
0.28 |
% |
|
|
468 |
|
|
|
5,495 |
|
|
|
5,963 |
|
Non-Interest-Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Demand deposits |
|
|
440,285 |
|
|
|
|
|
|
|
|
|
527,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Other liabilities |
|
|
9,423 |
|
|
|
|
|
|
|
|
|
10,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total Liabilities |
|
|
1,427,680 |
|
|
|
|
|
|
|
|
|
1,716,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Shareholders' Equity |
|
|
137,796 |
|
|
|
|
|
|
|
|
|
150,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total Liabilities & Shareholders' Equity |
|
$ |
1,565,476 |
|
|
|
|
|
|
|
|
$ |
1,866,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net Interest Income (FTE) |
|
|
|
|
$ |
27,291 |
|
|
|
|
|
|
|
|
$ |
24,050 |
|
|
|
|
|
$ |
(1,628 |
) |
|
$ |
4,869 |
|
|
$ |
3,241 |
|
||||
Interest Rate Spread 2 |
|
|
|
|
|
|
|
|
3.26 |
% |
|
|
|
|
|
|
|
|
2.68 |
% |
|
|
|
|
|
|
|
|
|
|||||||
Cost of Funds |
|
|
|
|
|
|
|
|
1.08 |
% |
|
|
|
|
|
|
|
|
0.19 |
% |
|
|
|
|
|
|
|
|
|
|||||||
Interest Expense as a Percentage of Average Earning Assets |
|
|
|
|
|
|
|
|
1.05 |
% |
|
|
|
|
|
|
|
|
0.19 |
% |
|
|
|
|
|
|
|
|
|
|||||||
Net Interest Margin (FTE) 3 |
|
|
|
3.77 |
% |
|
|
|
|
|
|
|
|
2.78 |
% |
|
|
|
|
|
|
|
|
|
49
The Company believes that higher interest rates will continue to have a positive effect on yields of variable rate loans, new loan originations and purchases/reinvestment of AFS securities. The Company also expects the cost of deposits to continue to rise as competition for deposits increases and as time deposits reprice at maturity. A portion of the Company’s funding may continue to be drawn from borrowings in the near term, also resulting in a higher cost of funds. The effect of these factors on the Corporation’s net interest margin (FTE) will depend on a number of factors, including the Company’s ability to continue to increase the loan portfolio, compete for deposits and manage its borrowings. The Company can give no assurance as to the timing or extent of further increases in market interest rates or the impact of rising interest rates or any other factor on the Company's net interest margin (FTE). Alternatively, if market interest rates begin to decline, the Company’s net interest margin (FTE) may be adversely affected as the Company generally expects its assets to reprice more quickly than its deposits and borrowings.
Provision for credit losses
A provision for credit losses of $261 thousand was recognized during the three months ended June 30, 2023 compared to a recovery of provision for loan losses of $217 thousand recognized during the three months ended June 30, 2022. A provision for credit losses of $13 thousand was recognized during the six months ended June 30, 2023 compared to a recovery of provision for loan losses recognized of $69 thousand during the six months ended June 30, 2022. The second quarter 2023 provision for credit losses was comprised of $216 thousand of provision for loan losses and $45 thousand of provision for losses on unfunded commitments. The period-end ACL as a percentage of total loans was 0.81% as of June 30, 2023, 0.59% as of December 31, 2022 and 0.57% as of June 30, 2022. The total of the ACL and the fair value mark as a percentage of gross loans (a non-GAAP financial measure) amounted to 1.94% as of June 30, 2023, compared to 2.29% as of December 31, 2022 and 2.39% as of June 30, 2022.
Loan growth in the second quarter of 2023 was the primary driver of the provision for credit losses taken during the period; however, the majority of the increase in loan balances was attributable to the purchase of government-guaranteed loans which do not require an ACL. No changes have been made to the qualitative factor methodology since January 1, 2023.
Further discussion of management’s assessment of the ACL is provided earlier in the report and in Note 5 – Allowance for Credit Losses, found in the Notes to the Consolidated Financial Statements. In management’s opinion, the ACL was adequately provided for at June 30, 2023. The ACL calculation, provision for credit losses, asset quality and collateral values may be significantly impacted by deterioration in economic conditions. Should economic conditions worsen, we could experience further increases in our required ACL and record additional provision for credit loss exposure.
Noninterest income
The components of noninterest income for the three months ended June 30, 2023 and 2022 are shown below (dollars in thousands):
|
|
For the Three Months Ended |
|
|
Variance |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
|
$ |
|
|
% |
|
||||
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Wealth management fees |
|
$ |
397 |
|
|
$ |
572 |
|
|
$ |
(175 |
) |
|
|
-30.6 |
% |
Advisory and brokerage income |
|
|
- |
|
|
|
210 |
|
|
|
(210 |
) |
|
|
-100.0 |
% |
Deposit account fees |
|
|
399 |
|
|
|
458 |
|
|
|
(59 |
) |
|
|
-12.9 |
% |
Debit/credit card and ATM fees |
|
|
636 |
|
|
|
779 |
|
|
|
(143 |
) |
|
|
-18.4 |
% |
Bank owned life insurance income |
|
|
261 |
|
|
|
246 |
|
|
|
15 |
|
|
|
6.1 |
% |
Gains on sale of assets |
|
|
- |
|
|
|
1,113 |
|
|
|
(1,113 |
) |
|
|
100.0 |
% |
Other |
|
|
352 |
|
|
|
268 |
|
|
|
84 |
|
|
|
31.3 |
% |
Total noninterest income |
|
$ |
2,045 |
|
|
$ |
3,646 |
|
|
$ |
(1,601 |
) |
|
|
-43.9 |
% |
Noninterest income for the three months ended June 30, 2023 of $2.0 million was $1.6 million or 43.9% lower than the amount recorded for the three months ended June 30, 2022, primarily due to gains on the sale of two properties of $1.1 million in the second quarter of the prior year. In addition, $210 thousand of income was recognized in the second quarter of the prior year related to advisory and brokerage income; this business line was sold in the fourth quarter of 2022, eliminating future income or expense related thereto. In the second quarter of 2023, the Company received an additional $267 thousand recovery of unearned premiums related to the loss of insurance on the student loan portfolio, bringing the total recovered from liquidation of the insurance company to over $1.3 million.
50
The components of noninterest income for the six months ended June 30, 2023 and 2022 are shown below (dollars in thousands):
|
|
For the Six Months Ended |
|
|
Variance |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
|
$ |
|
|
% |
|
||||
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Wealth management fees |
|
$ |
801 |
|
|
$ |
1,129 |
|
|
$ |
(328 |
) |
|
|
-29.1 |
% |
Advisory and brokerage income |
|
|
- |
|
|
|
426 |
|
|
|
(426 |
) |
|
|
-100.0 |
% |
Deposit account fees |
|
|
800 |
|
|
|
923 |
|
|
|
(123 |
) |
|
|
-13.3 |
% |
Debit/credit card and ATM fees |
|
|
1,207 |
|
|
|
1,486 |
|
|
|
(279 |
) |
|
|
-18.8 |
% |
Bank owned life insurance income |
|
|
513 |
|
|
|
457 |
|
|
|
56 |
|
|
|
12.3 |
% |
Resolution of commercial dispute |
|
|
- |
|
|
|
2,400 |
|
|
|
(2,400 |
) |
|
|
-100.0 |
% |
Gain on sale of assets |
|
|
- |
|
|
|
1,113 |
|
|
|
(1,113 |
) |
|
|
-100.0 |
% |
Gain on sale of securities, net |
|
|
254 |
|
|
|
- |
|
|
|
254 |
|
|
N/A |
|
|
Other |
|
|
746 |
|
|
|
499 |
|
|
|
247 |
|
|
|
49.5 |
% |
Total noninterest income |
|
$ |
4,321 |
|
|
$ |
8,433 |
|
|
$ |
(4,112 |
) |
|
|
-48.8 |
% |
Noninterest income for the six months ended June 30, 2023 of $4.3 million was $4.1 million or 48.8% lower than the amount recorded for the six months ended June 30, 2022. Noninterest income decreased 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 properties and $426 thousand of advisory and brokerage income recognized in the first half of 2022.
Noninterest expense
The components of noninterest expense for the three months ended June 30, 2023 and 2022 are shown below (dollars in thousands):
|
|
For the Three Months Ended |
|
|
Variance |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
|
$ |
|
|
% |
|
||||
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Salaries and employee benefits |
|
$ |
4,062 |
|
|
$ |
4,086 |
|
|
$ |
(24 |
) |
|
|
-0.6 |
% |
Net occupancy |
|
|
929 |
|
|
|
1,282 |
|
|
|
(353 |
) |
|
|
-27.5 |
% |
Equipment |
|
|
176 |
|
|
|
254 |
|
|
|
(78 |
) |
|
|
-30.7 |
% |
Bank franchise tax |
|
|
313 |
|
|
|
304 |
|
|
|
9 |
|
|
|
3.0 |
% |
Computer software |
|
|
203 |
|
|
|
357 |
|
|
|
(154 |
) |
|
|
-43.1 |
% |
Data processing |
|
|
806 |
|
|
|
699 |
|
|
|
107 |
|
|
|
15.3 |
% |
FDIC deposit insurance assessment |
|
|
220 |
|
|
|
125 |
|
|
|
95 |
|
|
|
76.0 |
% |
Marketing, advertising and promotion |
|
|
275 |
|
|
|
259 |
|
|
|
16 |
|
|
|
6.2 |
% |
Plastics expense |
|
|
30 |
|
|
|
92 |
|
|
|
(62 |
) |
|
|
-67.4 |
% |
Professional fees |
|
|
198 |
|
|
|
404 |
|
|
|
(206 |
) |
|
|
-51.0 |
% |
Core deposit intangible amortization |
|
|
379 |
|
|
|
427 |
|
|
|
(48 |
) |
|
|
-11.2 |
% |
Other |
|
|
973 |
|
|
|
1,153 |
|
|
|
(180 |
) |
|
|
-15.6 |
% |
Total noninterest expense |
|
$ |
8,564 |
|
|
$ |
9,442 |
|
|
$ |
(878 |
) |
|
|
-9.3 |
% |
Noninterest expense for the quarter ended June 30, 2023 of $8.6 million was $878 thousand or 9.3% lower than the quarter ended June 30, 2022. This decrease is primarily due to lower occupancy expenses of $353 thousand from the elimination of four branch facilities, as well as reduced professional and consulting fees of $206 thousand and reduced computer software expenses of $154 thousand as a result of efficiencies gained from the Merger.
51
The components of noninterest expense for the six months ended June 30, 2023 and 2022 are shown below (dollars in thousands):
|
|
For the Six Months Ended |
|
|
Variance |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
|
$ |
|
|
% |
|
||||
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Salaries and employee benefits |
|
$ |
8,113 |
|
|
$ |
8,817 |
|
|
$ |
(704 |
) |
|
|
-8.0 |
% |
Net occupancy |
|
|
2,108 |
|
|
|
2,479 |
|
|
|
(371 |
) |
|
|
-15.0 |
% |
Equipment |
|
|
394 |
|
|
|
537 |
|
|
|
(143 |
) |
|
|
-26.6 |
% |
Bank franchise tax |
|
|
637 |
|
|
|
608 |
|
|
|
29 |
|
|
|
4.8 |
% |
Computer software |
|
|
405 |
|
|
|
620 |
|
|
|
(215 |
) |
|
|
-34.7 |
% |
Data processing |
|
|
1,548 |
|
|
|
1,437 |
|
|
|
111 |
|
|
|
7.7 |
% |
FDIC deposit insurance assessment |
|
|
320 |
|
|
|
351 |
|
|
|
(31 |
) |
|
|
-8.8 |
% |
Marketing, advertising and promotion |
|
|
650 |
|
|
|
526 |
|
|
|
124 |
|
|
|
23.6 |
% |
Plastics expense |
|
|
78 |
|
|
|
231 |
|
|
|
(153 |
) |
|
|
-66.2 |
% |
Professional fees |
|
|
390 |
|
|
|
741 |
|
|
|
(351 |
) |
|
|
-47.4 |
% |
Core deposit intangible amortization |
|
|
770 |
|
|
|
866 |
|
|
|
(96 |
) |
|
|
-11.1 |
% |
Other |
|
|
2,012 |
|
|
|
2,324 |
|
|
|
(312 |
) |
|
|
-13.4 |
% |
Total noninterest expense |
|
$ |
17,425 |
|
|
$ |
19,537 |
|
|
$ |
(2,112 |
) |
|
|
-10.8 |
% |
Noninterest expense for the six months ended June 30, 2023 of $17.4 million was $2.1 million or 10.8% lower than the six months ended June 30, 2022. This decrease is the result of efficiencies gained from the Merger, namely : 1) salaries and employee benefits decreased $704 thousand, 2) net occupancy decreased $371 thousand, 3) professional fees decreased $351 thousand, and 4) computer software expense decreased $215 thousand.
The efficiency ratio (FTE) of 54.1% for the three months ended June 30, 2023 compared favorably to 58.3% for the same quarter of 2022, due to the increase in net interest income (FTE) and the decrease in noninterest expense, as described above. The efficiency ratio (FTE) of 55.1% for the six months ended June 30, 2023 also compared favorably to 60.1% for the six months ended June 30, 2022 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 June 30, 2023 and 2022, the Company provided $1.3 million and $1.2 million for Federal income taxes, respectively, resulting in effective income tax rates of 18.4% and 17.4%, respectively. For the six months ended June 30, 2023 and 2022, the Company provided $2.6 million and $2.2 million for Federal income taxes, respectively, resulting in effective income tax rates of 18.3% and 17.4%, respectively. For each period, the effective income tax rate differed from the U.S. statutory rate of 21% due to the recognition of low-income housing tax credits and the effect of tax-exempt income from municipal bonds and bank owned life insurance policies.
52
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 were no changes in the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 1A. RISK FACTORS.
During the quarter ended June 30, 2023, there have been no material changes from the risk factors described in the Company’s Form 10-K for the year ended December 31, 2022. 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
53
ITEM 5. OTHER INFORMATION.
None
None
ITEM 6. EXHIBITS.
Exhibit Number |
|
Description of Exhibit |
|
|
|
|
|
|
|
||
|
|
|
|
||
|
|
|
|
||
|
|
|
101 |
|
The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, 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 June 30, 2023, 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: |
|
August 11, 2023 |
|
|
|
|
|
/s/ Tara Y. Harrison |
|
|
Tara Y. Harrison |
|
|
Executive Vice President and Chief Financial Officer |
|
|
(principal financial and accounting officer)
|
Date: |
|
August 11, 2023 |
55