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Virginia National Bankshares Corp - Quarter Report: 2023 September (Form 10-Q)

10-Q

 

`

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 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)

 

Name of each exchange on which registered

Common Stock

 

VABK

 

The Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

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

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

Yes No

As of November 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

 

Part I. Financial Information

 

 

Item 1 Financial Statements

 

Page 4

Consolidated Balance Sheets (unaudited)

 

Page 4

Consolidated Statements of Income (unaudited)

 

Page 5

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

 

Page 6

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

 

Page 7

Consolidated Statements of Cash Flows (unaudited)

 

Page 8

Notes to Consolidated Financial Statements (unaudited)

 

Page 9

 

 

 

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

 

Page 37

Application of Critical Accounting Policies and Estimates

 

Page 38

Financial Condition

 

Page 39

Results of Operations

 

Page 46

 

 

 

Item 3 Quantitative and Qualitative Disclosures About Market Risk

 

Page 54

 

 

 

Item 4 Controls and Procedures

 

Page 54

 

 

 

Part II. Other Information

 

 

Item 1 Legal Proceedings

 

Page 54

Item 1A Risk Factors

 

Page 54

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

 

Page 54

Item 3 Defaults Upon Senior Securities

 

Page 54

Item 4 Mine Safety Disclosures

 

Page 54

Item 5 Other Information

 

Page 55

Item 6 Exhibits

 

Page 55

 

 

 

Signatures

 

Page 56

 

 

2


 

 

Glossary of Acronyms and Defined Terms

2005 Plan

-

2005 Stock Incentive Plan

2014 Plan

-

2014 Stock Incentive Plan

2022 Plan

-

2022 Stock Incentive Plan

ACL

-

Allowance for credit losses

Acquired Loans

-

Loans acquired from Fauquier

AFS

-

Available for sale

ALLL

-

Allowance for loan and lease losses

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

CME

-

Chicago Mercantile Exchange

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

SOFR

-

Secured Overnight Financing Rate

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)

 

 

 

September 30, 2023

 

 

December 31, 2022 *

 

ASSETS

 

Unaudited

 

 

 

 

Cash and due from banks

 

$

7,416

 

 

$

20,993

 

Interest-bearing deposits in other banks

 

 

9,959

 

 

 

19,098

 

Federal funds sold

 

 

1,015

 

 

 

45

 

Securities:

 

 

 

 

 

 

Available for sale, at fair value

 

 

390,816

 

 

 

538,186

 

Restricted securities, at cost

 

 

7,269

 

 

 

5,137

 

Total securities

 

 

398,085

 

 

 

543,323

 

Loans, net of deferred fees and costs

 

 

1,020,518

 

 

 

936,415

 

Allowance for credit losses

 

 

(7,799

)

 

 

(5,552

)

Loans, net

 

 

1,012,719

 

 

 

930,863

 

Premises and equipment, net

 

 

16,298

 

 

 

17,808

 

Assets held for sale

 

 

-

 

 

 

965

 

Bank owned life insurance

 

 

38,635

 

 

 

38,552

 

Goodwill

 

 

7,768

 

 

 

7,768

 

Core deposit intangible, net

 

 

5,448

 

 

 

6,586

 

Right of use asset, net

 

 

7,110

 

 

 

6,536

 

Deferred tax asset, net

 

 

19,567

 

 

 

17,315

 

Accrued interest receivable and other assets

 

 

38,559

 

 

 

13,507

 

Total assets

 

$

1,562,579

 

 

$

1,623,359

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Demand deposits:

 

 

 

 

 

 

Noninterest-bearing

 

$

399,158

 

 

$

495,649

 

Interest-bearing

 

 

287,480

 

 

 

399,983

 

Money market and savings deposit accounts

 

 

406,189

 

 

 

467,600

 

Certificates of deposit and other time deposits

 

 

277,471

 

 

 

115,106

 

Total deposits

 

 

1,370,298

 

 

 

1,478,338

 

Short-term borrowings

 

 

43,000

 

 

 

-

 

Junior subordinated debt, net

 

 

3,448

 

 

 

3,413

 

Lease liability

 

 

6,824

 

 

 

6,173

 

Accrued interest payable and other liabilities

 

 

3,282

 

 

 

2,019

 

Total liabilities

 

 

1,426,852

 

 

 

1,489,943

 

Commitments and contingent liabilities

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

Preferred stock, $2.50 par value

 

 

-

 

 

 

-

 

Common stock, $2.50 par value

 

 

13,253

 

 

 

13,214

 

Capital surplus

 

 

105,862

 

 

 

105,344

 

Retained earnings

 

 

72,384

 

 

 

63,482

 

Accumulated other comprehensive loss

 

 

(55,772

)

 

 

(48,624

)

Total shareholders' equity

 

 

135,727

 

 

 

133,416

 

Total liabilities and shareholders' equity

 

$

1,562,579

 

 

$

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 nine months ended

 

 

 

September 30, 2023

 

 

September 30, 2022

 

 

September 30, 2023

 

 

September 30, 2022

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

13,748

 

 

$

11,024

 

 

$

41,409

 

 

$

32,403

 

Federal funds sold

 

 

133

 

 

 

299

 

 

 

143

 

 

 

662

 

Other interest-bearing deposits

 

 

64

 

 

 

618

 

 

 

442

 

 

 

973

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

2,848

 

 

 

2,626

 

 

 

8,674

 

 

 

5,300

 

Tax exempt

 

 

327

 

 

 

313

 

 

 

983

 

 

 

925

 

Dividends

 

 

94

 

 

 

66

 

 

 

265

 

 

 

192

 

Total interest and dividend income

 

 

17,214

 

 

 

14,946

 

 

 

51,916

 

 

 

40,455

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

78

 

 

 

56

 

 

 

273

 

 

 

175

 

Money market and savings deposits

 

 

2,739

 

 

 

415

 

 

 

6,709

 

 

 

1,470

 

Certificates and other time deposits

 

 

2,685

 

 

 

147

 

 

 

5,109

 

 

 

499

 

Federal funds purchased

 

 

505

 

 

 

-

 

 

 

1,271

 

 

 

-

 

Short-term borrowings

 

 

21

 

 

 

-

 

 

 

112

 

 

 

-

 

Junior subordinated debt

 

 

86

 

 

 

51

 

 

 

226

 

 

 

148

 

Total interest expense

 

 

6,114

 

 

 

669

 

 

 

13,700

 

 

 

2,292

 

Net interest income

 

 

11,100

 

 

 

14,277

 

 

 

38,216

 

 

 

38,163

 

Provision for (recovery of) credit losses

 

 

(73

)

 

 

39

 

 

 

(60

)

 

 

(30

)

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

 

 

11,173

 

 

 

14,238

 

 

 

38,276

 

 

 

38,193

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Wealth management fees

 

 

419

 

 

 

590

 

 

 

1,220

 

 

 

1,719

 

Advisory and brokerage income

 

 

-

 

 

 

213

 

 

 

-

 

 

 

639

 

Deposit account fees

 

 

404

 

 

 

443

 

 

 

1,204

 

 

 

1,366

 

Debit/credit card and ATM fees

 

 

535

 

 

 

660

 

 

 

1,742

 

 

 

2,146

 

Bank owned life insurance income

 

 

981

 

 

 

252

 

 

 

1,494

 

 

 

709

 

Resolution of commercial dispute

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,400

 

Gains on sale of assets

 

 

132

 

 

 

4

 

 

 

132

 

 

 

1,117

 

Gain on termination of interest swap

 

 

-

 

 

 

-

 

 

 

460

 

 

 

-

 

Loss on sales of AFS, net

 

 

-

 

 

 

-

 

 

 

(206

)

 

 

-

 

Other

 

 

173

 

 

 

138

 

 

 

919

 

 

 

637

 

Total noninterest income

 

 

2,644

 

 

 

2,300

 

 

 

6,965

 

 

 

10,733

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,936

 

 

 

4,252

 

 

 

12,049

 

 

 

13,069

 

Net occupancy

 

 

991

 

 

 

1,318

 

 

 

3,099

 

 

 

3,797

 

Equipment

 

 

195

 

 

 

249

 

 

 

589

 

 

 

786

 

Bank franchise tax

 

 

292

 

 

 

304

 

 

 

929

 

 

 

912

 

Computer software

 

 

185

 

 

 

287

 

 

 

590

 

 

 

907

 

Data processing

 

 

623

 

 

 

712

 

 

 

2,171

 

 

 

2,149

 

FDIC deposit insurance assessment

 

 

220

 

 

 

70

 

 

 

540

 

 

 

421

 

Marketing, advertising and promotion

 

 

262

 

 

 

347

 

 

 

912

 

 

 

873

 

Plastics expense

 

 

51

 

 

 

91

 

 

 

129

 

 

 

322

 

Professional fees

 

 

202

 

 

 

310

 

 

 

592

 

 

 

1,051

 

Core deposit intangible amortization

 

 

368

 

 

 

415

 

 

 

1,138

 

 

 

1,281

 

Other

 

 

1,015

 

 

 

1,148

 

 

 

3,027

 

 

 

3,472

 

Total noninterest expense

 

 

8,340

 

 

 

9,503

 

 

 

25,765

 

 

 

29,040

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

5,477

 

 

 

7,035

 

 

 

19,476

 

 

 

19,886

 

Provision for income taxes

 

 

824

 

 

 

1,263

 

 

 

3,381

 

 

 

3,505

 

Net income

 

$

4,653

 

 

$

5,772

 

 

$

16,095

 

 

$

16,381

 

Net income per common share, basic

 

$

0.87

 

 

$

1.08

 

 

$

3.00

 

 

$

3.08

 

Net income per common share, diluted

 

$

0.86

 

 

$

1.08

 

 

$

2.99

 

 

$

3.06

 

Weighted average common shares outstanding, basic

 

 

5,365,982

 

 

 

5,326,543

 

 

 

5,354,086

 

 

 

5,321,652

 

Weighted average common shares outstanding, diluted

 

 

5,395,483

 

 

 

5,348,900

 

 

 

5,382,145

 

 

 

5,347,878

 

 

See Notes to Consolidated Financial Statements

5


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

(Unaudited)

 

 

 

For the three months ended

 

 

For the nine months ended

 

 

 

September 30, 2023

 

 

September 30, 2022

 

 

September 30, 2023

 

 

September 30, 2022

 

Net income

 

$

4,653

 

 

$

5,772

 

 

$

16,095

 

 

$

16,381

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on securities, net of tax benefit of ($2,603) and ($1,837) for the three and nine months ended September 30, 2023; and net of tax benefit of ($3,416) and ($12,952) for the three and nine months ended September 30, 2022; respectively

 

 

(9,792

)

 

 

(12,845

)

 

 

(6,911

)

 

 

(48,724

)

Reclassification adjustment for realized gain on termination of interest rate swap, net of tax benefit of $0 and ($97) for the three and nine months ended September 30, 2023, respectively

 

 

 

 

 

 

 

 

(363

)

 

 

 

Reclassification adjustment for realized losses on securities, net of tax of $0 and $43 for the three and nine months ended September 30, 2023, respectively

 

 

 

 

 

 

 

 

163

 

 

 

 

Unrealized gains (losses) on interest rate swaps, net of tax benefit of $0 and ($9) for the three and nine months ended September 30, 2023; and net of tax of $49 and $153 for the three and nine months ended September 30, 2022; respectively

 

 

 

 

 

179

 

 

 

(37

)

 

 

574

 

Total other comprehensive loss

 

 

(9,792

)

 

 

(12,666

)

 

 

(7,148

)

 

 

(48,150

)

Total comprehensive income (loss)

 

$

(5,139

)

 

$

(6,894

)

 

$

8,947

 

 

$

(31,769

)

 

See Notes to Consolidated Financial Statements

6


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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

 

Exercise of stock options

 

$

3

 

 

$

21

 

 

 

-

 

 

 

-

 

 

 

24

 

Stock option expense

 

 

-

 

 

 

42

 

 

 

-

 

 

 

-

 

 

 

42

 

Restricted stock grant expense

 

 

-

 

 

 

184

 

 

 

-

 

 

 

-

 

 

 

184

 

Vested stock grants

 

 

10

 

 

 

(10

)

 

 

-

 

 

 

-

 

 

 

-

 

Cash dividends declared ($0.30 per share)

 

 

-

 

 

 

-

 

 

 

(1,598

)

 

 

-

 

 

 

(1,598

)

Net income

 

 

-

 

 

 

-

 

 

 

5,772

 

 

 

-

 

 

 

5,772

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(12,666

)

 

 

(12,666

)

Balance, September 30, 2022

 

$

13,214

 

 

$

105,095

 

 

$

58,026

 

 

$

(50,361

)

 

$

125,974

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Stock option expense

 

 

-

 

 

 

18

 

 

 

-

 

 

 

-

 

 

 

18

 

Restricted stock grant expense

 

 

-

 

 

 

180

 

 

 

-

 

 

 

-

 

 

 

180

 

Vested stock grants

 

 

3

 

 

 

(3

)

 

 

-

 

 

 

-

 

 

 

-

 

Cash dividends declared ($0.33 per share)

 

 

-

 

 

 

-

 

 

 

(1,771

)

 

 

-

 

 

 

(1,771

)

Net income

 

 

-

 

 

 

-

 

 

 

4,653

 

 

 

-

 

 

 

4,653

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(9,792

)

 

 

(9,792

)

Balance, September 30, 2023

 

$

13,253

 

 

$

105,862

 

 

$

72,384

 

 

$

(55,772

)

 

$

135,727

 

See Notes to Consolidated Financial Statements

 

7


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

 

For the nine months ended

 

 

 

September 30, 2023

 

 

September 30, 2022

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$

16,095

 

 

$

16,381

 

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

 

 

 

 

 

 

Provision for (recovery of) credit losses

 

 

(60

)

 

 

(30

)

Net accretion of certain acquisition-related adjustments

 

 

(5,637

)

 

 

(1,518

)

Amortization of intangible assets

 

 

1,138

 

 

 

1,332

 

Net amortization and (accretion) of securities

 

 

(1,754

)

 

 

317

 

Net losses on sale of AFS

 

 

206

 

 

 

 

Net gains on sale of other assets

 

 

(132

)

 

 

(1,117

)

Earnings on bank owned life insurance

 

 

(1,494

)

 

 

(709

)

Depreciation and other amortization

 

 

2,527

 

 

 

2,875

 

Stock option expense

 

 

128

 

 

 

125

 

Stock grant expense

 

 

411

 

 

 

398

 

Net change in:

 

 

 

 

 

 

Accrued interest receivable and other assets

 

 

52

 

 

 

1,509

 

Accrued interest payable and other liabilities

 

 

(783

)

 

 

(2,112

)

Net cash provided by operating activities

 

 

10,697

 

 

 

17,451

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Net increase in restricted investments

 

 

(2,132

)

 

 

(188

)

Purchases of available for sale securities

 

 

(68,565

)

 

 

(314,997

)

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

 

 

183,950

 

 

 

18,365

 

Net change in loans

 

 

(78,721

)

 

 

119,905

 

Purchase of bank owned life insurance

 

 

 

 

 

(6,354

)

Proceeds from bank owned life insurance payout

 

 

1,411

 

 

-

 

Proceeds from sale of premises and equipment

 

 

2,358

 

 

 

6,211

 

Proceeds from sale of other real estate owned

 

 

 

 

 

610

 

Purchase of bank premises and equipment

 

 

(870

)

 

 

(510

)

Net cash provided by (used in) investing activities

 

 

37,431

 

 

 

(176,958

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Net change in demand deposits, interest checking, money market and savings accounts

 

 

(270,405

)

 

 

(171,728

)

Net change in certificates of deposit and other time deposits

 

 

162,357

 

 

 

(27,753

)

Net change in federal funds purchased

 

 

 

 

 

 

Net change in other borrowings

 

 

43,000

 

 

 

 

Proceeds from termination of interest swap

 

 

460

 

 

 

 

Proceeds from stock options exercised

 

 

18

 

 

 

24

 

Cash dividends paid

 

 

(5,304

)

 

 

(4,791

)

Net cash used in financing activities

 

 

(69,874

)

 

 

(204,248

)

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

$

(21,746

)

 

$

(363,755

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

 

Beginning of period

 

$

40,136

 

 

$

508,840

 

End of period

 

$

18,390

 

 

$

145,085

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

   Cash payments for:

 

 

 

 

 

 

Interest

 

$

10,701

 

 

$

2,344

 

Taxes

 

$

3,579

 

 

$

2,750

 

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
   ACTIVITIES

 

 

 

 

 

 

Unrealized losses on available for sale securities

 

$

(8,542

)

 

$

(61,676

)

Unrealized gains on interest rate swaps

 

$

 

 

$

727

 

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

 

$

1,983

 

 

$

540

 

 

See Notes to Consolidated Financial Statements

8


 

VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 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 nine months ended September 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

Disclosure Improvements - In October 2023, the FASB issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative”. This ASU incorporates certain SEC disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.

 

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.

 

9


 

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.

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.

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.

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.

10


 

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
(Incurred Loss)

 

 

Impact of
ASC 326

 

 

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

 

 

 

1,170

 

   Allowance for credit losses

 

$

5,552

 

 

$

2,491

 

 

$

8,043

 

 

 

 

 

 

 

 

 

 

 

Loans, net

 

$

930,863

 

 

$

(2,136

)

 

$

928,727

 

 

 

 

 

 

 

 

 

 

 

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 September 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 $3.4 million at September 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:

1.
Commercial and industrial (Commercial)
2.
Construction (Real estate construction and land)
3.
Consumer (Consumer)
4.
Commercial real estate, non-owner occupied (Commercial mortgage)
5.
Commercial real estate, owner occupied (Commercial mortgage)
6.
Home equity and junior liens (1-4 family residential mortgage)
7.
Multifamily (Commercial mortgage)
8.
Residential first lien (1-4 family residential mortgage)

Remaining life methodology:

9.
Minute lender (Consumer/Commercial)
10.
Student loans (Consumer)

 

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 payable 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 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 September 30, 2023 and December 31, 2022 were as follows (dollars in thousands):

 

September 30, 2023

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Value

 

U.S. Government treasuries

 

$

106,722

 

 

$

9

 

 

$

(1,052

)

 

$

105,679

 

U.S. Government agencies

 

 

45,168

 

 

 

-

 

 

 

(7,399

)

 

 

37,769

 

Mortgage-backed securities/CMOs

 

 

185,460

 

 

 

-

 

 

 

(33,399

)

 

 

152,061

 

Corporate bonds

 

 

19,655

 

 

 

-

 

 

 

(992

)

 

 

18,663

 

Municipal bonds

 

 

104,409

 

 

 

-

 

 

 

(27,765

)

 

 

76,644

 

Total Securities Available for Sale

 

$

461,414

 

 

$

9

 

 

$

(70,607

)

 

$

390,816

 

 

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 September 30, 2023, there were $331.8 million or 284 issues of individual securities, held in an unrealized loss position. These securities have an unrealized loss of $70.6 million and consist of 119 mortgage-backed/collateralized mortgage obligations, 128 municipal bonds, 20 agency bonds, 6 treasury bonds and 11 corporate bonds.

Accrued interest receivable on AFS securities as of September 30, 2023 amounted to $2.0 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 September 30, 2023, and December 31, 2022 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

September 30, 2023

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

U.S. Government treasuries

 

$

-

 

 

$

-

 

 

$

51,817

 

 

$

(1,052

)

 

$

51,817

 

 

$

(1,052

)

U.S. Government agencies

 

 

9,968

 

 

 

(32

)

 

 

27,651

 

 

 

(7,367

)

 

 

37,619

 

 

 

(7,399

)

Mortgage-backed/CMOs

 

 

-

 

 

 

-

 

 

 

147,063

 

 

 

(33,399

)

 

 

147,063

 

 

 

(33,399

)

Corporate bonds

 

 

-

 

 

 

-

 

 

 

18,663

 

 

 

(992

)

 

 

18,663

 

 

 

(992

)

Municipal bonds

 

 

2,750

 

 

 

(113

)

 

 

73,894

 

 

 

(27,652

)

 

 

76,644

 

 

 

(27,765

)

 

 

$

12,718

 

 

$

(145

)

 

$

319,088

 

 

$

(70,462

)

 

$

331,806

 

 

$

(70,607

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 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 $2.9 million and $5.1 million at September 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 $17.5 million and $2.1 million at September 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 nine months ended September 30, 2023, the Company sold AFS securities with a total book value of $49.9 million, incurring a pre-tax loss of $206 thousand, as part of a strategic decision to reinvest proceeds into higher yielding assets. There were no sales of securities during the three months ended September 30, 2023 or the three and nine months ending September 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 $7.3 million and $5.1 million as of September 30, 2023 and December 31, 2022, respectively, are carried at cost.

The amortized cost and fair value of AFS debt securities at September 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

 

$

105,223

 

 

$

104,236

 

After one year to five years

 

 

1,499

 

 

 

1,443

 

 

$

106,722

 

 

$

105,679

 

U.S. Government agencies

 

 

 

 

 

 

One year or less

 

$

10,000

 

 

$

9,968

 

After one year to five years

 

 

5,793

 

 

 

4,954

 

After five years to ten years

 

 

25,375

 

 

 

20,107

 

Ten years or more

 

 

4,000

 

 

 

2,740

 

 

$

45,168

 

 

$

37,769

 

Mortgage-backed securities/CMOs

 

 

 

 

 

 

One year or less

 

$

4,021

 

 

$

3,942

 

After one year to five years

 

 

4,757

 

 

 

4,444

 

After five years to ten years

 

 

3,124

 

 

 

2,764

 

Ten years or more

 

 

173,558

 

 

 

140,911

 

 

$

185,460

 

 

$

152,061

 

Corporate bonds

 

 

 

 

 

 

One year or less

 

$

1,002

 

 

$

983

 

After one year to five years

 

 

18,653

 

 

 

17,680

 

 

$

19,655

 

 

$

18,663

 

Municipal bonds

 

 

 

 

 

 

After one year to five years

 

$

3,374

 

 

$

3,180

 

After five years to ten years

 

 

20,874

 

 

 

18,406

 

Ten years or more

 

 

80,161

 

 

 

55,058

 

 

$

104,409

 

 

$

76,644

 

 

 

 

 

 

 

 

Total Debt Securities Available for Sale

 

$

461,414

 

 

$

390,816

 

 

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 adoption of ASC and CECL, see Note 2 - Adoption of New Accounting Standards. All loan information presented as of September 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 September 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 $3.4 million as of September 30, 2023, from the amortized cost basis of loans.

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Commercial

 

$

121,846

 

 

$

71,139

 

Real estate construction and land

 

 

31,526

 

 

 

37,541

 

1-4 family residential mortgages

 

 

316,862

 

 

 

323,185

 

Commercial mortgages

 

 

511,327

 

 

 

459,125

 

Consumer

 

 

38,957

 

 

 

45,425

 

Total loans

 

 

1,020,518

 

 

 

936,415

 

Less: Allowance for credit losses

 

 

(7,799

)

 

 

(5,552

)

Net loans

 

$

1,012,719

 

 

$

930,863

 

 

The balances in the table above include unamortized premiums and net deferred loan costs and fees. As of September 30, 2023 and December 31, 2022, unamortized premiums from purchases of loans (excluding loans acquired during the Merger) were $3.3 million, and $1.4 million, respectively, due primarily to purchases of government-guaranteed loans. Net deferred loan costs and fees totaled $2.1 million and $755 thousand as of September 30, 2023 and December 31, 2022, respectively.

Consumer loans include $56 thousand and $180 thousand of demand deposit overdrafts as of September 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 $10.0 million as of September 30, 2023 on the Acquired Loans.

The following table shows the aging of the Company's loan portfolio, by class, at September 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

 

$

-

 

 

$

-

 

 

$

783

 

 

$

-

 

 

$

121,063

 

 

$

121,846

 

Real estate construction and land

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

31,526

 

 

 

31,526

 

1-4 family residential mortgages

 

 

1,924

 

 

 

607

 

 

 

-

 

 

 

700

 

 

 

313,631

 

 

 

316,862

 

Commercial mortgages

 

 

-

 

 

 

-

 

 

 

-

 

 

 

443

 

 

 

510,884

 

 

 

511,327

 

Consumer loans

 

 

146

 

 

 

132

 

 

 

71

 

 

 

-

 

 

 

38,608

 

 

 

38,957

 

Total Loans

 

$

2,070

 

 

$

739

 

 

$

854

 

 

$

1,143

 

 

$

1,015,712

 

 

$

1,020,518

 

 

16


 

The following table shows the Company's amortized cost basis of loans on nonaccrual status as of September 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 $12 thousand, due to collateral value shortfall. 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 $501 thousand are included in this figure in 2023 and not included in 2022.

 

 

CECL

 

 

Incurred Loss

 

 

 

September 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

 

 

228

 

 

 

472

 

 

 

700

 

 

 

673

 

Commercial mortgages

 

 

443

 

 

 

 

 

 

443

 

 

 

-

 

Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total Loans

 

$

671

 

 

$

472

 

 

$

1,143

 

 

$

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 nine months ended September 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 and nine months ended September 30, 2023 of modified loans that were modified during the previous twelve months and all are current as of September 30, 2023.

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 -
Purchased
Credit Impaired

 

 

Acquired Loans - Purchased Performing

 

 

Acquired
Loans -
Total

 

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

 

 

 

17


 

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

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2022

 

Accretable yield, beginning of period

 

11,667

 

 

 

13,742

 

Accretion

 

(828

)

 

 

(2,327

)

Reclassification from nonaccretable difference

 

6,829

 

 

 

9,021

 

Other changes, net

 

(734

)

 

 

(3,502

)

Accretable yield, end of period

 

16,934

 

 

 

16,934

 

 

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
Past
Due

 

 

PCI

 

 

Current

 

 

Total
Loans

 

 

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

 

 

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 and nine months ended September 30, 2023 on loans modified in the previous twelve months.

 

18


 

 

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 adoption of CECL, see Note 2 - Adoption of New Accounting Standards. All ACL information presented as of September 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.

Discounted Cash Flow
o
DCF models, being periodic in nature, allow for effective incorporation of a reasonable and supportable forecast in a directionally consistent and objective manner.
o
The analysis aligns well with other calculations/actions outside the ACL estimation, which will mitigate model risk in other areas and allow for symmetrical application. For example, fair value (exit price notion), profitability analysis, IRR calculations, ALM, stress testing, and other forms of cash flow analysis.
o
Peer data is available for certain inputs (Probability of Default, Loss Given Default) if first-party data is not available or meaningful. This is made possible by the periodic nature of the model.
o
The DCF methodology is utilized on the following pools: 1) Commercial & Industrial; 2) Construction; 3) Consumer; 4) CRE NonOwner Occupied; 5) CRE Owner Occupied; 6) HELOC & Junior Lien; 7) Residential 1st Lien; and 8) Multifamily.

Remaining Life
o
This methodology leverages a quarterly loss rate as well as future expectations of portfolio balances to calculate a reserve.
o
There are two main strengths of this methodology. First, it is fairly easy to execute and does not rely on large quantities of historical loan-level data. Second, it can satisfy the need to incorporate a reasonable and supportable forecast in a straightforward manner by either applying a forecast policy of “applicable history” or leveraging an actual econometric model for the analysis.
o
The remaining life methodology is utilized on the following pools: 1) Minute Lender; and 2) Student Loans.

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:

The economic forecast reflects the worst economic environment observed for each economic factor. This is done by quantifying a rolling 1-year average for each economic factor. Then, the most pessimistic 1-year average observations are captured and utilized as economic forecast inputs within the application.
The economic forecast assumed is a ‘worst-case’ economic environment with inputs reflective of the great recession.
The economic forecast is used to quantify credit risk in the form of Loss Rate. The resulting periodic default and loss rates are applied to the prepayment adjusted amortization schedules for each segment.

19


 

The resulting ACL, which represents a lifetime reserve (symmetrical to the base model), is input into the qualitative framework’s maximum loss rate field. The difference between the expected model and the maximum model results are then allocated based on weight and risk assignment.

 

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 nonaccrual status. As of September 30, 2023, after reviewing each loan in nonaccrual status, a specific reserve of $12 thousand was established.

 

The primary driver in the decrease in reserves from adoption date of January 1, 2023 to September 30, 2023 was the proportional increase in government-guaranteed loans which do not require an ACL.

 

20


 

The following table shows the ACL activity by loan portfolio for the three and nine months ended September 30, 2023 (dollars in thousands):

 

 

Commercial
Loans

 

 

Real Estate
Construction
and Land

 

 

1-4 family residential mortgages

 

 

Commercial mortgages

 

 

Consumer
Loans

 

 

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
 losses

 

 

(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 losses

 

 

19

 

 

 

(107

)

 

 

715

 

 

 

(516

)

 

 

105

 

 

 

216

 

Balance as of June 30, 2023

 

$

215

 

 

$

464

 

 

$

2,277

 

 

$

3,955

 

 

$

952

 

 

$

7,863

 

   Charge-off

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(199

)

 

$

(199

)

   Recoveries

 

 

103

 

 

 

-

 

 

 

3

 

 

 

1

 

 

 

26

 

 

 

133

 

   Provision for (recovery of) credit losses

 

 

(128

)

 

 

(45

)

 

 

(803

)

 

 

763

 

 

 

215

 

 

 

2

 

Balance as of September 30, 2023

 

$

190

 

 

$

419

 

 

$

1,477

 

 

$

4,719

 

 

$

994

 

 

$

7,799

 

 

The following table presents a breakdown of the provision for credit losses for the periods indicated (dollars in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30, 2023

 

 

September 30, 2022

 

 

September 30, 2023

 

 

September 30, 2022

 

Provision for credit losses:

 

 

 

 

 

 

 

 

 

 

 

  Provision (recovery) for loans

$

2

 

 

$

39

 

 

$

(17

)

 

$

(30

)

  Provision (recovery) for unfunded commitments

 

(75

)

 

 

-

 

 

 

(43

)

 

 

-

 

Total

$

(73

)

 

$

39

 

 

$

(60

)

 

$

(30

)

 

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 September 30, 2023 (dollars in thousands):

 

 

September 30, 2023

 

 

 

Real Estate Secured Loans

 

 

Allowance for Credit Losses -Loans

 

Commercial real estate - non owner occupied

 

$

443

 

 

$

-

 

Residential 1-4 family real estate

 

 

700

 

 

 

12

 

Total

 

$

1,143

 

 

$

12

 

 

21


 

 

 

The following table presents the Company's recorded investment in loans by credit quality indicators by year of origination as of September 30, 2023 (dollars in thousands). Current period gross write-off amounts represent write-offs for the nine months ended September 30, 2023 (dollars in thousands):

 

 

September 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

 

$

55,109

 

 

$

12,471

 

 

$

2,913

 

 

$

5,575

 

 

$

7,332

 

 

$

15,808

 

 

$

21,547

 

 

$

11

 

 

$

120,766

 

Watch

 

 

-

 

 

 

43

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

45

 

Special Mention

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

84

 

 

 

6

 

 

 

-

 

 

 

90

 

Substandard

 

 

-

 

 

 

103

 

 

 

6

 

 

 

36

 

 

 

75

 

 

 

238

 

 

 

50

 

 

 

437

 

 

 

945

 

Total commercial

 

$

55,109

 

 

$

12,617

 

 

$

2,919

 

 

$

5,611

 

 

$

7,407

 

 

$

16,132

 

 

$

21,603

 

 

$

448

 

 

$

121,846

 

Current period gross write-off

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate construction and land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

8,089

 

 

$

11,956

 

 

$

4,663

 

 

$

1,734

 

 

$

947

 

 

$

2,253

 

 

$

129

 

 

$

-

 

 

$

29,771

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

352

 

 

 

-

 

 

 

-

 

 

 

352

 

Special Mention

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Substandard

 

 

1,356

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

47

 

 

 

-

 

 

 

-

 

 

 

1,403

 

Total real estate construction and land

 

$

9,445

 

 

$

11,956

 

 

$

4,663

 

 

$

1,734

 

 

$

947

 

 

$

2,652

 

 

$

129

 

 

$

-

 

 

$

31,526

 

Current period gross write-off

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

14,444

 

 

$

14,747

 

 

$

56,857

 

 

$

76,725

 

 

$

25,490

 

 

$

89,557

 

 

$

22,084

 

 

$

528

 

 

$

300,432

 

Watch

 

 

-

 

 

 

1,540

 

 

 

125

 

 

 

1,001

 

 

 

-

 

 

 

6,026

 

 

 

1,294

 

 

 

-

 

 

 

9,986

 

Special Mention

 

 

-

 

 

 

847

 

 

 

81

 

 

 

692

 

 

 

-

 

 

 

1,407

 

 

 

78

 

 

 

-

 

 

 

3,105

 

Substandard

 

 

-

 

 

 

-

 

 

 

54

 

 

 

505

 

 

 

98

 

 

 

2,290

 

 

 

392

 

 

 

-

 

 

 

3,339

 

Total 1-4 family residential mortgage

 

$

14,444

 

 

$

17,134

 

 

$

57,117

 

 

$

78,923

 

 

$

25,588

 

 

$

99,280

 

 

$

23,848

 

 

$

528

 

 

$

316,862

 

Current period gross write-off

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

66,300

 

 

$

43,233

 

 

$

47,704

 

 

$

102,551

 

 

$

43,485

 

 

$

171,477

 

 

$

1,909

 

 

$

76

 

 

$

476,735

 

Watch

 

 

-

 

 

 

-

 

 

 

263

 

 

 

172

 

 

 

167

 

 

 

18,524

 

 

 

-

 

 

 

-

 

 

 

19,126

 

Special Mention

 

 

-

 

 

 

-

 

 

 

393

 

 

 

285

 

 

 

-

 

 

 

4,194

 

 

 

-

 

 

 

-

 

 

 

4,872

 

Substandard

 

 

153

 

 

 

-

 

 

 

1,843

 

 

 

2,820

 

 

 

-

 

 

 

5,778

 

 

 

-

 

 

 

-

 

 

 

10,594

 

Total commercial mortgages

 

$

66,453

 

 

$

43,233

 

 

$

50,203

 

 

$

105,828

 

 

$

43,652

 

 

$

199,973

 

 

$

1,909

 

 

$

76

 

 

$

511,327

 

Current period gross write-off

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

1,110

 

 

$

216

 

 

$

512

 

 

$

361

 

 

$

137

 

 

$

22,135

 

 

$

14,429

 

 

 

 

 

$

38,900

 

Watch

 

 

-

 

 

 

-

 

 

 

8

 

 

 

14

 

 

 

12

 

 

 

4

 

 

 

-

 

 

 

 

 

 

38

 

Special Mention

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

1

 

 

 

7

 

 

 

9

 

Substandard

 

 

1

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

7

 

 

 

-

 

 

 

-

 

 

 

 

 

 

10

 

Total consumer

 

$

1,111

 

 

$

216

 

 

$

522

 

 

$

375

 

 

$

156

 

 

$

22,140

 

 

$

14,430

 

 

$

7

 

 

$

38,957

 

Current period gross write-off

 

$

-

 

 

$

-

 

 

$

34

 

 

$

3

 

 

$

55

 

 

$

421

 

 

$

8

 

 

$

-

 

 

$

521

 

 

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 ALLL by major classification during the year ended December 31, 2022 (dollars in thousands):

 

 

Commercial
Loans

 

 

Real Estate
Construction
and Land

 

 

Real Estate
Mortgages

 

 

Consumer
Loans

 

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of beginning of year

 

$

252

 

 

$

399

 

 

$

4,478

 

 

$

855

 

 

$

5,984

 

Charge-offs

 

 

(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
   impaired

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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
Mention

 

 

Sub-
standard

 

 

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 September 30, 2023 and December 31, 2022 and $8.1 million as of September 30, 2022. The reduction from September 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 $5.4 million, $6.6 million and $7.0 million of other intangible assets as of September 30, 2023, December 31, 2022 and September 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):

 

September 30, 2023

 

 

December 31, 2022

 

 

September 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

 

$

(4,212

)

 

$

9,660

 

$

(3,074

)

 

$

9,660

 

$

(2,670

)

    Customer relationships intangible

 

-

 

 

-

 

 

 

-

 

 

-

 

 

 

773

 

 

(550

)

         Total

$

9,660

 

$

(4,212

)

 

$

9,660

 

$

(3,074

)

 

$

10,433

 

$

(3,220

)

Amortization expense was $368 thousand and $415 thousand for the three months ended September 30, 2023 and 2022, respectively and $1.1 million and $1.3 million for the nine months ended September 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 September 30, 2023 is as follows (dollars in thousands):

 

Core

 

 

 

Deposit

 

 

 

Intangible

 

 

For the three months ending December 31, 2023

$

355

 

 

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

$

5,448

 

 

 

 

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):

 

 

 

September 30, 2023

 

 

September 30, 2022

 

Lease liability

 

$

6,824

 

 

$

6,551

 

Right-of-use asset

 

$

7,110

 

 

$

6,941

 

Weighted average remaining lease term

 

4.90 years

 

 

5.68 years

 

Weighted average discount rate

 

 

2.29

%

 

 

1.97

%

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Lease Expense:

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Operating lease expense

 

$

424

 

 

$

437

 

 

$

1,330

 

 

$

1,331

 

Short-term lease expense

 

 

84

 

 

 

196

 

 

 

288

 

 

 

387

 

Total lease expense

 

$

508

 

 

$

633

 

 

$

1,618

 

 

$

1,718

 

Cash paid for amounts included in
   lease liabilities

 

$

326

 

 

$

408

 

 

$

1,174

 

 

$

1,240

 

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

Undiscounted Cash Flow

 

September 30, 2023

 

Three months ending December 31, 2023

 

$

368

 

Twelve months ending December 31, 2024

 

 

1,520

 

Twelve months ending December 31, 2025

 

 

1,437

 

Twelve months ending December 31, 2026

 

 

1,095

 

Twelve months ending December 31, 2027

 

 

999

 

Thereafter

 

 

1,791

 

Total undiscounted cash flows

 

$

7,210

 

Less: Discount

 

 

(386

)

Lease liability

 

$

6,824

 

 

 

 

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 nine months ended September 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 September 30, 2023 and September 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

 

September 30, 2023

 

 

September 30, 2022

 

 

 

Net
Income

 

 

Weighted
Average
Shares

 

 

Per
Share
Amount

 

 

Net
Income

 

 

Weighted
Average
Shares

 

 

Per
Share
Amount

 

Basic net income per share

 

$

4,653

 

 

 

5,365,982

 

 

$

0.87

 

 

$

5,772

 

 

 

5,326,543

 

 

$

1.08

 

Effect of dilutive stock options

 

 

-

 

 

 

29,501

 

 

 

(0.01

)

 

 

-

 

 

 

22,357

 

 

 

(0.00

)

Diluted net income per share

 

$

4,653

 

 

 

5,395,483

 

 

$

0.86

 

 

$

5,772

 

 

 

5,348,900

 

 

$

1.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30, 2023

 

 

September 30, 2022

 

 

 

Net
Income

 

 

Weighted
Average
Shares

 

 

Per
Share
Amount

 

 

Net
Income

 

 

Weighted
Average
Shares

 

 

Per
Share
Amount

 

Basic net income per share

 

$

16,095

 

 

 

5,354,086

 

 

$

3.00

 

 

$

16,381

 

 

 

5,321,652

 

 

$

3.08

 

Effect of dilutive stock options

 

 

-

 

 

 

28,059

 

 

 

(0.01

)

 

 

-

 

 

 

26,226

 

 

 

(0.01

)

Diluted net income per share

 

$

16,095

 

 

$

5,382,145

 

 

$

2.99

 

 

$

16,381

 

 

 

5,347,878

 

 

$

3.06

 

 

For the three and nine months ended September 30, 2023, there were 110,301 option shares considered anti-dilutive and excluded from this calculation. For the three and nine months ended September 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 September 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
   options

 

 

-

 

 

 

(178,506

)

 

 

(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

 

 

 

1,231

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Stock grants issued and outstanding:

 

 

 

 

 

 

 

 

 

Total vested and unvested shares

 

 

18,932

 

 

 

95,888

 

 

 

-

 

Fully vested shares

 

 

-

 

 

 

49,999

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

Option grants issued and outstanding:

 

 

 

 

 

 

 

 

 

Total vested and unvested shares

 

 

-

 

 

 

175,301

 

 

 

-

 

Fully vested shares

 

 

-

 

 

 

122,016

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

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):

 

 

 

September 30, 2023

 

 

 

Number of Options

 

 

Weighted
Average
Exercise Price

 

 

Aggregate
Intrinsic Value

 

Outstanding at January 1, 2023

 

 

168,280

 

 

$

33.95

 

 

$

830

 

Issued

 

 

8,400

 

 

$

33.22

 

 

 

 

Exercised

 

 

(1,379

)

 

$

(13.69

)

 

 

 

Expired

 

 

-

 

 

$

-

 

 

 

 

Outstanding at September 30, 2023

 

 

175,301

 

 

$

34.08

 

 

$

371

 

 

 

 

 

 

 

 

 

 

Options exercisable at September 30, 2023

 

 

122,016

 

 

$

35.85

 

 

$

220

 

 

For the three months ended September 30, 2023 and 2022, the Company recognized $18 thousand and $42 thousand, respectively, in compensation expense for stock options. For the nine months ended September 30, 2023 and 2022, the Company recognized $128 thousand and $125 thousand, respectively, in compensation expense for stock options. As of September 30, 2023, there was $185 thousand in unrecognized compensation expense remaining to be recognized in future reporting periods through 2028. 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 4,800 issued during the three months ended September 30, 2023 and 8,400 granted during the nine months ended September 30, 2023. There were no stock option grants issued during the three and nine months ended September 30, 2022.

28


 

Summary information pertaining to options outstanding at September 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
Options
Outstanding

 

 

Weighted-
Average
Remaining
Contractual Life

 

Weighted-
Average
Exercise
Price

 

 

Number of
Options
Exercisable

 

 

Weighted-
Average
Exercise
Price

 

$23.75 to $30.00

 

 

65,000

 

 

6.8 Years

 

$

24.65

 

 

 

38,600

 

 

$

24.66

 

$30.01 to $40.00

 

 

52,820

 

 

7.3 Years

 

$

36.38

 

 

 

25,935

 

 

$

37.51

 

$40.01 to $42.62

 

 

57,481

 

 

4.6 Years

 

$

42.62

 

 

 

57,481

 

 

$

42.62

 

Total

 

 

175,301

 

 

6.2 Years

 

$

34.08

 

 

 

122,016

 

 

$

35.85

 

 

Stock Grants

Unrestricted stock grant – No unrestricted stock grants were awarded during the nine months ended September 30, 2023. During the nine months ended September 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 nine months ended September 30, 2023. (Note that all such shares were granted during the second quarter of 2023 with no shares granted during the first or third quarter of 2023.) During the nine months ended September 30, 2022, 5,580 and 12,856 restricted shares, were granted to employees and non-employee directors, respectively, vesting over a four-year or five-year period. (Note that all such shares were granted during the first quarter of 2022 with no shares granted during the second or third quarter of 2022.) For the three and nine months ended September 30, 2023, $180 thousand and $411 thousand, respectively, was expensed as a result of restricted stock grants. As of September 30, 2023, there was $1.7 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 nine months ended September 30, 2023 are summarized below (dollars in thousands except per share data):

 

 

September 30, 2023

 

 

 

Number of
Shares

 

 

Weighted
Average
Grant Date
Fair Value
Per Share

 

 

Aggregate
Intrinsic Value

 

Nonvested as of January 1, 2023

 

 

51,664

 

 

$

32.05

 

 

$

1,568

 

Issued

 

 

27,332

 

 

$

32.73

 

 

$

829

 

Vested

 

 

(14,175

)

 

$

30.95

 

 

$

(430

)

Forfeited

 

 

-

 

 

$

-

 

 

$

-

 

Nonvested at September 30, 2023

 

 

64,821

 

 

$

32.57

 

 

$

1,967

 

 

 

 

 

 

 

 

 

 

 

 

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).

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 September 30, 2023 and December 31, 2022 (dollars in thousands):

 

 

 

 

 

 

Fair Value Measurements at September 30, 2023 Using:

 

 

 

 

 

 

Quoted Prices
in Active
Markets for
Identical Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

Description

 

Balance

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government treasuries

 

$

105,679

 

 

$

-

 

 

$

105,679

 

 

$

-

 

U.S. Government agencies

 

 

37,769

 

 

 

-

 

 

 

37,769

 

 

 

-

 

Mortgage-backed securities/CMOs

 

 

152,061

 

 

 

-

 

 

 

152,061

 

 

 

-

 

Corporate bonds

 

 

18,663

 

 

 

-

 

 

 

18,663

 

 

 

-

 

Municipal bonds

 

 

76,644

 

 

 

-

 

 

 

76,644

 

 

 

-

 

Total securities available for sale

 

$

390,816

 

 

$

-

 

 

$

390,816

 

 

$

-

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2022 Using:

 

 

 

 

 

 

Quoted Prices
in Active
Markets for
Identical Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

Description

 

Balance

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government treasuries

 

$

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 September 30, 2023 (dollars in thousands). There were no such assets to report as of December 31, 2022.

 

 

 

 

 

Quoted Prices
in Active
Markets for
Identical Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

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 September 30, 2023 and December 31, 2022 are as follows (dollars in thousands):

 

 

 

 

 

 

Fair Value Measurements at September 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

 

$

18,390

 

 

$

18,390

 

 

$

-

 

 

$

-

 

 

$

18,390

 

Available for sale securities

 

 

390,816

 

 

 

-

 

 

 

390,816

 

 

 

-

 

 

 

390,816

 

Restricted securities

 

 

7,269

 

 

 

-

 

 

 

7,269

 

 

 

-

 

 

 

7,269

 

Loans, net

 

 

1,012,719

 

 

 

-

 

 

 

-

 

 

 

953,073

 

 

 

953,073

 

Bank owned life insurance

 

 

38,635

 

 

 

-

 

 

 

38,635

 

 

 

-

 

 

 

38,635

 

Accrued interest receivable

 

 

5,404

 

 

 

-

 

 

 

2,045

 

 

 

3,359

 

 

 

5,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits and interest-bearing transaction and money market accounts

 

$

1,092,827

 

 

$

-

 

 

$

1,092,827

 

 

$

-

 

 

$

1,092,827

 

Certificates of deposit

 

 

277,471

 

 

 

-

 

 

 

276,586

 

 

 

-

 

 

 

276,586

 

FHLB Borrowings

 

 

43,000

 

 

 

-

 

 

 

43,020

 

 

 

-

 

 

 

43,020

 

Junior subordinated debt, net

 

 

3,448

 

 

 

-

 

 

 

3,448

 

 

 

-

 

 

 

3,448

 

Accrued interest payable

 

 

1,547

 

 

 

-

 

 

 

1,547

 

 

 

-

 

 

 

1,547

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2023 and September 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 loss arising during the period

 

 

(8,748

)

 

 

(46

)

 

 

(8,794

)

Related income tax effects

 

 

1,837

 

 

 

9

 

 

 

1,846

 

 

 

 

(6,911

)

 

 

(37

)

 

 

(6,948

)

 

 

 

 

 

 

 

 

 

 

Reclassification into net income

 

 

206

 

 

 

(460

)

 

 

(254

)

Related income tax effects

 

 

(43

)

 

 

97

 

 

 

54

 

 

 

 

163

 

 

 

(363

)

 

 

(200

)

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss at September 30, 2023

 

$

(55,772

)

 

$

-

 

 

$

(55,772

)

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(61,676

)

 

 

727

 

 

 

(60,949

)

Related income tax effects

 

 

12,952

 

 

 

(153

)

 

 

12,799

 

 

 

 

(48,724

)

 

 

574

 

 

 

(48,150

)

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) at September 30, 2022

 

$

(50,888

)

 

$

527

 

 

$

(50,361

)

 

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 were no hedges in place as of September 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:

Bank - The commercial banking segment involves making loans and generating deposits from individuals, businesses and charitable organizations. Loan fee income, service charges from deposit accounts, and other non-interest-related fees, such as fees for debit cards and ATM usage and fees for treasury management services, generate additional income for the Bank segment.
Sturman Wealth Advisors – Sturman Wealth Advisors, formerly known as VNB Investment Services, offered wealth management and investment advisory services. Revenue for this segment was generated primarily from investment advisory and financial planning fees, with a small portion attributable to brokerage commissions. The Bank sold this business line effective December 19, 2022.
VNB Trust & Estate Services – VNB Trust & Estate Services offers corporate trustee services, trust and estate administration, IRA administration and custody services. Revenue for this segment is generated from administration, service and custody fees, as well as management fees that are derived from Assets Under Management. Investment management services currently are offered through in-house and third-party managers.
Masonry Capital - Masonry Capital offers investment management services for separately managed accounts and a private investment fund employing a value-based, catalyst-driven investment strategy. Revenue for this segment is generated from management fees that are derived from Assets Under Management and incentive income that is based on the investment returns generated on performance-based Assets Under Management.

35


 

Segment information for the three and nine months ended September 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 September 30, 2023

 

Bank

 

 

VNB Trust &
Estate
Services

 

 

Masonry
Capital

 

 

Consolidated

 

Net interest income

 

$

11,100

 

 

$

-

 

 

$

-

 

 

$

11,100

 

Recovery of credit losses

 

 

(73

)

 

 

-

 

 

 

-

 

 

 

(73

)

Noninterest income

 

 

2,215

 

 

 

272

 

 

 

157

 

 

 

2,644

 

Noninterest expense

 

 

7,775

 

 

 

356

 

 

 

209

 

 

 

8,340

 

Income (loss) before income taxes

 

 

5,613

 

 

 

(84

)

 

 

(52

)

 

 

5,477

 

Provision for (benefit from) income
   taxes

 

 

852

 

 

 

(17

)

 

 

(11

)

 

 

824

 

Net income (loss)

 

$

4,761

 

 

$

(67

)

 

$

(41

)

 

$

4,653

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2023

 

Bank

 

 

VNB Trust &
Estate
Services

 

 

Masonry
Capital

 

 

Consolidated

 

Net interest income

 

$

38,216

 

 

$

-

 

 

$

-

 

 

$

38,216

 

Recovery of credit losses

 

 

(60

)

 

 

-

 

 

 

-

 

 

 

(60

)

Noninterest income

 

 

5,707

 

 

 

782

 

 

 

476

 

 

 

6,965

 

Noninterest expense

 

 

24,131

 

 

 

1,027

 

 

 

607

 

 

 

25,765

 

Income (loss) before income taxes

 

 

19,852

 

 

 

(245

)

 

 

(131

)

 

 

19,476

 

Provision for (benefit from) income taxes

 

 

3,459

 

 

 

(51

)

 

 

(27

)

 

 

3,381

 

Net income (loss)

 

$

16,393

 

 

$

(194

)

 

$

(104

)

 

$

16,095

 

 

Three months ended September 30, 2022

 

Bank

 

 

Sturman Wealth Advisors

 

 

VNB Trust &
Estate
Services

 

 

Masonry
Capital

 

 

Consolidated

 

Net interest income

 

$

14,277

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

14,277

 

Provision for credit losses

 

 

39

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

39

 

Noninterest income

 

 

1,486

 

 

 

212

 

 

 

435

 

 

 

167

 

 

 

2,300

 

Noninterest expense

 

 

8,833

 

 

 

154

 

 

 

324

 

 

 

192

 

 

 

9,503

 

Income (loss) before income taxes

 

 

6,891

 

 

 

58

 

 

 

111

 

 

 

(25

)

 

 

7,035

 

Provision for (benefit from) income
   taxes

 

 

1,233

 

 

 

12

 

 

 

23

 

 

 

(5

)

 

 

1,263

 

Net income (loss)

 

$

5,658

 

 

$

46

 

 

$

88

 

 

$

(20

)

 

$

5,772

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2022

 

Bank

 

 

Sturman Wealth Advisors

 

 

VNB Trust &
Estate
Services

 

 

Masonry
Capital

 

 

Consolidated

 

Net interest income

 

$

38,163

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

38,163

 

Recovery of credit losses

 

 

(30

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(30

)

Noninterest income

 

 

5,871

 

 

 

639

 

 

 

3,631

 

 

 

592

 

 

 

10,733

 

Noninterest expense

 

 

26,370

 

 

 

482

 

 

 

1,621

 

 

 

567

 

 

 

29,040

 

Income before income taxes

 

 

17,694

 

 

 

157

 

 

 

2,010

 

 

 

25

 

 

 

19,886

 

Provision for income taxes

 

 

3,045

 

 

 

33

 

 

 

422

 

 

 

5

 

 

 

3,505

 

Net income

 

$

14,649

 

 

$

124

 

 

$

1,588

 

 

$

20

 

 

$

16,381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 nine months ended September 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 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.

ROAA for the three months ended September 30, 2023 was 1.18% compared to 1.30% realized in the same period in the prior year, as net income was lower in the current period as compared to the same period in the prior year. ROAA for the nine months ended September 30, 2023 was 1.37% compared to 1.20% realized in the same period in the prior year, as the decline in average assets outweighed the decline in net income.
ROAE for the three months ended September 30, 2023 was 12.91% compared to 16.50% realized in same period in the prior year. ROAE for the nine months ended September 30, 2023 was 15.42% compared to 14.98% realized in same period in the prior year.
Net income per diluted share was $0.86 for the three months ended September 30, 2023, compared to $1.08 for the same period in the prior year. Net income per diluted share was $2.99 for the nine months ended September 30, 2023, compared to $3.06 for the same period in the prior year. Both period over period declines were due to the decrease in net income.

37


 

We also manage our capital levels through growth, quarterly cash dividends, 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. Repurchases may be made through open market purchases or in privately negotiated transactions. The actual timing, number, and value of shares repurchased under the program will be determined by a committee of the Board. No shares have been repurchased to date under such plan.

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 September 30, 2023 were $1.6 billion. This is a $60.8 million, or 3.7%, decrease from total assets reported at December 31, 2022 and a $171.2 million, or 9.9%, decrease from total assets reported at September 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. Deposit balances increased $22.2 million, or 1.6%, from June 30, 2023 to September 30, 2023, as the Bank's strategy shifted to meet customer rate demands.

Interest-bearing deposits in other banks

The Company had $10.0 million of interest-bearing deposits in other banks as of September 30, 2023, compared to $19.1 million as of December 31, 2022 and $76.2 million as of September 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 were largely funded by liquidation of interest-bearing deposits in other banks. During the quarter ended September 30, 2023, interest bearing deposits in other banks decreased further due to the funding of increased loan demand.

Federal funds sold

The Company had $1.0 million in overnight federal funds sold as of September 30, 2023, $45 thousand as of December 31, 2022 and $53.1 million as of September 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 September 30, 2023 totaled $398.1 million, a decrease of $145.2 million compared with the $543.3 million reported at December 31, 2022 and a $145.5 million decrease from the $543.6 million reported at September 30, 2022. A security in the amount of $25 million which matured on September 30, 2023 was reclassified as a receivable resulting in an increase in other assets, as the proceeds were received after quarter-end. The decrease from year-end and the prior year was part of a strategic decision to reinvest proceeds into higher yielding assets.. At September 30, 2023 and December 31, 2022, the investment securities holdings represented 25.5% and 33.5% of the Company’s total assets, respectively.

The Company’s investment securities portfolio included restricted securities totaling $7.3 million as of September 30, 2023, compared to $5.1 million as of December 31, 2022 and $5.1 million as of September 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.

 

 

39


 

At September 30, 2023, the unrestricted securities portfolio totaled $390.8 million. The following table summarizes the Company's AFS securities by type as of September 30, 2023, December 31, 2022, and September 30, 2022 (dollars in thousands):

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

September 30, 2022

 

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

Balance

 

 

Total

 

 

Balance

 

 

Total

 

 

Balance

 

 

Total

 

U.S. Government treasuries

 

$

105,679

 

 

 

27.0

%

 

$

242,470

 

 

 

45.1

%

 

$

241,375

 

 

 

44.8

%

U.S. Government agencies

 

 

37,769

 

 

 

9.7

%

 

 

28,755

 

 

 

5.4

%

 

 

28,905

 

 

 

5.4

%

Mortgage-backed securities/CMOs

 

 

152,061

 

 

 

38.9

%

 

 

167,076

 

 

 

31.0

%

 

 

160,461

 

 

 

29.8

%

Corporate bonds

 

 

18,663

 

 

 

4.8

%

 

 

18,729

 

 

 

3.5

%

 

 

29,295

 

 

 

5.4

%

Municipal bonds

 

 

76,644

 

 

 

19.6

%

 

 

81,156

 

 

 

15.1

%

 

 

78,423

 

 

 

14.6

%

Total available for sale securities

 

$

390,816

 

 

 

100.0

%

 

$

538,186

 

 

 

100.0

%

 

$

538,459

 

 

 

100.0

%

 

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 September 30, 2023, total loans were $1.0 billion, compared to $936.4 million as of December 31, 2022 and $942.3 million at September 30, 2022. Loans as a percentage of total assets at September 30, 2023 were 65.3%, compared to 54.4% as of September 30, 2022. Loans as a percentage of deposits at September 30, 2023 were 74.5%, compared to 59.0% as of September 30, 2022.

The following table summarizes the Company's loan portfolio by type of loan as of September 30, 2023, December 31, 2022, and September 30, 2022 (dollars in thousands):

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

September 30, 2022

 

 

 

Balance

 

 

% of
Total

 

 

Balance

 

 

% of
Total

 

 

Balance

 

 

% of
Total

 

Commercial loans

 

$

121,846

 

 

 

11.9

%

 

$

71,139

 

 

 

7.6

%

 

$

72,685

 

 

 

7.7

%

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Construction and land

 

 

31,526

 

 

 

3.1

%

 

 

37,541

 

 

 

4.0

%

 

 

49,668

 

 

 

5.3

%

    1-4 family residential mortgages

 

 

316,862

 

 

 

31.0

%

 

 

323,185

 

 

 

34.5

%

 

 

324,891

 

 

 

34.5

%

    Commercial

 

 

511,327

 

 

 

50.2

%

 

 

459,125

 

 

 

49.0

%

 

 

447,185

 

 

 

47.5

%

       Total real estate mortgage

 

 

859,715

 

 

 

84.3

%

 

 

819,851

 

 

 

87.6

%

 

 

821,744

 

 

 

87.3

%

Consumer

 

 

38,957

 

 

 

3.8

%

 

 

45,425

 

 

 

4.9

%

 

 

47,918

 

 

 

5.0

%

Total loans

 

$

1,020,518

 

 

 

100.0

%

 

$

936,415

 

 

 

100.0

%

 

$

942,347

 

 

 

100.0

%

 

Loan balances increased by $84.1 million or 9.0% from December 31, 2022 to September 30, 2023. During the first nine months of 2023, the Company funded $91.3 million in organic loan production and purchased $53.6 million in government guaranteed loans. Paydowns and normal amortization of $60.8 million partially offset the loans funded during the first nine months of 2023. As of September 30, 2023, only $177 thousand of PPP loans remain outstanding on the Bank's balance sheet.

 

 

40


 

The following table details the Company's levels of non-owner occupied commercial real estate as of September 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-
standard

 

 

Nonaccrual

 

Hotels

 

$

12,899

 

 

 

5.44

%

 

$

2,580

 

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

Office Building

 

 

67,484

 

 

 

28.48

%

 

$

794

 

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

Warehouses/Industrial

 

 

47,648

 

 

 

20.11

%

 

$

1,906

 

 

 

0.00

%

 

 

1.38

%

 

 

0.93

%

Retail

 

 

83,835

 

 

 

35.38

%

 

$

1,397

 

 

 

0.06

%

 

 

0.00

%

 

 

0.00

%

Day Cares / Schools

 

 

14,851

 

 

 

6.27

%

 

$

1,485

 

 

 

2.44

%

 

 

0.00

%

 

 

0.00

%

All Other Commercial Buildings

 

 

10,234

 

 

 

4.32

%

 

$

787

 

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

Total Non-Owner Occupied CRE

 

$

236,951

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 $1.1 million at September 30, 2023, compared to balances of $673 thousand and $607 thousand reported at December 31, 2022 and September 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 $501 thousand are now included in this figure.

Past Due Loans - The Company had loans in its portfolio totaling $854 thousand, $705 thousand and $859 thousand, as of September 30, 2023, December 31, 2022 and September 30, 2022, respectively, that were 90 or more days past due and still accruing interest as the Company deemed them to be collectible. The past due balance as of September 30, 2023 is comprised of two loans totaling $783 thousand which are 100% government-guaranteed, and five student loans totaling $71 thousand.

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 2. Adoption of New Accounting Standards for information on the Company's accounting policy for loan modifications to borrowers experiencing financial difficulty and how the Company defines TLMs. As of September 30, 2023, the Company had TLMs totaling $597 thousand.

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, there were two loans to a single borrower totaling $495 thousand that are nonperforming TDRs. 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.

41


 

Allowance for Credit Losses

 

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

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

September 30, 2022

 

Total loans

 

$

1,020,518

 

 

$

936,415

 

 

$

942,347

 

Nonaccrual loans

 

$

1,143

 

 

$

673

 

 

$

607

 

Allowance for credit losses

 

$

7,799

 

 

$

5,552

 

 

$

5,485

 

Nonaccrual loans to total loans

 

 

0.11

%

 

 

0.07

%

 

 

0.06

%

ACL to total loans

 

 

0.76

%

 

 

0.59

%

 

 

0.58

%

ACL to nonaccrual loans

 

 

682.33

%

 

 

824.96

%

 

 

903.62

%

The ACL on loans as a percentage of loans was 0.76% as of September 30, 2023, 0.59% as of December 31, 2022, and 0.58% as of September 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 1.73% as of September 30, 2023, compared to 2.29% as of December 31, 2022 and 2.38% as of September 30, 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 $10.0 million as of September 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.

Recoveries of provision for credit losses totaling $17 thousand and $30 thousand were recorded in the nine months ended September 30, 2023 and 2022, respectively. The following is a summary of the changes in the ACL for the nine months ended September 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

 

 

(521

)

 

 

(783

)

Recoveries

 

 

294

 

 

 

314

 

Recovery of provision for credit losses

 

 

(17

)

 

 

(30

)

Allowance for credit losses, September 30

 

$

7,799

 

 

$

5,485

 

 

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 September 30, 2023 and acknowledges that the ACL may increase throughout the year as economic conditions may continue to deteriorate for the foreseeable future.

42


 

Premises and equipment

The Company’s premises and equipment, net of depreciation, as of September 30, 2023 totaled $16.3 million compared to $17.8 million as of December 31, 2022 and $18.8 million as of September 30, 2022, decreasing from prior year third quarter due to the sale of a two branch building during 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 September 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. 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.

Leases

As of September 30, 2023, the Company has recorded $7.1 million of right-of-use assets and $6.8 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.

 

43


 

 

Deposits

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

Total deposits as of September 30, 2023 were $1.4 billion, a decrease of $108.0 million compared to December 31, 2022, and a decrease of $226.3 million compared to September 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 experienced expected declines in deposit balances during 2022 and the first half of 2023. Deposit balances increased $22.2 million, or 1.6%, from June 30, 2023 to September 30, 2023, as the Bank adjusted deposit pricing strategies to respond to the market's rate expectation demands.

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

September 30, 2022

 

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

Balance

 

 

Total

 

 

Balance

 

 

Total

 

 

Balance

 

 

Total

 

No cost and low cost deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest demand deposits

 

$

399,158

 

 

 

29.1

%

 

$

495,649

 

 

 

33.5

%

 

$

539,134

 

 

 

33.8

%

Interest checking accounts

 

 

287,480

 

 

 

21.0

%

 

 

399,983

 

 

 

27.1

%

 

 

417,530

 

 

 

26.2

%

Money market and savings deposit accounts

 

 

406,189

 

 

 

29.6

%

 

 

467,600

 

 

 

31.6

%

 

 

505,733

 

 

 

31.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest and low cost deposit accounts

 

 

1,092,827

 

 

 

79.7

%

 

 

1,363,232

 

 

 

92.2

%

 

 

1,462,397

 

 

 

91.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposit accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

267,035

 

 

 

19.5

%

 

 

111,134

 

 

 

7.5

%

 

 

129,038

 

 

 

8.0

%

CDARS deposits

 

 

10,436

 

 

 

0.8

%

 

 

3,972

 

 

 

0.3

%

 

 

5,212

 

 

 

0.3

%

Total certificates of deposit and other time deposits

 

 

277,471

 

 

 

20.3

%

 

 

115,106

 

 

 

7.8

%

 

 

134,250

 

 

 

8.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposit account balances

 

$

1,370,298

 

 

 

100.0

%

 

$

1,478,338

 

 

 

100.0

%

 

$

1,596,647

 

 

 

100.0

%

 

Noninterest-bearing demand deposits on September 30, 2023 were $399.2 million, representing 29.1% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled $693.7 million, and represented 50.6% of total deposits at September 30, 2023. Collectively, noninterest-bearing and interest-bearing transaction, money market and savings accounts represented 79.7% of total deposit accounts at September 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 $22.8 million and $105.9 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 September 30, 2023. As of December 31, 2022, ICS® deposit balances of $28.4 million and $110.1 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 20.2% of total deposits consisted of certificates of deposit and other time deposit accounts totaling $277.5 million at September 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 and third quarters 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 $10.4 million as of September 30, 2023 and $4.0 million as of December 31, 2022, all of which were reciprocal balances for the Company’s customers.

As of September 30, 2023 and December 31, 2022, the estimated amounts of uninsured deposits were $329.9 million, or 24.1% and $459.4 million, or 31.1% of total deposits, respectively.

44


 

Federal funds purchased

The Company purchased no federal funds as of September 30, 2023, December 31, 2022 or September 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 September 30, 2023, based on the FHLB’s evaluation, the Company has an available credit position of $396 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 $68.3 million, secured by commercial mortgages, with borrowings of $43.0 million as of September 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 no outstanding balances on these lines or facilities as of September 30, 2023, December 31, 2022 or September 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 September 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. Historically, the interest rate on the capital security reset every three months at 1.70% above the then current three-month LIBOR and was paid quarterly. With the cessation of LIBOR, on September 13, 2023, the rate converted to a spread adjustment of 0.03% plus a margin of 1.70% above the three-month CME Term SOFR.

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

Shareholders' equity and regulatory capital ratios

The following table displays the changes in shareholders' equity for the Company from December 31, 2022 to September 30, 2023 (dollars in thousands):

Equity, December 31, 2022

 

$

133,416

 

Net income

 

 

16,095

 

Other comprehensive income

 

 

(7,148

)

Impact of adoption of CECL

 

 

(1,890

)

Cash dividends declared

 

 

(5,303

)

Exercise of stock options

 

 

18

 

Equity increase due to expensing of stock options

 

 

128

 

Equity increase due to expensing of restricted stock

 

 

411

 

Equity, September 30, 2023

 

$

135,727

 

 

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

45


 

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 17.96%, 17.96%, 18.76% and 11.26%, respectively, as of September 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 17.81%, 17.81%, 18.61% and 11.16%, respectively, as of September 30, 2023, also exceeding the minimum requirements.

As of September 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.”

 

46


 

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 Nine Months Ended

 

 

 

September 30,
2023

 

 

September 30,
2022

 

 

September 30,
2023

 

 

September 30,
2022

 

Fully tax-equivalent measures

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

11,100

 

 

$

14,277

 

 

$

38,216

 

 

$

38,163

 

Fully tax-equivalent adjustment

 

 

87

 

 

 

84

 

 

 

262

 

 

 

245

 

Net interest income (FTE)

 

$

11,187

 

 

$

14,361

 

 

$

38,478

 

 

$

38,408

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio

 

 

60.7

%

 

 

57.3

%

 

 

57.0

%

 

 

59.4

%

Fully tax-equivalent adjustment

 

 

-0.4

%

 

 

-0.3

%

 

 

-0.3

%

 

 

-0.3

%

Efficiency ratio (FTE)

 

 

60.3

%

 

 

57.0

%

 

 

56.7

%

 

 

59.1

%

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

3.02

%

 

 

3.45

%

 

 

3.50

%

 

 

2.98

%

Fully tax-equivalent adjustment

 

 

0.02

%

 

 

0.02

%

 

 

0.02

%

 

 

0.02

%

Net interest margin (FTE)

 

 

3.04

%

 

 

3.47

%

 

 

3.52

%

 

 

3.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Other financial measures

 

 

 

 

 

 

 

 

 

 

 

 

ACL to total loans

 

 

0.76

%

 

 

0.58

%

 

 

 

 

 

 

Fair value mark to total loans

 

 

0.98

%

 

 

1.80

%

 

 

 

 

 

 

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

 

 

1.74

%

 

 

2.38

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book value per share

 

$

25.29

 

 

$

23.65

 

 

 

 

 

 

 

Impact of intangible assets

 

 

(2.46

)

 

 

(2.84

)

 

 

 

 

 

 

Tangible book value per share (non-GAAP)

 

$

22.83

 

 

$

20.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity

 

$

135,727

 

 

$

125,974

 

 

 

 

 

 

 

Impact of intangible assets

 

 

(13,216

)

 

 

(15,130

)

 

 

 

 

 

 

Tangible equity

 

$

122,511

 

 

$

110,844

 

 

 

 

 

 

 

 

Net income

Net income for the three months ended September 30, 2023 was $4.7 million, a $1.1 million decrease compared to $5.8 million reported for the three months ended September 30, 2022. Net income per diluted share was $0.86 for the three months ended September 30, 2023 compared to $1.08 per diluted share for the same period in the prior year.

 

Net income for the nine months ended September 30, 2023 was $16.1 million, compared to $16.4 million for the nine months ended September 30, 2022. Net income per diluted share was $2.99 for the nine months ended September 30, 2023, compared to $3.06 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 September 30, 2023 was $11.2 million, a $3.2 million decrease compared to net interest income (FTE) of $14.4 million for the three months ended September 30, 2022. Net interest income (FTE) increased primarily due to the increased yield earned on loans, from 4.56% to 5.53%, positively impacting interest income by $2.4 million. This metric was also positively impacted by the yield earned on securities, increasing from 2.41% in the three months ended September 30, 2022 to 2.96% in the three months ended September 30, 2023, positively impacting interest income by $646 thousand. The increase in average loan balances, from $959.1 million for the three months ended September 30, 2022 to $986.5 million for the three months ended September 30, 2023, positively impacted interest income by $309 thousand. Interest expense increased $5.4 million for the three months ended September 30, 2023, negatively impacting net interest margin (FTE), compared to the same period in the prior year. The net interest margin (FTE) of 3.04% for the three months ended September 30, 2023 was 43 bps lower than the 3.47% for the three months ended September 30, 2022. Overall, the cost of interest-bearing deposits increased period over period,

47


 

from a cost of 22 bps to 226 bps, increasing interest expense by $4.9 million. The cost of short-term borrowings, including fed funds purchased, negatively impacted net interest margin (FTE) by $526 thousand as compared to the prior year.

 

Year-to-date overview - Net interest income (FTE) for the nine months ended September 30, 2023 was $38.5 million, a $70 thousand increase compared to net interest income (FTE) of $38.4 million for the nine months ended September 30, 2022. Net interest income (FTE) increased primarily due to the increased yield earned on loans, from 4.37% to 5.81%, positively impacting interest income by $10.4 million. The decrease in volume of loans, from an average balance of $991.6 million for the nine months ended September 30, 2022 to $953.4 million for the nine months ended September 30, 2023, negatively impacted interest income (FTE) by $1.3 million. The increase in volume of securities held, from an average balance of $406.1 million for the nine months ended September 30, 2022 to $485.3 million for the nine months ended September 30, 2023, positively impacted net interest income (FTE) by $1.4 million, and the increase in yield earned on such securities increased from 2.19% to 2.80% for the periods noted, positively impacting net interest income (FTE) by $2.1 million. Interest expense increased $11.4 million for the nine months ended September 30, 2023, negatively impacting net interest margin (FTE), compared to the same period in the prior year. Overall, the cost of interest-bearing deposits increased period over period, from a cost of 25 bps to 170 bps, increasing interest expense by $10.3 million. The cost of short-term borrowings, including fed funds purchased, negatively impacted net interest margin (FTE) by $1.4 million 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.

48


 

The following tables detail the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest-bearing liabilities, for the three and nine months ended September 30, 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

 

 

 

 

 

 

 

 

September 30, 2023

 

September 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

 

$387,180

 

$2,942

 

3.04%

 

$445,854

 

$2,692

 

2.42%

 

$(385)

 

$635

 

$250

Tax Exempt Securities 1

 

66,835

 

414

 

2.48%

 

65,836

 

397

 

2.41%

 

6

 

11

 

17

Total Securities 1

 

454,015

 

3,356

 

2.96%

 

511,690

 

3,089

 

2.41%

 

(379)

 

646

 

267

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

843,477

 

11,612

 

5.46%

 

834,323

 

9,485

 

4.51%

 

104

 

2,023

 

2,127

Commercial

 

103,059

 

1,394

 

5.37%

 

74,970

 

846

 

4.48%

 

359

 

189

 

548

Consumer

 

39,945

 

742

 

7.37%

 

49,793

 

693

 

5.52%

 

(154)

 

203

 

49

      Total Loans

 

986,481

 

13,748

 

5.53%

 

959,086

 

11,024

 

4.56%

 

309

 

2,415

 

2,724

Fed Funds Sold

 

9,569

 

133

 

5.51%

 

52,908

 

299

 

2.24%

 

(373)

 

207

 

(166)

Other interest-bearing deposits

 

10,491

 

64

 

2.42%

 

120,440

 

618

 

2.04%

 

(652)

 

98

 

(554)

Total Earning Assets

 

1,460,556

 

17,301

 

4.70%

 

1,644,124

 

15,030

 

3.63%

 

(1,095)

 

3,366

 

2,271

Less: Allowance for Credit Losses

 

(7,907)

 

 

 

 

 

(5,530)

 

 

 

 

 

 

 

 

 

 

Total Non-Earning Assets

 

114,792

 

 

 

 

 

124,247

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$1,567,441

 

 

 

 

 

$1,762,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Checking

 

$304,969

 

$78

 

0.10%

 

$401,886

 

$56

 

0.06%

 

$(16)

 

$38

 

$22

Money Market and Savings Deposits

 

407,213

 

2,739

 

2.67%

 

547,878

 

415

 

0.30%

 

(133)

 

2,457

 

2,324

Time Deposits

 

252,917

 

2,685

 

4.21%

 

142,195

 

147

 

0.41%

 

197

 

2,341

 

2,538

Total Interest-Bearing Deposits

 

965,099

 

5,502

 

2.26%

 

1,091,959

 

618

 

0.22%

 

48

 

4,836

 

4,884

Federal funds purchased

 

1,300

 

21

 

6.41%

 

 

 

 

21

 

 

21

Short-term borrowings

 

37,648

 

505

 

5.32%

 

 

 

 

505

 

 

505

Junior subordinated debt

 

3,443

 

86

 

9.91%

 

3,394

 

51

 

5.96%

 

1

 

34

 

35

Total Interest-Bearing Liabilities

 

1,007,490

 

6,114

 

2.41%

 

1,095,353

 

669

 

0.24%

 

575

 

4,870

 

5,445

Non-Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

406,518

 

 

 

 

 

519,759

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

10,422

 

 

 

 

 

8,932

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

1,424,430

 

 

 

 

 

1,624,044

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

143,011

 

 

 

 

 

138,797

 

 

 

 

 

 

 

 

 

 

Total Liabilities & Shareholders' Equity

 

$1,567,441

 

 

 

 

 

$1,762,841

 

 

 

 

 

 

 

 

 

 

Net Interest Income (FTE)

 

 

 

$11,187

 

 

 

 

 

$14,361

 

 

 

$(1,670)

 

$(1,504)

 

$(3,174)

Interest Rate Spread 2

 

 

 

 

 

2.29%

 

 

 

 

 

3.38%

 

 

 

 

 

 

Cost of Funds

 

 

 

 

 

1.72%

 

 

 

 

 

0.16%

 

 

 

 

 

 

Interest Expense as a Percentage of Average
   Earning Assets

 

 

 

 

 

1.66%

 

 

 

 

 

0.16%

 

 

 

 

 

 

Net Interest Margin (FTE) 3

 

 

 

 

 

3.04%

 

 

 

 

 

3.47%

 

 

 

 

 

 

 

(1)
Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 21%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP Presentations earlier in this section.
(2)
Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.
(3)
Net interest margin (FTE) is net interest income expressed as a percentage of average earning assets.
(4)
The impact on the net interest income (FTE) resulting from changes in average balances and average rates is shown for the period indicated. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

 

Note that figures may not foot due to rounding.

 

49


 

Consolidated Average Balance Sheet and Analysis of Net Interest Income

 

 

For the Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2023

 

 

September 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

 

$

418,367

 

 

$

8,939

 

 

 

2.85

%

 

$

340,692

 

 

$

5,492

 

 

 

2.15

%

 

$

1,420

 

 

$

2,027

 

 

$

3,447

 

Tax Exempt Securities 1

 

 

66,957

 

 

 

1,245

 

 

 

2.48

%

 

 

65,447

 

 

 

1,170

 

 

 

2.38

%

 

 

27

 

 

 

48

 

 

 

75

 

Total Securities 1

 

 

485,324

 

 

 

10,184

 

 

 

2.80

%

 

 

406,139

 

 

 

6,662

 

 

 

2.19

%

 

 

1,447

 

 

 

2,075

 

 

 

3,522

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

 

827,902

 

 

 

36,077

 

 

 

5.83

%

 

 

855,632

 

 

 

27,567

 

 

 

4.31

%

 

 

(920

)

 

 

9,430

 

 

 

8,510

 

Commercial

 

 

83,393

 

 

 

3,103

 

 

 

4.97

%

 

 

85,148

 

 

 

2,930

 

 

 

4.60

%

 

 

(61

)

 

 

234

 

 

 

173

 

Consumer

 

 

42,094

 

 

 

2,229

 

 

 

7.08

%

 

 

50,808

 

 

 

1,906

 

 

 

5.02

%

 

 

(366

)

 

 

689

 

 

 

323

 

      Total Loans

 

 

953,389

 

 

 

41,409

 

 

 

5.81

%

 

 

991,588

 

 

 

32,403

 

 

 

4.37

%

 

 

(1,347

)

 

 

10,353

 

 

 

9,006

 

Fed Funds Sold

 

 

3,527

 

 

 

143

 

 

 

5.42

%

 

 

118,228

 

 

 

662

 

 

 

0.75

%

 

 

(1,182

)

 

 

663

 

 

 

(519

)

Other interest-bearing deposits

 

 

17,444

 

 

 

442

 

 

 

3.39

%

 

 

196,801

 

 

 

973

 

 

 

0.66

%

 

 

(1,547

)

 

 

1,016

 

 

 

(531

)

Total Earning Assets

 

 

1,459,684

 

 

 

52,178

 

 

 

4.78

%

 

 

1,712,756

 

 

 

40,700

 

 

 

3.18

%

 

 

(2,629

)

 

 

14,107

 

 

 

11,478

 

Less: Allowance for Credit Losses

 

 

(7,933

)

 

 

 

 

 

 

 

 

(5,806

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Non-Earning Assets

 

 

114,387

 

 

 

 

 

 

 

 

 

124,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,566,138

 

 

 

 

 

 

 

 

$

1,831,468

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Interest Bearing Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Checking

 

$

332,587

 

 

$

273

 

 

 

0.11

%

 

$

411,504

 

 

$

175

 

 

 

0.06

%

 

$

(39

)

 

$

137

 

 

$

98

 

Money Market and Savings Deposits

 

 

423,547

 

 

 

6,709

 

 

 

2.12

%

 

 

584,597

 

 

 

1,470

 

 

 

0.34

%

 

 

(511

)

 

 

5,750

 

 

 

5,239

 

Time Deposits

 

 

192,139

 

 

 

5,109

 

 

 

3.56

%

 

 

151,045

 

 

 

499

 

 

 

0.44

%

 

 

171

 

 

 

4,439

 

 

 

4,610

 

Total Interest-Bearing Deposits

 

 

948,273

 

 

 

12,091

 

 

 

1.70

%

 

 

1,147,146

 

 

 

2,144

 

 

 

0.25

%

 

 

(379

)

 

 

10,326

 

 

 

9,947

 

Federal funds purchased

 

 

2,927

 

 

 

112

 

 

 

5.12

%

 

 

 

 

 

 

 

 

 

 

 

112

 

 

 

 

 

 

112

 

Short-term borrowings

 

 

33,289

 

 

 

1,271

 

 

 

5.10

%

 

 

 

 

 

 

 

 

 

 

 

1,271

 

 

 

 

 

 

1,271

 

Junior subordinated debt

 

 

5

 

 

 

226

 

 

 

6043.22

%

 

 

3,383

 

 

 

148

 

 

 

0.00

%

 

 

2

 

 

 

76

 

 

 

78

 

Total Interest-Bearing Liabilities

 

 

984,494

 

 

 

13,700

 

 

 

1.86

%

 

 

1,150,529

 

 

 

2,292

 

 

 

0.27

%

 

 

1,006

 

 

 

10,402

 

 

 

11,408

 

Non-Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

428,906

 

 

 

 

 

 

 

 

 

524,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

9,760

 

 

 

 

 

 

 

 

 

10,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

1,423,160

 

 

 

 

 

 

 

 

 

1,685,228

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

139,553

 

 

 

 

 

 

 

 

 

146,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities & Shareholders' Equity

 

$

1,562,713

 

 

 

 

 

 

 

 

$

1,831,468

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income (FTE)

 

 

 

 

$

38,478

 

 

 

 

 

 

 

 

$

38,408

 

 

 

 

 

$

(3,635

)

 

$

3,705

 

 

$

70

 

Interest Rate Spread 2

 

 

 

 

 

 

 

 

2.92

%

 

 

 

 

 

 

 

 

2.91

%

 

 

 

 

 

 

 

 

 

Cost of Funds

 

 

 

 

 

 

 

 

1.30

%

 

 

 

 

 

 

 

 

0.18

%

 

 

 

 

 

 

 

 

 

Interest Expense as a Percentage of Average Earning Assets

 

 

 

 

 

 

 

 

1.25

%

 

 

 

 

 

 

 

 

0.18

%

 

 

 

 

 

 

 

 

 

Net Interest Margin (FTE) 3

 

 

 

3.52

%

 

 

 

 

 

 

 

 

3.00

%

 

 

 

 

 

 

 

 

 

 

(1)
Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 21%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP Presentations earlier in this section.
(2)
Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.
(3)
Net interest margin (FTE) is net interest income expressed as a percentage of average earning assets.
(4)
The impact on the net interest income (FTE) resulting from changes in average balances and average rates is shown for the period indicated. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

 

Note that figures may not foot due to rounding.

 

50


 

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 recovery of provision for credit losses of $73 thousand was recognized during the three months ended September 30, 2023 compared to a provision for loan losses of $39 thousand recognized during the three months ended September 30, 2022. A recovery of provision for credit losses of $60 thousand was recognized during the nine months ended September 30, 2023 compared to a recovery of provision for credit losses of $30 thousand during the nine months ended September 30, 2022. The third quarter 2023 recovery of provision for credit losses was comprised of $2 thousand of provision for loan losses and $75 thousand of recovery for provision for losses on unfunded commitments.

The majority of the increase in loan balances in the third quarter of 2023 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 September 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 September 30, 2023 and 2022 are shown below (dollars in thousands):

 

 

For the Three Months Ended

 

 

Variance

 

 

 

September 30,
2023

 

 

September 30,
2022

 

 

$

 

 

%

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Wealth management fees

 

$

419

 

 

$

590

 

 

$

(171

)

 

 

-29.0

%

Advisory and brokerage income

 

 

-

 

 

 

213

 

 

 

(213

)

 

 

-100.0

%

Deposit account fees

 

 

404

 

 

 

443

 

 

 

(39

)

 

 

-8.8

%

Debit/credit card and ATM fees

 

 

535

 

 

 

660

 

 

 

(125

)

 

 

-18.9

%

Bank owned life insurance income

 

 

981

 

 

 

252

 

 

 

729

 

 

 

289.3

%

Gains on sale of assets

 

 

132

 

 

 

4

 

 

 

128

 

 

 

100.0

%

Other

 

 

173

 

 

 

138

 

 

 

35

 

 

 

25.4

%

Total noninterest income

 

$

2,644

 

 

$

2,300

 

 

$

344

 

 

 

15.0

%

 

Noninterest income for the three months ended September 30, 2023 of $2.6 million was $344 thousand or 15.0% higher than the amount recorded for the three months ended September 30, 2022, primarily due to receipt of $710 thousand of bank-owned life insurance proceeds as a result of a death of a former employee. $213 thousand of income was recognized in the third 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.

51


 

The components of noninterest income for the nine months ended September 30, 2023 and 2022 are shown below (dollars in thousands):

 

 

For the Nine Months Ended

 

 

Variance

 

 

 

September 30,
2023

 

 

September 30,
2022

 

 

$

 

 

%

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Wealth management fees

 

$

1,220

 

 

$

1,719

 

 

$

(499

)

 

 

-29.0

%

Advisory and brokerage income

 

 

-

 

 

 

639

 

 

 

(639

)

 

 

-100.0

%

Deposit account fees

 

 

1,204

 

 

 

1,366

 

 

 

(162

)

 

 

-11.9

%

Debit/credit card and ATM fees

 

 

1,742

 

 

 

2,146

 

 

 

(404

)

 

 

-18.8

%

Bank owned life insurance income

 

 

1,494

 

 

 

709

 

 

 

785

 

 

 

110.7

%

Resolution of commercial dispute

 

 

-

 

 

 

2,400

 

 

 

(2,400

)

 

 

-100.0

%

Gain on sale of assets

 

 

132

 

 

 

1,117

 

 

 

(985

)

 

 

-88.2

%

Gain on termination of interest swap

 

 

460

 

 

 

-

 

 

 

460

 

 

N/A

 

Loss on sale of AFS, net

 

 

(206

)

 

 

-

 

 

 

(206

)

 

N/A

 

Other

 

 

919

 

 

 

637

 

 

 

282

 

 

 

44.3

%

Total noninterest income

 

$

6,965

 

 

$

10,733

 

 

$

(3,768

)

 

 

-35.1

%

 

Noninterest income for the nine months ended September 30, 2023 of $7.0 million was $3.8 million or 35.1% lower than the amount recorded for the nine months ended September 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 $639 thousand of advisory and brokerage income recognized in the first nine months of 2022. During the nine months ended September 30, 2023, the Company received $710 thousand of bank-owned life insurance proceeds as a result of a death of a former employee

Noninterest expense

The components of noninterest expense for the three months ended September 30, 2023 and 2022 are shown below (dollars in thousands):

 

 

For the Three Months Ended

 

 

Variance

 

 

 

September 30,
2023

 

 

September 30,
2022

 

 

$

 

 

%

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

3,936

 

 

$

4,252

 

 

$

(316

)

 

 

-7.4

%

Net occupancy

 

 

991

 

 

 

1,318

 

 

 

(327

)

 

 

-24.8

%

Equipment

 

 

195

 

 

 

249

 

 

 

(54

)

 

 

-21.7

%

Bank franchise tax

 

 

292

 

 

 

304

 

 

 

(12

)

 

 

-3.9

%

Computer software

 

 

185

 

 

 

287

 

 

 

(102

)

 

 

-35.5

%

Data processing

 

 

623

 

 

 

712

 

 

 

(89

)

 

 

-12.5

%

FDIC deposit insurance assessment

 

 

220

 

 

 

70

 

 

 

150

 

 

 

214.3

%

Marketing, advertising and promotion

 

 

262

 

 

 

347

 

 

 

(85

)

 

 

-24.5

%

Plastics expense

 

 

51

 

 

 

91

 

 

 

(40

)

 

 

-44.0

%

Professional fees

 

 

202

 

 

 

310

 

 

 

(108

)

 

 

-34.8

%

Core deposit intangible amortization

 

 

368

 

 

 

415

 

 

 

(47

)

 

 

-11.3

%

Other

 

 

1,015

 

 

 

1,148

 

 

 

(133

)

 

 

-11.6

%

Total noninterest expense

 

$

8,340

 

 

$

9,503

 

 

$

(1,163

)

 

 

-12.2

%

Noninterest expense for the quarter ended September 30, 2023 of $8.3 million was $1.2 million or 12.2% lower than the quarter ended September 30, 2022. This decrease is primarily due to reduced salaries and employee benefits of $316 thousand and lower occupancy expenses of $327 thousand from the elimination of four branch facilities, both as a result of efficiencies gained from the Merger.

52


 

 

The components of noninterest expense for the nine months ended September 30, 2023 and 2022 are shown below (dollars in thousands):

 

 

For the Nine Months Ended

 

 

Variance

 

 

 

September 30,
2023

 

 

September 30,
2022

 

 

$

 

 

%

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

12,049

 

 

$

13,069

 

 

$

(1,020

)

 

 

-7.8

%

Net occupancy

 

 

3,099

 

 

 

3,797

 

 

 

(698

)

 

 

-18.4

%

Equipment

 

 

589

 

 

 

786

 

 

 

(197

)

 

 

-25.1

%

Bank franchise tax

 

 

929

 

 

 

912

 

 

 

17

 

 

 

1.9

%

Computer software

 

 

590

 

 

 

907

 

 

 

(317

)

 

 

-35.0

%

Data processing

 

 

2,171

 

 

 

2,149

 

 

 

22

 

 

 

1.0

%

FDIC deposit insurance assessment

 

 

540

 

 

 

421

 

 

 

119

 

 

 

28.3

%

Marketing, advertising and promotion

 

 

912

 

 

 

873

 

 

 

39

 

 

 

4.5

%

Plastics expense

 

 

129

 

 

 

322

 

 

 

(193

)

 

 

-59.9

%

Professional fees

 

 

592

 

 

 

1,051

 

 

 

(459

)

 

 

-43.7

%

Core deposit intangible amortization

 

 

1,138

 

 

 

1,281

 

 

 

(143

)

 

 

-11.2

%

Other

 

 

3,027

 

 

 

3,472

 

 

 

(445

)

 

 

-12.8

%

Total noninterest expense

 

$

25,765

 

 

$

29,040

 

 

$

(3,275

)

 

 

-11.3

%

 

Noninterest expense for the nine months ended September 30, 2023 of $25.8 million was $3.3 million or 11.3% lower than the nine months ended September 30, 2022. This decrease is the result of efficiencies gained from the Merger, namely: 1) salaries and employee benefits decreased $1.0 million, 2) net occupancy decreased $698 thousand, 3) professional fees decreased $459 thousand, and 4) computer software expense decreased $317 thousand. In addition, professional fees declined as two consultants paid in the nine months ending September 30, 2022 were not paid in the same period in the current year.

 

The efficiency ratio (FTE) was 60.3% for the three months ended September 30, 2023 compared to 57.0% for the same quarter of 2022, due predominantly to the decrease in net interest income (FTE), as described above. The efficiency ratio (FTE) of 56.7% for the nine months ended September 30, 2023 compared favorably to 59.1% for the nine months ended September 30, 2022. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP efficiency ratio.

Provision for Income Taxes

For the three months ended September 30, 2023 and 2022, the Company provided $824 thousand and $1.3 million for Federal income taxes, respectively, resulting in effective income tax rates of 15.0% and 18.0%, respectively. For the nine months ended September 30, 2023 and 2022, the Company provided $3.4 million and $3.5 million for Federal income taxes, respectively, resulting in effective income tax rates of 17.4% and 17.6%, 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.

 

53


 

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 September 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

In the ordinary course of its operations, the Company and/or its subsidiaries are parties to various legal proceedings from time to time. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome of such proceedings, in the aggregate, will not have a material adverse effect on the business or financial condition of the Company and its subsidiaries.

ITEM 1A. RISK FACTORS.

During the quarter ended September 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

54


 

ITEM 5. OTHER INFORMATION.

(a)
Required 8-K disclosures.

None

(b)
Changes in procedures for director nominations by security holders.

None

 

ITEM 6. EXHIBITS.

 

Exhibit

Number

 

Description of Exhibit

 

 

 

 

 

 

31.1

 

302 Certification of Principal Executive Officer

 

 

 

31.2

 

302 Certification of Principal Financial Officer

 

 

 

32.1

 

906 Certification

 

 

 

101

 

The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 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 September 30, 2023, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101.0)

 

55


 

SIGNATURES

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

 

VIRGINIA NATIONAL BANKSHARES CORPORATION

(Registrant)

 

 

 

 

 

/s/ Glenn W. Rust

 

 

Glenn W. Rust

 

 

President and Chief Executive Officer

(principal executive officer)

 

 

 

Date:

 

November 13, 2023

 

 

 

 

 

/s/ Tara Y. Harrison

 

 

Tara Y. Harrison

 

 

Executive Vice President and Chief Financial Officer

 

 

(principal financial and accounting officer)

 

Date:

 

November 13, 2023

 

56