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 | CMO | - | Collateralized mortgage obligation | the Company | - | Virginia National Bankshares Corporation and its subsidiaries | COVID-19CRE
| - | Novel coronavirus diseaseCommercial real estate
| DCF |
| Discounted cash flow | EBA | - | Excess Balance Account | Effective Date | - | April 1, 2021 | EPS
| -
| Earnings per share or net income per share
| Exchange Act | - | Securities Exchange Act of 1934, as amended | Fauquier | - | Fauquier Bankshares, Inc. and its subsidiaries | FASB | - | Financial Accounting Standards Board | Federal Reserve | - | Board of Governors of the Federal Reserve System | Federal Reserve Bank or FRB | - | Federal Reserve Bank of Richmond | FFS | - | Federal funds sold, or fed funds sold | FHLB | - | Federal Home Loan Bank of Atlanta | Form 10-K | - | Annual Report on Form 10-K for the year ended December 31, 20212022 | FTE | - | Fully taxable equivalent | GAAP or U.S. GAAP | - | Accounting principles generally accepted in the United States | ICS®ICS®
| - | Insured Cash SweepSweep® | ®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 | Merger Agreement | - | Agreement and Plan of Reorganization between the Company and Fauquier dated September 30, 2020, including a related Plan of Merger | NPA | - | Nonperforming assets | OCC
| -
| Office of the Comptroller of the Currency
| OREO | - | Other real estate owned | OTTI | - | Other than temporary impairment | PCA | - | Prompt Corrective Action | PCD | - | Purchased loan with credit deterioration | PCI | - | Purchased credit impaired | PIIPITI
| - | Personally identifiable informationPrincipal, 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 | SAB
| -
| Staff Accounting Bulletin
| SBA | - | Small Business Administration | SEC | - | U.S. Securities and Exchange Commission | Securities Act
| -
| Securities Act of 1933, as amended
| Sturman Wealth | - | Sturman Wealth Advisors | TDR | - | Troubled debt restructuring | TFB | - | The Fauquier Bank | VNBTrustTLM
| -
| VNBTrust, National AssociationTroubled 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, 2022 | | | December 31, 2021 * | | | March 31, 2023 | | | December 31, 2022 * | | ASSETS | | Unaudited | | | | | | Unaudited | | | | | Cash and due from banks | | $ | 15,773 | | | $ | 20,345 | | | $ | 19,706 | | | $ | 20,993 | | Interest-bearing deposits in other banks | | | 76,194 | | | | 336,032 | | | | 15,563 | | | | 19,098 | | Federal funds sold | | | 53,118 | | | | 152,463 | | | | 12 | | | | 45 | | Securities: | | | | | | | | | | | Available for sale, at fair value | | | 538,459 | | | | 303,817 | | | | 492,760 | | | | 538,186 | | Restricted securities, at cost | | | 5,138 | | | | 4,950 | | | | 5,750 | | | | 5,137 | | Total securities | | | 543,597 | | | | 308,767 | | | | 498,510 | | | | 543,323 | | Loans, net of deferred fees and costs | | | 942,347 | | | | 1,061,211 | | | | 939,957 | | | | 936,415 | | Allowance for loan losses | | | (5,485 | ) | | | (5,984 | ) | | Allowance for credit losses | | | | (7,772 | ) | | | (5,552 | ) | Loans, net | | | 936,862 | | | | 1,055,227 | | | | 932,185 | | | | 930,863 | | Premises and equipment, net | | | 18,817 | | | | 25,093 | | | | 17,676 | | | | 17,808 | | Assets held for sale | | | | - | | | | 965 | | Bank owned life insurance | | | 38,298 | | | | 31,234 | | | | 38,804 | | | | 38,552 | | Goodwill | | | 8,140 | | | | 8,140 | | | | 7,768 | | | | 7,768 | | Core deposit intangible, net | | | 6,990 | | | | 8,271 | | | | 6,195 | | | | 6,586 | | Other intangible assets, net | | | 223 | | | | 274 | | | Other real estate owned, net | | | - | | | | 611 | | | Right of use asset, net | | | 6,941 | | | | 7,583 | | | | 6,336 | | | | 6,536 | | Deferred tax asset, net | | | | 16,129 | | | | 17,315 | | Accrued interest receivable and other assets | | | 28,803 | | | | 18,144 | | | | 12,644 | | | | 13,507 | | Total assets | | $ | 1,733,756 | | | $ | 1,972,184 | | | $ | 1,571,528 | | | $ | 1,623,359 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | Liabilities: | | | | | | | | | | | Demand deposits: | | | | | | | | | | | Noninterest-bearing | | $ | 539,134 | | | $ | 522,281 | | | $ | 448,094 | | | $ | 495,649 | | Interest-bearing | | | 417,530 | | | | 446,314 | | | | 360,652 | | | | 399,983 | | Money market and savings deposit accounts | | | 505,733 | | | | 665,530 | | | | 418,795 | | | | 467,600 | | Certificates of deposit and other time deposits | | | 134,250 | | | | 162,045 | | | | 169,719 | | | | 115,106 | | Total deposits | | | 1,596,647 | | | | 1,796,170 | | | | 1,397,260 | | | | 1,478,338 | | Borrowings | | | | 19,250 | | | | - | | Junior subordinated debt, net | | | 3,401 | | | | 3,367 | | | | 3,424 | | | | 3,413 | | Lease liability | | | 6,551 | | | | 7,108 | | | | 5,968 | | | | 6,173 | | Accrued interest payable and other liabilities | | | 1,183 | | | | 3,552 | | | | 4,129 | | | | 2,019 | | Total liabilities | | | 1,607,782 | | | | 1,810,197 | | | | 1,430,031 | | | | 1,489,943 | | Commitments and contingent liabilities | | | | | | | | | | | Shareholders' equity: | | | | | | | | | | | Preferred stock, $2.50 par value | | | - | | | | - | | | | - | | | | - | | Common stock, $2.50 par value | | | 13,214 | | | | 13,178 | | | | 13,238 | | | | 13,214 | | Capital surplus | | | 105,095 | | | | 104,584 | | | | 105,491 | | | | 105,344 | | Retained earnings | | | 58,026 | | | | 46,436 | | | | 65,621 | | | | 63,482 | | Accumulated other comprehensive loss | | | (50,361 | ) | | | (2,211 | ) | | | (42,853 | ) | | | (48,624 | ) | Total shareholders' equity | | | 125,974 | | | | 161,987 | | | | 141,497 | | | | 133,416 | | Total liabilities and shareholders' equity | | $ | 1,733,756 | | | $ | 1,972,184 | | | $ | 1,571,528 | | | $ | 1,623,359 | | Common shares outstanding | | | 5,327,271 | | | | 5,308,335 | | | | 5,338,650 | | | | 5,337,271 | | Common shares authorized | | | 10,000,000 | | | | 10,000,000 | | | | 10,000,000 | | | | 10,000,000 | | Preferred shares outstanding | | | - | | | | - | | | | - | | | | - | | Preferred shares authorized | | | 2,000,000 | | | | 2,000,000 | | | | 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 | | | For the three months ended | | | | September 30, 2022 | | | September 30, 2021 | | | September 30, 2022 | | | September 30, 2021 | | | March 31, 2023 | | | March 31, 2022 | | Interest and dividend income: | | | | | | | | | | | | | | | | Loans, including fees | | $ | 11,024 | | | $ | 12,957 | | | $ | 32,403 | | | $ | 31,904 | | | $ | 12,767 | | | $ | 10,769 | | Federal funds sold | | | 299 | | | | 45 | | | | 662 | | | | 78 | | | | - | | | | 61 | | Other interest-bearing deposits | | | 618 | | | | 55 | | | | 973 | | | | 94 | | | | 258 | | | | 136 | | Investment securities: | | | | | | | | | | | | | | | | | Taxable | | | 2,626 | | | | 742 | | | | 5,300 | | | | 2,006 | | | | 2,951 | | | | 1,012 | | Tax exempt | | | 313 | | | | 280 | | | | 925 | | | | 729 | | | | 327 | | | | 304 | | Dividends | | | 66 | | | | 55 | | | | 192 | | | | 121 | | | | 67 | | | | 62 | | Total interest and dividend income | | | 14,946 | | | | 14,134 | | | | 40,455 | | | | 34,932 | | | | 16,370 | | | | 12,344 | | | | | | | | | | | | | | | | | | | Interest expense: | | | | | | | | | | | | | | | | | Demand and savings deposits | | | 471 | | | | 673 | | | | 1,645 | | | | 1,598 | | | | 1,862 | | | | 676 | | Certificates and other time deposits | | | 147 | | | | 282 | | | | 499 | | | | 886 | | | | 648 | | | | 195 | | Borrowings | | | 51 | | | | (325 | ) | | | 148 | | | | (181 | ) | | | 386 | | | | - | | Junior subordinated debt | | | | 61 | | | | 48 | | Total interest expense | | | 669 | | | | 630 | | | | 2,292 | | | | 2,303 | | | | 2,957 | | | | 919 | | Net interest income | | | 14,277 | | | | 13,504 | | | | 38,163 | | | | 32,629 | | | | 13,413 | | | | 11,425 | | Provision for (recovery of) loan losses | | | 39 | | | | 267 | | | | (30 | ) | | | 477 | | | Net interest income after provision for (recovery of) loan losses | | | 14,238 | | | | 13,237 | | | | 38,193 | | | | 32,152 | | | Provision for (recovery of) credit losses | | | | (248 | ) | | | 148 | | Net interest income after provision for (recovery of) credit losses | | | | 13,661 | | | | 11,277 | | | | | | | | | | | | | | | | | | | Noninterest income: | | | | | | | | | | | | | | | | | Wealth management fees | | | 590 | | | | 744 | | | | 1,719 | | | | 2,053 | | | | 404 | | | | 557 | | Advisory and brokerage income | | | 213 | | | | 358 | | | | 639 | | | | 908 | | | | - | | | | 216 | | Deposit account fees | | | 443 | | | | 396 | | | | 1,366 | | | | 982 | | | | 401 | | | | 465 | | Debit/credit card and ATM fees | | | 660 | | | | 808 | | | | 2,146 | | | | 1,561 | | | | 571 | | | | 707 | | Bank owned life insurance income | | | 252 | | | | 201 | | | | 709 | | | | 507 | | | | 252 | | | | 211 | | Resolution of commercial dispute | | | - | | | | - | | | | 2,400 | | | | - | | | | - | | | | 2,400 | | Gains on sale of assets | | | 4 | | | | - | | | | 1,117 | | | | - | | | Gain on termination of interest swap | | | | 460 | | | | - | | Losses on sales of AFS, net | | | | (206 | ) | | | - | | Other | | | 138 | | | | 971 | | | | 637 | | | | 1,426 | | | | 394 | | | | 231 | | Total noninterest income | | | 2,300 | | | | 3,478 | | | | 10,733 | | | | 7,437 | | | | 2,276 | | | | 4,787 | | | | | | | | | | | | | | | | | | | Noninterest expense: | | | | | | | | | | | | | | | | | Salaries and employee benefits | | | 4,252 | | | | 4,562 | | | | 13,069 | | | | 11,705 | | | | 4,051 | | | | 4,731 | | Net occupancy | | | 1,318 | | | | 1,039 | | | | 3,797 | | | | 2,643 | | | | 1,179 | | | | 1,197 | | Equipment | | | 249 | | | | 205 | | | | 786 | | | | 661 | | | | 218 | | | | 283 | | Bank franchise tax | | | 304 | | | | 320 | | | | 912 | | | | 922 | | | | 324 | | | | 304 | | Computer software | | | 287 | | | | 361 | | | | 907 | | | | 744 | | | | 202 | | | | 263 | | Data processing | | | 712 | | | | 1,114 | | | | 2,149 | | | | 2,397 | | | | 742 | | | | 738 | | FDIC deposit insurance assessment | | | 70 | | | | 349 | | | | 421 | | | | 594 | | | | 100 | | | | 226 | | Marketing, advertising and promotion | | | 347 | | | | 337 | | | | 873 | | | | 706 | | | | 375 | | | | 267 | | Merger and merger-related expenses | | | - | | | | 1,935 | | | | - | | | | 8,087 | | | Debit/credit card and ATM expenses | | | 91 | | | | 212 | | | | 322 | | | | 589 | | | | 48 | | | | 139 | | Professional fees | | | 310 | | | | 186 | | | | 1,051 | | | | 873 | | | | 192 | | | | 337 | | Core deposit intangible amortization | | | 415 | | | | 417 | | | | 1,281 | | | | 845 | | | | 391 | | | | 439 | | Other | | | 1,148 | | | | 1,787 | | | | 3,472 | | | | 2,832 | | | | 1,039 | | | | 1,171 | | Total noninterest expense | | | 9,503 | | | | 12,824 | | | | 29,040 | | | | 33,598 | | | | 8,861 | | | | 10,095 | | | | | | | | | | | | | | | | | | | Income before income taxes | | | 7,035 | | | | 3,891 | | | | 19,886 | | | | 5,991 | | | | 7,076 | | | | 5,969 | | Provision for income taxes | | | 1,263 | | | | 753 | | | | 3,505 | | | | 1,201 | | | | 1,285 | | | | 1,045 | | Net income | | $ | 5,772 | | | $ | 3,138 | | | $ | 16,381 | | | $ | 4,790 | | | $ | 5,791 | | | $ | 4,924 | | Net income per common share, basic | | $ | 1.08 | | | $ | 0.59 | | | $ | 3.08 | | | $ | 1.08 | | | $ | 1.08 | | | $ | 0.93 | | Net income per common share, diluted | | $ | 1.08 | | | $ | 0.59 | | | $ | 3.06 | | | $ | 1.07 | | | $ | 1.08 | | | $ | 0.92 | | Weighted average common shares outstanding, basic | | | 5,326,543 | | | | 5,306,370 | | | | 5,321,652 | | | | 4,453,303 | | | | 5,338,099 | | | | 5,311,983 | | Weighted average common shares outstanding, diluted | | | 5,348,900 | | | | 5,338,872 | | | | 5,347,878 | | | | 4,478,779 | | | | 5,375,619 | | | | 5,343,564 | |
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 | | | For the three months ended | | | | September 30, 2022 | | | September 30, 2021 | | | September 30, 2022 | | | September 30, 2021 | | | March 31, 2023 | | | March 31, 2022 | | Net income | | $ | 5,772 | | | $ | 3,138 | | | $ | 16,381 | | | $ | 4,790 | | | $ | 5,791 | | | $ | 4,924 | | Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | Unrealized losses on securities, net of tax of ($3,416) and ($12,952) for the three and nine months ended September 30, 2022; and net of tax of ($94) and ($488) for the three and nine months ended September 30, 2021, respectively | | | (12,845 | ) | | | (352 | ) | | | (48,724 | ) | | | (1,836 | ) | | Unrealized gains (losses) on interest rate swaps, net of tax of $49 and $153 for the three and nine months ended September 30, 2022; and net of tax of $7 and ($22) for the three and nine months ended September 30, 2021, respectively | | | 179 | | | | 27 | | | | 574 | | | | (84 | ) | | Unrealized losses on securities, net of tax of $1,597 and ($5,228) for the three ended March 31, 2023 and 2022; respectively | | | | 6,008 | | | | (19,665 | ) | Reclassification adjustment for realized gain on termination of interest rate swap, net of tax benefit of ($97) and $0 for the three months ended March 31, 2023 and 2022, respectively | | | | (363 | ) | | | - | | Reclassification adjustment for realized losses on securities, net of tax of $43 and $0 for the three months ended March 31, 2023 and 2022, respectively | | | | 163 | | | | - | | Unrealized gains (losses) on interest rate swaps, net of tax of ($9) and $62 for the three months ended March 31, 2023 and 2022, respectively | | | | (37 | ) | | | 235 | | Total other comprehensive loss | | | (12,666 | ) | | | (325 | ) | | | (48,150 | ) | | | (1,920 | ) | | | 5,771 | | | | (19,430 | ) | Total comprehensive income (loss) | | $ | (6,894 | ) | | $ | 2,813 | | | $ | (31,769 | ) | | $ | 2,870 | | | $ | 11,562 | | | $ | (14,506 | ) |
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,MARCH 31, 2023 AND 2022 AND 2021 (Dollars in thousands, except per share data) (Unaudited)
| | | Common Stock | | | Capital Surplus | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Total | | | Balance, December 31, 2020 | | $ | 6,722 | | | $ | 32,457 | | | $ | 41,959 | | | $ | 1,460 | | | $ | 82,598 | | | Exercise of stock options | | | 1 | | | | 14 | | | | - | | | | - | | | | 15 | | | Stock option expense | | | - | | | | 34 | | | | - | | | | - | | | | 34 | | | Restricted stock grant expense | | | - | | | | 61 | | | | - | | | | - | | | | 61 | | | Vested stock grants | | | 7 | | | | (7 | ) | | | - | | | | - | | | | - | | | Cash dividends declared ($0.30 per share) | | | - | | | | - | | | | (814 | ) | | | - | | | | (814 | ) | | Net income | | | - | | | | - | | | | 1,505 | | | | - | | | | 1,505 | | | Other comprehensive loss | | | - | | | | - | | | | - | | | | (3,387 | ) | | | (3,387 | ) | | Balance, March 31, 2021 | | $ | 6,730 | | | $ | 32,559 | | | $ | 42,650 | | | $ | (1,927 | ) | | $ | 80,012 | | | Common stock issued in acquisition of Fauquier Bankshares, Inc. | | | 6,428 | | | | 71,608 | | | | | | | | | | 78,036 | | | Exercise of stock options | | | 2 | | | | 13 | | | | - | | | | - | | | | 15 | | | Stock option expense | | | - | | | | 31 | | | | - | | | | - | | | | 31 | | | Restricted stock grant expense | | | - | | | | 165 | | | | - | | | | - | | | | 165 | | | Vested stock grants | | | 16 | | | | (16 | ) | | | - | | | | - | | | | - | | | Cash dividends declared ($0.30 per share) | | | - | | | | - | | | | (1,596 | ) | | | - | | | | (1,596 | ) | | Net income | | | - | | | | - | | | | 147 | | | | - | | | | 147 | | | Other comprehensive income | | | - | | | | - | | | | - | | | | 1,792 | | | | 1,792 | | | Balance, June 30, 2021 | | $ | 13,176 | | | $ | 104,360 | | | $ | 41,201 | | | $ | (135 | ) | | $ | 158,602 | | | Stock option expense | | | - | | | | 31 | | | | - | | | | - | | | | 31 | | | Restricted stock grant expense | | | - | | | | 57 | | | | - | | | | - | | | | 57 | | | Vested stock grants | | | 2 | | | | (2 | ) | | | - | | | | - | | | | - | | | Cash dividends declared ($0.30 per share) | | | - | | | | - | | | | (1,593 | ) | | | - | | | | (1,593 | ) | | Net income | | | - | | | | - | | | | 3,138 | | | | - | | | | 3,138 | | | Other comprehensive loss | | | - | | | | - | | | | - | | | | (325 | ) | | | (325 | ) | | Balance, September 30, 2021 | | $ | 13,178 | | | $ | 104,446 | | | $ | 42,746 | | | $ | (460 | ) | | $ | 159,910 | | | | | | | | | | | | | | | | Common Stock | | | Capital Surplus | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Total | | Balance, December 31, 2021 | | $ | 13,178 | | | $ | 104,584 | | | $ | 46,436 | | | $ | (2,211 | ) | | $ | 161,987 | | | $ | 13,178 | | | $ | 104,584 | | | $ | 46,436 | | | $ | (2,211 | ) | | $ | 161,987 | | Stock option expense | | | - | | | | 41 | | | | - | | | | - | | | | 41 | | | | - | | | | 41 | | | | - | | | | - | | | | 41 | | Restricted stock grant expense | | | - | | | | 93 | | | | - | | | | - | | | | 93 | | | | - | | | | 93 | | | | - | | | | - | | | | 93 | | Vested stock grants | | | 12 | | | | (12 | ) | | | - | | | | - | | | | - | | | | 12 | | | | (12 | ) | | | - | | | | - | | | | - | | Cash dividends declared ($0.30 per share) | | | - | | | | - | | | | (1,596 | ) | | | - | | | | (1,596 | ) | | | - | | | | - | | | | (1,596 | ) | | | - | | | | (1,596 | ) | Net income | | | - | | | | - | | | | 4,924 | | | | - | | | | 4,924 | | | | - | | | | - | | | | 4,924 | | | | - | | | | 4,924 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | (19,430 | ) | | | (19,430 | ) | | | - | | | | - | | | | - | | | | (19,430 | ) | | | (19,430 | ) | Balance, March 31, 2022 | | $ | 13,190 | | | $ | 104,706 | | | $ | 49,764 | | | $ | (21,641 | ) | | $ | 146,019 | | | $ | 13,190 | | | $ | 104,706 | | | $ | 49,764 | | | $ | (21,641 | ) | | $ | 146,019 | | Stock option expense | | | - | | | | 42 | | | | - | | | | - | | | | 42 | | | Restricted stock grant expense | | | - | | | | 121 | | | | - | | | | - | | | | 121 | | | Vested stock grants | | | 11 | | | | (11 | ) | | | - | | | | - | | | | - | | | Cash dividends declared ($0.30 per share) | | | - | | | | - | | | | (1,597 | ) | | | - | | | | (1,597 | ) | | Net income | | | - | | | | - | | | | 5,685 | | | | - | | | | 5,685 | | | Other comprehensive loss | | | - | | | | - | | | | - | | | | (16,054 | ) | | | (16,054 | ) | | Balance, June 30, 2022 | | $ | 13,201 | | | $ | 104,858 | | | $ | 53,852 | | | $ | (37,695 | ) | | $ | 134,216 | | | | | | | | | | | | | | | | Balance, December 31, 2022 | | | $ | 13,214 | | | $ | 105,344 | | | $ | 63,482 | | | $ | (48,624 | ) | | $ | 133,416 | | Exercise of stock options | | | 3 | | | | 21 | | | | - | | | | - | | | | 24 | | | | 3 | | | | 15 | | | | - | | | | - | | | | 18 | | Stock option expense | | | - | | | | 42 | | | | - | | | | - | | | | 42 | | | | - | | | | 42 | | | | - | | | | - | | | | 42 | | Restricted stock grant expense | | | - | | | | 184 | | | | - | | | | - | | | | 184 | | | | - | | | | 111 | | | | - | | | | - | | | | 111 | | Vested stock grants | | | 10 | | | | (10 | ) | | | - | | | | - | | | | - | | | Cash dividends declared ($0.30 per share) | | | - | | | | - | | | | (1,598 | ) | | | - | | | | (1,598 | ) | | 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 | | | - | | | | - | | | | 5,772 | | | | - | | | | 5,772 | | | | - | | | | - | | | | 5,791 | | | | - | | | | 5,791 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | (12,666 | ) | | | (12,666 | ) | | Balance, September 30, 2022 | | $ | 13,214 | | | $ | 105,095 | | | $ | 58,026 | | | $ | (50,361 | ) | | $ | 125,974 | | | Other comprehensive income | | | | - | | | | - | | | | - | | | | 5,771 | | | | 5,771 | | Balance, March 31, 2023 | | | $ | 13,238 | | | $ | 105,491 | | | $ | 65,621 | | | $ | (42,853 | ) | | $ | 141,497 | |
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 | | | For the three months ended | | | | September 30, 2022 | | | September 30, 2021 | | | March 31, 2023 | | | March 31, 2022 | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | Net income | | $ | 16,381 | | | $ | 4,790 | | | $ | 5,791 | | | $ | 4,924 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | Provision for (recovery of) loan losses | | | (30 | ) | | | 477 | | | Provision for (recovery of) credit losses | | | | (248 | ) | | | 148 | | Net accretion of certain acquisition-related adjustments | | | (1,518 | ) | | | (2,474 | ) | | | (1,517 | ) | | | (540 | ) | Amortization of intangible assets | | | 1,332 | | | | 896 | | | | 391 | | | | 456 | | Net amortization and accretion of securities | | | 317 | | | | 1,100 | | | Net gains on sale of other assets | | | (1,117 | ) | | | (65 | ) | | Net amortization and (accretion) of securities | | | | (576 | ) | | | 388 | | Net losses on sale of securities | | | | (206 | ) | | | (5 | ) | Earnings on bank owned life insurance | | | (709 | ) | | | (507 | ) | | | (252 | ) | | | (211 | ) | Depreciation and other amortization | | | 2,875 | | | | 2,173 | | | | 882 | | | | 967 | | Stock option expense | | | 125 | | | | 96 | | | | 42 | | | | 41 | | Stock grant expense | | | 398 | | | | 283 | | | | 111 | | | | 93 | | Net change in: | | | | | | | | | | | | | Accrued interest receivable and other assets | | | 1,509 | | | | (1,552 | ) | | | (200 | ) | | | 2,749 | | Accrued interest payable and other liabilities | | | (2,112 | ) | | | 1,882 | | | | 2,380 | | | | 376 | | Net cash provided by operating activities | | | 17,451 | | | | 7,099 | | | | 6,598 | | | | 9,386 | | | | | | | | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | Acquisition of Fauquier Bankshares | | | — | | | | 153,278 | | | Net (increase) decrease in restricted investments | | | (188 | ) | | | 2,019 | | | Net increase in restricted investments | | | | (613 | ) | | | (188 | ) | Purchases of available for sale securities | | | (314,997 | ) | | | (36,127 | ) | | | — | | | | (69,252 | ) | Proceeds from maturities, calls and principal payments of available for sale securities | | | 18,365 | | | | 22,876 | | | Net decrease in loans | | | 119,905 | | | | 95,117 | | | Proceeds from maturities, calls, sales and principal payments of available for sale securities | | | | 53,596 | | | | 6,428 | | Net change in loans | | | | (2,055 | ) | | | 54,484 | | Purchase of bank owned life insurance | | | (6,354 | ) | | | — | | | | — | | | | (5,542 | ) | Proceeds from sale of premises and equipment | | | 6,211 | | | | 34 | | | | 962 | | | | 5 | | Proceeds from sale of other real estate owned | | | 610 | | | | — | | | Proceeds from sale of loans | | | — | | | | 6,126 | | | Purchase of bank premises and equipment | | | (510 | ) | | | (1,055 | ) | | | (236 | ) | | | (154 | ) | Net cash (used in) provided by investing activities | | | (176,958 | ) | | | 242,268 | | | Net cash provided by (used in) investing activities | | | | 51,654 | | | | (14,219 | ) | | | | | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | Net (decrease) increase in demand deposits, interest checking, money market and savings accounts | | | (171,728 | ) | | | 192,565 | | | Net decrease in certificates of deposit and other time deposits | | | (27,753 | ) | | | (3,728 | ) | | Net decrease in other borrowings | | | - | | | | (42,582 | ) | | Net change in demand deposits, interest checking, money market and savings accounts | | | | (135,692 | ) | | | (15,179 | ) | Net change in certificates of deposit and other time deposits | | | | 54,619 | | | | (6,624 | ) | Net change in other borrowings | | | | 19,250 | | | | - | | Gain on termination of interest swap | | | | 460 | | | | - | | Proceeds from stock options exercised | | | 24 | | | | 30 | | | | 18 | | | | - | | Cash dividends paid | | | (4,791 | ) | | | (4,817 | ) | | | (1,762 | ) | | | (1,596 | ) | Net cash (used in) provided by financing activities | | | (204,248 | ) | | | 141,468 | | | | (63,107 | ) | | | (23,399 | ) | NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | $ | (363,755 | ) | | $ | 390,835 | | | NET (DECREASE) IN CASH AND CASH EQUIVALENTS | | | $ | (4,855 | ) | | $ | (28,232 | ) | | | | | | | | | | | | | | CASH AND CASH EQUIVALENTS: | | | | | | | | | | | | | Beginning of period | | $ | 508,840 | | | $ | 34,695 | | | $ | 40,136 | | | $ | 508,840 | | End of period | | $ | 145,085 | | | $ | 425,530 | | | $ | 35,281 | | | $ | 480,608 | | | | | | | | | | | | | | | SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | | | | | | | | | | | Cash payments for: | | | | | | | | | | | | | Interest | | $ | 2,344 | | | $ | 2,289 | | | $ | 2,827 | | | $ | 957 | | Taxes | | $ | 2,750 | | | $ | 1,042 | | | | | | | | | | | | | | | | SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | | | | | | Unrealized losses on available for sale securities | | $ | (61,676 | ) | | $ | (2,324 | ) | | Unrealized gains (losses) on interest rate swaps | | $ | 727 | | | $ | (106 | ) | | Unrealized gains (losses) on available for sale securities | | | $ | 7,812 | | | $ | (24,893 | ) | Unrealized gains on interest rate swaps | | | $ | — | | | $ | 297 | | Initial right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 540 | | | $ | — | | | $ | — | | | $ | 541 | | Assets acquired in business combination | | $ | — | | | $ | 909,736 | | | Liabilities assumed in business combination | | $ | — | | | $ | 840,226 | | | Change in goodwill | | $ | — | | | $ | 8,526 | | |
See Notes to Consolidated Financial Statements 8
VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30, 2022March 31, 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, 2021.2022. Business Combination: On April 1, 2021, Virginia National Bankshares Corporation completed the merger with Fauquier Bankshares, Inc. with and into the Company for total consideration paid of $78.0 million. Additional information about this transaction is presented in Note 2 – Business Combinations.
Nature of Operations: The accompanying unaudited consolidated financial statements include the accounts of the Company, and its subsidiaries Virginia National Bank and Masonry Capital Management, LLC, a registered investment advisor. The Bank offers a full range of banking and related financial services to meet the needs of individuals, businesses and charitable organizations, including the fiduciary services of VNB Trust and Estate Services and, in 2021,Services. Until the sale of TFB Trust and Investment Management. Thethe business line on December 19, 2022, the Bank also offers,offered, through its networking agreements with third parties, investment advisory and other investment services under Sturman Wealth Advisors and, in 2021, TFB Investment Services.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 ALLL,ACL, accounting for business combinations, including loans acquired in the business combination, impairment ofACL on individually evaluated loans, goodwill impairment, other-than-temporary impairmentcredit losses of securities, other intangible assets, and fair value measurements. Operating results for the three and nine months ended September 30, 2022March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.2023. Reclassifications: If needed, certain previously reported amounts have been reclassified to conform to current period presentation. No such reclassifications were significant. Recent Significant Accounting Pronouncements Financial Instruments –Investments in Tax Credit LossesStructures - In June 2016,March 2023, the FASB issued ASU 2016-13, “Financial Instruments –2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” TheStructures Using the Proportional Amortization Method”. These amendments in this ASU, among other things, requireallow reporting entities to elect to account for qualifying tax equity investments using the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Manyproportional amortization method, regardless of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvementsprogram giving rise to the codification as well as other transition matters.
Smaller reporting companies, like the Company, who file with the U.S. Securities and Exchange Commission (SEC) and all otherrelated income tax credits. The ASU is effective for public business entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years beginning after December 15, 2022. The amendments of Topic 326, upon2023, including interim periods within those fiscal years. Early adoption will be applied on a modified retrospective basis, with the cumulative effect of adopting the new standard being recorded as an adjustment to opening retained earningsis permitted for all entities in the period of adoption.
any interim period. The Company established a cross-functional steering committee in 2017 to prepare for and implement changes related to Topic 326 and has gathered historical loan loss data for purposes of evaluating appropriate portfolio segmentation and modeling methods underdoes not expect the standard. The Company has performed procedures to validate the historical loan loss data to ensure its suitability and reliability for purposes of developing an estimate of expected credit losses under Topic 326. The Company has also engaged a vendor to assist in modeling expected lifetime losses under Topic 326, and is continuing to 9
develop and refine an approach to estimating the Allowance for Credit Losses (ACL). The adoption of Topic 326 may result in significant changesASU 2023-02 to the Company’shave a material impact on its consolidated financial statements, which may include changes in the level of the ACL that will be considered adequate, a reduction in total equity and regulatory capital of the Bank, differences in the timing of recognizing changes to the ACL and expanded disclosures about the ACL. The Company has not yet determined an estimate of the effect of these changes. The adoption of the standard will also result in significant changes in the Company’s internal control over financial reporting related to the ACL.
Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin 119. SAB 119 updated portions of SEC interpretative guidance to align with Topic 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.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. In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU No. 2021-01 “Reference Rate Reform (Topic 9
(Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company has identified all loans that are directly or indirectly impacted by LIBOR. The Company is assessing ASU 2020-04 and its impact 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 transition away from LIBOR for its loanCompany'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 other financial instruments.
TDRs and Vintage Disclosures In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments-Credit Losses, (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.Disclosures,” ASU 2022-02 addresses areas identified bycollectively referred to as ASC 326. This standard, in part, replaced the FASBincurred loss methodology with an expected loss methodology that is referred to as partthe current expected credit loss ("CECL") methodology. ASC 326 requires an estimate of its post-implementation reviewcredit losses for the remaining estimated life of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for TDRs by creditors that have adopted the CECL modelfinancial assets using historical experience, current conditions, and enhance the disclosure requirements forreasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and 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 investment in leasesamount expected to be collected by year of origination inusing an allowance for credit losses. Purchased credit deteriorated loans will receive an initial allowance at the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method relatedacquisition date that represents an adjustment to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.
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Note 2. Business Combinations
On April 1, 2021, the Company completed the merger with Fauquier Bankshares, Inc. with and into the Company, with the Company surviving, pursuant to the termsamortized cost basis of the Agreement and Plan of Reorganization, dated September 30, 2020, between the Company and Fauquier.loan, with no impact to earnings.
PursuantIn addition, ASU 326 made changes to the Merger Agreement, holders of shares of Fauquier common stock received 0.675 shares of the Company’s common stockaccounting for each share of Fauquier common stock held immediately prioravailable-for-sale debt securities. One change is to the Effective Date of the Merger, plus cash in lieu of fractional shares. In connection with the transaction, the Company issued 2,571,213 shares of its common stockrequire credit losses to the shareholders of Fauquierbe presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and paid $4 thousand in cash in lieu of fractional shares. Each share of the Company’s common stock outstanding immediately priordoes not believe that it is more likely than not, they will be required to the Merger remained outstanding and was unaffected by the Merger. Shortly after the Effective Date of the Merger, The Fauquier Bank, Fauquier’s wholly-owned bank subsidiary, was merged with and into Virginia National Bank, the Company’s wholly-owned bank subsidiary, with Virginia National Bank surviving.sell.
The Company accountedadopted 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 Merger usingcumulative effect of adopting ASC 326, which reflects the acquisition methodtransition adjustments noted above, net of accountingthe 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 ASC 805, Business Combinations. Underpreviously applicable accounting standards ("Incurred Loss"). Subsequent to adoption, the acquisition method of accounting,Company will record adjustments to its ACL and reserve for unfunded commitments through the assets acquired and liabilities assumedprovision for credit losses in the Mergerconsolidated 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 common stockoutstanding principal balance on PCD loans, will be accreted into interest income over the estimated remaining lives of the Company issuedloans 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 consideration were recorded at their respective acquisition date fair values. DeterminingTDRs together with other loans that share similar risk characteristics. The adoption of ASC 326 did not affect the faircarrying value of assetsdebt securities or the amount of unrealized gains and liabilities, particularly related tolosses recorded in accumulated other comprehensive loss. Upon adoption of ASC 326, the loanCompany did not have any securities included in its portfolio is inherently subjective and involves significant judgment regardingwhere OTTI had previously been recognized or that required an ACL. Therefore, the methods and assumptions used to estimate fair value. Under ASC 805, during the measurement period of up to one year, the acquirer shall adjust the amounts recognized at the acquisition date and may recognize additional assets or liabilities to reflect new information obtained from facts and circumstancesCompany determined that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Measurement period adjustments are recognized in the reporting period in which they are determined. The measurement period mayan ACL on AFS was not exceed one year from the acquisition date.deemed material.
10
The following table presents asillustrates the impact of April 1, 2021 the total consideration paid by the Company in connection with the Merger, the fair values of the assets acquired and liabilities assumed, and the resulting goodwilladopting ASC 326 (dollars in thousands): | | | | | | | | | | | | | | | As Recorded | | | | | | As Recorded | | | | by Fauquier | | | Fair Value | | | by Virginia National | | | | Bankshares, Inc. | | | Adjustment | | | Bankshares | | Assets: | | | | | | | | | | Cash and cash equivalents | | $ | 153,282 | | | $ | - | | | $ | 153,282 | | Securities available for sale | | | 93,133 | | | | - | | | | 93,133 | | Restricted securities | | | 1,619 | | | | - | | | | 1,619 | | Loans, net | | | 615,766 | | | | (13,123 | ) | | | 602,643 | | Premises and equipment | | | 16,276 | | | | 3,872 | | | | 20,148 | | Other real estate owned | | | 1,356 | | | | (745 | ) | | | 611 | | Bank-owned life insurance | | | 13,677 | | | | - | | | | 13,677 | | Right-of-use assets | | | 4,355 | | | | 1,077 | | | | 5,432 | | Core deposit intangible | | | - | | | | 9,660 | | | | 9,660 | | Other assets | | | 11,298 | | | | (1,009 | ) | | | 10,289 | | Total assets acquired | | $ | 910,762 | | | $ | (268 | ) | | $ | 910,494 | | | | | | | | | | | | Liabilities: | | | | | | | | | | Deposits | | | 817,499 | | | | 191 | | | | 817,690 | | Short-term borrowings | | | 12,582 | | | | 473 | | | | 13,055 | | Junior subordinated debt | | | 4,124 | | | | (790 | ) | | | 3,334 | | Lease liability | | | 4,440 | | | | 352 | | | | 4,792 | | Other liabilities | | | 1,355 | | | | - | | | | 1,355 | | Total liabilities assumed | | $ | 840,000 | | | $ | 226 | | | $ | 840,226 | | Net assets acquired | | | | | | | | $ | 70,268 | | Total consideration paid | | | | | | | | | 78,036 | | Goodwill | | | | | | | | $ | 7,768 | |
| | | | | | | | | | | | | | | 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 | | | | 1,171 | | Allowance for credit losses | | $ | 5,552 | | | $ | 2,491 | | | $ | 8,044 | | | | | | | | | | | | Loans, net | | $ | 930,863 | | | $ | (2,136 | ) | | $ | 928,726 | | | | | | | | | | | | Net deferred tax asset | | $ | 17,315 | | | $ | 499 | | | $ | 17,814 | | | | | | | | | | | | Liabilities: | | | | | | | | | | Reserve for credit losses on unfunded commitments | | | 60 | | | | 253 | | | | 313 | | | | | | | | | | | | Total equity | | $ | 133,416 | | | $ | (1,890 | ) | | $ | 131,526 | |
11Available for Sale Securities
In connection with the Merger,- 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 approximately $in earnings.7.8
millionIf either of goodwillthe 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 $9.7 million of other intangible assetsadverse conditions specifically related to the core deposits of Fauquier. The goodwill arising fromsecurity. If the Merger with Fauquier is not deductible for income taxes. The core deposit intangible asset will be amortized overassessment indicates that a period of seven years usingcredit loss exists, the sum of years digits method.
The Acquired Loans had aggregate outstanding principal of $622.9 million and an estimated fairpresent value of $602.6 million. The discount between the outstanding principal balance and fair value of $20.3 million represents expected credit losses and adjustments for market interest rates of $21.3 million, offset by elimination of net deferred fees/costs of $979 thousand. Under the acquisition method (ASC 805), the ALLL recorded in the books of Fauquier in the amount of $7.2 million was not carried over into the books of the Company.
As of the Effective Date, the fair value of the performing loans was $513.8 million, which was 1.7% less than the book value of the loans. The total fair value discount on performing loans of $9.0 million consisted of a credit discount of $8.4 million and an other fair value discount of $647 thousand. Loans that have evidence of deterioration in credit quality since origination are categorized as purchased credit impaired. As of the Effective Date, the fair value of PCI loans was $87.3 million, which was 12.3% below the book value of the loans. The total fair value mark on PCI loans of $12.3 million consisted of a credit discount of $11.2 million and an other fair value discount of $1.1 million.
Information about PCI acquired loans as of April 1, 2021 is as follows (dollars in thousands):
| | | | | April 1, 2021 | | Contractual principal and interest at acquisition | $ | 136,476 | | Nonaccretable difference | | (33,712 | ) | Expected cash flows at acquisition | | 102,764 | | Accretable yield | | (15,499 | ) | Basis in PCI loans at acquisition, estimated fair value | $ | 87,265 | |
Fair values of the major categories of assets acquired and liabilities assumed as part of the Merger were determined as follows:
Cash and due from banks: The carrying amount of cash and due from banks was used as a reasonable estimate of fair value.
Securities available for sale: The estimated fair value of investment securities AFS was based on quoted pricing from a third party portfolio accounting service vendor for the valuation of those securities.
Loans: The Acquired Loans were recorded at fair value at the Merger date without carryover of Fauquier's ALLL. The fair value of the Acquired Loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected 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 March 31, 2023, there was no ACL related to the AFS portfolio. 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 $4.7 million at March 31, 2023 and was reported in Accrued interest receivable and other assets on the Acquired Loansconsolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and then discounting those cash flowsrecognized 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. 11
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 rateor 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 wouldis deducted from the loans' amortized cost basis to present the net amount expected to be requiredcollected 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 market participant. In this regard,pooled basis when similar risk characteristics exist. The Company has identified ten portfolio segments and calculates the Acquired Loans were segregated into pools based on loan typeACL 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) 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)
Additionally, the ACL calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit risk. Loan type was determined based on collateral type, loan purposelosses to differ from historical experience. These qualitative adjustments may increase or reduce 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 structure. Credit risk characteristics included risk rating groups (pass ratedoperations 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 adversely classified loans), updated loan-to-value ratioseffect of any concentrations of credit and lien position,changes in the levels of such concentrations, and past loan performance. For valuation purposes, these pools were further disaggregated by maturitythe effect of other external factors such as competition, legal and pricing characteristics (e.g., fixed-rate, adjustable-rate, balloon maturities). Premises and equipment: The land and buildings acquired were recorded at fair value as determined by current appraisals by independent third parties and tax assessments at Effective Date.
Other real estate owned: Other real estate owned was recorded at fair value basedregulatory requirements, on an existing purchase contract, lessthe level of estimated selling costs. (Note that the OREO was sold during the second quarter of 2022.)
Bank owned life insurance: The carrying amount of bank owned life insurance was used as a reasonable estimate of fair value.credit losses.
Right
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 use assets and lease liabilities: Lease liabilities were measuredloans 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 present value of the remaining lease payments,reporting dated adjusted for selling costs as if each acquired lease was a new lease of the Company at the Effective Date. Right-of-use assets were measured at the same amount as the lease liability as adjusted to reflect favorable or unfavorable terms of the lease when compared with market terms.appropriate.
12
Core deposit intangible:
Allowance for Credit Losses – Reserve for Unfunded Commitments - The fair valueCompany 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 CDI was determined based on a discounted cash flow analysiscurrent expected credit loss model using a discount rate basedthe same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in Accrued interest and other liabilities on the estimated cost of equity capital for a market participant. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through the FHLB. The life of the deposit base and projected deposit attrition rates were determined using Fauquier’s historical deposit data. The CDI was estimated at $9.7 million or 1.3% of non-maturity deposits.Company’s consolidated balance sheets. Deposits:Accrued Interest Receivable - The fair value adjustmentCompany elected not to measure an ACL for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of deposits represents a premium over the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar term certificates of deposit, using a discounted cash flow method.is doubtful. The resulting estimated fair value adjustment of certificates of deposit ranging in maturity from one month to three years is a $191 thousand premium and is being amortized into income over a period of thirty-six months.
Short-term borrowings: The fair value of borrowings was determined by comparison to current interest rates for similar borrowings. The resulting fair value adjustment to short-term borrowings is a $473 thousand premium, which was anticipated to be amortized into interest expense over the remaining life of the debt on a straight-line basis. (NoteCompany has concluded that such borrowings were repaidthis policy results in the third quartertimely reversal of 2021, and therefore, the premium was fully amortized during the quarter in which they were repaid.)
Junior subordinated debt: The fair value of the junior subordinated debt was determined by forecasting the cash flows at the stated coupon rate and discount at a prevailing market rate. The prevailing market rate was based on implied market yields for recently issued debt with similar duration, credit quality, seniority and structure, issued by institutions of similar asset size. The resulting estimated fair value adjustment of junior subordinated debt is a $790uncollectible interest. thousand discount and is being accreted over the remaining life of the debt on a straight-line basis.
The revenue and earnings amounts specific to Fauquier since the Effective Date that are included in the consolidated results for 2021 are not readily determinable. The disclosures of these amounts are impracticable due to the merging of certain processes and systems at the Effective Date.
There were no merger and merger-related expenses incurred during the three and nine months ended September 30, 2022 and $1.9 million and $8.1 million incurred during the three and nine months ended September 30, 2021, respectively, primarily consisting of personnel and legal expenses.
Note 3. Securities The amortized cost and fair values of securities available for sale as of September 30, 2022March 31, 2023 and December 31, 20212022 were as follows (dollars in thousands):
| September 30, 2022 | | | | Gross | | | Gross | | | | | | March 31, 2023 | | | | | Gross | | | Gross | | | | | | | Amortized | | | Unrealized | | | Unrealized | | | Fair | | | Amortized | | | Unrealized | | | Unrealized | | | Fair | | | | Cost | | | Gains | | | (Losses) | | | Value | | | Cost | | | Gains | | | (Losses) | | | Value | | U.S. Government treasuries | | $ | 244,646 | | | $ | - | | | $ | (3,271 | ) | | $ | 241,375 | | | $ | 196,488 | | | $ | - | | | $ | (1,919 | ) | | $ | 194,569 | | U.S. Government agencies | | | 35,291 | | | | - | | | | (6,386 | ) | | | 28,905 | | | | 35,209 | | | | - | | | | (5,984 | ) | | | 29,225 | | Mortgage-backed securities/CMOs | | | 188,029 | | | | - | | | | (27,568 | ) | | | 160,461 | | | | 191,012 | | | | - | | | | (25,384 | ) | | | 165,628 | | Corporate bonds | | | 30,988 | | | | - | | | | (1,693 | ) | | | 29,295 | | | | 19,605 | | | | - | | | | (821 | ) | | | 18,784 | | Municipal bonds | | | 103,898 | | | | - | | | | (25,475 | ) | | | 78,423 | | | | 104,690 | | | | 14 | | | | (20,150 | ) | | | 84,554 | | Total Securities Available for Sale | | $ | 602,852 | | | $ | - | | | $ | (64,393 | ) | | $ | 538,459 | | | $ | 547,004 | | | $ | 14 | | | $ | (54,258 | ) | | $ | 492,760 | |
| December 31, 2021 | | | | Gross | | | Gross | | �� | | | | December 31, 2022 | | | | | Gross | | | Gross | | | | | | | Amortized | | | Unrealized | | | Unrealized | | | Fair | | | Amortized | | | Unrealized | | | Unrealized | | | Fair | | | | Cost | | | Gains | | | (Losses) | | | Value | | | Cost | | | Gains | | | (Losses) | | | Value | | U.S. Government treasuries | | | $ | 245,583 | | | $ | - | | | $ | (3,113 | ) | | $ | 242,470 | | U.S. Government agencies | | $ | 32,424 | | | $ | 24 | | | $ | (867 | ) | | $ | 31,581 | | | | 35,283 | | | | - | | | | (6,528 | ) | | | 28,755 | | Mortgage-backed securities/CMOs | | | 172,975 | | | | 248 | | | | (2,259 | ) | | | 170,964 | | | | 194,964 | | | | - | | | | (27,888 | ) | | | 167,076 | | Corporate bonds | | | | 19,581 | | | | - | | | | (852 | ) | | | 18,729 | | Municipal bonds | | | 101,136 | | | | 1,162 | | | | (1,026 | ) | | | 101,272 | | | | 104,831 | | | | - | | | | (23,675 | ) | | | 81,156 | | Total Securities Available for Sale | | $ | 306,535 | | | $ | 1,434 | | | $ | (4,152 | ) | | $ | 303,817 | | | $ | 600,242 | | | $ | - | | | $ | (62,056 | ) | | $ | 538,186 | |
As of September 30, 2022,March 31, 2023, there were $537.8489.9 million or 291287 issues of individual securities, held in an unrealized loss position. These securities have an unrealized loss of $64.454.3 million and consist of 113120 mortgage-backed/collateralized mortgage obligations, 126124 municipal bonds, 1920 agency bonds, 1412 treasury bonds and 1911 corporate bonds. 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, 2022,March 31, 2023, and December 31, 20212022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less than 12 Months | | | 12 Months or More | | | Total | | | Less than 12 Months | | | 12 Months or More | | | Total | | September 30, 2022 | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | March 31, 2023 | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | | U.S. Government treasuries | | $ | 241,375 | | | $ | (3,271 | ) | | $ | — | | | $ | — | | | $ | 241,375 | | | $ | (3,271 | ) | | $ | 194,569 | | | $ | (1,919 | ) | | $ | - | | | $ | - | | | $ | 194,569 | | | $ | (1,919 | ) | U.S. Government agencies | | | 6,017 | | | | (873 | ) | | | 22,624 | | | | (5,513 | ) | | | 28,641 | | | | (6,386 | ) | | | 2,972 | | | | (201 | ) | | | 26,253 | | | | (5,783 | ) | | | 29,225 | | | | (5,984 | ) | Mortgage-backed/CMOs | | | 104,457 | | | | (15,751 | ) | | | 56,004 | | | | (11,817 | ) | | | 160,461 | | | | (27,568 | ) | | | 21,722 | | | | (897 | ) | | | 143,905 | | | | (24,487 | ) | | | 165,627 | | | | (25,384 | ) | Corporate bonds | | | 21,959 | | | | (1,311 | ) | | | 7,336 | | | | (382 | ) | | | 29,295 | | | | (1,693 | ) | | | 15,237 | | | | (588 | ) | | | 3,547 | | | | (233 | ) | | | 18,784 | | | | (821 | ) | Municipal bonds | | | 46,604 | | | | (11,239 | ) | | | 31,382 | | | | (14,236 | ) | | | 77,986 | | | | (25,475 | ) | | | 5,935 | | | | (245 | ) | | | 75,738 | | | | (19,905 | ) | | | 81,673 | | | | (20,150 | ) | | | $ | 420,412 | | | $ | (32,445 | ) | | $ | 117,346 | | | $ | (31,948 | ) | | $ | 537,758 | | | $ | (64,393 | ) | | $ | 240,435 | | | $ | (3,850 | ) | | $ | 249,443 | | | $ | (50,408 | ) | | $ | 489,878 | | | $ | (54,258 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less than 12 Months | | | 12 Months or More | | | Total | | December 31, 2021 | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | | U.S. Government agencies | | $ | 14,443 | | | $ | (340 | ) | | $ | 15,220 | | | $ | (527 | ) | | $ | 29,663 | | | $ | (867 | ) | Mortgage-backed/CMOs | | | 131,876 | | | | (1,735 | ) | | | 15,192 | | | | (524 | ) | | | 147,068 | | | | (2,259 | ) | Municipal bonds | | | 40,352 | | | | (722 | ) | | | 10,409 | | | | (304 | ) | | | 50,761 | | | | (1,026 | ) | | | $ | 186,671 | | | $ | (2,797 | ) | | $ | 40,821 | | | $ | (1,355 | ) | | $ | 227,492 | | | $ | (4,152 | ) |
13
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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, 2022,March 31, 2023, management believes the impairments detailed in the table above are temporary, and no impairmentcredit loss has been realized in the Company’s consolidated income statement. An “other-than-temporary impairment” is considered to exist if either of the following conditions are met: it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or the Company does not expect to recover the security’s entire amortized cost basis (even if the Company does not intend to sell). In the event that a security would suffer impairment for a reason that was “other than temporary,” the Company would be expected to write down the security’s value to its new fair value, and the amount of the write down would be included in earnings as a realized loss. As of September 30, 2022, management has concluded that none of its investment securities have an OTTI based upon the information available. Additionally, management has the ability to hold any security with an unrealized loss until maturity or until such time as the value of the security has recovered from its unrealized loss position.
Securities having carrying values of $5.15.2 million at September 30, 2022March 31, 2023 were pledged as collateral to secure deposits and facilitate borrowing from the Federal Reserve Bank of Richmond. At December 31, 2021,2022, securities having carrying values of $12.75.1 million were similarly pledged. ForDuring the three and nine months ended September 30, 2022March 31, 2023, the Company sold AFS securities with a total book value of $49.9 million, incurring a pre-tax loss of $206 thousand, and September 30, 2021, thereused the net proceeds to fund normal daily operating demands. There were no sales of securities.securities during the three months ending March 31, 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 $5.15.8 million and $5.05.1 million as of September 30, 2022March 31, 2023 and December 31, 2021,2022, are carried at cost.
14
The amortized cost and fair value of AFS debt securities at September 30, 2022March 31, 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 | | | Amortized Cost | | | Fair Value | | U.S. Government treasuries | | | | | | | | | | | One year or less | | $ | 191,949 | | | $ | 190,074 | | | $ | 145,203 | | | $ | 144,365 | | After one year to five years | | | 52,697 | | | | 51,301 | | | | 51,285 | | | | 50,204 | | | | $ | 244,646 | | | $ | 241,375 | | | $ | 196,488 | | | $ | 194,569 | | U.S. Government agencies | | | | | | | | | | | After one year to five years | | $ | 649 | | | $ | 559 | | | $ | 4,835 | | | $ | 4,289 | | After five years to ten years | | | 30,642 | | | | 25,418 | | | | 26,374 | | | | 21,995 | | Ten years or more | | | 4,000 | | | | 2,928 | | | | 4,000 | | | | 2,941 | | | | $ | 35,291 | | | $ | 28,905 | | | $ | 35,209 | | | $ | 29,225 | | Mortgage-backed securities/CMOs | | | | | | | | | | | | | One year or less | | | $ | 4,356 | | | $ | 4,249 | | After one year to five years | | $ | 1,915 | | | $ | 1,752 | | | | 6,483 | | | | 6,116 | | After five years to ten years | | | 930 | | | | 852 | | | | 3,254 | | | | 2,967 | | Ten years or more | | | 185,184 | | | | 157,857 | | | | 176,919 | | | | 152,296 | | | | $ | 188,029 | | | $ | 160,461 | | | $ | 191,012 | | | $ | 165,628 | | Corporate bonds | | | | | | | | | | | | | One year or less | | $ | 1,525 | | | $ | 1,484 | | | After one year to five years | | | 25,347 | | | | 24,070 | | | | 19,605 | | | | 18,784 | | After five years to ten years | | | 4,116 | | | | 3,741 | | | | | $ | 30,988 | | | $ | 29,295 | | | $ | 19,605 | | | $ | 18,784 | | Municipal bonds | | | | | | | | | | | | | After one year to five years | | $ | 610 | | | $ | 585 | | | $ | 3,059 | | | $ | 2,963 | | After five years to ten years | | | 18,085 | | | | 16,251 | | | | 19,983 | | | | 18,462 | | Ten years or more | | | 85,203 | | | | 61,587 | | | | 81,648 | | | | 63,129 | | | | $ | 103,898 | | | $ | 78,423 | | | $ | 104,690 | | | $ | 84,554 | | | | | | | | | | | | | | | Total Debt Securities Available for Sale | | $ | 602,852 | | | $ | 538,459 | | | $ | 547,004 | | | $ | 492,760 | |
Note 4. Loans On January 1, 2023, the Company adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable. For further information and discussion regarding the Company's accounting policies and policy elections related to the accounting standard update, see Note 1 - Summary of Significant Accounting Policies. All loan information presented as of March 31, 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, 2022March 31, 2023 and December 31, 20212022, 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 $4.7 million as of March 31, 2023, from the amortized cost basis of loans.
| | | September 30, | | | December 31, | | | March 31, | | | December 31, | | | | 2022 | | | 2021 | | | 2023 | | | 2022 | | Commercial | | $ | 72,685 | | | $ | 96,696 | | | $ | 72,601 | | | $ | 71,139 | | Real estate construction and land | | | 49,668 | | | | 79,331 | | | | 34,493 | | | | 37,541 | | 1-4 family residential mortgages | | | 324,891 | | | | 358,148 | | | | 317,794 | | | | 323,185 | | Commercial mortgages | | | 447,185 | | | | 473,632 | | | | 471,602 | | | | 459,125 | | Consumer | | | 47,918 | | | | 53,404 | | | | 43,467 | | | | 45,425 | | Total loans | | | 942,347 | | | | 1,061,211 | | | | 939,957 | | | | 936,415 | | Less: Allowance for loan losses | | | (5,485 | ) | | | (5,984 | ) | | Less: Allowance for credit losses | | | | (7,772 | ) | | | (5,552 | ) | Net loans | | $ | 936,862 | | | $ | 1,055,227 | | | $ | 932,185 | | | $ | 930,863 | |
Primarily within the second quarter of 2020 and the first quarter of 2021, the Company and Fauquier, prior to the Merger, assisted nonprofit organizations and local businesses by funding a combined total of $15207.5
million of SBA PPP loans, which were designed to provide economic relief to small businesses adversely impacted by COVID-19. As of September 30, 2022, the Company had PPP loans of $254 thousand outstanding on its balance sheet, with the remainder having been forgiven by the SBA. The balances in the table above include unamortized premiums and net deferred loan costs and fees. As of September 30, 2022March 31, 2023 and December 31, 2021,2022, unamortized premiums on loans purchased prior to(excluding loans acquired during the MergerMerger) were $1.11.4 million, and $1.1 million, respectively.remaining rather consistent due to purchases of loans with premiums, offset by amortization of existing premiums. Net deferred loan fees totaled $636854 thousand and $865755 thousand as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. 15Consumer loans include $
285 thousand and $180 thousand of demand deposit overdrafts as of March 31, 2023 and December 31, 2022, respectively. Loans acquired in business combinations are recorded in the Consolidated Balance Sheetsbalance 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 $12.114.1 million on the purchased impaired loans and $5.0 million on the purchased performing loans as of September 30, 2022March 31, 2023 on the Acquired Loans. See Note 2 – Business Combinations The following table shows the aging of the Company's loan portfolio, by class, at March 31, 2023 (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | Past Due Aging as of March 31, 2023 | | 30-59 Days | | | 60-89 Days | | | 90 Days or More Past Due and Still Accruing | | | Nonaccrual Loans | | | Current Loans | | | Total Loans | | | | | | | | | | | | | | | | | | | | | Commercial | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 72,601 | | | $ | 72,601 | | Real estate construction and land | | | - | | | | - | | | | - | | | | - | | | | 34,493 | | | | 34,493 | | 1-4 family residential mortgages | | | 458 | | | | 189 | | | | - | | | | 728 | | | | 316,419 | | | | 317,794 | | Commercial mortgages | | | - | | | | - | | | | - | | | | 500 | | | | 471,102 | | | | 471,602 | | Consumer loans | | | 157 | | | | 94 | | | | 69 | | | | - | | | | 43,147 | | | | 43,467 | | Total Loans | | $ | 615 | | | $ | 283 | | | $ | 69 | | | $ | 1,228 | | | $ | 937,762 | | | $ | 939,957 | |
The following table shows the Company's amortized cost basis of loans on nonaccrual status as of March 31, 2023 and December 31, 2022 (dollars in thousands). All nonaccrual loans are evaluated for more informationan ACL on an individual basis. Only one nonaccrual loan required an ACL, in the amount of $27 thousand, due to collateral value shortfall. | | | | | | | | | | | | | | | | | | | CECL | | | Incurred Loss | | | | March 31, 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 | | | 728 | | | | - | | | | 728 | | | | 673 | | Commercial mortgages | | | 446 | | | | 54 | | | | 500 | | | | - | | Consumer | | | - | | | | - | | | | - | | | | - | | Total Loans | | $ | 1,174 | | | $ | 54 | | | $ | 1,228 | | | $ | 673 | |
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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. Loan modifications to borrowers experiencing financial difficulty (or modified loans) as of March 31, 2023 represent 0.13% of total loans outstanding, as follows (dollars in thousands): | | | | | | | | | | | | | Amortized Cost Basis | | | % of Total Loan Type | | | Financial Effect | Rate Reduction | | | | | | | | | 1-4 family residential mortgages | | $ | 85 | | | | 0.03 | % | | Reduced the contractual interest rate from 6.125% to 5.0% on one loan | Capitalization of PITI | | | | | | | | | 1-4 family residential mortgages | | | 488 | | | | 0.15 | % | | Capitalized PITI to back end of note on one loan; no change in maturity date | Term Extension | | | | | | | | | Consumer | | | 625 | | | | 1.44 | % | | Added a weighted-average 1.87 years to the life of the loans. The monthly payments were added to the end of the original loan terms of these borrowers. | Total | | $ | 1,198 | | | | 0.13 | % | | |
The Company closely monitors the performance of all modified loans to understand the effectiveness of its modification efforts. Upon determination, if applicable, that all or a portion of a modified loan is uncollectible, that amount is charged against the ACL. There were no payment defaults during the three months ended March 31, 2023 of modified loans that were modified during the previous twelve months and all are current as of March 31, 2023, with the exception of two modified student loans totaling $60 thousand. 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 loan balances acquired in the Merger. accounting. The outstanding principal balance and the carrying amount at September 30,December 31, 2022 on these Acquired Loansof loans acquired in business combinations were as follows (dollars(dollars in thousands): | | | September 30, 2022 | | | December 31, 2021 | | | December 31, 2022 | | | | Acquired Loans - Purchased Credit Impaired | | | Acquired Loans - Purchased Performing | | | Acquired Loans - Total | | | Acquired Loans - Purchased Credit Impaired | | | Acquired Loans - Purchased Performing | | | Acquired Loans - Total | | | Acquired Loans - Purchased Credit Impaired | | | Acquired Loans - Purchased Performing | | | Acquired Loans - Total | | Outstanding principal balance | | $ | 49,265 | | | $ | 302,578 | | | $ | 351,843 | | | $ | 76,608 | | | $ | 372,172 | | | $ | 448,780 | | | $ | 43,250 | | | $ | 290,604 | | | $ | 333,854 | | Carrying amount: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial | | $ | 659 | | | $ | 14,350 | | | $ | 15,009 | | | $ | 994 | | | $ | 28,065 | | | $ | 29,059 | | | $ | 630 | | | $ | 12,606 | | | $ | 13,236 | | Real estate construction and land | | | 4,310 | | | | 8,862 | | | | 13,172 | | | | 18,576 | | | | 14,297 | | | | 32,873 | | | | 1,461 | | | | 8,530 | | | | 9,991 | | 1-4 family residential mortgages | | | 10,445 | | | | 168,603 | | | | 179,048 | | | | 16,020 | | | | 194,708 | | | | 210,728 | | | | 9,076 | | | | 164,280 | | | | 173,356 | | Commercial mortgages | | | 21,711 | | | | 104,355 | | | | 126,066 | | | | 28,675 | | | | 126,638 | | | | 155,313 | | | | 20,828 | | | | 99,206 | | | | 120,034 | | Consumer | | | 81 | | | | 1,421 | | | | 1,502 | | | | 118 | | | | 2,224 | | | | 2,342 | | | | 72 | | | | 1,277 | | | | 1,349 | | Total acquired loans | | $ | 37,206 | | | $ | 297,591 | | | $ | 334,797 | | | $ | 64,383 | | | $ | 365,932 | | | $ | 430,315 | | | $ | 32,067 | | | $ | 285,899 | | | $ | 317,966 | |
The following table presents a summary of the changes in the accretable yield of loans classified as purchased credit impaired (dollars in thousands): | | | | | | | | | | | | | | | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | Accretable yield, beginning of period | $ | 11,667 | | | $ | 14,641 | | | $ | 13,742 | | | $ | — | | Additions | | — | | | | — | | | | — | | | | 15,499 | | Accretion | | (828 | ) | | | (773 | ) | | | (2,327 | ) | | | (1,631 | ) | Reclassification from nonaccretable difference | | 6,829 | | | | — | | | | 9,021 | | | | — | | Other changes, net | | (734 | ) | | | — | | | | (3,502 | ) | | | — | | Accretable yield, end of period | $ | 16,934 | | | $ | 13,868 | | | $ | 16,934 | | | $ | 13,868 | |
| | | | | Three Months Ended March 31, | | | 2022 | | Accretable yield, beginning of period | $ | 13,742 | | Additions | | - | | Accretion | | (738 | ) | Reclassification from nonaccretable difference | | 2,193 | | Other changes, net | | (2,769 | ) | Accretable yield, end of period | $ | 12,428 | |
Accounting guidance requires certain disclosures about investments in impaired loans, the allowance for loan losses and interest income recognized on impaired loans. A loan is considered impaired when it is probable that the Company will be unable to collect all principal and interest amounts when due according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, expected future cash flows, financial condition of the borrower, and current economic conditions.
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The following tables reflect the breakdown by class of the Company’s loans classified as impaired loans, excluding PCI loans, as of September 30, 2022 and December 31, 2021. These loans are reported at their recorded investment, which is the carrying amount of the loan as reflected on the Company’s balance sheet, net of charge-offs and other amounts applied to reduce the net book balance. Average recorded investment in impaired loans is computed using an average of month-end balances for these loans for either the nine months ended September 30, 2022 or the twelve months ended December 31, 2021. Interest income recognized is for the nine months ended September 30, 2022 or the twelve months ended December 31, 2021 (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | September 30, 2022 | | Recorded Investment | | | Unpaid Principal Balance | | | Associated Allowance | | | Average Recorded Investment | | | Interest Income Recognized | | Impaired loans without a valuation allowance: | | | | | | | | | | | | | | | | 1-4 family residential mortgages | | $ | 698 | | | $ | 725 | | | $ | - | | | $ | 619 | | | $ | 7 | | Total impaired loans without a valuation allowance | | | 698 | | | | 725 | | | | - | | | | 619 | | | | 7 | | | | | | | | | | | | | | | | | | Impaired loans with a valuation allowance: | | | | | | | | | | | | | | | | Consumer | | | 756 | | | | 756 | | | | 16 | | | | 812 | | | | 38 | | Total impaired loans with a valuation allowance | | | 756 | | | | 756 | | | | 16 | | | | 812 | | | | 38 | | Total impaired loans | | $ | 1,454 | | | $ | 1,481 | | | $ | 16 | | | $ | 1,431 | | | $ | 45 | |
| | | | | | | | | | | | | | | | | | | | | December 31, 2021 | | Recorded Investment | | | Unpaid Principal Balance | | | Associated Allowance | | | Average Recorded Investment | | | Interest Income Recognized | | Impaired loans without a valuation allowance: | | | | | | | | | | | | | | | | Real estate construction and land | | $ | - | | | $ | 37 | | | $ | - | | | $ | 2 | | | $ | - | | 1-4 family residential mortgages | | | 594 | | | | 600 | | | | - | | | | 269 | | | | 24 | | Total impaired loans without a valuation allowance | | | 594 | | | | 637 | | | | - | | | | 271 | | | | 24 | | | | | | | | | | | | | | | | | | Impaired loans with a valuation allowance: | | | | | | | | | | | | | | | | Consumer | | | 935 | | | | 935 | | | | 6 | | | | 974 | | | | 54 | | Total impaired loans with a valuation allowance | | | 935 | | | | 935 | | | | 6 | | | | 974 | | | | 54 | | Total impaired loans | | $ | 1,529 | | | $ | 1,572 | | | $ | 6 | | | $ | 1,245 | | | $ | 78 | |
Included in the impaired loans are non-accrual loans. Generally, a loan is placed on non-accrual when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more. Any unpaid interest previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other non-accrual loans is recognized only to the extent of interest payments received. The recorded investment in non-accrual loans is shown below by class (dollars in thousands):
| | | | | | | | | | | September 30, 2022 | | | December 31, 2021 | | 1-4 family residential mortgages | | $ | 607 | | | $ | 495 | | Total non-accrual loans | | $ | 607 | | | $ | 495 | |
Additionally, TDRs are considered impaired loans. TDRs occur when the Company agrees to modify the original terms of a loan by granting a concession that it would not otherwise consider due to the deterioration in the financial condition of the borrower. These concessions are done in an attempt to improve the paying capacity of the borrower, and in some cases to avoid foreclosure, and are made with the intent to restore the loan to a performing status once sufficient payment history can be demonstrated. These concessions could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.
In accordance with regulatory guidance, the Company approved for certain customers who have been adversely affected by COVID-19 to defer principal-only, or principal and interest. Such short-term modifications, which were made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. COVID-19 related loan deferrals declined to zero as of September 30, 2022, from $1.2 million as of December 31, 2021 and September 30, 2021.
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Based on regulatory guidance on student lending, the Company has classified
48The past due status of its student loans purchased (“Purchased Student Loans”), as TDRs for a total of $756 thousand as of September 30, 2022. These borrowers that should have beenDecember 31, 2022 was as follows (dollars in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of thousands):twelve months
(36 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Past Due Aging as of December 31, 2022 | | 30-59 Days | | | 60-89 Days | | | 90 Days or More | | | Total Past Due | | | PCI | | | Current | | | Total Loans | | | 90 Days Past Due and Still Accruing | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial | | $ | - | | | $ | 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 | |
months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered TDRs. Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. Initially, all student loans were fully insured by a surety bond, and the Company did not expect to experience a loss on these loans. Management evaluates these loans individually for impairment and includes any expected loss in the ALLL; interest continues to accrue on these TDRs during any deferment and forbearance periods. The following table provides a summary, by class, of TDRs as of December 31, 2022 that continuecontinued to accrue interest under the terms of the restructuring agreement, which arewere considered to be performing, and TDRs that have beenwere placed in non-accrualnonaccrual status which arewere considered to be nonperforming (dollars in thousands).: | | | | | | | | | | | | | | | | | Troubled debt restructurings | | September 30, 2022 | | | December 31, 2021 | | | | No. of | | | Recorded | | | No. of | | | Recorded | | | | Loans | | | Investment | | | Loans | | | Investment | | Performing TDRs | | | | | | | | | | | | | 1-4 family residential mortgages | | | 1 | | | $ | 91 | | | | 1 | | | $ | 99 | | Consumer | | | 48 | | | | 756 | | | | 58 | | | | 935 | | Total performing TDRs | | | 49 | | | $ | 847 | | | | 59 | | | $ | 1,034 | | | | | | | | | | | | | | | Nonperforming TDRs | | | | | | | | | | | | | 1-4 family residential mortgages | | | 2 | | | $ | 503 | | | | 1 | | | $ | 495 | | Total nonperforming TDRs | | | 2 | | | | 503 | | | | 1 | | | | 495 | | Total TDRs | | | 51 | | | $ | 1,350 | | | | 60 | | | $ | 1,529 | |
| | | | | | | | | 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 | | | 0 | | | | - | | Total nonperforming TDRs | | | 2 | | | | 495 | | Total TDRs | | | 49 | | | $ | 1,283 | |
A summary of loans shown above that were modified under the terms of a TDR during the three and nine months ended September 30, 2022 and 2021 is shown below by class (dollars in thousands). The Post-Modification Recorded Balance reflects the period end balances, inclusive of any interest capitalized to principal, partial principal paydowns, and principal charge-offs since the modification date. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported.
| | | | | | | | | | | | | | | | | | | | | | | | | | | For the three months ended | | | For the three months ended | | | | September 30, 2022 | | | September 30, 2021 | | | | Number of Loans | | | Pre- Modification Recorded Balance | | | Post- Modification Recorded Balance | | | Number of Loans | | | Pre- Modification Recorded Balance | | | Post- Modification Recorded Balance | | | | | | | | | | | | | | | | | | | | | 1-4 family residential mortgages | | | 0 | | | $ | — | | | $ | — | | | | 1 | | | $ | 501 | | | $ | 501 | | Total loans modified during the period | | | 0 | | | $ | — | | | $ | — | | | | 1 | | | $ | 501 | | | $ | 501 | | | | | | | | | | | | | | | | | | | | | | | For the nine months ended | | | For the nine months ended | | | | September 30, 2022 | | | September 30, 2021 | | | | Number of Loans | | | Pre- Modification Recorded Balance | | | Post- Modification Recorded Balance | | | Number of Loans | | | Pre- Modification Recorded Balance | | | Post- Modification Recorded Balance | | | | | | | | | | | | | | | | | | | | | Consumer | | -- | | | $ | — | | | $ | — | | | | 6 | | | $ | 63 | | | $ | 63 | | 1-4 family residential mortgages | | | 1 | | | | 54 | | | | 54 | | | | 1 | | | | 501 | | | | 501 | | Total loans modified during the period | | | 1 | | | $ | 54 | | | $ | 54 | | | | 7 | | | $ | 564 | | | $ | 564 | |
18
During the three and nine months ended September 30, 2022, there were no loans modified as a TDR that subsequently defaulted which had been modified as a TDR during the twelve months prior to default. There were five loans modified as a TDR that subsequently defaulted during the year ended December 31, 2021 which had been modified as a TDR during the twelve months prior to default. These student loans had balances totaling $56 thousand prior to being charged off.
There were no loans secured by 1-4 family residential property that weredefaults in the process of foreclosure at September 30,three months ended March 31, 2022 or December 31, 2021.on loans modified in the previous twelve months. Note 5. Allowance for LoanCredit Losses On January 1, 2023, the Company adopted ASC 326. The ALLL is maintained at a level which, in management’s judgment, is adequate to absorb probablemeasurement of expected credit losses inherentunder the CECL methodology is applicable to financial assets measured at amortized cost. For further information and discussion regarding the Company's accounting policies and policy elections related to the accounting standard update, see Note 1 - Summary of Significant Accounting Policies. All ACL information presented as of March 31, 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. oDCF models, being periodic in nature, allow for effective incorporation of a reasonable and supportable forecast in a directionally consistent and objective manner. oThe 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. oPeer 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. 18
oThe 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.
oThis methodology leverages a quarterly loss rate as well as future expectations of portfolio balances to calculate a reserve. oThere 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. oThe 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. •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. The amountBenefits of the allowance is based on management’s quarterly evaluation of the collectability of the loan portfolio, credit concentrations, historical loss experience, specific impaired loans,scorecard include directional consistency, objectivity, controls and economic conditions. To determine the total ALLL, the Company estimates the reserves needed for each segment of the portfolio, including loans analyzed individually and loans analyzed on a pooled basis. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows.quantification framework (auditable).
For purposes of determiningeach segment, the ALLL onscorecard calculates the outstanding loansdifference between the quantitative expected credit loss and the maximum loss rate. This difference represents all available qualitative adjustment that were not Acquired Loans, the Company has segmented certain loans in the portfolio by product type. Within these segments, the Company has sub-segmented its portfolio by classes, based on the associated risks within these classes. Non-PCI acquired loan pools are also evaluated for additional required ALLL. Notecan be applied to that under the acquisition method of accounting (ASC 805), the ALLL recorded in the books of Fauquier was not carried over into the books of the Company; however the Acquired Loans were subject to net fair value marks.segment.
Management utilizes a loss migration modelIndividual Evaluation -In accordance with ASC 326, the Company will evaluate individual loans for determining the quantitativeexpected credit losses when those loans do not share similar risk assigned to unimpairedcharacteristics with loans in order to capture historical loss information at the loan level, track loss migration through risk grade deterioration, and increase efficiencies related to performing the calculations. The quantitative risk factor for each loan class primarily utilizes a migration analysis loss method based on loss history for the prior twelve quarters.
The migration analysis loss method is used for all loan pools except for the following:
•All pools with a risk classification of excellent or good, as noted in the Risk Ratings and Historical Loss Factor Assigned section as follows.
•Student loans purchased - The loss rate methodology for student loans is based on the average historical loss rate for each tranche of loans,evaluated using a twelve-quarter lookback period. Due to the declining balances in these pools, a balance weighted loss rate weight is used. In addition, qualitative factors are applied.
•Commercial and industrial government guaranteed loans and PPP loans - These loans require no reserve as these are 100% guaranteed by either the SBA or the United States Department of Agriculture.
•Minute Lendercollective (pooled) basis. Loans – Commercial and Consumer - Minute Lender loans were acquired in the Merger and were historically assigned a loss rate of 4%, which was a recommendation of the vendor that administers the program. A 4% loss rate will be utilized until such time that a historical loss rate is available.
Under the migration analysis method, average loss rates are calculated at the risk grade and class levels by dividing the twelve-quarter average net charge-off amount by the twelve-quarter average loan balances. Qualitative factors are combined with these quantitative factors to arrive at the overall general allowances.
The Company’s internal creditworthiness grading system is based on experiences with similarly graded loans. The Company performs regular credit reviews of the loan portfolio to review the credit quality and adherence to its underwriting standards. Additionally, external reviews of a portion of the credits are conducted annually.
Loans that trend upward on the risk ratings scale, toward more positive risk ratings, generally exhibit lower risk factor characteristics. Conversely, loans that migrate toward more negative ratings generally will result in a higher risk factor being applied to those related loan balances.
19
Risk Ratings and Historical Loss Factor Assigned
Excellentnot 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.
A 0%
Management has elected to perform an individual evaluation on all loans in non-accrual status. As of March 31, 2023, after reviewing each loan in non-accrual status, a specific reserve of $27 thousand was established.
The primary driver in the decline in reserves from adoption date of January 1, 2023 to March 31, 2023 was a reduction in the student loan pool, both in loan balances and in the 12-quarter historical loss rate, which declined. For the other pools that use the DCF method, an improvement in the economic factor is applied,yielded a lower expected loss rate. The following table shows the ACL activity by loan portfolio for the three months ended March 31, 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) loan losses | | | (7 | ) | | | (90 | ) | | | (75 | ) | | | 33 | | | | (96 | ) | | | (235 | ) | Balance as of March 31, 2023 | | $ | 176 | | | $ | 571 | | | $ | 1,560 | | | $ | 4,471 | | | $ | 994 | | | $ | 7,772 | |
The following table presents a breakdown of the provision for credit losses for the periods indicated (dollars in thousands):
| | | | | | | | | Three Months Ended | | | March 31, 2023 | | | March 31, 2022 | | Provision for credit losses: | | | | | | Provision (recovery) for loans | $ | (235 | ) | | $ | 148 | | Provision (recovery) for unfunded commitments | | (13 | ) | | | - | | Total | $ | (248 | ) | | $ | 148 | |
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 theseof March 31, 2023 (dollars in thousands): | | | | | | | | | | | March 31, 2023 | | | | Real Estate Secured Loans | | | Allowance for Credit Losses -Loans | | Commercial real estate - non owner occupied | | $ | 726 | | | $ | - | | Residential 1-4 family real estate | | | 757 | | | | 27 | | Total | | $ | 1,483 | | | $ | 27 | |
20
The following table presents the Company's recorded investment in loans are secured by cash or fully guaranteedcredit quality indicators by a U.S. government agency and represent a minimal risk. year of origination as of March 31, 2023 (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2023 | | | | Term Loans Amortized Cost Basis by Origination Year | | | | | | | | | | 2023 | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | Prior | | | Revolving Loans | | | Total | | Commercial | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | $ | 1,836 | | | $ | 15,324 | | | $ | 7,844 | | | $ | 9,392 | | | $ | 9,999 | | | $ | 24,511 | | | $ | 2,251 | | | $ | 71,157 | | Watch | | | - | | | | 46 | | | | - | | | | - | | | | 133 | | | | 11 | | | | - | | | | 190 | | Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | 103 | | | | 8 | | | | 111 | | Substandard | | | - | | | | 90 | | | | 13 | | | | 213 | | | | 393 | | | | 434 | | | | - | | | | 1,143 | | Total commercial | | $ | 1,836 | | | $ | 15,460 | | | $ | 7,857 | | | $ | 9,605 | | | $ | 10,525 | | | $ | 25,059 | | | $ | 2,259 | | | $ | 72,601 | | . | | | | | | | | | | | | | | | | | | | | | | | | | Real estate construction and land | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | $ | 1,732 | | | $ | 12,243 | | | $ | 6,390 | | | $ | 2,448 | | | $ | 934 | | | $ | 8,696 | | | $ | - | | | $ | 32,443 | | Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | 641 | | | | - | | | | 641 | | Substandard | | | - | | | | - | | | | - | | | | - | | | | 364 | | | | 1,045 | | | | - | | | | 1,409 | | Total real estate construction and land | | $ | 1,732 | | | $ | 12,243 | | | $ | 6,390 | | | $ | 2,448 | | | $ | 1,298 | | | $ | 10,382 | | | $ | - | | | $ | 34,493 | | . | | | | | | | | | | | | | | | | | | | | | | | | | 1-4 family residential mortgages | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | $ | 2,497 | | | $ | 16,360 | | | $ | 59,194 | | | $ | 80,070 | | | $ | 26,432 | | | $ | 95,918 | | | $ | 25,878 | | | $ | 306,349 | | Watch | | | - | | | | 728 | | | | 207 | | | | 402 | | | | - | | | | 4,805 | | | | 1,432 | | | | 7,574 | | Special Mention | | | - | | | | 277 | | | | 158 | | | | - | | | | - | | | | 859 | | | | - | | | | 1,294 | | Substandard | | | - | | | | - | | | | 54 | | | | 508 | | | | 101 | | | | 1,405 | | | | 509 | | | | 2,577 | | Total 1-4 family residential mortgage | | $ | 2,497 | | | $ | 17,365 | | | $ | 59,613 | | | $ | 80,980 | | | $ | 26,533 | | | $ | 102,987 | | | $ | 27,819 | | | $ | 317,794 | | . | | | | | | | | | | | | | | | | | | | | | | | | | Commercial mortgages | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | $ | 23,894 | | | $ | 41,703 | | | $ | 47,526 | | | $ | 108,099 | | | $ | 34,858 | | | $ | 175,772 | | | $ | - | | | $ | 431,852 | | Watch | | | - | | | | - | | | | 2,876 | | | | 4,374 | | | | 8,899 | | | | 9,820 | | | | - | | | | 25,969 | | Special Mention | | | - | | | | - | | | | 396 | | | | 296 | | | | - | | | | 1,212 | | | | - | | | | 1,904 | | Substandard | | | 159 | | | | - | | | | 1,880 | | | | 2,549 | | | | 1,125 | | | | 6,164 | | | | - | | | | 11,877 | | Total commercial mortgages | | $ | 24,053 | | | $ | 41,703 | | | $ | 52,678 | | | $ | 115,318 | | | $ | 44,882 | | | $ | 192,968 | | | $ | - | | | $ | 471,602 | | . | | | | | | | | | | | | | | | | | | | | | | | | | Consumer | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | $ | 297 | | | $ | 297 | | | $ | 507 | | | $ | 389 | | | $ | 170 | | | $ | 24,835 | | | $ | 16,648 | | | $ | 43,143 | | Watch | | | - | | | | - | | | | - | | | | - | | | | - | | | | 117 | | | | 13 | | | | 130 | | Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | 77 | | | | - | | | | 77 | | Substandard | | | - | | | | - | | | | 30 | | | | - | | | | - | | | | 69 | | | | 18 | | | | 117 | | Total consumer | | $ | 297 | | | $ | 297 | | | $ | 537 | | | $ | 389 | | | $ | 170 | | | $ | 25,098 | | | $ | 16,679 | | | $ | 43,467 | |
| | | | | | | | | | | | | | | | | | | | | | | | | Current period gross write-off | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 142 | | | $ | - | | | $ | 142 | |
21
Credit Quality Indicators The Company has never experienced a loss within this category. Good
These loans represent a low risk and are secured by marketable collateral within margin. In an abundance of caution, a nominal loss reserve of 0.15% is applied to these loans. The Company has never experienced a loss within this category.utilizes the following credit quality indicators:
Pass A historical loss factor for loans rated “Pass” is applied to current balances of like-rated loans, pooled by class. Loans with the following risk ratings are pooled by class and considered together as “Pass”:
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. A historical loss factor for loans rated “Watch” is applied to current balances of like-rated loans pooled by class. Special Mention These potential problem loans are currently protected but are potentially weak. A historical loss factor for loans rated “Special Mention” is applied to current balances of like-rated loans pooled by class. Substandard These problem loans are inadequately protected by the sound worth and paying capacity of the borrower and/or the value of any collateral pledged. These loans may be considered impaired and evaluated on an individual basis. Otherwise, a historical loss factor for loans rated “Substandard” is applied to current balances of all other “Substandard” loans pooled by class. Doubtful Loans with this rating have significant deterioration in the sound worth and paying capacity of the borrower and/or the value of any collateral pledged, making collection or liquidation of the loan in full highly questionable. These loans would be considered impaired and evaluated on an individual basis.
2022
Prior to the adoption of ASC 326 The following table presents the changes in the ACL by major classification during the year ended December 31, 2022 (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | Commercial Loans | | | Real Estate Construction and Land | | | Real Estate Mortgages | | | Consumer Loans | | | Total | | Allowance for Credit Losses: | | | | | | | | | | | | | | | | Balance as of beginning of year | | $ | 252 | | | $ | 399 | | | $ | 4,478 | | | $ | 855 | | | $ | 5,984 | | Charge-offs | | | (600 | ) | | | - | | | | - | | | | (655 | ) | | | (1,255 | ) | Recoveries | | | 519 | | | | 9 | | | | 11 | | | | 178 | | | | 717 | | Provision for (recovery of) loan losses | | | 23 | | | | (187 | ) | | | (51 | ) | | | 321 | | | | 106 | | Ending Balance | | $ | 194 | | | $ | 221 | | | $ | 4,438 | | | $ | 699 | | | $ | 5,552 | |
| | | | | | | | | | | | | | | | Ending Balance: | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | - | | | $ | - | | | $ | - | | | $ | 23 | | | $ | 23 | | Collectively evaluated for impairment | | | 194 | | | | 221 | | | | 4,438 | | | | 676 | | | | 5,529 | | Acquired loans - purchased credit 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 September 30, 2022 and December 31, 20212022 (dollars in thousands). There were no loans rated “Doubtful” as of either period.December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2022 | | Excellent | | | Good | | | Pass | | | Watch | | | Special Mention | | | Sub- standard | | | TOTAL | | Commercial | | $ | 24,802 | | | $ | 16,641 | | | $ | 29,016 | | | $ | 1,070 | | | $ | 16 | | | $ | 1,140 | | | $ | 72,685 | | Real estate construction and land | | | - | | | | - | | | | 43,774 | | | | 342 | | | | 817 | | | | 4,735 | | | | 49,668 | | 1-4 family residential mortgages | | | - | | | | - | | | | 308,834 | | | | 7,620 | | | | 5,605 | | | | 2,832 | | | | 324,891 | | Commercial mortgages | | | - | | | | - | | | | 388,167 | | | | 42,279 | | | | 5,669 | | | | 11,070 | | | | 447,185 | | Consumer | | | 464 | | | | 18,785 | | | | 27,449 | | | | 1,105 | | | | 63 | | | | 52 | | | | 47,918 | | Total Loans | | $ | 25,266 | | | $ | 35,426 | | | $ | 797,240 | | | $ | 52,416 | | | $ | 12,170 | | | $ | 19,829 | | | $ | 942,347 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2021 | | Excellent | | | Good | | | Pass | | | Watch | | | Special Mention | | | Sub- standard | | | TOTAL | | Commercial | | $ | 45,862 | | | $ | 13,920 | | | $ | 32,460 | | | $ | 732 | | | $ | 1,645 | | | $ | 2,077 | | | $ | 96,696 | | Real estate construction and land | | | - | | | | - | | | | 51,098 | | | | 7,360 | | | | 2,849 | | | | 18,024 | | | | 79,331 | | 1-4 family residential mortgages | | | - | | �� | | 2,030 | | | | 334,300 | | | | 5,013 | | | | 1,520 | | | | 15,285 | | | | 358,148 | | Commercial mortgages | | | - | | | | - | | | | 382,108 | | | | 61,563 | | | | 8,530 | | | | 21,431 | | | | 473,632 | | Consumer | | | 524 | | | | 18,535 | | | | 32,821 | | | | 1,225 | | | | 179 | | | | 120 | | | | 53,404 | | Total Loans | | $ | 46,386 | | | $ | 34,485 | | | $ | 832,787 | | | $ | 75,893 | | | $ | 14,723 | | | $ | 56,937 | | | $ | 1,061,211 | |
In addition, the adequacy of the Company’s ALLL is evaluated through reference to eight qualitative factors, listed below and ranked in order of importance:
1)Changes in national and local economic conditions, including the condition of various market segments;
2)Changes in the value of underlying collateral;
3)Changes in volume of classified assets, measured as a percentage of capital;
4)Changes in volume of delinquent loans;
5)The existence and effect of any concentrations of credit and changes in the level of such concentrations;
6)Changes in lending policies and procedures, including underwriting standards;
7)Changes in the experience, ability and depth of lending management and staff; and
8)Changes in the level of policy exceptions. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | |
It has been the Company’s experience that the first five factors drive losses to a much greater extent than the last three factors; therefore, the first five factors are weighted more heavily. Qualitative factors are not assessed against loans rated “Excellent” or “Good,” as the Company has never experienced a loss within these categories.
For each segment and class of loans, management must exercise significant judgment to determine the estimation method that fits the credit risk characteristics of its various segments. Although this evaluation is inherently subjective, qualified management utilizes its significant knowledge and experience related to both the Company’s markets and the history of the Company’s loan losses.
Impaired loans are individually evaluated and, if deemed appropriate, a specific allocation is made for these loans. In reviewing the loans classified as impaired loans totaling $1.5 million at September 30, 2022, a specific valuation allowance was recognized after consideration was given for each borrowing as to the fair value of the collateral on the loan or the present value of expected future cash flows from the borrower. The $16 thousand in the allowance total shown below as individually evaluated for impairment was attributed to the impaired student loans that required an allowance as of September 30, 2022.
21
A summary of the transactions in the Allowance for Loan Losses by major loan portfolio segment for the nine months ended September 30, 2022 and the year ended December 31, 2021 appears below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | As of and for the period ended September 30, 2022 | | | | | | | | | | | | | Commercial Loans | | | Real Estate Construction and Land | | | Real Estate Mortgages | | | Consumer Loans | | | Total | | Allowance for Loan Losses: | | | | | | | | | | | | | | | | Balance as of beginning of year | | $ | 252 | | | $ | 399 | | | $ | 4,478 | | | $ | 855 | | | $ | 5,984 | | Charge-offs | | | (243 | ) | | | - | | | | - | | | | (540 | ) | | | (783 | ) | Recoveries | | | 151 | | | | 9 | | | | 8 | | | | 146 | | | | 314 | | Provision for (recovery of) loan losses | | | 80 | | | | (81 | ) | | | (297 | ) | | | 268 | | | | (30 | ) | Ending Balance | | $ | 240 | | | $ | 327 | | | $ | 4,189 | | | $ | 729 | | | $ | 5,485 | | | | | | | | | | | | | | | | | | Ending Balance: | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | - | | | $ | - | | | $ | - | | | $ | 16 | | | $ | 16 | | Collectively evaluated for impairment | | | 240 | | | | 327 | | | | 4,189 | | | | 713 | | | | 5,469 | | Acquired loans - purchased credit impaired | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | Loans: | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | - | | | $ | - | | | $ | 594 | | | $ | 756 | | | $ | 1,350 | | Collectively evaluated for impairment | | | 72,026 | | | | 45,358 | | | | 739,326 | | | | 47,081 | | | | 903,791 | | Acquired loans - purchased credit impaired | | | 659 | | | | 4,310 | | | | 32,156 | | | | 81 | | | | 37,206 | | Ending Balance | | $ | 72,685 | | | $ | 49,668 | | | $ | 772,076 | | | $ | 47,918 | | | $ | 942,347 | |
| | | | | | | | | | | | | | | | | | | | | As of and for the period ended December 31, 2021 | | | | | | | | | | | | | | | | Commercial Loans | | | Real Estate Construction and Land | | | Real Estate Mortgages | | | Consumer Loans | | | Total | | Allowance for Loan Losses: | | | | | | | | | | | | | | | | Balance as of beginning of year | | $ | 209 | | | $ | 160 | | | $ | 3,897 | | | $ | 1,189 | | | $ | 5,455 | | Charge-offs | | | (147 | ) | | | - | | | | - | | | | (688 | ) | | | (835 | ) | Recoveries | | | 191 | | | | 12 | | | | 6 | | | | 141 | | | | 350 | | Provision for (recovery of) loan losses | | | (1 | ) | | | 227 | | | | 575 | | | | 213 | | | | 1,014 | | Ending Balance | | $ | 252 | | | $ | 399 | | | $ | 4,478 | | | $ | 855 | | | $ | 5,984 | | | | | | | | | | | | | | | | | | Ending Balance: | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | - | | | $ | - | | | $ | - | | | $ | 6 | | | $ | 6 | | Collectively evaluated for impairment | | | 252 | | | | 399 | | | | 4,478 | | | | 849 | | | | 5,978 | | Acquired loans - purchased credit impaired | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | Loans: | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | - | | | $ | - | | | $ | 594 | | | $ | 935 | | | $ | 1,529 | | Collectively evaluated for impairment | | | 95,702 | | | | 60,755 | | | | 786,491 | | | | 52,351 | | | | 995,299 | | Acquired loans - purchased credit impaired | | | 994 | | | | 18,576 | | | | 44,695 | | | | 118 | | | | 64,383 | | Ending Balance | | $ | 96,696 | | | $ | 79,331 | | | $ | 831,780 | | | $ | 53,404 | | | $ | 1,061,211 | |
As previously mentioned, one of the major factors that the Company uses in evaluating the adequacy of its ALLL is changes in the volume of delinquent loans. Management monitors payment activity on a regular basis. For all classes of loans, the Company considers the entire balance of the loan to be contractually delinquent if the minimum payment is not received by the due date. Interest and fees continue to accrue on past due loans until they are placed in nonaccrual or charged off.
22
The following tables show the aging of past due loans as of September 30, 2022 and December 31, 2021 (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Past Due Aging as of September 30, 2022 | | 30-59 Days | | | 60-89 Days | | | 90 Days or More | | | Total Past Due | | | PCI | | | Current | | | Total Loans | | | 90 Days Past Due and Still Accruing | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial | | $ | 9 | | | $ | - | | | $ | 709 | | | $ | 718 | | | $ | 659 | | | $ | 71,308 | | | $ | 72,685 | | | $ | 709 | | Real estate construction and land | | | 5 | | | | - | | | | - | | | | 5 | | | | 4,310 | | | | 45,353 | | | | 49,668 | | | | - | | 1-4 family residential mortgages | | | 831 | | | | 324 | | | | 129 | | | | 1,284 | | | | 10,445 | | | | 313,162 | | | | 324,891 | | | | 129 | | Commercial mortgages | | | - | | | | - | | | | - | | | | - | | | | 21,711 | | | | 425,474 | | | | 447,185 | | | | - | | Consumer loans | | | 361 | | | | 78 | | | | 21 | | | | 460 | | | | 81 | | | | 47,377 | | | | 47,918 | | | | 21 | | Total Loans | | $ | 1,206 | | | $ | 402 | | | $ | 859 | | | $ | 2,467 | | | $ | 37,206 | | | $ | 902,674 | | | $ | 942,347 | | | $ | 859 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Past Due Aging as of December 31, 2021 | | 30-59 Days | | | 60-89 Days | | | 90 Days or More | | | Total Past Due | | | PCI | | | Current | | | Total Loans | | | 90 Days Past Due and Still Accruing | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial | | $ | 385 | | | $ | 355 | | | $ | 718 | | | $ | 1,458 | | | $ | 994 | | | $ | 94,244 | | | $ | 96,696 | | | $ | 718 | | Real estate construction and land | | | 873 | | | | 1,283 | | | | - | | | | 2,156 | | | | 18,576 | | | | 58,599 | | | | 79,331 | | | | - | | 1-4 family residential mortgages | | | 1,508 | | | | 100 | | | | 495 | | | | 2,103 | | | | 16,020 | | | | 340,025 | | | | 358,148 | | | | - | | Commercial mortgages | | | - | | | | - | | | | - | | | | - | | | | 28,675 | | | | 444,957 | | | | 473,632 | | | | - | | Consumer loans | | | 345 | | | | 196 | | | | 83 | | | | 624 | | | | 118 | | | | 52,662 | | | | 53,404 | | | | 83 | | Total Loans | | $ | 3,111 | | | $ | 1,934 | | | $ | 1,296 | | | $ | 6,341 | | | $ | 64,383 | | | $ | 990,487 | | | $ | 1,061,211 | | | $ | 801 | |
Note 6. Goodwill and Other Intangible Assets The carrying amount of goodwill was $8.17.8 million at September 30, 2022March 31, 2023 and December 31, 2021.2022 and $8.1 million as of March 31, 2022. The reduction from March 31, 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 $7.26.2 million, $8.56.6 million and $8.1 million of other intangible assets as of September 30, 2022,March 31, 2023, December 31, 20212022 and September 30, 2021,March 31, 2022, respectively. Other intangible assets were recognized in connection with (i) the book of business, including interest in the client relationships of an officer, acquired by VNB Wealth in 2016, now referred to asconnection 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 23
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, 2022 | | | December 31, 2021 | | | Gross Carrying Amount | | Accumulated Amortization | | | Gross Carrying Amount | | Accumulated Amortization | | Amortized intangible assets: | | | | | | | | | | Core deposit intangible | $ | 9,660 | | $ | (2,670 | ) | | $ | 9,660 | | $ | (1,389 | ) | Customer relationships intangible | | 773 | | | (550 | ) | | | 773 | | | (499 | ) | Total | $ | 10,433 | | $ | (3,220 | ) | | $ | 10,433 | | $ | (1,888 | ) |
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| | | | | | | | | | | | | | | | | | | | | | March 31, 2023 | | | December 31, 2022 | | | March 31, 2022 | | | Gross Carrying Amount | | Accumulated Amortization | | | Gross Carrying Amount | | Accumulated Amortization | | | Gross Carrying Amount | | Accumulated Amortization | | Amortized intangible assets: | | | | | | | | | | | | | | | Core deposit intangible | $ | 9,660 | | $ | (3,465 | ) | | $ | 9,660 | | $ | (3,074 | ) | | $ | 9,660 | | $ | (1,828 | ) | Customer relationships intangible | | - | | | - | | | | - | | | - | | | | 773 | | | (516 | ) | Total | $ | 9,660 | | $ | (3,465 | ) | | $ | 9,660 | | $ | (3,074 | ) | | $ | 10,433 | | $ | (2,344 | ) |
Amortization expense was $432391 thousand and $434456 thousand for the three months ended September 30, 2022March 31, 2023 and 2021, respectively and $1.3 million and $896 thousand for the nine months ended September 30, 2022 and 2021, respectively.2022. Estimated future amortization expense as of September 30, 2022March 31, 2023 is as follows (dollars in thousands): | | Core | | Customer | | Core | | | Deposit | | Relationships | | Deposit | | | | Intangible | | Intangible | | Intangible | | | For the three months ending December 31, 2022 | $ | 404 | | $ | 16 | | | For the year ending December 31, 2023 | | 1,493 | | 67 | | | For the nine months ending December 31, 2023 | | $ | 1,102 | | | For the year ending December 31, 2024 | | 1,301 | | 67 | | | 1,301 | | | For the year ending December 31, 2025 | | 1,110 | | 67 | | | 1,110 | | | For the year ending December 31, 2026 | | 918 | | 6 | | | 918 | | | For the year ending December 31, 2027 | | | 726 | | | Thereafter | | 1,764 | | - | | | 1,038 | | | Total | $ | 6,990 | | $ | 223 | | $ | 6,195 | | |
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 areis classified as an operating leases.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, 2022 | | | September 30, 2021 | | | March 31, 2023 | | | March 31, 2022 | | Lease liability | | $ | 6,551 | | | $ | 7,463 | | | $ | 5,968 | | | $ | 7,295 | | Right-of-use asset | | $ | 6,941 | | | $ | 7,970 | | | Right-of-use asset | | | $ | 6,336 | | | $ | 7,744 | | Weighted average remaining lease term | | 5.68 years | | | 6.19 years | | | 5.12 years | | | 6.19 years | | Weighted average discount rate | | | 1.97 | % | | | 1.98 | % | | | 2.05 | % | | | 1.98 | % |
| | | | | | | | | | | | | | | | | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | Lease Expense: | | 2022 | | | 2021 | | | | | | 2021 | | Operating lease expense | | $ | 437 | | | $ | 420 | | | $ | 1,331 | | | $ | 1,069 | | Short-term lease expense | | | 196 | | | | 127 | | | | 387 | | | | 188 | | Total lease expense | | $ | 633 | | | $ | 547 | | | $ | 1,718 | | | $ | 1,257 | | Cash paid for amounts included in lease liabilities | | $ | 408 | | | $ | 390 | | | $ | 1,240 | | | $ | 998 | |
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| | | | | | | | | | | Three Months Ended March 31, | | Lease Expense: | | 2023 | | | 2022 | | Operating lease expense | | $ | 511 | | | $ | 445 | | Short-term lease expense | | | 123 | | | | 52 | | Total lease expense | | $ | 634 | | | $ | 497 | | Cash paid for amounts included in lease liabilities | | $ | 512 | | | $ | 398 | |
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands): | Undiscounted Cash Flow | | September 30, 2022 | | | March 31, 2023 | | Three months ending December 31, 2022 | | $ | 409 | | | Twelve months ending December 31, 2023 | | | 1,567 | | | Nine months ending December 31, 2023 | | | $ | 1,030 | | Twelve months ending December 31, 2024 | | | 1,296 | | | | 1,257 | | Twelve months ending December 31, 2025 | | | 1,091 | | | | 1,165 | | Twelve months ending December 31, 2026 | | | 748 | | | | 822 | | Twelve months ending December 31, 2027 | | | | 724 | | Thereafter | | | 1,791 | | | | 1,165 | | Total undiscounted cash flows | | $ | 6,902 | | | $ | 6,163 | | Less: Discount | | | (351 | ) | | | (195 | ) | Lease liability | | $ | 6,551 | | | $ | 5,968 | |
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, 2022March 31, 2023 and 2021.2022. 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,March 31, 2023 and March 31, 2022 and September 30, 2021 is included in the calculation of basic and diluted net income per share (dollars below reported in thousands except per share data).
| Three Months Ended | | September 30, 2022 | | | September 30, 2021 | | | March 31, 2023 | | | March 31, 2022 | | | | Net Income | | | Weighted Average Shares | | | Per Share Amount | | | Net Income | | | Weighted Average Shares | | | Per Share Amount | | | Net Income | | | Weighted Average Shares | | | Per Share Amount | | | Net Income | | | Weighted Average Shares | | | Per Share Amount | | Basic net income per share | | $ | 5,772 | | | | 5,326,543 | | | $ | 1.08 | | | $ | 3,138 | | | | 5,306,370 | | | $ | 0.59 | | | $ | 5,791 | | | | 5,338,099 | | | $ | 1.08 | | | $ | 4,924 | | | | 5,311,983 | | | $ | 0.93 | | Effect of dilutive stock options | | | - | | | | 22,357 | | | | - | | | | - | | | | 32,502 | | | | - | | | | - | | | | 37,520 | | | | - | | | | - | | | | 31,581 | | | | (0.01 | ) | Diluted net income per share | | $ | 5,772 | | | | 5,348,900 | | | $ | 1.08 | | | $ | 3,138 | | | | 5,338,872 | | | $ | 0.59 | | | $ | 5,791 | | | | 5,375,619 | | | $ | 1.08 | | | $ | 4,924 | | | | 5,343,564 | | | $ | 0.92 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine Months Ended | | September 30, 2022 | | | September 30, 2021 | | | | | Net Income | | | Weighted Average Shares | | | Per Share Amount | | | Net Income | | | Weighted Average Shares | | | Per Share Amount | | | Basic net income per share | | $ | 16,381 | | | | 5,321,652 | | | $ | 3.08 | | | $ | 4,790 | | | | 4,453,303 | | | $ | 1.08 | | | Effect of dilutive stock options | | | - | | | | 26,226 | | | | (0.02 | ) | | | - | | | | 25,476 | | | | (0.01 | ) | | Diluted net income per share | | $ | 16,381 | | | $ | 5,347,878 | | | $ | 3.06 | | | $ | 4,790 | | | | 4,478,779 | | | $ | 1.07 | | |
For the three and nine months ended September 30,March 31, 2023, there were 101,481 option shares considered anti-dilutive and excluded from this calculation. For the three months ended March 31, 2022, there were 101,901 option shares considered anti-dilutive and excluded from this calculation. For the three and nine months ended September 30, 2021, there were 91,501 option shares considered anti-dilutive and excluded from this calculation.
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Note 9. Stock Incentive Plans At the Annual Shareholders Meeting on June 23, 2022, shareholders approved the Virginia National Bankshares Corporation 2022 Stock Incentive Plan. The 2022 Plan made available up to 150,000 shares of the Company’s common stock to be issued to plan participants. The 2014 Plan made available up to 275,625 shares of the Company’s common stock, as adjusted by prior issued stock dividends, to be issued to plan participants. The 2022 Plan and the 2014 Plan provide for granting of both incentive and nonqualified stock options, as well as restricted stock, unrestricted stock and other stock based awards. No new grants can be issued under the 2005 Stock Incentive Plan as this plan has expired. For the 2022 Plan, the option price for any stock options cannot be less that the fair value of the Company’s stock on the grant date. In addition, 95% of the common stock authorized for issuance must have a vesting or exercise schedule of at least one year. For the 2014 Plan and the 2005 Plan, the option price of incentive stock options cannot be less than the fair value of the stock at the time an option is granted and nonqualified stock options may be granted at prices established by the Board of Directors, including prices less than the fair value on the date of grant. Outstanding stock options generally expire ten years from the grant date. Stock options generally vest by the fourth or fifth anniversary of the date of the grant. A summary of the shares issued and available under each of the Plans is shown below as of September 30, 2022.March 31, 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. No grants have been issued under the 2022 Plan.
| | | 2022 Plan | | | 2014 Plan | | | 2005 Plan | | | 2022 Plan | | | 2014 Plan | | | 2005 Plan | | Aggregate shares issuable | | | 150,000 | | | | 275,625 | | | | 253,575 | | | | 150,000 | | | | 275,625 | | | | 253,575 | | Options issued, net of forfeited and expired options | | | — | | | | (170,106 | ) | | | (59,870 | ) | | | - | | | | (170,106 | ) | | | (59,870 | ) | Unrestricted stock issued | | | — | | | | (11,635 | ) | | | — | | | | - | | | | (11,635 | ) | | | - | | Restricted stock grants issued, net of forfeited | | | — | | | | (65,853 | ) | | | — | | | | - | | | | (75,853 | ) | | | - | | Cancelled due to Plan expiration | | | — | | | | — | | | | (193,705 | ) | | | - | | | | - | | | | (193,705 | ) | Remaining available for grant | | | 150,000 | | | | 28,031 | | | | - | | | | 150,000 | | | | 18,031 | | | | - | | | | | | | | | | | | | | | | | Stock grants issued and outstanding: | | | | | | | | | | | | | | | | | | | Total vested and unvested shares | | | — | | | | 77,488 | | | | — | | | | - | | | | 87,488 | | | | - | | Fully vested shares | | | — | | | | 35,724 | | | | — | | | | - | | | | 44,415 | | | | - | | | | | | | | | | | | | | | | | | | Option grants issued and outstanding: | | | | | | | | | | | | | | | | | | | Total vested and unvested shares | | | — | | | | 166,901 | | | | 1,379 | | | | - | | | | 166,901 | | | | - | | Fully vested shares | | | — | | | | 87,548 | | | | 1,379 | | | | - | | | | 96,349 | | | | - | | | | | | | | | | | | | | | | | | | | | Exercise price range | | | — | | | $23.75 to $42.62 | | | $13.69 | | | | - | | | $23.75 to $42.62 | | | | - | |
The Company accounts for all of its stock incentive plans under recognition and measurement accounting principles which require that the compensation cost relating to stock-based payment transactions be recognized in the financial statements. Stock-based compensation arrangements include stock options and restricted stock. All stock-based payments to employees are required to be valued at a fair value on the date of grant and expensed based on that fair value over the applicable vesting period.
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Stock Options Changes in the stock options outstanding related to the Plans are summarized below (dollars in thousands except per share data):
| | | September 30, 2022 | | | March 31, 2023 | | | | Number of Options | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value | | | Number of Options | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value | | Outstanding at January 1, 2022 | | | 169,280 | | | $ | 33.89 | | | $ | 962 | | | Outstanding at January 1, 2023 | | | | 168,280 | | | $ | 33.95 | | | $ | 830 | | Issued | | | — | | | | — | | | | | | | - | | | | - | | | | | Exercised | | | (1,000 | ) | | | (23.75 | ) | | | | | | (1,379 | ) | | | (13.69 | ) | | | | Expired | | | — | | | | — | | | | | | | - | | | | - | | | | | Outstanding at September 30, 2022 | | | 168,280 | | | $ | 33.95 | | | $ | 532 | | | Outstanding at March 31, 2023 | | | | 166,901 | | | $ | 34.12 | | | $ | 739 | | | | | | | | | | | | | | | | | | | | | Options exercisable at September 30, 2022 | | | 88,927 | | | $ | 36.18 | | | $ | 223 | | | Options exercisable at March 31, 2023 | | | | 96,349 | | | $ | 35.97 | | | $ | 339 | |
For the three months ended September 30,March 31, 2023 and 2022, and 2021, the Company recognized $42 thousand and $31 thousand, respectively, in compensation expense for stock options. For the nine months ended September 30, 2022 and 2021, the Company recognized $125 thousand and $9641 thousand, respectively, in compensation expense for stock options. As of September 30, 2022,March 31, 2023, there was $262179 thousand in unrecognized compensation expense remaining to be recognized in future reporting periods through 2026. The fair value of any stock option grant is estimated at the grant date using the Black-Scholes pricing model. There were no stock option grants issued during the three and nine months ended September 30, 2022March 31, 2023 and 2021.2022. Summary information pertaining to options outstanding at September 30, 2022March 31, 2023 is shown below. Share and per share data have been adjusted to reflect the prior stock dividends issued.
| | | Options Outstanding | | | Options Exercisable | | | 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 | | | Number of Options Outstanding | | | Weighted- Average Remaining Contractual Life | | Weighted- Average Exercise Price | | | Number of Options Exercisable | | | Weighted- Average Exercise Price | | $13.69 to $20.00 | | | 1,379 | | | 0.4 Years | | $ | 13.69 | | | | 1,379 | | | $ | 13.69 | | | $20.01 to $30.00 | | | 65,000 | | | 7.8 Years | | | 24.65 | | | | 25,400 | | | | 24.67 | | | $23.75 to $30.00 | | | | 65,000 | | | 7.3 Years | | | 24.65 | | | | 30,600 | | | | 24.90 | | $30.01 to $40.00 | | | 44,420 | | | 7.8 Years | | | 36.97 | | | | 16,172 | | | | 37.87 | | | | 44,420 | | | 7.3 Years | | | 36.97 | | | | 19,772 | | | | 37.65 | | $40.01 to $42.62 | | | 57,481 | | | 5.6 Years | | | 42.62 | | | | 45,976 | | | | 42.62 | | | | 57,481 | | | 5.1 Years | | | 42.62 | | | | 45,977 | | | | 42.62 | | Total | | | 168,280 | | | 7.0 Years | | $ | 33.95 | | | | 88,927 | | | $ | 36.18 | | | | 166,901 | | | 6.6 Years | | $ | 34.12 | | | | 96,349 | | | $ | 35.97 | |
Stock Grants Unrestricted stock grant -– No unrestricted stock grants were awarded during the three months ended March 31, 2023. During the ninethree months ended September 30,March 31, 2022, 100 shares of unrestricted stock were granted to an employee for a total expense of $4 thousand.No unrestricted stock grants were awarded during the three months ended September 30, 2022 or during the year ended December 31, 2021. Restricted stock grants – No restricted stock was granted during the three months ended March 31, 2023. During the ninethree months ended September 30,March 31, 2022, 5,580 and 12,8565,730 restricted shares were granted to employees and non-employee directors, respectively, vesting over a four-year or five-year period. (Note that all such shares were granted during the first quarter of 2022 with no shares granted during the second or third quarter of 2022.) During the three and nine months ended September 30, 2021, 5,730 and 19,233 restricted shares, respectively, were granted. For the three and nine months ended September 30, 2022,March 31, 2023, $184111 thousand and $398 thousand, respectively, was expensed as a result of restricted stock grants. As of September 30, 2022,March 31, 2023, there was $1.11.2 million in unrecognized compensation expense for all restricted stock grants remaining to be recognized in future reporting periods through 2027. 27
Changes in the restricted stock grants outstanding during the ninethree months ended September 30, 2022March 31, 2023 are summarized below (dollars in thousands except per share data): | | | September 30, 2022 | | | March 31, 2023 | | | | Number of Shares | | | Weighted Average Grant Date Fair Value Per Share | | | Aggregate Intrinsic Value | | | Number of Shares | | | Weighted Average Grant Date Fair Value Per Share | | | Aggregate Intrinsic Value | | Nonvested as of January 1, 2022 | | | 37,011 | | | $ | 28.98 | | | $ | 1,165 | | | Nonvested as of January 1, 2023 | | | | 51,664 | | | $ | 32.05 | | | $ | 1,858 | | Issued | | | 18,536 | | | | 35.62 | | | 601 | | | | - | | | | - | | | | - | | Vested | | | (13,183 | ) | | | (29.04 | ) | | | (392 | ) | | | (8,591 | ) | | | 32.21 | | | | (309 | ) | Forfeited | | | (600 | ) | | | (33.74 | ) | | | (19 | ) | | | - | | | | - | | | | - | | Nonvested at September 30, 2022 | | | 41,764 | | | $ | 31.82 | | | $ | 1,355 | | | Nonvested at March 31, 2023 | | | | 43,073 | | | $ | 32.02 | | | $ | 1,549 | | | | | | | | | | | | | | | | | | | | |
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:
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| Level 1 – |
| Valuation is based on quoted prices in active markets for identical assets and liabilities. |
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| 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. |
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| Level 3 – |
| Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market |
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The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements: Securities available for sale Securities AFS are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). Additional information on interest rate swaps is presented in Note 12 – Derivative Instruments and Hedging Activities. Interest rate swaps The Company recognizes interest rate swaps at fair value. The Company has contracted with a third-party to provide valuations for interest rate swaps using standard valuation techniques. The Company’s interest rate swaps are classified as Level 2. Additional information on interest rate swaps is presented in Note 12 – Derivative Instruments and Hedging Activities. The following tables present the balances measured at fair value on a recurring basis as of September 30, 2022March 31, 2023 and December 31, 20212022 (dollars in thousands):
| | | | | | Fair Value Measurements at September 30, 2022 Using: | | | | | | Fair Value Measurements at March 31, 2023 Using: | | | | | | | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | | | | | | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | | Description | | Balance | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Balance | | | (Level 1) | | | (Level 2) | | | (Level 3) | | Assets: | | | | | | | | | | | | | | | | | | | U.S. Government treasuries | | $ | 241,375 | | | $ | - | | | $ | 241,375 | | | $ | - | | | $ | 194,569 | | | $ | - | | | $ | 194,569 | | | $ | - | | U.S. Government agencies | | | 28,905 | | | | - | | | | 28,905 | | | | - | | | | 29,225 | | | | - | | | | 29,225 | | | | - | | Mortgage-backed securities/CMOs | | | 160,461 | | | | - | | | | 160,461 | | | | - | | | | 165,628 | | | | - | | | | 165,628 | | | | - | | Corporate bonds | | | 29,295 | | | | - | | | | 29,295 | | | | - | | | | 18,784 | | | | - | | | | 18,784 | | | | - | | Municipal bonds | | | 78,423 | | | | - | | | | 78,423 | | | | - | | | | 84,554 | | | | - | | | | 84,554 | | | | - | | Total securities available for sale | | $ | 538,459 | | | $ | - | | | $ | 538,459 | | | $ | - | | | $ | 492,760 | | | $ | - | | | $ | 492,760 | | | $ | - | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swap asset | | | 538 | | | | - | | | | 538 | | | | - | | | | - | | | | - | | | | - | | | | - | | Total assets at fair value | | $ | 538,997 | | | $ | - | | | $ | 538,997 | | | $ | - | | | $ | 492,760 | | | $ | - | | | $ | 492,760 | | | $ | - | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | Fair Value Measurements at December 31, 2021 Using: | | | | | | | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | | Description | | Balance | | | (Level 1) | | | (Level 2) | | | (Level 3) | | Assets: | | | | | | | | | | | | | U.S. Government agencies | | $ | 31,581 | | | $ | - | | | $ | 31,581 | | | $ | - | | Mortgage-backed securities/CMOs | | | 170,964 | | | | - | | | | 170,964 | | | | - | | Municipal bonds | | | 101,272 | | | | - | | | | 101,272 | | | | - | | Total securities available for sale | | $ | 303,817 | | | $ | - | | | $ | 303,817 | | | $ | - | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | Interest rate swap liabilities | | $ | 197 | | | $ | - | | | $ | 197 | | | $ | - | | Total liabilities at fair value | | $ | 197 | | | $ | - | | | $ | 197 | | | $ | - | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | 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: Other Real Estate Owned Other real estate owned is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the ALLL.ACL. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Consolidated Statements of Income. As of March 31, 2023 and December 31, 2021,2022, the Company had no OREO property. As of March 31, 2022, the Company had one OREO property that had been acquired through the Merger which was carried atwith a fair value of $611 thousand. The Company$611 thousand, which was sold this OREO property during the second quarter of the current year and therefore had a zero balance in OREO as of September 30, 2022. ImpairedCollateral Dependent Loans with an ACL
LoansIn 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 designated as impaired when, inevaluated for expected credit losses on an individual basis and excluded from the judgmentcollective evaluation. Specific allocations of management based on current information and events, it is probable that allthe ACL are determined by analyzing the borrower's ability to repay amounts due according toowed, collateral deficiencies, the contractual termsrelative risk grade of the loan agreement will notand economic conditions affecting the borrower's industry, among other things. A loan is considered to be collectedcollateral dependent when, due. The measurement of loss associated with impaired loans canbased upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be based on either (a)provided substantially through the observable market priceoperation or sale of the loan orcollateral. In such cases, expected credit losses are based on the fair value of the collateral or (b) usingat the presentmeasurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of expected future cash flows discounted at the loan’s effective interest rate, which is notcollateral supporting collateral dependent loans on a fair value measurement. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable.quarterly basis. The vast majority of the collateral is real estate. Thefair value of real estate collateral supporting collateral dependent loans is determined utilizing an income or market valuation approach based on anevaluated by appraisal conducted by an independent, licensed appraiser outsideservices using a methodology that is consistent with the Uniform Standards of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3.Professional Appraisal Practice.
Impaired loans that are measured based on expected future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest are not recorded at fair value, and are therefore excluded from fair value disclosure requirements.
The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).30
Impaired loans allocated to the ALLL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The Company had impaired loans, excluding PCI loans, of $1.5 million as of September 30, 2022 and $1.5 million as of December 31, 2021. All impaired loans were measured based on expected future cash flows discounted at the loan’s effective interest rate, or fair value of collateral, as noted above.
The following table presents the Company’sCompany's assets that were measured at fair value on a nonrecurring basis as of DecemberMarch 31, 2021. There were no such assets to report as of September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | Fair Value Measurements at December 31, 2021 Using: | | | | | | | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | | Description | | Balance | | | (Level 1) | | | (Level 2) | | | (Level 3) | | Assets: | | | | | | | | | | | | | Other Real Estate Owned | | $ | 611 | | | $ | - | | | $ | - | | | $ | 611 | |
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For the assets measured at fair value on a nonrecurring basis as of December 31, 2021, the following table displays quantitative information about Level 3 Fair Value Measurements2023 (dollars in thousands). There were no such assets to report as of September 30,December 31, 2022.
| | | | | | | | | | | | | Description | | Fair Value | | | Valuation Technique | | Unobservable Inputs | | Weighted Average | | Assets: | | | | | | | | | | | Other Real Estate Owned | | $ | 611 | | | Market comparables | | Discount applied to bonafide offer * | | | 6.0 | % | * A discount percentage is applied based on estimated cost to sell. | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | 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 | | $ | 28 | | | $ | - | | | $ | - | | | $ | 28 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Description | | Fair Value | | | Valuation Technique | | | Unobservable Inputs | | | Discount Rate | | Assets: | | | | | | | | | | | | | Individually evaluated loans | | $ | 28 | | | 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. The carrying values and estimated fair values of the Company's financial instruments as of September 30, 2022March 31, 2023 and December 31, 20212022 are as follows (dollars in thousands):
| | | | | | Fair Value Measurements at September 30, 2022 Using: | | | | | | Fair Value Measurements at March 31, 2023 Using: | | | | | | | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | | | | | | | | | 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 | | | Carrying value | | | Level 1 | | | Level 2 | | | Level 3 | | | Fair Value | | Assets | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalent | | $ | 145,085 | | | $ | 145,085 | | | $ | - | | | $ | - | | | $ | 145,085 | | | $ | 35,281 | | | $ | 35,281 | | | $ | - | | | $ | - | | | $ | 35,281 | | Available for sale securities | | | 538,459 | | | | - | | | | 538,459 | | | | - | | | | 538,459 | | | | 492,760 | | | | - | | | | 492,760 | | | | - | | | | 492,760 | | Restricted securities | | | | 5,750 | | | | - | | | | 5,750 | | | | - | | | | 5,750 | | Loans, net | | | 936,862 | | | | - | | | | - | | | | 901,051 | | | | 901,051 | | | | 932,185 | | | | - | | | | - | | | | 893,836 | | | | 893,836 | | Bank owned life insurance | | | 38,298 | | | | - | | | | 38,298 | | | | - | | | | 38,298 | | | | 38,804 | | | | - | | | | 38,804 | | | | - | | | | 38,804 | | Accrued interest receivable | | | 4,351 | | | | - | | | | 2,114 | | | | 2,237 | | | | 4,351 | | | | 4,720 | | | | - | | | | 2,008 | | | | 2,712 | | | | 4,720 | | Interest rate swap asset | | | 538 | | | | - | | | | 538 | | | | - | | | | 538 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Demand deposits and interest-bearing transaction and money market accounts | | $ | 1,462,397 | | | $ | - | | | $ | 1,462,397 | | | $ | - | | | $ | 1,462,397 | | | $ | 1,227,541 | | | $ | - | | | $ | 1,227,541 | | | $ | - | | | $ | 1,227,541 | | Certificates of deposit | | | 134,250 | | | | - | | | | 133,741 | | | | - | | | | 133,741 | | | | 169,719 | | | | - | | | | 170,307 | | | | - | | | | 170,307 | | Junior subordinated debt, net | | | 3,401 | | | | - | | | | 3,158 | | | | - | | | | 3,158 | | | | 3,424 | | | | - | | | | 3,424 | | | | - | | | | 3,424 | | Accrued interest payable | | | 123 | | | | - | | | | 123 | | | | - | | | | 123 | | | | 637 | | | | - | | | | 637 | | | | - | | | | 637 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | Fair Value Measurements at December 31, 2021 Using: | | | | | | Fair Value Measurements at December 31, 2022 Using: | | | | | | | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | | | | | | | | | 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 | | | Carrying value | | | Level 1 | | | Level 2 | | | Level 3 | | | Fair Value | | Assets | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalent | | $ | 508,840 | | | $ | 508,840 | | | $ | - | | | $ | - | | | $ | 508,840 | | | $ | 40,136 | | | $ | 40,136 | | | $ | - | | | $ | - | | | $ | 40,136 | | Available for sale securities | | | 303,817 | | | | - | | | | 303,817 | | | | - | | | | 303,817 | | | | 538,186 | | | | - | | | | 538,186 | | | | - | | | | 538,186 | | Restricted securities | | | | 5,137 | | | | - | | | | 5,137 | | | | - | | | | 5,137 | | Loans, net | | | 1,055,227 | | | | - | | | | - | | | | 1,059,650 | | | | 1,059,650 | | | | 930,863 | | | | - | | | | - | | | | 890,929 | | | | 890,929 | | Assets held for sale | | | | 965 | | | | - | | | | 965 | | | | - | | | | 965 | | Bank owned life insurance | | | 31,234 | | | | - | | | | 31,234 | | | | - | | | | 31,234 | | | | 38,552 | | | | - | | | | 38,552 | | | | - | | | | 38,552 | | Other real estate owned, net | | | 611 | | | | - | | | | - | | | | 611 | | | | 611 | | | Accrued interest receivable | | | 3,778 | | | | - | | | | 1,252 | | | | 2,526 | | | | 3,778 | | | | 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 | | $ | 1,634,125 | | | $ | - | | | $ | 1,634,125 | | | $ | - | | | $ | 1,634,125 | | | $ | 1,363,232 | | | $ | - | | | $ | 1,363,232 | | | $ | - | | | $ | 1,363,232 | | Certificates of deposit | | | 162,045 | | | | - | | | | 161,850 | | | | - | | | | 161,850 | | | | 115,106 | | | | - | | | | 109,260 | | | | - | | | | 109,260 | | Junior subordinated debt | | | 3,367 | | | | - | | | | 3,367 | | | | - | | | | 3,367 | | | Junior subordinated debt, net | | | | 3,413 | | | | - | | | | 3,413 | | | | - | | | | 3,413 | | Accrued interest payable | | | 174 | | | | - | | | | 174 | | | | - | | | | 174 | | | | 157 | | | | - | | | | 157 | | | | - | | | | 157 | | Interest rate swap liabilities | | | 205 | | | | - | | | | 205 | | | | - | | | | 205 | | |
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. Consequently, the fair values of the Company’s financial instruments will fluctuate when interest rate levels change, and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk; however, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
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Note 11. Other Comprehensive Income (Loss) A component of the Company’s other comprehensive income (loss), in addition to net income from operations, is the recognition of the unrealized gains and losses on AFS securities, net of income taxes. Reclassifications of realized gains and losses on AFS securities are reported in the income statement as “Gains on sales of securities” with the corresponding income tax effect reflected as a component of income tax expense. There were no sales of securities in the three and nine months ended September 30, 2022 and 2021.
The following table presents the cumulative balances of the componentschanges in each component of accumulated other comprehensive income (loss), net of deferred taxes of $10.6 million and $464 thousand, as of September 30,March 31, 2023 and March 31, 2022 and December 31, 2021, respectively (dollars in thousands).
| | | | | | | | | | | September 30, 2022 | | | December 31, 2021 | | Accumulated other comprehensive loss on securities | | $ | (50,871 | ) | | $ | (2,164 | ) | Accumulated other comprehensive income (loss) on interest rate swap | | | 510 | | | | (47 | ) | Total accumulated other comprehensive loss | | $ | (50,361 | ) | | $ | (2,211 | ) |
| | | | | | | | | | | | | | | Securities AFS | | | Interest Rate Swap | | | Total | | Accumulated other comprehensive income (loss) at December 31, 2022 | | $ | (49,024 | ) | | $ | 400 | | | $ | (48,624 | ) |
| | | | | | | | | | Other comprehensive income (loss) arising during the period | | | 7,605 | | | | (46 | ) | | | 7,559 | | Related income tax effects | | | (1,597 | ) | | | 9 | | | | (1,588 | ) | | | | 6,008 | | | | (37 | ) | | | 5,971 | | | | | | | | | | | | Reclassification into net income | | | 206 | | | | (460 | ) | | | (254 | ) | Related income tax effects | | | (43 | ) | | | 97 | | | | 54 | | | | | 163 | | | | (363 | ) | | | (200 | ) | | | | | | | | | | | Accumulated other comprehensive income (loss) at March 31, 2023 | | $ | (42,853 | ) | | $ | — | | | $ | (42,853 | ) | | | | | | | | | | |
| | Securities AFS | | | Interest Rate Swap | | | Total | | Accumulated other comprehensive income (loss) at December 31, 2021 | | $ | (2,164 | ) | | $ | (47 | ) | | $ | (2,211 | ) |
| | | | | | | | | | Other comprehensive income (loss) arising during the period | | | (24,871 | ) | | | 276 | | | | (24,595 | ) | Related income tax effects | | | 5,223 | | | | (58 | ) | | | 5,165 | | | | | (19,648 | ) | | | 218 | | | | (19,430 | ) | | | | | | | | | | | Accumulated other comprehensive income (loss) at March 31, 2022 | | $ | (21,812 | ) | | $ | 171 | | | $ | (21,641 | ) |
Note 12. Derivative Instruments and Hedging Activities
The Company uses derivative financial instruments primarily to manage risks to the Company associated with changing interest rates, and to assist customers with their risk management objectives. The Company designates certain interest rate swaps as hedging instruments in qualifying cash flow hedges. The changes in fair value of these designated hedging instruments is reported as a component of other comprehensive income. Customer accommodation loan swaps are derivative contracts that are not designated in a qualifying hedging relationship. Cash flow hedges. The Company designates interest rate swaps as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Company’s junior subordinated debt. These interest rate swaps are derivative financial instruments that manage the risk of variability in cash flows by exchanging variable-rate interest payments on a notional amount of the Company’s borrowings for fixed-rate interest payments. Interest rate swaps designated as cash flow hedges are expected to be highly effective in offsetting the effect of changes in interest rates on the amount of variable-rate interest payments, and the Company assesses the effectiveness of each hedging relationship quarterly. If the Company determines that a cash flow hedge is no longer highly effective, future changes in the fair value of the hedging instrument would be reported in earnings. As of September 30, 2022 andAt December 31, 2021,2022, the Company had a designated cash flow hedgeshedge to manage its exposure to variability in cash flows on certainone variable rate borrowingsborrowing through 2036. In anticipation of terminating the borrowing position in the current year, such hedge position was liquidated in the first quarter of 2023 for a gain of $460 thousand. There are no other hedges in place as of March 31, 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 33
instrument is terminated and the hedged interest payments remain probable of occurring, any remaining unrecognized gain or loss in other comprehensive income is reclassified into earnings in the period(s) during which the forecasted interest payments affect earnings. Amounts reclassified into earnings and interest receivable or payable under designated interest rate swaps are reported in interest expense. The Company does not expect any unrealized losses related to cash flow hedges to be reclassified into earnings in the next twelve months. Cash collateral held at other banks for swaps was $575 thousand as of September 30, 2022 and $570580 thousand as of December 31, 2021.2022. Related to the liquidation of the hedge as noted above, the cash collateral was returned to the Company. Collateral iswas dependent on the market valuation of the underlying hedges.
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The follow table summarizes the Company’s derivative instruments as of September 30, 2022 and December 31, 20212022 (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | September 30, 2022 | | December 31, 2022 | Derivatives designated as hedging instruments | | Notional/ Contract Amount | | | Fair Value | | | Fair Value Balance Sheet Location | | Expiration Date | | Notional/ Contract Amount | | | Fair Value | | | Fair Value Balance Sheet Location | | Expiration Date | Interest rate forward swap - cash flow | | $ | 4,000 | | | $ | 538 | | | Other Liabilities | | 6/15/2031 | | $ | 4,000 | | | $ | 506 | | | Junior subordinated debt | | 6/15/2031 | | | | | | | | | | | December 31, 2021 | | Derivatives designated as hedging instruments | | Notional/ Contract Amount | | | Fair Value | | | Fair Value Balance Sheet Location | | Expiration Date | | Interest rate forward swap - cash flow | | $ | 4,000 | | | $ | (197 | ) | | Other Liabilities | | 6/15/2031 | | Interest rate swap - fair value | | $ | 3,940 | | | $ | (8 | ) | | Other Liabilities | | 2/12/2022 | |
Note 13. Segment Reporting TheFor 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, offersoffered wealth management and investment advisory services. Revenue for this segment iswas generated primarily from investment advisory and financial planning fees, with a small and decreasing 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. A management fee for administrative and technology support services provided by the Bank is allocated to the other three lines of business. For both the three months ended September 30, 2022 and 2021, management fees totaling $25 thousand were charged by the Bank and eliminated in consolidated totals. For both the nine months ended September 30, 2022 and 2021, management fees totaling $75 thousand were charged by the Bank and eliminated in consolidated totals.
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Segment information for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 is shown in the following tables (dollars in thousands). Note that asset information is not reported below, as the assets of Sturman Wealth Advisors and VNB Trust & Estate Services are reported at the Bank level;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, 2022 | | Bank | | | Sturman Wealth Advisors | | | VNB Trust & Estate Services | | | Masonry Capital | | | Consolidated | | Net interest income | | $ | 14,277 | | | $ | - | | | $ | - | | | $ | - | | | $ | 14,277 | | Provision for loan losses | | | 39 | | | | - | | | | - | | | | - | | | | 39 | | Noninterest income | | | 1,486 | | | | 212 | | | | 435 | | | | 167 | | | | 2,300 | | Noninterest expense | | | 8,833 | | | | 154 | | | | 324 | | | | 192 | | | | 9,503 | | Income (loss) before income taxes | | | 6,891 | | | | 58 | | | | 111 | | | | (25 | ) | | | 7,035 | | Provision for (benefit from) income taxes | | | 1,233 | | | | 12 | | | | 23 | | | | (5 | ) | | | 1,263 | | Net income (loss) | | $ | 5,658 | | | $ | 46 | | | $ | 88 | | | $ | (20 | ) | | $ | 5,772 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine months ended September 30, 2022 | | Bank | | | Sturman Wealth Advisors | | | VNB Trust & Estate Services | | | Masonry Capital | | | Consolidated | | Net interest income | | $ | 38,163 | | | $ | - | | | $ | - | | | $ | - | | | $ | 38,163 | | Provision for (recovery of) loan losses | | | (30 | ) | | | - | | | | - | | | | - | | | | (30 | ) | Noninterest income | | | 5,871 | | | | 639 | | | | 3,631 | | | | 592 | | | | 10,733 | | Noninterest expense | | | 26,370 | | | | 482 | | | | 1,621 | | | | 567 | | | | 29,040 | | Income before income taxes | | | 17,694 | | | | 157 | | | | 2,010 | | | | 25 | | | | 19,886 | | Provision for income taxes | | | 3,045 | | | | 33 | | | | 422 | | | | 5 | | | | 3,505 | | Net income | | $ | 14,649 | | | $ | 124 | | | $ | 1,588 | | | $ | 20 | | | $ | 16,381 | |
| Three months ended September 30, 2021 | | Bank | | | Sturman Wealth Advisors | | | VNB Trust & Estate Services | | | Masonry Capital | | | Consolidated | | | Three months ended March 31, 2023 | | | Bank | | | VNB Trust & Estate Services | | | Masonry Capital | | | Consolidated | | | | | Net interest income | | $ | 13,504 | | | $ | - | | | $ | - | | | $ | - | | | $ | 13,504 | | | $ | 13,413 | | | $ | - | | | $ | - | | | $ | 13,413 | | | | | Provision for loan losses | | | 267 | | | | - | | | | - | | | | - | | | | 267 | | | Provision for credit losses | | | | (248 | ) | | | - | | | | - | | | | (248 | ) | | | | Noninterest income | | | 2,890 | | | | 209 | | | | 203 | | | | 176 | | | | 3,478 | | | | 1,855 | | | | 260 | | | | 161 | | | | 2,276 | | | | | Noninterest expense | | | 12,183 | | | | 163 | | | | 315 | | | | 163 | | | | 12,824 | | | | 8,370 | | | | 309 | | | | 182 | | | | 8,861 | | | | | Income (loss) before income taxes | | | 3,944 | | | | 46 | | | | (112 | ) | | | 13 | | | | 3,891 | | | | 7,146 | | | | (49 | ) | | | (21 | ) | | | 7,076 | | | | | Provision for (benefit from) income taxes | | | 763 | | | | 10 | | | | (23 | ) | | | 3 | | | | 753 | | | | 1,299 | | | | (10 | ) | | | (4 | ) | | | 1,285 | | | | | Net income (loss) | | $ | 3,181 | | | $ | 36 | | | $ | (89 | ) | | $ | 10 | | | $ | 3,138 | | | $ | 5,847 | | | $ | (39 | ) | | $ | (17 | ) | | $ | 5,791 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine months ended September 30, 2021 | | Bank | | | Sturman Wealth Advisors | | | VNB Trust & Estate Services | | | Masonry Capital | | | Consolidated | | | | | | | | | | | | | | | | | | | | Three months ended March 31, 2022 | | | Bank | | | Sturman Wealth Advisors | | | VNB Trust & Estate Services | | | Masonry Capital | | | Consolidated | | Net interest income | | $ | 32,629 | | | $ | - | | | $ | - | | | $ | - | | | $ | 32,629 | | | $ | 11,425 | | | $ | - | | | $ | - | | | $ | - | | | $ | 11,425 | | Provision for loan losses | | | 477 | | | | - | | | | - | | | | - | | | | 477 | | | Provision for (recovery of) loan losses | | | | 148 | | | | - | | | | - | | | | - | | | | 148 | | Noninterest income | | | 5,760 | | | | 602 | | | | 607 | | | | 468 | | | | 7,437 | | | | 1,534 | | | | 216 | | | | 2,831 | | | | 206 | | | | 4,787 | | Noninterest expense | | | 31,854 | | | | 490 | | | | 736 | | | | 518 | | | | 33,598 | | | | 8,821 | | | | 166 | | | | 922 | | | | 186 | | | | 10,095 | | Income (loss) before income taxes | | | 6,058 | | | | 112 | | | | (129 | ) | | | (50 | ) | | | 5,991 | | | Provision for (benefit from) income taxes | | | 1,214 | | | | 24 | | | | (27 | ) | | | (10 | ) | | | 1,201 | | | Net income (loss) | | $ | 4,844 | | | $ | 88 | | | $ | (102 | ) | | $ | (40 | ) | | $ | 4,790 | | | | | | | | | | | | | | | | Income before income taxes | | | | 3,990 | | | | 50 | | | | 1,909 | | | | 20 | | | | 5,969 | | Provision for income taxes | | | | 630 | | | | 10 | | | | 401 | | | | 4 | | | | 1,045 | | Net income | | | $ | 3,360 | | | $ | 40 | | | $ | 1,508 | | | $ | 16 | | | $ | 4,924 | |
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited consolidated financial statements, and notes thereto, of Virginia National Bankshares Corporation included in this report and the audited consolidated financial statements, and notes thereto, of the Company included in the Company’s Form 10-K for the year ended December 31, 2021.2022. Operating results for the three and nine months ended September 30, 2022March 31, 2023 are not necessarily indicative of the results for the year ending December 31, 20222023 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 judgementjudgment of the Company and its management about future events. While Company management believes such statements to be reasonable, future events and predictions are subject to circumstances that are not within the control of the Company and its management. Actual results may differ materially from those included in the forward-looking statements due to a number of factors, including, without limitation, the effects of and changes in: inflation, interest rates, market and monetary fluctuations; liquidity and capital requirements; market disruptions including pandemics or significant health hazards, severe weather conditions, natural disasters, terrorist activities, financial crises, political crises, war and other military conflicts (including the ongoing military conflict between Russia and Ukraine) or other major events, the governmental and societal responses thereto, or the prospect of these events; changes, particularly declines, in general economic and market conditions in the local economies in which the Company operates, including the effects of declines in real estate values,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 levelslevels; competitive pressures on loan and general economic contraction as a result of COVID-19 or other pandemics; fluctuationsdeposit pricing and demand; fluctuation in interest rates, deposits, loan demand, and asset quality; assumptions that underlie the Company’s ALLL;ACL; the potential adverse effectsvalue of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (e.g., COVID-19 or other pandemics), and of governmental and societal responses thereto;securities held in the performance of vendors or other parties with which the Company does business; competition; technology; changes in laws, regulations and guidance; changes in accounting principles or guidelines;Company's investment portfolio; performance of assets under management; expected revenue synergiescybersecurity threats or attacks and cost savingsthe 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 recently completed mergerCompany’s press releases and filings with Fauquier may not be fully realized or realized within the expected timeframe;SEC; and the businessesCompany’s performance in managing the risks involved in any of the Company and Fauquier may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; revenues following the Merger may be lower than expected; customer and employee relationships and business operations may be disrupted by the merger; and other factors impacting financial services businesses.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, 20212022 and other reports filed from time to time by the Company with the Securities and Exchange Commission. These statements speak only as of the date made, and the Company does not undertake to update any forward-looking statements to reflect changes or events that may occur after this release. MERGER WITH FAUQUIER BANKSHARES, INC., AND THE FAUQUIER BANK
On April 1, 2021, the Company completed its Merger with Fauquier. The Merger of Fauquier with and into the Company was effected pursuant to the terms and conditions of the Agreement and Plan of Reorganization, dated as of September 30, 2020, between the Company and Fauquier, and a related Plan of Merger. Immediately after the Merger, The Fauquier Bank, Fauquier’s wholly-owned bank subsidiary, merged with and into Virginia National Bank, the Company’s wholly-owned bank subsidiary.
Pursuant to the Merger Agreement, former holders of shares of Fauquier common stock received 0.675 shares of the Company’s common stock for each share of Fauquier common stock held immediately prior to the Merger, with cash paid in lieu of fractional shares. Each share of common stock of the Company outstanding immediately prior to the Merger remained outstanding and was unaffected by the Merger.
Refer to Note 2 - Business Combinations, in the Notes to Consolidated Financial Statements, for further detail on the accounting policy for business combinations, fair values of assets and liabilities assumed, assumptions used in determining the fair values of assets and liabilities and the resulting goodwill.
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OVERVIEW Our primary financial goal is to maximize the Company’s earnings to increase long-term shareholder value. We monitor three key financial performance measures to determine our success in realizing this goal: 1) return on average assets, 2) return on average equity, and 3) net income per share. (Refer to Reconcilement of Non-GAAP Measures within the Non-GAAP presentations section for further detail and calculation of amounts labeled as "Non-GAAP.") •ROAA for the three months ended September 30, 2022March 31, 2023 was 1.30%1.48% compared to 0.65% (0.96% excluding merger and merger-related expenses, a non-GAAP measure)1.03% realized in the same period in the prior year, as the increase in net income was significantly higher and average assets lower in the current period and no merger or merger-related expenses were incurred in the current period. ROAA for the nine months ended September 30, 2022 was 1.20%as compared to 0.41% (0.94% excluding merger and merger-related expenses, a non-GAAP measure) realized in the same period in the prior year. •ROAE for the three months ended September 30, 2022March 31, 2023 was 16.50%17.57% compared to 7.70% (11.29% excluding merger and merger-related expenses, a non-GAAP measure) realized in same period in the prior year. ROAE for the nine months ended September 30, 2022 was 14.98% compared to 4.80% (11.00% excluding merger and merger-related expenses, a non-GAAP measure)12.53% realized in same period in the prior year. •Net income per diluted share was $1.08 for the three months ended September 30, 2022,March 31, 2023, compared to $0.59 ($0.86 excluding merger and merger-related expenses, a non-GAAP measure)$0.92 for the same period in the prior year, due to the increase of $2.6 million in net income. Net income per diluted share was $3.06 for the nine months ended September 30, 2022, compared to $1.07 ($2.45 excluding merger and merger-related expenses, a non-GAAP measure) for the same period in the prior year, due to the increase of $11.6 million$867 thousand in net income.
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We also manage our capital levels through growth, quarterly cash dividends, periodic stock dividends and share repurchases, when prudent, while maintaining a strong capital position. Refer to the Results of Operations, Non-GAAP Presentation section, later in this Management’s Discussion and Analysis for more discussion on these financial performance measures. IMPACT OF COVID-19
The Company’s financial performance generally, and in particular the ability of its borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is dependent on the business environment in its primary markets. COVID-19 has had, and may have in the future, a wide range of economic impacts nationally and in the Company’s primary markets. Continuing cases of COVID-19, including the emergence of variants of the COVID-19 virus, continue to be a public health concern in the Company’s markets. There have been encouraging signs of strength in the economic recovery, including growth in consumer spending and improvement in the labor market, but many businesses continue to face difficulty in hiring desirable employees and meeting consumer demand, and certain portions of the global supply chain remain challenged by shortages and delays that first occurred due to the initial COVID-19 outbreak. There remains uncertainty about the pace of economic recovery, including uncertainty related to the labor market, inflation and fiscal and monetary policy responses from the federal government. There remains a risk that consumers and borrowers who have been supported during the pandemic by government stimulus measures may not return to employment and may not be able to repay debts as agreed following the cessation of government stimulus programs, including expanded unemployment benefits.
Management will carefully monitor any future impacts attributable to the COVID-19 pandemic and its impact on the Company’s markets, customers and employees, and believes that the pandemic continues to present risks of elevated loan losses, sustained net interest margin compression and falling demand for loans; however, at this time management cannot determine the ultimate impact of the pandemic on the results of operations of the Company.
Throughout the onset of this pandemic, the Company has maintained its high standards of credit quality on organic loan funding to limit credit risk exposure. There were no COVID-19 related loan deferrals as of September 30, 2022.
As of September 30, 2022, capital ratios of the Company were in excess of regulatory requirements. While currently included in the category of “well capitalized” by bank regulators, a prolonged economic recession could adversely impact reported and regulatory capital ratios. The Company maintains access to multiple sources of liquidity. Management also revisited its capital and liquidity stress tests, as well as capital and liquidity contingency plans, to validate that the Company can react effectively to an economic downturn.
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Operations, Processes, Controls and Business Continuity Plan
The Company reacted quickly to the COVID-19 pandemic. Since the start of the pandemic, the Company has taken and is continuing to take precautions to protect the safety and well-being of the Bank’s employees and customers. We began internal social distancing in mid-March of 2020, as well as distancing from the public by keeping our drive-thru services available, and encouraging customers to conduct transactions at ATMs, through online banking and/or the mobile app. The Company also increased consumer and business mobile deposit limits to encourage customers to make deposits remotely from the safety of their home or business. The Company implemented a temporary schedule whereby most staff members worked remotely, allowing the remaining essential staff to create more distance between each other within the offices. We temporarily increased the number of staff in the client service center to assist more customers by telephone and encourage them to utilize online and mobile banking. The client service center was also moved on a short-term basis to a larger location to allow for appropriate social distancing. In addition, the Company enhanced disinfecting procedures to include hospital-grade cleaning solution and foggers, increased the frequency of cleaning and issued personal protective equipment, including N-95 and disposable face masks, face shields, sneeze guards, gloves and thermometers, to employees, along with specific instructions for use, to enhance their safety. We also installed disinfecting protective strips to high touch areas and placed free-standing air filter machines throughout our facilities. We purchased COVID-19 instant test kits that we have on-site, ready to be deployed when needed, and we provided antibody testing options to all employees. Management provides frequent email communications and social media updates regarding COVID-19, helpful tips and status of Company initiatives, as well as warning customers of potential scams during this pandemic. The Bank remains very focused on the safety and well-being of its employees and customers during COVID-19 and is committed to safely and responsibly operating its branches and operating facilities, as all branches have reopened and work schedules have returned to normal.
The Company’s preparedness resulted in minimal impact to the Company’s operations as a result of COVID-19. Business continuity planning allowed for successful deployment of most of our employees to work in a remote environment. No material operational or internal control risks have been identified to date, and the Company has enhanced fraud-related controls.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES The accounting and reporting policies followed by the Company conform, in all material respects, to GAAP and to general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. The Company considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s consolidated financial statements. The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations. For additional information regarding critical accounting policies, refer to the Application of Critical Accounting Policies and Critical Accounting Estimates section under Item 7 in the Company’s 20212022 Form 10-K. There have been noThe significant changeschange in the Company’s application of critical accounting policies since December 31, 2021.2022 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.
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FINANCIAL CONDITION Total assets The total assets of the Company as of September 30, 2022March 31, 2023 were $1.7$1.6 billion. This is a $238$51.8 million, or 12.1%3.2%, decrease from total assets reported at December 31, 20212022 and a $178.1$363.7 million, or 9.3%18.8%, decrease from total assets reported at September 30, 2021. TheMarch 31, 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 first quarter of 2023, which resulted in decreases were substantially within gross loans, as legacy organic loan balances declined due to business sales, property sales, loan refinancesovernight investments and participation fluctuations, Acquired Loan balances declined due to successful execution of paydowns to improve asset quality, SBA PPP loans were forgiven, and other curtailments (see more detail in the Loansecurities portfolio section following).in order to provide necessary funding. 38
Interest-bearing deposits in other banks The Company had $76.2$15.6 million of interest-bearing deposits in other banks as of September 30, 2022,March 31, 2023, compared to $336.0$19.1 million as of December 31, 20212022 and $254.2$311.5 million as of September 30, 2021. SignificantMarch 31, 2022. During 2022, significant excess liquidity has beenwas deployed into short-term investment securitiessecurities. The Company's strategic decision to delay increasing cost of funds, as stated above, resulted in an expected decline in interest-bearing deposits during the ninethree months ended September 30, 2022 to earn a higher yield.March 31, 2023. Federal funds sold The Company had overnight federal funds sold of $53.1 million$12 thousand as of September 30,March 31, 2023, $45 thousand as of December 31, 2022 and $152.5 million as of DecemberMarch 31, 2021 and $152.4 million as of September 30, 2021.2022. Any excess funds are sold on a daily basis in the federal funds market. The Company intendsmonitors liquidity on a daily basis to maintainensure that it maintains sufficient liquidity at all times to meet its funding commitments.commitments at all times. The Company continues to participate in the Excess Balance Account of the Federal Reserve Bank of Richmond. The EBA is a limited-purpose account at the FRB for the maintenance of excess cash balances held by financial institutions. The EBA eliminates the potential of concentration risk that comes with depositing excess balances with one or multiple correspondent banks. Securities The Company’s investment securities portfolio as of September 30, 2022March 31, 2023 totaled $543.6$498.5 million, an increasea decrease of $234.8$44.8 million compared with the $308.8$543.3 million reported at December 31, 20212022 and an increase of $263.9$152.0 million from the $279.7$346.5 million reported at September 30, 2021.March 31, 2022. The increasedecrease from year-end andis due to sales from lower yielding AFS securities to meet funding demands discussed earlier, while the increase during the same period in the prior year is the result of deploying excess funds into higher yielding assets. Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company. At September 30, 2022March 31, 2023 and December 31, 2021,2022, the investment securities holdings represented 31.4%31.7% and 15.7%33.5% of the Company’s total assets, respectively. The Company’s investment securities portfolio included restricted securities totaling $5.1$5.8 million as of September 30, 2022,March 31, 2023, compared to $5.0$5.1 million as of December 31, 20212022 and $2.6$5.1 million as of September 30, 2021.March 31, 2022. These securities represent stock in the FRB, the FHLB, CBB Financial Corporation (the holding company for Community Bankers' Bank), and an investment in an SBA loan fund. The level of FRB and FHLB stock that the Company is required to hold is determined in accordance with membership guidelines provided by the Federal Reserve and the FHLB, respectively. Stock ownership in the bank holding company for Community Bankers’ Bank provides the Company with several benefits that are not available to non-shareholder correspondent banks. None of these restricted securities are traded on the open market and can only be redeemed by the respective issuer. At September 30, 2022,March 31, 2023, the unrestricted securities portfolio totaled $538.5$492.8 million. The following table summarizes the Company's AFS securities by type as of September 30, 2022,March 31, 2023, December 31, 2021,2022, and September 30, 2021March 31, 2022 (dollars in thousands):
| | | September 30, 2022 | | | December 31, 2021 | | | September 30, 2021 | | | March 31, 2023 | | | December 31, 2022 | | | March 31, 2022 | | | | | | | % of | | | | | | % of | | | | | | % of | | | | | | % of | | | | | | % of | | | | | | % of | | | | Balance | | | Total | | | Balance | | | Total | | | Balance | | | Total | | | Balance | | | Total | | | Balance | | | Total | | | Balance | | | Total | | U.S. Government treasuries | | $ | 241,375 | | | | 44.8 | % | | $ | — | | | | — | | | $ | — | | | | — | | | $ | 194,569 | | | | 39.5 | % | | $ | 242,470 | | | | 45.1 | % | | $ | 39,392 | | | | 11.5 | % | U.S. Government agencies | | | 28,905 | | | | 5.4 | % | | | 31,581 | | | | 10.4 | % | | | 32,538 | | | | 11.7 | % | | | 29,225 | | | | 5.9 | % | | | 28,755 | | | | 5.3 | % | | | 32,264 | | | | 9.5 | % | Mortgage-backed securities/CMOs | | | 160,461 | | | | 29.8 | % | | | 170,964 | | | | 56.3 | % | | | 145,998 | | | | 52.7 | % | | | 165,628 | | | | 33.6 | % | | | 167,076 | | | | 31.0 | % | | | 176,960 | | | | 51.8 | % | Corporate bonds | | | 29,295 | | | | 5.4 | % | | | — | | | | — | | | | — | | | | — | | | | 18,784 | | | | 3.8 | % | | | 18,729 | | | | 3.5 | % | | | 3,703 | | | | 1.1 | % | Municipal bonds | | | 78,423 | | | | 14.6 | % | | | 101,272 | | | | 33.3 | % | | | 98,510 | | | | 35.6 | % | | | 84,554 | | | | 17.2 | % | | | 81,156 | | | | 15.1 | % | | | 89,042 | | | | 26.1 | % | Total available for sale securities | | $ | 538,459 | | | | 100.0 | % | | $ | 303,817 | | | | 100.0 | % | | $ | 277,046 | | | | 100.0 | % | | $ | 492,760 | | | | 100.0 | % | | $ | 538,186 | | | | 100.0 | % | | $ | 341,361 | | | | 100.0 | % |
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The securities are held primarily for earnings, liquidity, and asset/liability management purposes and are reviewed quarterly for possible other-than-temporary impairments. During this review, management analyzes the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer, and the Company’s intent and ability to hold the security to recovery or maturity. These factors are analyzed for each individual security. Refer to Note 1. Summary of Significant Accounting Policies for discussion on the impact of CECL to the evaluation of securities for ACL.
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Loan portfolio A management objective is to grow loan balances while maintaining the asset quality of the loan portfolio. The Company seeks to achieve this objective by maintaining rigorous underwriting standards coupled with regular evaluation of the creditworthiness of, and the designation of lending limits for, each borrowing relationship. The portfolio strategies include seeking industry, loan size, and loan type diversification to minimize credit exposure and originating loans in markets with which the Company is familiar. The Company's geographical trade area includes localities in Virginia, Maryland and the District of Columbia that are within a 100-mile radius of any office of the Company. As of September 30, 2022,March 31, 2023, total loans were $942.3$940.0 million, compared to $1.1 billion$936.4 million as of December 31, 20212022 and $1.1$1.0 billion at September 30, 2021.March 31, 2022. Loans as a percentage of total assets at September 30, 2022March 31, 2023 were 54.4%59.8%, compared to 58.2%52.0% as of September 30, 2021.March 31, 2022. Loans as a percentage of deposits at September 30, 2022March 31, 2023 were 59.0%67.3%, compared to 64.0%56.8% as of September 30, 2021.March 31, 2022. The following table summarizes the Company's loan portfolio by type of loan as of September 30, 2022,March 31, 2023, December 31, 2021,2022, and September 30, 2021March 31, 2022 (dollars in thousands):
| | | September 30, 2022 | | | December 31, 2021 | | | September 30, 2021 | | | March 31, 2023 | | | December 31, 2022 | | | March 31, 2022 | | | | Balance | | | % of Total | | | Balance | | | % of Total | | | Balance | | | % of Total | | | Balance | | | % of Total | | | Balance | | | % of Total | | | Balance | | | % of Total | | Commercial loans | | $ | 72,685 | | | | 7.7 | % | | $ | 96,696 | | | | 9.1 | % | | $ | 119,959 | | | | 10.8 | % | | $ | 72,601 | | | | 7.7 | % | | $ | 71,139 | | | | 7.6 | % | | $ | 88,858 | | | | 8.8 | % | Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Construction and land | | | 49,668 | | | | 5.3 | % | | | 79,331 | | | | 7.5 | % | | | 92,082 | | | | 8.3 | % | | | 34,493 | | | | 3.7 | % | | | 37,541 | | | | 4.0 | % | | | 64,937 | | | | 6.5 | % | 1-4 family residential mortgages | | | 324,891 | | | | 34.5 | % | | | 358,148 | | | | 33.8 | % | | | 372,474 | | | | 33.5 | % | | | 317,794 | | | | 33.8 | % | | | 323,185 | | | | 34.5 | % | | | 343,382 | | | | 34.1 | % | Commercial | | | 447,185 | | | | 47.5 | % | | | 473,632 | | | | 44.6 | % | | | 464,866 | | | | 41.8 | % | | | 471,602 | | | | 50.2 | % | | | 459,125 | | | | 49.0 | % | | | 459,103 | | | | 45.6 | % | Total real estate mortgage | | | 821,744 | | | | 87.3 | % | | | 911,111 | | | | 85.9 | % | | | 929,422 | | | | 83.6 | % | | | 823,889 | | | | 87.7 | % | | | 819,851 | | | | 87.5 | % | | | 867,422 | | | | 86.2 | % | Consumer | | | 47,918 | | | | 5.0 | % | | | 53,404 | | | | 5.0 | % | | | 63,069 | | | | 5.6 | % | | | 43,467 | | | | 4.6 | % | | | 45,425 | | | | 4.9 | % | | | 50,682 | | | | 5.0 | % | Total loans | | $ | 942,347 | | | | 100.0 | % | | $ | 1,061,211 | | | | 100.0 | % | | $ | 1,112,450 | | | | 100.0 | % | | $ | 939,957 | | | | 100.0 | % | | $ | 936,415 | | | | 100.0 | % | | $ | 1,006,962 | | | | 100.0 | % |
The Company's planned strategy to further improve asset quality through negotiation of loan paydowns and PPP forgiveness resulted in a decrease in loanLoan balances from September 30, 2021 and December 31, 2021 to September 30, 2022. The decreaseincreased by $3.5 million or 0.4% from December 31, 2021 is2022 to March 31, 2023. During the first quarter of 2023, the Company funded $27.5 million in organic loan production. However, significant paydowns nearly offset this loan production, due predominantly to:to the following reasons: 1) paydowns$7.2 million of legacy organic loansloan payoffs due mainly to business sales, property sales, refinances2) $4.2 million of reductions due to competitor payoffs, 3) $2.2 million of cash payoffs, and participation fluctuations4) $1.8 million of $59.3 million, 2) workouts and paydowns of Acquired Loans of $51.9 million, and 3)payoffs due to the forgiveness of SBA PPP loanscustomer no longer needing the loan, which could have been related to the increase in the amount of $24.2 million.rate. As of September 30, 2022,March 31, 2023, only $254$215 thousand of PPP loans remain outstanding on the Bank's balance sheet.
The following table details the Company's levels of non-owner occupied commercial real estate as of March 31, 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 | | | Substandard | | | Non-accrual | | Hotels | | $ | 15,658 | | | | 6.82 | % | | $ | 2,610 | | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | Office Building | | | 69,845 | | | | 30.40 | % | | | 812 | | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | Warehouses/Industrial | | | 28,426 | | | | 12.37 | % | | | 1,093 | | | | 0.00 | % | | | 2.44 | % | | | 1.76 | % | Retail | | | 88,879 | | | | 38.69 | % | | | 1,481 | | | | 0.06 | % | | | 0.00 | % | | | 0.00 | % | All Other Commercial Buildings | | | 26,922 | | | | 11.72 | % | | | 1,171 | | | | 1.29 | % | | | 0.00 | % | | | 0.00 | % | Total Non-Owner Occupied CRE | | $ | 229,730 | | | | | | | | | | | | | | | | |
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Loan quality Non-accrualThe 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 only threesix loans to twofive borrowers, totaled $607 thousand$1.2 million at September 30, 2022,March 31, 2023, compared to balances of $495$673 thousand and $777$518 thousand reported at December 31, 20212022 and September 30, 2021,March 31, 2022, respectively. PCIThe adoption of CECL altered the manner in which purchased loans which otherwise would bethat were in non-accrualnonaccrual status are notpresented, and as a result, two such loans totaling $566 thousand are now included in the balances, as they earn interest through the yield accretion.this figure. Past Due Loans - The Company had loans in its portfolio totaling $859$69 thousand, $801$705 thousand and $678$837 thousand, as of September 30, 2022,March 31, 2023, December 31, 20212022 and September 30, 2021,March 31, 2022, respectively, that were 90 or more days past due and still accruing interest as the Company deemed them to be collectible. The balance as of September 30, 2022 includes a government-guaranteed loan in the amountMarch 31, 2023 consists of $709 thousand. The portfolio includes threefour non-insured student loans that are 90 days or more past due and still accruing interest, amounting to $21 thousand.interest. 40Troubled Loan Modifications -
The Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, effective January 1, 2023 on a prospective basis. Refer to Note 1. Summary of Significant Accounting Policies in Part I, Item 1, Notes to Consolidated Financial Statements for information on the Company's accounting policy for loan modifications to borrowers experiencing financial difficulty and how the Company defines TLMs. As of March 31, 2023, the Company had TLMs totaling $1.2 million. Troubled Debt Restructurings - After the adoption of ASU 2022-02, the Company no longer has TDRs. The below information is presented for December 31, 2022, prior to the adoption of ASU 2022-02. As of December 31, 2022, the Company had a total of $1.3 million of loans classified as impaired loansTDRs. Of this balance only one loan in the amount of $1.5 million$495 thousand was a nonperforming TDR. The remaining $788 thousand, of which $700 thousand were student loans, were classified as of September 30, 2022, $1.5 million as of December 31, 2021, and $1.6 million at September 30, 2021.performing. Based on regulatory guidance on student lending, the Company has classified 4846 of its Purchased Student Loans as TDRs for a total of $756$700 thousand as of September 30,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 has evaluated these loans individually for impairment and included any probable loss in the allowance for loan loss; interest continuescontinued to accrue on these TDRs during any deferment and forbearance periods. Management identifies potential problem loans through its periodic loan review process and considers potential problem loans as those loans classified as special mention, substandard, or doubtful. Allowance for loan lossesCredit Losses In general, the Company determines the adequacy of its ALLL by considering the risk classification and delinquency status of loans and other factors. Management may also establish specific allowances for loans which management believes require allowances greater than those allocated according to their risk classification. The purpose of the allowance is to provide for losses inherent in the loan portfolio. Since risks to the loan portfolio include general economic trends as well as conditions affecting individual borrowers, the allowance is an estimate. The Company is committed to determining, on an ongoing basis, the adequacy of its ALLL. The Company applies historical loss rates to various pools of loans based on risk rating classifications. In addition, the adequacy of the ALLL is further evaluated by applying estimates of loss that could be attributable to any one of the following eight qualitative factors:
1)Changes in national and local economic conditions, including the condition of various market segments;
2)Changes in the value of underlying collateral;
3)Changes in volume of classified assets, measured as a percentage of capital;
4)Changes in volume of delinquent loans;
5)The existence and effect of any concentrations of credit and changes in the level of such concentrations;
6)Changes in lending policies and procedures, including underwriting standards;
7)Changes in the experience, ability and depth of lending management and staff; and
8)Changes in the level of policy exceptions.
The Company utilizes a loss migration model, which uses loan level attributes to track the movement of loans through various risk classifications in order to estimate the percentage of losses likely in the portfolio. If economic conditions improve or worsen, the Company could experience changes in the required ALLL. It is possible that asset quality metrics could decline in the future if there are further challenges to the economic recovery, including a resurgence in COVID-19 cases or the emergence of variants of the COVID-19 virus.
The relationship of the ALLLACL to total loans and nonaccrual loans appears below (dollars in thousands): | | | | | | | | | | | | | | | September 30, 2022 | | | December 31, 2021 | | | September 30, 2021 | | Total loans | | $ | 942,347 | | | $ | 1,061,211 | | | $ | 1,112,450 | | Nonaccrual loans | | $ | 607 | | | $ | 495 | | | $ | 777 | | Allowance for loan losses | | $ | 5,485 | | | $ | 5,984 | | | $ | 5,623 | | Nonaccrual loans to total loans | | | 0.06 | % | | | 0.05 | % | | | 0.07 | % | ALLL to total loans | | | 0.58 | % | | | 0.56 | % | | | 0.51 | % | ALLL to nonaccrual loans | | | 903.62 | % | | | 1208.89 | % | | | 723.68 | % |
| | | | | | | | | | | | | | | March 31, 2023 | | | December 31, 2022 | | | March 31, 2022 | | Total loans | | $ | 939,957 | | | $ | 936,415 | | | $ | 1,006,962 | | Nonaccrual loans | | $ | 1,228 | | | $ | 673 | | | $ | 518 | | Allowance for credit losses | | $ | 7,772 | | | $ | 5,552 | | | $ | 5,834 | | Nonaccrual loans to total loans | | | 0.13 | % | | | 0.07 | % | | | 0.05 | % | ACL to total loans | | | 0.83 | % | | | 0.59 | % | | | 0.58 | % | ACL to nonaccrual loans | | | 632.90 | % | | | 824.96 | % | | | 1126.25 | % |
The ALLLACL on loans as a percentage of loans was 0.58%0.83% as of September 30, 2022, 0.56%March 31, 2023, 0.59% as of December 31, 2021,2022, and 0.51%0.58% as of September 30, 2021. The ALLL as a percentage of gross loans, excluding the impact of the Acquired loans and fair value mark (a non-GAAP financial measure), would have been 0.90% as of September 30, 2022, unchanged from 0.90% as of September 30, 2021.March 31, 2022. The total of the ALLLACL and the fair value mark as a percentage of gross loans (a non-GAAP financial measure) amounted to 2.38%2.33% as of September 30, 2022,March 31, 2023, compared to 2.24%2.29% as of September 30, 2021.December 31, 2022. The fair value mark that was allocated to the acquired loans was $21.3 million as of the Effective Date, with a remaining balance of $14.1 million as 4140
$17.0 million as of September 30, 2022.March 31, 2023. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP ALLLACL as a percentage of loans.
A recovery of provision for loan losses totaling $30$235 thousand and a provision for loan losses totaling $477$148 thousand were recorded in the ninethree months ended September 30,March 31, 2023 and 2022, and 2021, respectively. The following is a summary of the changes in the ALLLACL for the ninethree months ended September 30,March 31, 2023 and 2022 and 2021 (dollars in thousands):
| | | 2022 | | | 2021 | | | 2023 | | | 2022 | | Allowance for loan losses, January 1 | | $ | 5,984 | | | $ | 5,455 | | | 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 | | | (783 | ) | | | (605 | ) | | | (136 | ) | | | (473 | ) | Recoveries | | | 314 | | | | 296 | | | | 100 | | | | 175 | | Provision for (recovery of) loan losses | | | (30 | ) | | | 477 | | | | (235 | ) | | | 148 | | Allowance for loan losses, September 30 | | $ | 5,485 | | | $ | 5,623 | | | Allowance for credit losses, March 31 | | | $ | 7,772 | | | $ | 5,834 | |
For additional insight into management’s approach and methodology in estimating the ALLL,ACL, please refer to the earlier discussion of “Allowance for LoanCredit 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 ALLLACL on a quarterly basis to ensure it is adequate based upon the calculated probable losses inherent in the portfolio. Management believes the ALLLACL was adequately provided for as of September 30, 2022March 31, 2023 and acknowledges that the ALLLACL may increase throughout the year as economic conditions may continue to deteriorate for the foreseeable future. Premises and equipment The Company’s premises and equipment, net of depreciation, as of September 30, 2022March 31, 2023 totaled $18.8$17.7 million compared to $25.1$17.8 million as of December 31, 20212022 and $25.2$24.7 million as of September 30, 2021,March 31, 2022, decreasing from prior year first quarter due to the sale of two buildings duringin the current year.second quarter of 2022. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of assets. Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon disposition, assets and related accumulated depreciation are removed from the books, and any resulting gain or loss is charged to income. As of September 30, 2022,March 31, 2023, the Company occupied sixteenfourteen 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 officesthe office of both Masonry Capital andCapital. Sturman Wealth Advisors.currently leases space in the 404 People Place office building. VNB Trust & Estate Services is located at 103 Third Street, SE, Charlottesville, Virginia. Both the Arlington Boulevard facility in Charlottesville and the People Place facility in Albemarle County also contain office space that is currently under lease to tenants. 42Assets held for sale of $965 thousand as of December 31, 2022 were sold during the three months ended March 31, 2023.
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Leases As of September 30, 2022,March 31, 2023, the Company has recorded $6.9$6.3 million of right-of-use assets and $6.6$6.0 million of lease liabilities, in accordance with ASU 2016-02 “Leases” (Topic 842). As of December 31, 2021, $7.62022, $6.5 million of right-of-use assets and $7.1$6.2 million of lease liabilities were included on the balance sheet. Right-of-use assets are assets that represent the Company’s right to use, or control the use of, a specified asset for the lease term, offset by the lease liability, which is the Company’s obligation to make lease payments arising from a lease, measured on a discounted basis. Deposits Deposit accounts represent the Company’s primary source of funds and are comprised of demand deposits, interest-bearing checking, money market, and savings accounts as well as time deposits. These deposits have been provided predominantly by individuals, businesses and charitable organizations in the Commonwealth of Virginia. Total deposits as of September 30, 2022March 31, 2023 were $1.6$1.4 billion, a decrease of $199.5$81.1 million compared to December 31, 2021,2022, and a decrease of $140.5$377.1 million compared to September 30, 2021March 31, 2022 (dollars in thousands). As stated above, during 2022, the Company made a strategic decision to delay increasing rates paid on deposit accounts. As a result, the Company has experienced expected declines during 2022 and the first quarter of 2023 in deposit balances.
| | | September 30, 2022 | | | December 31, 2021 | | | September 30, 2021 | | | March 31, 2023 | | | December 31, 2022 | | | March 31, 2022 | | | | | | % of | | | | | % of | | | | | % of | | | | | % of | | | | | % of | | | | | % of | | | | Balance | | | Total | | | Balance | | | Total | | | Balance | | | Total | | | Balance | | | Total | | | Balance | | | Total | | | Balance | | | Total | | No cost and low cost deposits: | No cost and low cost deposits: | | | | | | | | | | | | | | | | | No cost and low cost deposits: | | | | | | | | | | | | | | | | | Noninterest demand deposits | | $ | 539,134 | | | | 33.8 | % | | $ | 522,281 | | | | 29.1 | % | | $ | 504,696 | | | | 29.1 | % | | $ | 448,094 | | | | 32.1 | % | | $ | 495,649 | | | | 33.5 | % | | $ | 523,189 | | | | 29.5 | % | Interest checking accounts | | | 417,530 | | | | 26.2 | % | | | 446,314 | | | | 24.8 | % | | | 424,642 | | | | 24.4 | % | | | 360,652 | | | | 25.8 | % | | | 399,983 | | | | 27.1 | % | | | 451,339 | | | | 25.5 | % | Money market and savings deposit accounts | | | 505,733 | | | | 31.7 | % | | | 665,530 | | | | 37.1 | % | | | 642,788 | | | | 37.0 | % | | | 418,795 | | | | 30.0 | % | | | 467,600 | | | | 31.6 | % | | | 644,418 | | | | 36.3 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total noninterest and low cost deposit accounts | | | 1,462,397 | | | | 91.7 | % | | | 1,634,125 | | | | 91.0 | % | | | 1,572,126 | | | | 90.5 | % | | | 1,227,541 | | | | 87.9 | % | | | 1,363,232 | | | | 92.2 | % | | | 1,618,946 | | | | 91.3 | % | | | | | | | | | | | | | �� | | | | | | | | | | | | | | | | | | | | | | | | | Time deposit accounts: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Certificates of deposit | | | 129,038 | | | | 8.0 | % | | | 155,901 | | | | 8.7 | % | | | 158,113 | | | | 9.1 | % | | | 165,591 | | | | 11.8 | % | | | 111,134 | | | | 7.5 | % | | | 149,759 | | | | 8.4 | % | CDARS deposits | | | 5,212 | | | | 0.3 | % | | | 6,144 | | | | 0.3 | % | | | 6,944 | | | | 0.4 | % | | | 4,128 | | | | 0.3 | % | | | 3,972 | | | | 0.3 | % | | | 5,643 | | | | 0.3 | % | Total certificates of deposit and other time deposits | | | 134,250 | | | | 8.3 | % | | | 162,045 | | | | 9.0 | % | | | 165,057 | | | | 9.5 | % | | | 169,719 | | | | 12.1 | % | | | 115,106 | | | | 7.8 | % | | | 155,402 | | | | 8.7 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total deposit account balances | | $ | 1,596,647 | | | | 100.0 | % | | $ | 1,796,170 | | | | 100.0 | % | | $ | 1,737,183 | | | | 100.0 | % | | $ | 1,397,260 | | | | 100.0 | % | | $ | 1,478,338 | | | | 100.0 | % | | $ | 1,774,348 | | | | 100.0 | % |
Noninterest-bearing demand deposits on September 30, 2022March 31, 2023 were $539.1$448.1 million, representing 33.8%32.1% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled $923.3$779.4 million, and represented 57.9%55.8% of total deposits at September 30, 2022.March 31, 2023. Collectively, noninterest-bearing and interest-bearing transaction, money market and savings accounts represented 91.7%87.9% of total deposit accounts at September 30, 2022.March 31, 2023. These account types are an excellent source of low-cost funding for the Company. The Company also offers insured cash sweep deposit products. ICS® deposit balances of $28.4$41.3 million and $110.1$85.1 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, 2022.March 31, 2023. As of December 31, 2021,2022, ICS® deposit balances of $39.2$31.0 million and $225.9$229.1 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 8.3%12.1% of total deposits consisted of certificates of deposit and other time deposit accounts totaling $134.3$169.7 million at September 30, 2022.March 31, 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 $5.2$4.1 million as of September 30, 2022March 31, 2023 and $6.1$4.0 million as of December 31, 2021,2022, all of which were reciprocal balances for the Company’s customers. 4342
As of March 31, 2023 and December 31, 2022, the estimated amounts of uninsured deposits were $370.6 million, or 26.5% and $459.4 million, or 31.1% of total deposits, respectively. 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 March 31, 2023, based on the FHLB’s evaluation, the Company has an available credit position of $405 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 $68.6 million, secured by commercial mortgages, with no outstanding borrowings of $19.3 million as of September 30, 2022 or DecemberMarch 31, 2021. The Company has2023 and an off-balance sheet letter of credit in the amount of $30 million as of September 30, 2022 and $60 million as of DecemberMarch 31, 2021,2023, which is issued in favor of the Commonwealth of Virginia Department of the Treasury to secure public fund depository accounts. ThisAs of December 31, 2022, there were no borrowings with the FHLB and the letter of credit is secured by commercial mortgages.balance was $30 million. Additional borrowing arrangements maintained by the Company include formal unsecured federal funds lines with fivesix major regional correspondent banks for a total of $114 million and a secured line with the Federal Reserve discount window.window in the amount of $4 million, based on the market value of the collateral. The Company had no outstanding balances on these lines or facilities as of September 30, 2022,March 31, 2023, December 31, 20212022 or September 30, 2021.March 31, 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, 2022March 31, 2023 and December 31, 2021,2022, total capital securities were $3.4 million, as adjusted to fair value as of the date of the Merger. The interest rate on the capital security resets every three months at 1.70% above the then current three-month LIBOR and is paid quarterly. Management is in communication with the issuer regarding the alternative reference rate that will apply after the discontinuance of LIBOR. The Trust II issuance of capital securities and the respective subordinated debentures are callable at any time. The subordinated debentures are an unsecured obligation of the Company and are junior in right of payment to all present and future senior indebtedness of the Company. The capital securities are guaranteed by the Company on a subordinated basis.
Shareholders' equity and regulatory capital ratios The following table displays the changes in shareholders' equity for the Company from December 31, 20212022 to September 30, 2022March 31, 2023 (dollars in thousands): | Equity, December 31, 2021 | | $ | 161,987 | | | Equity, December 31, 2022 | | | $ | 133,416 | | Net income | | | 16,381 | | | | 5,791 | | Other comprehensive loss | | | (48,150 | ) | | Other comprehensive income | | | | 5,771 | | Impact of adoption of CECL | | | | (1,890 | ) | Cash dividends declared | | | (4,791 | ) | | | (1,762 | ) | Exercise of stock options | | | 24 | | | | 18 | | Equity increase due to expensing of stock options | | | 125 | | | | 42 | | Equity increase due to expensing of restricted stock | | | 398 | | | | 111 | | Equity, September 30, 2022 | | $ | 125,974 | | | Equity, March 31, 2023 | | | $ | 141,497 | |
The Basel III capital rules require banks and bank holding companies to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%); (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%); and (iv) a leverage ratio of 4%, calculated 43
as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter). The Company’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were 16.41%17.62%, 16.41%17.62%, 16.97%18.41% and 9.17%10.67%, respectively, as of September 30, 2022,March 31, 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 16.18%17.36%, 16.18%17.36%, 16.73%18.18% and 9.04%10.51%, respectively, as of September 30, 2022,March 31, 2023, also exceeding the minimum requirements. 44
As of September 30, 2022,March 31, 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 ROAA, adjusted ROAE, adjusted net income, adjusted earnings per share, adjusted ALLLACL to total loans, tangible book value per share and the following fully-taxable equivalent measures: net interest income-FTE, efficiency ratio-FTE and net interest margin-FTE. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented. Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods, other financial institutions, and between different sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of (1) items that do not reflect ongoing operating performance, (2) items that do not reflect the implicit percentage of the ALLLACL 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.”
4544
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)thousands, except for the per share data):
| | | For the three months ended | | | For the nine months ended | | | For the three months ended | | | | September 30, 2022 | | | September 30, 2021 | | | September 30, 2022 | | | September 30, 2021 | | | March 31, 2023 | | | March 31, 2022 | | Performance measures | | | | | | | | | | | | | | Return on average assets ("ROAA") | | | 1.30 | % | | | 0.65 | % | | | 1.20 | % | | | 0.41 | % | | Impact of merger and merger related expenses, net of tax | | | 0.00 | % | | | 0.31 | % | | | 0.00 | % | | | 0.53 | % | | ROAA, excluding merger and merger related expenses (non-GAAP) | | | 1.30 | % | | | 0.96 | % | | | 1.20 | % | | | 0.94 | % | | | | | | | | | | | | | | | | Return on average equity ("ROAE") | | | 16.50 | % | | | 7.70 | % | | | 14.98 | % | | | 4.80 | % | | Impact of merger and merger related expenses, net of tax | | | 0.00 | % | | | 3.59 | % | | | 0.00 | % | | | 6.20 | % | | ROAE, excluding merger and merger related expenses (non-GAAP) | | | 16.50 | % | | | 11.29 | % | | | 14.98 | % | | | 11.00 | % | | | | | | | | | | | | | | | | Net income | | $ | 5,772 | | | $ | 3,138 | | | $ | 16,381 | | | $ | 4,790 | | | Impact of merger and merger related expenses, net of tax | | | - | | | | 1,465 | | | | - | | | | 6,188 | | | Net income, excluding merger and merger related expenses (non-GAAP) | | $ | 5,772 | | | $ | 4,603 | | | $ | 16,381 | | | $ | 10,978 | | | | | | | | | | | | | | | | | Net income per share, diluted | | $ | 1.08 | | | $ | 0.59 | | | $ | 3.06 | | | $ | 1.07 | | | Impact of merger and merger related expenses, net of tax | | | - | | | | 0.27 | | | | - | | | | 1.38 | | | Net income per share, excluding merger and merger related expenses (non-GAAP), diluted | | $ | 1.08 | | | $ | 0.86 | | | $ | 3.06 | | | $ | 2.45 | | | | | | | | | | | | | | | | | | | | | | Fully tax-equivalent measures | | | | | | | | | | | | | | | | | | | Net interest income | | $ | 14,277 | | | $ | 13,504 | | | $ | 38,163 | | | $ | 32,629 | | | $ | 13,413 | | | $ | 11,425 | | Fully tax-equivalent adjustment | | | 84 | | | | 77 | | | | 245 | | | | 194 | | | | 87 | | | | 65 | | Net interest income (FTE) | | $ | 14,361 | | | $ | 13,581 | | | $ | 38,408 | | | $ | 32,823 | | | $ | 13,500 | | | $ | 11,490 | | | | | | | | | | | | | | | | | | | | | Efficiency ratio | | | 57.3 | % | | | 75.5 | % | | | 59.4 | % | | | 83.9 | % | | | 56.5 | % | | | 62.3 | % | Fully tax-equivalent adjustment | | | -0.3 | % | | | -0.3 | % | | | -0.3 | % | | | -0.4 | % | | | -0.4 | % | | | -0.3 | % | Efficiency ratio (FTE) | | | 57.0 | % | | | 75.2 | % | | | 59.1 | % | | | 83.5 | % | | | 56.1 | % | | | 62.0 | % | | | | | | | | | | | | | | | | | | | | Net interest margin | | | 3.45 | % | | | 3.06 | % | | | 2.98 | % | | | 3.01 | % | | | 3.69 | % | | | 2.57 | % | Fully tax-equivalent adjustment | | | 0.02 | % | | | 0.02 | % | | | 0.02 | % | | | 0.02 | % | | | 0.02 | % | | | 0.02 | % | Net interest margin (FTE) | | | 3.47 | % | | | 3.08 | % | | | 3.00 | % | | | 3.03 | % | | | 3.71 | % | | | 2.59 | % | | | | | | | | | | | | | | | | | | | | | | As of | | | | | | As of | | | | September 30, 2022 | | | December 31, 2021 | | | September 30, 2021 | | | | | | March 31, 2023 | | | December 31, 2022 | | Other financial measures: | | | | | | | | | | | | | | | | | | ALLL to total loans | | | 0.58 | % | | | 0.56 | % | | | 0.51 | % | | | | | Impact of acquired loans and fair value mark | | | 0.32 | % | | | 0.39 | % | | | 0.39 | % | | | | | ALLL to total loans, excluding acquired loans and fair value mark (non-GAAP) | | | 0.90 | % | | | 0.95 | % | | | 0.90 | % | | | | | | | | | | | | | | | | | ALLL to total loans | | | 0.58 | % | | | 0.56 | % | | | 0.51 | % | | | | | ACL to total loans | | | | 0.83 | % | | | 0.59 | % | Fair value mark to total loans | | | 1.80 | % | | | 1.74 | % | | | 1.73 | % | | | | | | 1.50 | % | | | 1.70 | % | ALLL + fair value mark to total loans (non-GAAP) | | | 2.38 | % | | | 2.30 | % | | | 2.24 | % | | | | | ACL + fair value mark to total loans (non-GAAP) | | | | 2.33 | % | | | 2.29 | % | | | | | | | | | | | | | | | | | | Book value per share | | $ | 23.65 | | | $ | 30.50 | | | $ | 30.13 | | | | | | $ | 26.51 | | | $ | 25.00 | | Impact of intangible assets | | | (2.88 | ) | | | (3.14 | ) | | | (3.21 | ) | | | | | | (2.62 | ) | | | (2.69 | ) | Tangible book value per share (non-GAAP) | | $ | 20.77 | | | $ | 27.36 | | | $ | 26.92 | | | | | | $ | 23.89 | | | $ | 22.31 | | | | | | | | | | | | | | | | | | | Total equity | | $ | 125,974 | | | $ | 161,987 | | | $ | 159,910 | | | | | | $ | 141,497 | | | $ | 133,416 | | Impact of intangible assets | | | (15,353 | ) | | | (16,685 | ) | | | (17,043 | ) | | | | | | (13,963 | ) | | | (14,354 | ) | Tangible equity | | $ | 110,621 | | | $ | 145,302 | | | $ | 142,867 | | | | | | $ | 127,534 | | | $ | 119,062 | |
46
Net income Net income for the three months ended September 30, 2022March 31, 2023 was $5.8 million, a $2.6 million$867 thousand increase compared to net income reported for the three months ended September 30, 2021.March 31, 2022. Net income per diluted share was $1.08 for the quarter ended September 30, 2022March 31, 2023 compared to $0.59 ($0.86 excluding the impact of merger and merger related expenses, net of tax, a non-GAAP financial measure)$0.92 per diluted share for the same quarter in the prior year. Net income for the nine months ended September 30, 2022 was $16.4 million, compared to $4.8 million for the nine months ended September 30, 2021. Net income per diluted share was $3.06 for the nine months ended September 30, 2022, compared to $1.07 ($2.45 excluding the impact of merger and merger related expenses, net of tax, a non-GAAP financial measure) per diluted share for the same period in the prior year.
Net interest income Net interest income (FTE) for the three months ended September 30, 2022March 31, 2023 was $14.4$13.5 million, a $780 thousand$2.0 million increase compared to net interest income (FTE) of $13.6$11.5 million for the three months ended September 30, 2021.March 31, 2022. Net interest income (FTE) increased primarily due to the increased volume of securities, increasing from an average of $274.1$313.4 million in the three months ended September 30, 2021March 31, 2022 to $511.7$514.5 million in the three months ended September 30, 2022,March 31, 2023, positively impacting interest income by $1.2 million. The increase in yield earned on such securities over the same period positively impacted interest income by $698$815 thousand, increasing from 1.68%1.86% for the three months ended September 30, 2021March 31, 2022 to 2.41%2.67% for the three months ended September 30, 2022. FFS and interestMarch 31, 2023. Interest bearing deposits in other banks contributed an additional $254$138 thousand and $563 thousand, respectively, to net interest income (FTE) for the three months ended September 30, 2022March 31, 2023 compared to the three months ended September 30, 2021.March 31, 2022. The decline in average loan balances, from $1.1$1.0 billion for the three months ended September 30, 2021March 31, 2022 to $959.1$932.8 million for the three months ended September 30, 2022,March 31, 2023, negatively impacted interest income by $2.1$1.1 million. However the yields on loans increased from 4.23% for the three months ended March 31, 2022 to 5.55% for the three months ended March 31, 2023. 45
The fair value accretion on Acquired Loans positively impacted net interest income by 1241 bps during the three months ended September 30, 2022.March 31, 2023. Net interest income (FTE) was mildlynegatively impacted by the $39 thousand increase in interest expense, as described below. Net interest income (FTE) for the nine months ended September 30, 2022 was $38.4 million, a $5.6$2.0 million increase compared to net interest income (FTE) of $32.8 million for the nine months ended September 30, 2021. The increase in volume of securities held, from an average balance of $239.8 million for the nine months ended September 30, 2021 to $406.1 million for the nine months ended September 30, 2022, positively impacted net interest income by $2.4 million, and the yield on such securities increased from 1.70% to 2.19% for the periods noted, positively impacting net interest income by $1.2 million. FFS and interest bearing deposits in other banks contributed an additional $584 thousand and $879 thousand, respectively, to net interest income (FTE) for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Net interest income (FTE) was also positively impacted by the improved loan yields which increased from 4.28% for the nine months ended September 30, 2021 to 4.37% for the nine months ended September 30, 2022, positively impacting net interest income by $846 thousand. The decrease in volume of loans negatively impacted interest income by $347 thousand. The fair value accretion on Acquired Loans positively impacted net interest income by 12 bps during the nine months ended September 30, 2022. Net interest income (FTE) was slightly impacted by the $11 thousand decrease in interest expense, as described below.
Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets for the period. The level of interest rates, together with the volume and mix of earning assets and interest-bearing liabilities, impact net interest income (FTE) and net interest margin (FTE). The net interest margin (FTE) of 3.47%3.71% for the three months ended September 30, 2022March 31, 2023 was 39112 bps higher than the 3.08%2.59% for the three months ended September 30, 2021. The net interest margin (FTE) of 3.00% for the nine months ended September 30, 2022 was 3 bps lower than the 3.03% for the nine months ended September 30, 2021.March 31, 2022. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP net interest margin.
47
Interest expense increased $39 thousand$2.0 million for the three months ended September 30, 2022March 31, 2023 compared to the same period in the prior year. Overall, the cost of interest-bearing deposits declinedincreased period over period, from a cost of 3129 bps to 22109 bps, due to decreased volume of interest-bearing deposits, declining $111.0 million forwhich more than offsets the period noted, positively impacting interest expense by $109 thousand, coupled with lower rates paid on deposits, positively impacting interest expense by $228 thousand. The slight increasedecrease in total interest expense is due to the impactaverage balances of the Company prepaying 100% of its outstanding FHLB advances during the quarter ending September 30, 2021, which positively impacted interest expense by $416 thousand as a result of accelerating the fair value accretion on such TFB debt. During the three months ended September 30, 2021, the Bank's average outstanding borrowing with the FHLB prior to repayment was $22.3 million, incurring interest expense of $41 thousand. No such borrowings were outstanding during the three months ended September 30, 2022.deposits. Interest expense decreased $11 thousand for the nine months ended September 30, 2022 compared to the same period in the prior year, primarily due to the decline in rates paid on deposits, from 34 bps to 25 bps, lowering interest expense by $659 thousand. The increase in the volume of interest-bearing deposits from period to period negatively impacted interest expense by $319 thousand. The prepayment of 100% of outstanding FHLB advances, as noted above, positively impacted interest expense by $416 thousand as a result of accelerating the fair value accretion on such TFB debt, offsetting the interest expense incurred during the nine months ended September 30, 2021 of $136 thousand, netting to a positive impact on interest expense during the prior period presented of $280 thousand.
4846
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, 2022March 31, 2023 and 2021.2022. 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 | | | | For the Three Months Ended | | | | | September 30, 2022 | | September 30, 2021 | | Change in Interest Income/ Expense | | March 31, 2023 | | March 31, 2022 | | Change in Interest Income/ Expense | | | Average | | Interest | | Average | | Average | | Interest | | Average | | Change Due to : 4 | | Total | | Average | | Interest | | Average | | Average | | Interest | | Average | | Change Due to : 4 | | Total | | | Balance | | Income/ | | Yield/Cost | | Balance | | Income/ | | Yield/Cost | | Volume | | Rate | | Increase/ | | Balance | | Income/ | | Yield/Cost | | Balance | | Income/ | | Yield/Cost | | Volume | | Rate | | Increase/ | | | | | Expense | | | | | | Expense | | | | | | | | (Decrease) | | | | Expense | | | | | | Expense | | | | | | | | (Decrease) | ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest Earning Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Taxable Securities | | $445,854 | | $2,692 | | 2.42% | | $214,194 | | $797 | | 1.49% | | $1,203 | | $692 | | $1,895 | | $447,428 | | $3,018 | | 2.70% | | $248,219 | | $1,074 | | 1.73% | | $1,146 | | $798 | | $1,944 | Tax Exempt Securities 1 | | 65,836 | | 397 | | 2.41% | | 59,869 | | 355 | | 2.37% | | 36 | | 6 | | 42 | | 67,083 | | 414 | | 2.47% | | 65,145 | | 385 | | 2.36% | | 12 | | 17 | | 29 | Total Securities 1 | | 511,690 | | 3,089 | | 2.41% | | 274,063 | | 1,152 | | 1.68% | | 1,239 | | 698 | | 1,937 | | 514,511 | | 3,432 | | 2.67% | | 313,364 | | 1,459 | | 1.86% | | 1,158 | | 815 | | 1,973 | Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real Estate | | 834,323 | | 9,485 | | 4.51% | | 929,017 | | 10,005 | | 4.27% | | (1,056) | | 538 | | (518) | | 816,742 | | 11,140 | | 5.53% | | 887,117 | | 9,095 | | 4.16% | | (759) | | 2,804 | | 2,045 | Commercial | | 74,970 | | 846 | | 4.48% | | 141,388 | | 1,810 | | 5.08% | | (770) | | (194) | | (964) | | 72,035 | | 874 | | 4.92% | | 92,742 | | 1,089 | | 4.76% | | (259) | | 44 | | (215) | Consumer | | 49,793 | | 693 | | 5.52% | | 69,876 | | 1,144 | | 6.50% | | (296) | | (155) | | (451) | | 44,057 | | 753 | | 6.93% | | 51,734 | | 586 | | 4.59% | | (98) | | 265 | | 167 | Total Loans | | 959,086 | | 11,024 | | 4.56% | | 1,140,281 | | 12,959 | | 4.51% | | (2,122) | | 189 | | (1,933) | | 932,834 | | 12,767 | | 5.55% | | 1,031,593 | | 10,770 | | 4.23% | | (1,116) | | 3,113 | | 1,997 | Fed Funds Sold | | 52,908 | | 299 | | 2.24% | | 137,472 | | 45 | | 0.13% | | (44) | | 298 | | 254 | | 10 | | — | | 0.00% | | 152,477 | | 61 | | 0.16% | | (30) | | (31) | | (61) | Other interest-bearing deposits | | 120,440 | | 618 | | 2.04% | | 198,983 | | 55 | | 0.11% | | (30) | | 593 | | 563 | | 28,262 | | 258 | | 3.70% | | 305,027 | | 120 | | 0.16% | | (209) | | 347 | | 138 | Total Earning Assets | | 1,644,124 | | 15,030 | | 3.63% | | 1,750,799 | | 14,211 | | 3.22% | | (957) | | 1,778 | | 821 | | 1,475,617 | | 16,457 | | 4.52% | | 1,802,461 | | 12,410 | | 2.79% | | (197) | | 4,244 | | 4,047 | Less: Allowance for Loan Losses | | (5,530) | | | | | | (5,607) | | | | | | | | | | | | (8,091) | | | | | | (6,027) | | | | | | | | | | | Total Non-Earning Assets | | 124,247 | | | | | | 159,106 | | | | | | | | | | | | 114,477 | | | | | | 140,916 | | | | | | | | | | | Total Assets | | $1,762,841 | | | | | | $1,904,298 | | | | | | | | | | | | $1,582,003 | | | | | | $1,937,350 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest Bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest Bearing Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest Checking | | $401,886 | | $56 | | 0.06% | | $410,504 | | $72 | | 0.07% | | $(1) | | $(15) | | $(16) | | $361,894 | | $89 | | 0.10% | | $421,468 | | $61 | | 0.06% | | $(10) | | $38 | | $28 | Money Market and Savings Deposits | | 547,878 | | 415 | | 0.30% | | 621,211 | | 601 | | 0.38% | | (66) | | (120) | | (186) | | 448,870 | | 1,773 | | 1.60% | | 656,219 | | 615 | | 0.38% | | (250) | | 1,408 | | 1,158 | Time Deposits | | 142,195 | | 147 | | 0.41% | | 171,256 | | 282 | | 0.65% | | (42) | | (93) | | (135) | | 127,386 | | 648 | | 2.06% | | 158,423 | | 195 | | 0.50% | | (45) | | 498 | | 453 | Total Interest-Bearing Deposits | | 1,091,959 | | 618 | | 0.22% | | 1,202,971 | | 955 | | 0.31% | | (109) | | (228) | | (337) | | 938,150 | | 2,510 | | 1.09% | | 1,236,110 | | 871 | | 0.29% | | (305) | | 1,944 | | 1,639 | Borrowings | | — | | — | | — | | 22,260 | | (375) | | -6.68% | | 375 | | — | | 375 | | 32,978 | | 386 | | 4.75% | | — | | — | | — | | 386 | | — | | 386 | Junior subordinated debt | | 3,394 | | 51 | | 5.96% | | 3,349 | | 50 | | — | | 1 | | — | | 1 | | 3,417 | | 61 | | 7.24% | | 3,371 | | 49 | | 5.90% | | 1 | | 11 | | 12 | Total Interest-Bearing Liabilities | | 1,095,353 | | 669 | | 0.24% | | 1,228,580 | | 630 | | 0.20% | | 267 | | (228) | | 39 | | 974,545 | | 2,957 | | 1.23% | | 1,239,481 | | 920 | | 0.30% | | 82 | | 1,955 | | 2,037 | Non-Interest-Bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Demand deposits | | 519,759 | | | | | | 499,068 | | | | | | | | | | | | 464,801 | | | | | | 527,091 | | | | | | | | | | | Other liabilities | | 8,932 | | | | | | 15,003 | | | | | | | | | | | | 8,989 | | | | | | 11,347 | | | | | | | | | | | Total Liabilities | | 1,624,044 | | | | | | 1,742,651 | | | | | | | | | | | | 1,448,335 | | | | | | 1,777,919 | | | | | | | | | | | Shareholders' Equity | | 138,797 | | | | | | 161,647 | | | | | | | | | | | | 133,668 | | | | | | 159,431 | | | | | | | | | | | Total Liabilities & Shareholders' Equity | | $1,762,841 | | | | | | $1,904,298 | | | | | | | | | | | | $1,582,003 | | | | | | $1,937,350 | | | | | | | | | | | Net Interest Income (FTE) | | | | $14,361 | | | | | | $13,581 | | | | $(1,224) | | $2,006 | | $782 | | | | $13,500 | | | | | | $11,490 | | | | $(279) | | $2,289 | | $2,010 | Interest Rate Spread 2 | | | | | | 3.38% | | | | | | 3.02% | | | | | | | | | | 3.29% | | | | | | 2.49% | | | | | Cost of Funds | | | | | | 0.16% | | | | | | 0.14% | | | | | | | | | | 0.83% | | | | | | 0.21% | | | | | Interest Expense as a Percentage of Average Earning Assets | | | | | | 0.16% | | | | | | 0.14% | | | | | | | | | | | | 0.81% | | | | | | 0.21% | | | | | | | Net Interest Margin (FTE) 3 | | | | | | 3.47% | | | | | | 3.08% | | | | | | | | | | | | 3.71% | | | | | | 2.59% | | | | | | |
(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. 49The 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 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. Alternatively, if market interest rates begin to decline, the Company’s net interest margin may be adversely affected as the Company generally expects its assets to reprice more quickly than its deposits and borrowings.
47
Consolidated Average Balance Sheet and Analysis of Net Interest Income
| | | | | | | | | | | | | | | | | | | | | For the Nine Months Ended | | | | | | | | | September 30, 2022 | | September 30, 2021 | | Change in Interest Income/ Expense | | | Average | | Interest | | Average | | Average | | Interest | | Average | | Change Due to : 4 | | Total | | | Balance | | Income/ | | Yield/Cost | | Balance | | Income/ | | Yield/Cost | | Volume | | Rate | | Increase/ | | | | | Expense | | | | | | Expense | | | | | | | | (Decrease) | ASSETS | | | | | | | | | | | | | | | | | | | Interest Earning Assets: | | | | | | | | | | | | | | | | | | | Securities: | | | | | | | | | | | | | | | | | | | Taxable Securities | | $340,692 | | $5,492 | | 2.15% | | $189,250 | | $2,127 | | 1.50% | | $2,181 | | $1,184 | | $3,365 | Tax Exempt Securities 1 | | 65,447 | | 1,170 | | 2.38% | | 50,559 | | 923 | | 2.43% | | 267 | | (19) | | 248 | Total Securities 1 | | 406,139 | | 6,662 | | 2.19% | | 239,809 | | 3,050 | | 1.70% | | 2,448 | | 1,165 | | 3,613 | Loans: | | | | | | | | | | | | | | | | | | | Real Estate | | 855,632 | | 27,567 | | 4.31% | | 771,407 | | 24,284 | | 4.21% | | 2,703 | | 580 | | 3,283 | Commercial | | 85,148 | | 2,930 | | 4.60% | | 158,691 | | 4,967 | | 4.18% | | (2,490) | | 453 | | (2,037) | Consumer | | 50,808 | | 1,906 | | 5.02% | | 65,426 | | 2,653 | | 5.42% | | (560) | | (187) | | (747) | Total Loans | | 991,588 | | 32,403 | | 4.37% | | 995,524 | | 31,904 | | 4.28% | | (347) | | 846 | | 499 | Fed Funds Sold | | 118,228 | | 662 | | 0.75% | | 94,502 | | 78 | | 0.11% | | 24 | | 560 | | 584 | Other interest-bearing deposits | | 196,801 | | 973 | | 0.66% | | 118,331 | | 94 | | 0.11% | | 99 | | 780 | | 879 | Total Earning Assets | | 1,712,756 | | 40,700 | | 3.18% | | 1,448,166 | | 35,126 | | 3.24% | | 2,224 | | 3,351 | | 5,575 | Less: Allowance for Loan Losses | | (5,806) | | | | | | (5,618) | | | | | | | | | | | Total Non-Earning Assets | | 124,518 | | | | | | 104,539 | | | | | | | | | | | Total Assets | | $1,831,468 | | | | | | $1,547,087 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | | Interest Bearing Liabilities: | | | | | | | | | | | | | | | | | | | Interest Bearing Deposits: | | | | | | | | | | | | | | | | | | | Interest Checking | | $411,504 | | $175 | | 0.06% | | $333,193 | | $191 | | 0.08% | | $39 | | $(55) | | $(16) | Money Market and Savings Deposits | | 584,597 | | 1,470 | | 0.34% | | 484,742 | | 1,407 | | 0.39% | | 266 | | (203) | | 63 | Time Deposits | | 151,045 | | 499 | | 0.44% | | 148,715 | | 886 | | 0.80% | | 14 | | (401) | | (387) | Total Interest-Bearing Deposits | | 1,147,146 | | 2,144 | | 0.25% | | 966,650 | | 2,484 | | 0.34% | | 319 | | (659) | | (340) | Borrowings | | — | | — | | — | | 31,967 | | (280) | | -1.17% | | 280 | | — | | 280 | Junior subordinated debt | | 3,383 | | 148 | | 5.85% | | 2,324 | | 99 | | — | | 46 | | 3 | | 49 | Total Interest-Bearing Liabilities | | 1,150,529 | | 2,292 | | 0.27% | | 1,000,941 | | 2,303 | | 0.31% | | 645 | | (656) | | (11) | Non-Interest-Bearing Liabilities: | | | | | | | | | | | | | | | | | | | Demand deposits | | 524,592 | | | | | | 402,163 | | | | | | | | | | | Other liabilities | | 10,107 | | | | | | 10,617 | | | | | | | | | | | Total Liabilities | | 1,685,228 | | | | | | 1,413,721 | | | | | | | | | | | Shareholders' Equity | | 146,240 | | | | | | 133,366 | | | | | | | | | | | Total Liabilities & Shareholders' Equity | | $1,831,468 | | | | | | $1,547,087 | | | | | | | | | | | Net Interest Income (FTE) | | | | $38,408 | | | | | | $32,823 | | | | $1,579 | | $4,007 | | $5,586 | Interest Rate Spread 2 | | | | | | 2.91% | | | | | | 2.94% | | | | | | | Cost of Funds | | | | | | 0.18% | | | | | | 0.22% | | | | | | | Interest Expense as a Percentage of Average Earning Assets | | | | | | 0.18% | | | | | | 0.21% | | | | | | | Net Interest Margin (FTE) 3 | | | | | | 3.00% | | | | | | 3.03% | | | | | | |
(1)Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 21%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP Presentations earlier in this section.
(2)Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.
(3)Net interest margin (FTE) is net interest income expressed as a percentage of average earning assets.
(4)The impact on the net interest income (FTE) resulting from changes in average balances and average rates is shown for the period indicated. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
50
Provision for loancredit losses A recovery of provision for loancredit losses of $39$248 thousand was recognized during the three months ended September 30, 2022March 31, 2023 compared to $267a provision for loan losses of $148 thousand recognized during the three months ended September 30, 2021. AMarch 31, 2022. The first quarter 2023 recovery of provision for credit losses was comprised of $235 thousand recovery of provision for loan losses and $12 thousand of $30 thousand was recognized during the nine months ended September 30, 2022 compared to arecovery of provision for loan losses recognized of $477 thousand during the nine months ended September 30, 2021.on unfunded commitments. The period-end ALLLACL as a percentage of total loans was 0.58%0.83% as of September 30, 2022, 0.56%March 31, 2023, 0.59% as of December 31, 20212022 and 0.51%0.58% as of September 30, 2021.March 31, 2022. The total of the ALLLACL and the fair value mark as a percentage of gross loans (a non-GAAP financial measure) amounted to 2.38%2.33% as of September 30, 2022,March 31, 2023, compared to 2.30%2.29% as of December 31, 2021 and 2.24% as of September 30, 2021.2022. Further discussion of management’s assessment of the ALLLACL is provided earlier in the report and in Note 5 – Allowance for LoanCredit Losses, found in the Notes to the Consolidated Financial Statements. In management’s opinion, the allowanceACL was adequately provided for at September 30, 2022.March 31, 2023. The ALLLACL calculation, provision for loan losses, asset quality and collateral values may be significantly impacted by deterioration in economic conditions. We have downgraded, then upgraded slightly, the qualitative factors pertaining to economic conditions within our ALLLprior ACL methodology; should economic conditions worsen, we could experience further increases in our required ALLLACL and record additional provision for loancredit loss exposure. Noninterest income The components of noninterest income for the three months ended September 30,March 31, 2023 and 2022 and 2021 are shown below (dollars in thousands): | | | For the Three Months Ended | | | Variance | | | For the Three Months Ended | | | Variance | | | | September 30, 2022 | | | September 30, 2021 | | | $ | | | % | | | March 31, 2023 | | | March 31, 2022 | | | $ | | | % | | Noninterest income: | | | | | | | | | | | | | | | | | | | | | | | | | Wealth management fees | | $ | 590 | | | $ | 744 | | | $ | (154 | ) | | | -20.7 | % | | $ | 404 | | | $ | 557 | | | $ | (153 | ) | | | -27.5 | % | Advisory and brokerage income | | | 213 | | | | 358 | | | | (145 | ) | | | -40.5 | % | | | - | | | | 216 | | | | (216 | ) | | | -100.0 | % | Deposit account fees | | | 443 | | | | 396 | | | | 47 | | | | 11.9 | % | | | 401 | | | | 465 | | | | (64 | ) | | | -13.8 | % | Debit/credit card and ATM fees | | | 660 | | | | 808 | | | | (148 | ) | | | -18.3 | % | | | 571 | | | | 707 | | | | (136 | ) | | | -19.2 | % | Bank owned life insurance income | | | 252 | | | | 201 | | | | 51 | | | | 25.4 | % | | | 252 | | | | 211 | | | | 41 | | | | 19.4 | % | Gains on sale of assets | | | 4 | | | | - | | | | 4 | | | | 100.0 | % | | Resolution of commercial dispute | | | | - | | | | 2,400 | | | | (2,400 | ) | | | -100.0 | % | Gain on termination of interest swap | | | | 460 | | | | - | | | | 460 | | | N/A | | Losses on sales of AFS, net | | | | (206 | ) | | | - | | | | (206 | ) | | N/A | | Other | | | 138 | | | | 971 | | | | (833 | ) | | | -85.8 | % | | | 394 | | | | 231 | | | | 163 | | | | 70.6 | % | Total noninterest income | | $ | 2,300 | | | $ | 3,478 | | | $ | (1,178 | ) | | | -33.9 | % | | $ | 2,276 | | | $ | 4,787 | | | $ | (2,511 | ) | | | -52.5 | % |
Noninterest income for the three months ended September 30, 2022March 31, 2023 of $2.3 million was $1.2$2.5 million or 33.9%52.5% lower than the amount recorded for the three months ended September 30, 2021. March 31, 2022. Noninterest income decreased predominantly due to the prior period Other Income, as reported on the consolidated statementsrecognition of $2.4 million of income including a second partial recovery of $401 thousand of unearned insurance premiums related to the loss of insurance on the student loan portfolio and a recovery of $312 thousand from a TFB loan that was charged off prior to April 1, 2021. In addition, wealth management fees, advisory and brokerage fees and debit/credit card/ATM fees have each decreased approximately $150 thousand over the prior period due to an anticipated reduction in the number of accounts in each area.commercial dispute. The components of noninterest income for the nine months ended September 30, 2022 and 2021 are shown below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | For the Nine Months Ended | | | Variance | | | | September 30, 2022 | | | September 30, 2021 | | | $ | | | % | | Noninterest income: | | | | | | | | | | | | | Wealth management fees | | $ | 1,719 | | | $ | 2,053 | | | $ | (334 | ) | | | -16.3 | % | Advisory and brokerage income | | | 639 | | | | 908 | | | | (269 | ) | | | -29.6 | % | Deposit account fees | | | 1,366 | | | | 982 | | | | 384 | | | | 39.1 | % | Debit/credit card and ATM fees | | | 2,146 | | | | 1,561 | | | | 585 | | | | 37.5 | % | Bank owned life insurance income | | | 709 | | | | 507 | | | | 202 | | | | 39.8 | % | Resolution of commercial dispute | | | 2,400 | | | | - | | | | 2,400 | | | N/A | | Gain on sale of assets | | | 1,117 | | | | - | | | | 1,117 | | | N/A | | Other | | | 637 | | | | 1,426 | | | | (789 | ) | | | -55.3 | % | Total noninterest income | | $ | 10,733 | | | $ | 7,437 | | | $ | 3,296 | | | | 44.3 | % |
5148
Noninterest income for the nine months ended September 30, 2022 of $10.7 million was $3.3 million or 44.3% higher than the amount recorded for the nine months ended September 30, 2021. Noninterest income increased predominantly due to the receipt and recognition of a $2.4 million one-time payment to resolve a commercial dispute, the $1.1 million gain on the sale of two buildings and an increase of $585 thousand of debit/credit card and ATM fees due to increased number of retail accounts as a result of the Merger.
Noninterest expense The components of noninterest expense for the three months ended September 30,March 31, 2023 and 2022 and 2021 are shown below (dollars in thousands): | | | For the Three Months Ended | | | Variance | | | For the Three Months Ended | | | Variance | | | | September 30, 2022 | | | September 30, 2021 | | | $ | | | % | | | March 31, 2023 | | | March 31, 2022 | | | $ | | | % | | Noninterest expense: | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | $ | 4,252 | | | $ | 4,562 | | | $ | (310 | ) | | | -6.8 | % | | $ | 4,051 | | | $ | 4,731 | | | $ | (680 | ) | | | -14.4 | % | Net occupancy | | | 1,318 | | | | 1,039 | | | | 279 | | | | 26.9 | % | | | 1,179 | | | | 1,197 | | | | (18 | ) | | | -1.5 | % | Equipment | | | 249 | | | | 205 | | | | 44 | | | | 21.5 | % | | | 218 | | | | 283 | | | | (65 | ) | | | -23.0 | % | Bank franchise tax | | | 304 | | | | 320 | | | | (16 | ) | | | -5.0 | % | | | 324 | | | | 304 | | | | 20 | | | | 6.6 | % | Computer software | | | 287 | | | | 361 | | | | (74 | ) | | | -20.5 | % | | | 202 | | | | 263 | | | | (61 | ) | | | -23.2 | % | Data processing | | | 712 | | | | 1,114 | | | | (402 | ) | | | -36.1 | % | | | 742 | | | | 738 | | | | 4 | | | | 0.5 | % | FDIC deposit insurance assessment | | | 70 | | | | 349 | | | | (279 | ) | | | -79.9 | % | | | 100 | | | | 226 | | | | (126 | ) | | | -55.8 | % | Marketing, advertising and promotion | | | 347 | | | | 337 | | | | 10 | | | | 3.0 | % | | | 375 | | | | 267 | | | | 108 | | | | 40.4 | % | Merger and merger-related expenses | | | - | | | | 1,935 | | | | (1,935 | ) | | | -100.0 | % | | Debit/credit card and ATM expenses | | | 91 | | | | 212 | | | | (121 | ) | | | -57.1 | % | | | 48 | | | | 139 | | | | (91 | ) | | | -65.5 | % | Professional fees | | | 310 | | | | 186 | | | | 124 | | | | 66.7 | % | | | 192 | | | | 337 | | | | (145 | ) | | | -43.0 | % | Core deposit intangible amortization | | | 415 | | | | 417 | | | | (2 | ) | | | -0.5 | % | | | 391 | | | | 439 | | | | (48 | ) | | | -10.9 | % | Other | | | 1,148 | | | | 1,787 | | | | (639 | ) | | | -35.8 | % | | | 1,039 | | | | 1,171 | | | | (132 | ) | | | -11.3 | % | Total noninterest expense | | $ | 9,503 | | | $ | 12,824 | | | $ | (3,321 | ) | | | -25.9 | % | | $ | 8,861 | | | $ | 10,095 | | | $ | (1,234 | ) | | | -12.2 | % |
Noninterest expense for the quarter ended September 30, 2022March 31, 2023 of $9.5$8.9 million was $3.3$1.2 million or 25.9%12.2% lower than the quarter ended September 30, 2021.March 31, 2022. This decrease is primarily due to merger and merger-related expenses incurred during the nine months ended September 30, 2021 of $1.9 million, a reduction inlower salaries and employee benefitsbenefit expenses of $310$680 thousand as a result ofperiod over period due to reduced headcount, as well as reduced professional and a $402consulting fees of $145 thousand reduction in data processing costs as a result of efficiencies gained in connection withfrom the Merger. The components of noninterest expense for the nine months ended September 30, 2022 and 2021 are shown below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | For the Nine Months Ended | | | Variance | | | | September 30, 2022 | | | September 30, 2021 | | | $ | | | % | | Noninterest expense: | | | | | | | | | | | | | Salaries and employee benefits | | $ | 13,069 | | | $ | 11,705 | | | $ | 1,364 | | | | 11.7 | % | Net occupancy | | | 3,797 | | | | 2,643 | | | | 1,154 | | | | 43.7 | % | Equipment | | | 786 | | | | 661 | | | | 125 | | | | 18.9 | % | Bank franchise tax | | | 912 | | | | 922 | | | | (10 | ) | | | -1.1 | % | Computer software | | | 907 | | | | 744 | | | | 163 | | | | 21.9 | % | Data processing | | | 2,149 | | | | 2,397 | | | | (248 | ) | | | -10.3 | % | FDIC deposit insurance assessment | | | 421 | | | | 594 | | | | (173 | ) | | | -29.1 | % | Marketing, advertising and promotion | | | 873 | | | | 706 | | | | 167 | | | | 23.7 | % | Merger and merger-related expenses | | | - | | | | 8,087 | | | | (8,087 | ) | | | -100.0 | % | Debit/credit card and ATM expenses | | | 322 | | | | 589 | | | | (267 | ) | | | -45.3 | % | Professional fees | | | 1,051 | | | | 873 | | | | 178 | | | | 20.4 | % | Core deposit intangible amortization | | | 1,281 | | | | 845 | | | | 436 | | | | 51.6 | % | Other | | | 3,472 | | | | 2,832 | | | | 640 | | | | 22.6 | % | Total noninterest expense | | $ | 29,040 | | | $ | 33,598 | | | $ | (4,558 | ) | | | -13.6 | % |
52
Noninterest expense for the nine months ended September 30, 2022 of $29.0 million was $4.6 million or 13.6% lower than the nine months ended September 30, 2021. This decrease is due to merger and merger-related expenses incurred during the nine months ended September 30, 2021 of $8.1 million, offset by increases in the following areas due to the Merger being effective April 1, 2021: 1) salaries and employee benefits increased $1.4 million, 2) net occupancy increased $1.2 million, and 3) core deposit intangible amortization increased $436 thousand. In addition, the Company incurred $685 thousand in expenses in the first quarter of 2022, included in other noninterest expense, related to the one-time payment to resolve a commercial dispute noted in the Noninterest income section earlier.
The efficiency ratio (FTE) of 57.0%56.1% for the three months ended September 30, 2022March 31, 2023 compared favorably to the 75.2%62.0% for the same quarter of 2021,2022, due to the increase in net interest income (FTE) and the decrease in noninterest expense, as described above. The efficiency ratio (FTE) of 59.1% for the nine months ended September 30, 2022 also compared favorably to the 83.5% for the nine months ended September 30, 2021 for the same reasons. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP efficiency ratio. Provision for Income Taxes For the three months ended September 30,March 31, 2023 and 2022, and 2021, the Company provided $1.3 million and $753 thousand for Federal income taxes, respectively, resulting in effective income tax rates of 18.0% and 19.4%, respectively. For the nine months ended September 30, 2022 and 2021, the Company provided $3.5 million and $1.2$1.0 million for Federal income taxes, respectively, resulting in effective income tax rates of 17.6%18.2% and 20.0%17.5%, respectively. The effective income tax rate for the current quarter and current year-to-date was lower than the prior year, due to the non-deductibility of certain merger and merger-related expenses in the prior year. For all periods,each period, the effective income tax rate differed from the U.S. statutory rate of 21% due to the effect of tax-exempt income from life insurance policies and municipal bonds and the recognition of low-income housing tax credits. OTHER SIGNIFICANT EVENTS None ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required ITEM 4. CONTROLS AND PROCEDURES The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management 49
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. The Company adopted FASB Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and related updates, as described further in Note 1 to the consolidated interim financial statements, effective January 1, 2023. Related to the adoption of these new accounting standards, the Company modified certain internal controls and designed and implemented certain new internal controls over the measurement of the ACL on loans and the reserve for unfunded commitments and related disclosures. New internal controls related primarily to the modeling of expected credit losses on loans, including controls over critical data and other inputs and model results. There waswere no changeother changes in the Company’s internal control over financial reporting that occurred during the quarterthree months ended September 30, 2022March 31, 2023 that hashave materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial reporting.
53
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None ITEM 1A. RISK FACTORS. During the quarter ended September 30, 2022,March 31, 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, 2021.2022. 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 ITEM 5. OTHER INFORMATION. (a)Required 8-K disclosures. None (b)Changes in procedures for director nominations by security holders. None
50
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 |
|
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| 101 |
| The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2022,March 31, 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, 2022,March 31, 2023, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101.0) |
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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) |
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| /s/ Glenn W. Rust |
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| Glenn W. Rust |
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| President and Chief Executive Officer (principal executive officer) |
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| Date: |
| November 2, 2022May 15, 2023
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| /s/ Tara Y. Harrison |
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| Tara Y. Harrison |
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| Executive Vice President and Chief Financial Officer |
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| (principal financial and accounting officer)
| Date: |
| November 2, 2022May 15, 2023
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