UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2022March 31, 2023
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-38874
(Exact name of registrant as specified in its charter)
Virginia | 54-1232965 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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112 West King Street, Strasburg, Virginia | 22657 |
(Address of principal executive offices) | (Zip Code) |
(540) 465-9121
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common stock, par value $1.25 per share | FXNC | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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| Accelerated filer |
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Non-accelerated filer |
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| Smaller reporting company |
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| Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 11, 2022, 6,252,147May 10, 2023, 6,264,286 shares of common stock, par value $1.25 per share, of the registrant were outstanding.
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Item 1. |
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| Consolidated Balance Sheets as of | |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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Item 3. | ||
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Item 4. | ||
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Item 1. | ||
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Item 1A. | ||
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Item 2. | ||
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Item 3. | ||
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Item 4. | ||
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Item 5. | ||
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Item 6. |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST NATIONAL CORPORATION
Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited) | (unaudited) | |||||||||||||||
June 30, | December 31, | March 31, | �� | December 31, | ||||||||||||
2022 | 2021* | 2023 | 2022* | |||||||||||||
Assets | ||||||||||||||||
Cash and due from banks | $ | 19,886 | $ | 18,725 | $ | 17,950 | $ | 20,784 | ||||||||
Interest-bearing deposits in banks | 104,529 | 157,281 | 59,851 | 46,130 | ||||||||||||
Securities available for sale, at fair value | 264,750 | 289,495 | 162,355 | 162,907 | ||||||||||||
Securities held to maturity, at amortized cost (fair value, 2022, $70,492; 2021, $33,617) | 77,151 | 33,441 | ||||||||||||||
Securities held to maturity, at amortized cost (net of allowance for credit losses of $132 at March 31, 2023) | 151,301 | 153,158 | ||||||||||||||
Restricted securities, at cost | 1,908 | 1,813 | 1,803 | 1,908 | ||||||||||||
Loans, net of allowance for loan losses, 2022, $6,202; 2021, $5,710 | 873,887 | 819,408 | ||||||||||||||
Loans, net of allowance for credit losses, 2023, $8,717; 2022, $7,446 | 909,250 | 913,077 | ||||||||||||||
Other real estate owned, net of valuation allowance | 1,665 | 1,848 | 184 | 184 | ||||||||||||
Premises and equipment, net | 22,118 | 22,403 | 21,637 | 21,876 | ||||||||||||
Accrued interest receivable | 4,154 | 3,903 | 4,389 | 4,543 | ||||||||||||
Bank owned life insurance | 24,569 | 24,294 | 24,424 | 24,531 | ||||||||||||
Goodwill | 3,030 | 3,030 | 3,030 | 3,030 | ||||||||||||
Core deposit intangibles, net | 145 | 154 | 131 | 136 | ||||||||||||
Other assets | 16,898 | 13,642 | 16,027 | 17,119 | ||||||||||||
Total assets | $ | 1,414,690 | $ | 1,389,437 | $ | 1,372,332 | $ | 1,369,383 | ||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||
Liabilities | ||||||||||||||||
Deposits: | ||||||||||||||||
Noninterest-bearing demand deposits | $ | 431,292 | $ | 413,188 | $ | 410,019 | $ | 427,344 | ||||||||
Savings and interest-bearing demand deposits | 731,125 | 689,998 | 676,875 | 677,139 | ||||||||||||
Time deposits | 133,733 | 145,566 | 154,631 | 136,849 | ||||||||||||
Total deposits | $ | 1,296,150 | $ | 1,248,752 | $ | 1,241,525 | $ | 1,241,332 | ||||||||
Subordinated debt, net of issuance cost | 4,994 | 9,993 | 4,996 | 4,995 | ||||||||||||
Junior subordinated debt | 9,279 | 9,279 | 9,279 | 9,279 | ||||||||||||
Accrued interest payable and other liabilities | 3,952 | 4,374 | 4,721 | 5,417 | ||||||||||||
Total liabilities | $ | 1,314,375 | $ | 1,272,398 | $ | 1,260,521 | $ | 1,261,023 | ||||||||
Commitments and contingencies | ||||||||||||||||
Shareholders’ Equity | ||||||||||||||||
Preferred stock, par value $1.25 per share; authorized 1,000,000 shares; none issued and outstanding | $ | 0 | $ | 0 | $ | — | $ | — | ||||||||
Common stock, par value $1.25 per share; authorized 8,000,000 shares; issued and outstanding, 2022, 6,252,147 shares; 2021, 6,228,176 shares | 7,815 | 7,785 | ||||||||||||||
Common stock, par value $1.25 per share; authorized 8,000,000 shares; issued and outstanding, 2023, 6,280,378 shares; 2022, 6,264,912 shares | 7,851 | 7,831 | ||||||||||||||
Surplus | 32,398 | 31,966 | 32,937 | 32,716 | ||||||||||||
Retained earnings | 82,804 | 76,990 | 91,239 | 90,284 | ||||||||||||
Accumulated other comprehensive (loss) income, net | (22,702 | ) | 298 | |||||||||||||
Accumulated other comprehensive loss, net | (20,216 | ) | (22,471 | ) | ||||||||||||
Total shareholders’ equity | $ | 100,315 | $ | 117,039 | $ | 111,811 | $ | 108,360 | ||||||||
Total liabilities and shareholders’ equity | $ | 1,414,690 | $ | 1,389,437 | $ | 1,372,332 | $ | 1,369,383 |
*Derived from audited consolidated financial statements.
See Notes to Consolidated Financial Statements
Consolidated Statements of Income (Unaudited)
(in thousands, except per share data)
Three Months Ended | Six Months Ended | Three Months Ended | ||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | March 31, | March 31, | |||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
Interest and Dividend Income | ||||||||||||||||||||||||
Interest and fees on loans | $ | 9,963 | $ | 7,074 | $ | 19,459 | $ | 14,217 | $ | 11,512 | $ | 9,496 | ||||||||||||
Interest on deposits in banks | 251 | 37 | 321 | 70 | 344 | 70 | ||||||||||||||||||
Interest and dividends on securities: | ||||||||||||||||||||||||
Taxable interest | 1,295 | 697 | 2,427 | 1,414 | 1,339 | 1,132 | ||||||||||||||||||
Tax-exempt interest | 309 | 215 | 614 | 395 | 306 | 305 | ||||||||||||||||||
Dividends | 21 | 22 | 42 | 44 | 27 | 21 | ||||||||||||||||||
Total interest and dividend income | $ | 11,839 | $ | 8,045 | $ | 22,863 | $ | 16,140 | $ | 13,528 | $ | 11,024 | ||||||||||||
Interest Expense | ||||||||||||||||||||||||
Interest on deposits | $ | 413 | $ | 328 | $ | 753 | $ | 691 | $ | 2,216 | $ | 340 | ||||||||||||
Interest on subordinated debt | 69 | 154 | 138 | 308 | 69 | 69 | ||||||||||||||||||
Interest on junior subordinated debt | 67 | 68 | 134 | 134 | 67 | 67 | ||||||||||||||||||
Total interest expense | $ | 549 | $ | 550 | $ | 1,025 | $ | 1,133 | $ | 2,352 | $ | 476 | ||||||||||||
Net interest income | $ | 11,290 | $ | 7,495 | $ | 21,838 | $ | 15,007 | $ | 11,176 | $ | 10,548 | ||||||||||||
Provision for (recovery of) loan losses | 400 | (1,000 | ) | 400 | (1,000 | ) | ||||||||||||||||||
Net interest income after provision for (recovery of) loan losses | $ | 10,890 | $ | 8,495 | $ | 21,438 | $ | 16,007 | ||||||||||||||||
Provision for credit losses | — | — | ||||||||||||||||||||||
Net interest income after provision for credit losses | $ | 11,176 | $ | 10,548 | ||||||||||||||||||||
Noninterest Income | ||||||||||||||||||||||||
Service charges on deposit accounts | $ | 698 | $ | 447 | $ | 1,307 | $ | 889 | $ | 646 | $ | 609 | ||||||||||||
ATM and check card fees | 797 | 682 | 1,547 | 1,283 | 800 | 750 | ||||||||||||||||||
Wealth management fees | 760 | 657 | 1,563 | 1,300 | 776 | 803 | ||||||||||||||||||
Fees for other customer services | 188 | 150 | 421 | 331 | 196 | 233 | ||||||||||||||||||
Brokered mortgage fees | 58 | 157 | 152 | 262 | — | 94 | ||||||||||||||||||
Income from bank owned life insurance | 131 | 99 | 275 | 212 | 149 | 144 | ||||||||||||||||||
Net gains on securities available for sale | 0 | 0 | 0 | 37 | ||||||||||||||||||||
Net gains on sale of mortgage loans held for sale | 0 | 18 | 0 | 25 | ||||||||||||||||||||
Other operating income | 148 | 225 | 226 | 239 | 211 | 78 | ||||||||||||||||||
Total noninterest income | $ | 2,780 | $ | 2,435 | $ | 5,491 | $ | 4,578 | $ | 2,778 | $ | 2,711 | ||||||||||||
Noninterest Expense | ||||||||||||||||||||||||
Salaries and employee benefits | $ | 5,086 | $ | 3,693 | $ | 10,210 | $ | 7,248 | $ | 5,346 | $ | 5,124 | ||||||||||||
Occupancy | 545 | 399 | 1,117 | 846 | 528 | 572 | ||||||||||||||||||
Equipment | 620 | 433 | 1,179 | 864 | 587 | 559 | ||||||||||||||||||
Marketing | 223 | 138 | 374 | 244 | 268 | 151 | ||||||||||||||||||
Supplies | 131 | 77 | 267 | 165 | 148 | 136 | ||||||||||||||||||
Legal and professional fees | 381 | 483 | 714 | 1,220 | 343 | 333 | ||||||||||||||||||
ATM and check card expense | 347 | 268 | 650 | 499 | 400 | 303 | ||||||||||||||||||
FDIC assessment | 132 | 78 | 284 | 147 | 106 | 152 | ||||||||||||||||||
Bank franchise tax | 238 | 172 | 454 | 340 | 254 | 216 | ||||||||||||||||||
Data processing expense | 221 | 216 | 457 | 420 | 202 | 236 | ||||||||||||||||||
Amortization expense | 5 | 5 | 9 | 19 | 5 | 4 | ||||||||||||||||||
Other real estate owned expense, net | 41 | 0 | 69 | 0 | 3 | 28 | ||||||||||||||||||
Other operating expense | 948 | 668 | 1,778 | 1,268 | 1,010 | 830 | ||||||||||||||||||
Total noninterest expense | $ | 8,918 | $ | 6,630 | $ | 17,562 | $ | 13,280 | $ | 9,200 | $ | 8,644 |
See Notes to Consolidated Financial Statements
FIRST NATIONAL CORPORATION
Consolidated Statements of Income (Unaudited)
(Continued)
(in thousands, except per share data)
Three Months Ended | Six Months Ended | Three Months Ended | ||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | March 31, | March 31, | |||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
Income before income taxes | $ | 4,752 | $ | 4,300 | $ | 9,367 | $ | 7,305 | $ | 4,754 | $ | 4,615 | ||||||||||||
Income tax expense | 917 | 958 | 1,803 | 1,527 | 905 | 886 | ||||||||||||||||||
Net income | $ | 3,835 | $ | 3,342 | $ | 7,564 | $ | 5,778 | $ | 3,849 | $ | 3,729 | ||||||||||||
Earnings per common share | ||||||||||||||||||||||||
Basic | $ | 0.61 | $ | 0.69 | $ | 1.21 | $ | 1.19 | $ | 0.61 | $ | 0.60 | ||||||||||||
Diluted | $ | 0.61 | $ | 0.69 | $ | 1.21 | $ | 1.19 | $ | 0.61 | $ | 0.60 |
See Notes to Consolidated Financial Statements
Consolidated Statements of Comprehensive Income (Loss) Income (Unaudited)
(in thousands)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Net income | $ | 3,835 | $ | 3,342 | $ | 7,564 | $ | 5,778 | ||||||||
Other comprehensive (loss), net of tax, | ||||||||||||||||
Unrealized holding gains (losses) on available for sale securities, net of tax ($2,595) and $78 for the three months and ($6,381) and ($354) for the six months ended June 30, 2022 and 2021, respectively | (9,762 | ) | 292 | (24,005 | ) | (1,333 | ) | |||||||||
Reclassification adjustment for gains included in net income, net of tax $0 and ($8) for the six months ended June 30, 2022 and 2021. There were no reclassification adjustments for the three month periods. | 0 | 0 | 0 | (29 | ) | |||||||||||
Change in fair value of cash flow hedges, net of tax $120 and ($101) for the three months and $267 and $95 for the six months ended June 30, 2022 and 2021, respectively | 452 | (376 | ) | 1,005 | 362 | |||||||||||
Total other comprehensive (loss) | (9,310 | ) | (84 | ) | (23,000 | ) | (1,000 | ) | ||||||||
Total comprehensive (loss) income | $ | (5,475 | ) | $ | 3,258 | $ | (15,436 | ) | $ | 4,778 |
Three Months Ended | ||||||||
March 31, | March 31, | |||||||
2023 | 2022 | |||||||
Net income | $ | 3,849 | $ | 3,729 | ||||
Other comprehensive income (loss), net of tax, | ||||||||
Unrealized holding gains (losses) on available for sale securities, net of tax of $576 and ($3,786) for the three months ended March 31, 2023 and 2022, respectively | 2,162 | (14,243 | ) | |||||
Amortization of unrealized holding losses on available-for-sale securities transferred to held to maturity, net of tax of $84 and $0 for the three months ended March 31, 2023 and 2022, respectively | 316 | — | ||||||
Change in fair value of cash flow hedges, net of tax ($60) and $146 for the three months ended March 31, 2023 and 2022, respectively | (223 | ) | 553 | |||||
Total other comprehensive income (loss) | 2,255 | (13,690 | ) | |||||
Total comprehensive income (loss) | $ | 6,104 | $ | (9,961 | ) |
See Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Six Months Ended | Three Months Ended | |||||||||||||||
June 30, | June 30, | March 31, | March 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Cash Flows from Operating Activities | ||||||||||||||||
Net income | $ | 7,564 | $ | 5,778 | $ | 3,849 | $ | 3,729 | ||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization of premises and equipment | 747 | 642 | 398 | 378 | ||||||||||||
Amortization of core deposit intangibles | 9 | 19 | 5 | 4 | ||||||||||||
Amortization of debt issuance costs | 1 | 1 | 1 | 1 | ||||||||||||
Origination of mortgage loans held for sale | 0 | (1,586 | ) | |||||||||||||
Proceeds from sale of mortgage loans held for sale | 0 | 1,856 | ||||||||||||||
Net gains on sales of mortgage loans held for sale | 0 | (25 | ) | |||||||||||||
Provision for (recovery of) loan losses | 400 | (1,000 | ) | |||||||||||||
Net gains on securities available for sale | 0 | (37 | ) | |||||||||||||
Net losses (gains) on sale of other real estate owned | 39 | (9 | ) | |||||||||||||
Net losses on sale of other real estate owned | — | 12 | ||||||||||||||
Increase in cash value of bank owned life insurance | (275 | ) | (212 | ) | (149 | ) | (144 | ) | ||||||||
Accretion of discounts and amortization of premiums on securities, net | 629 | 448 | 249 | 320 | ||||||||||||
Accretion of premium on time deposits | (122 | ) | (6 | ) | (25 | ) | (67 | ) | ||||||||
Accretion of certain acquisition-related loan discounts, net | (718 | ) | 0 | (145 | ) | (367 | ) | |||||||||
Stock-based compensation | 541 | 119 | 338 | 485 | ||||||||||||
Excess tax benefits on stock-based compensation | 3 | 3 | 4 | 4 | ||||||||||||
Losses (gains) on disposal of premises and equipment, net | 2 | (26 | ) | |||||||||||||
Deferred income tax benefit | 73 | 337 | ||||||||||||||
(Gains) losses on disposal of premises and equipment, net | (2 | ) | 2 | |||||||||||||
Deferred income tax expense (benefit) | 325 | 200 | ||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||
(Increase) decrease in interest receivable | (251 | ) | 55 | |||||||||||||
Decrease (increase) in other assets | 4,054 | (4,992 | ) | |||||||||||||
Decrease (increase) in interest receivable | 154 | (153 | ) | |||||||||||||
Decrease in other assets | 400 | 4,660 | ||||||||||||||
(Decrease) in accrued interest payable and other liabilities | (422 | ) | (1,950 | ) | (849 | ) | (440 | ) | ||||||||
Net cash provided by (used in ) operating activities | $ | 12,274 | $ | (585 | ) | |||||||||||
Net cash provided by operating activities | $ | 4,553 | $ | 8,624 | ||||||||||||
Cash Flows from Investing Activities | ||||||||||||||||
Proceeds from maturities, calls, principal payments, and sales of securities available for sale | $ | 14,929 | $ | 21,962 | $ | 3,056 | $ | 7,422 | ||||||||
Proceeds from maturities, calls, and principal payments of securities held to maturity | 5,271 | 3,288 | 2,109 | 813 | ||||||||||||
Purchases of securities available for sale | (21,147 | ) | (106,060 | ) | — | (21,147 | ) | |||||||||
Purchases of securities held to maturity | (49,033 | ) | 0 | — | (49,034 | ) | ||||||||||
Net (purchase) redemption of restricted securities | (95 | ) | 244 | |||||||||||||
Net redemption (purchase) of restricted securities | 105 | (95 | ) | |||||||||||||
Purchase of premises and equipment | (404 | ) | (205 | ) | (159 | ) | (195 | ) | ||||||||
Proceeds from sale of premises and equipment | 0 | 32 | 2 | — | ||||||||||||
Proceeds from sale of other real estate owned | 84 | 139 | — | 9 | ||||||||||||
Net (decrease) increase in loans | (54,161 | ) | 11,416 | |||||||||||||
Net cash used in investing activities | $ | (104,556 | ) | $ | (69,184 | ) | ||||||||||
Proceeds from cash value of bank owned life insurance | 256 | — | ||||||||||||||
Net decrease (increase) in loans | 1,786 | (10,820 | ) | |||||||||||||
Net cash provided by (used in) investing activities | $ | 7,155 | $ | (73,047 | ) |
See Notes to Consolidated Financial Statements
FIRST NATIONAL CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
(Continued)
(in thousands)
Six Months Ended | Three Months Ended | |||||||||||||||
June 30, | June 30, | March 31, | March 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Cash Flows from Financing Activities | ||||||||||||||||
Net increase in demand deposits and savings accounts | $ | 59,231 | $ | 76,309 | ||||||||||||
Net decrease in time deposits | (11,711 | ) | (4,459 | ) | ||||||||||||
Net (decrease) increase in demand deposits and savings accounts | $ | (17,589 | ) | $ | 48,641 | |||||||||||
Net increase (decrease) in time deposits | 17,807 | (4,434 | ) | |||||||||||||
Repayment of subordinated debt | (5,000 | ) | 0 | — | (5,000 | ) | ||||||||||
Cash dividends paid on common stock, net of reinvestment | (1,646 | ) | (1,092 | ) | (901 | ) | (817 | ) | ||||||||
Repurchase of common stock, stock incentive plan | (183 | ) | (39 | ) | (113 | ) | (183 | ) | ||||||||
Net cash provided by financing activities | $ | 40,691 | $ | 70,719 | ||||||||||||
(Decrease) increase in cash and cash equivalents | $ | (51,591 | ) | $ | 950 | |||||||||||
Repurchase of common stock, stock repurchase plan | (25 | ) | — | |||||||||||||
Net cash (used in) provided by financing activities | $ | (821 | ) | $ | 38,207 | |||||||||||
Increase (decrease) in cash and cash equivalents | $ | 10,887 | $ | (26,216 | ) | |||||||||||
Cash and Cash Equivalents | ||||||||||||||||
Beginning | $ | 176,006 | $ | 127,297 | $ | 66,914 | $ | 176,006 | ||||||||
Ending | $ | 124,415 | $ | 128,247 | $ | 77,801 | $ | 149,790 | ||||||||
Supplemental Disclosures of Cash Flow Information | ||||||||||||||||
Cash payments for: | ||||||||||||||||
Interest | $ | 1,184 | $ | 1,168 | $ | 2,186 | $ | 486 | ||||||||
Income taxes | $ | 1,040 | $ | 1,205 | ||||||||||||
Supplemental Disclosures of Noncash Investing and Financing Activities | ||||||||||||||||
Unrealized (losses) on securities available for sale | $ | (30,386 | ) | $ | (1,724 | ) | ||||||||||
Unrealized gains (losses) on securities available for sale | $ | 2,738 | $ | (18,030 | ) | |||||||||||
Change in fair value of cash flow hedges | $ | 1,272 | $ | 457 | $ | (283 | ) | $ | 699 | |||||||
Transfer from other real estate owned to premises and equipment | $ | 60 | $ | 0 | $ | — | $ | 60 | ||||||||
Transfer from loans to other real estate owned | $ | 0 | $ | 130 | ||||||||||||
Issuance of common stock, dividend reinvestment plan | $ | 104 | $ | 77 | $ | 41 | $ | 57 |
See Notes to Consolidated Financial Statements
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(in thousands, except share and per share data)
Common Stock | Surplus | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||||||||||||||||
Balance, March 31, 2021 | $ | 6,086 | $ | 6,214 | $ | 71,144 | $ | 2,482 | $ | 85,926 | ||||||||||
Net income | 0 | 0 | 3,342 | 0 | 3,342 | |||||||||||||||
Other comprehensive loss | 0 | 0 | 0 | (84 | ) | (84 | ) | |||||||||||||
Cash dividends on common stock ($0.12 per share) | 0 | 0 | (585 | ) | 0 | (585 | ) | |||||||||||||
Stock-based compensation | 0 | 45 | 0 | 0 | 45 | |||||||||||||||
Issuance of 1,997 shares common stock, dividend reinvestment plan | 2 | 36 | 0 | 0 | 38 | |||||||||||||||
Balance, June 30, 2021 | $ | 6,088 | $ | 6,295 | $ | 73,901 | $ | 2,398 | $ | 88,682 |
Common Stock | Surplus | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||
Balance, December 31, 2021 | $ | 7,785 | $ | 31,966 | $ | 76,990 | $ | 298 | $ | 117,039 | ||||||||||
Net income | — | — | 3,729 | — | 3,729 | |||||||||||||||
Other comprehensive loss | — | — | — | (13,690 | ) | (13,690 | ) | |||||||||||||
Cash dividends on common stock ($0.14 per share) | — | — | (874 | ) | — | (874 | ) | |||||||||||||
Stock-based compensation | — | 485 | — | — | 485 | |||||||||||||||
Issuance of 2,757 shares of common stock, dividend reinvestment plan | 3 | 54 | — | — | 57 | |||||||||||||||
Issuance of 27,134 shares of common stock, stock incentive plan | 34 | (34 | ) | — | — | — | ||||||||||||||
Repurchase of 8,283 shares of common stock, stock incentive plan | (10 | ) | (173 | ) | — | — | (183 | ) | ||||||||||||
Balance, March 31, 2022 | $ | 7,812 | $ | 32,298 | $ | 79,845 | $ | (13,392 | ) | $ | 106,563 |
Common Stock | Surplus | Retained Earnings | Accumulated Other Comprehensive (Loss) | Total | ||||||||||||||||
Balance, March 31, 2022 | $ | 7,812 | $ | 32,298 | $ | 79,845 | $ | (13,392 | ) | $ | 106,563 | |||||||||
Net income | 0 | 0 | 3,835 | 0 | 3,835 | |||||||||||||||
Other comprehensive loss | 0 | 0 | 0 | (9,310 | ) | (9,310 | ) | |||||||||||||
Cash dividends on common stock ($0.14 per share) | 0 | 0 | (876 | ) | 0 | (876 | ) | |||||||||||||
Stock-based compensation | 0 | 56 | 0 | 0 | 56 | |||||||||||||||
Issuance of 2,363 shares common stock, dividend reinvestment plan | 3 | 44 | 0 | 0 | 47 | |||||||||||||||
Balance, June 30, 2022 | $ | 7,815 | $ | 32,398 | $ | 82,804 | $ | (22,702 | ) | $ | 100,315 |
Common Stock | Surplus | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||||||||||||||||
Balance, December 31, 2020 | $ | 6,075 | $ | 6,151 | $ | 69,292 | $ | 3,398 | $ | 84,916 | ||||||||||
Net income | 0 | 0 | 5,778 | 0 | 5,778 | |||||||||||||||
Other comprehensive loss | 0 | 0 | 0 | (1,000 | ) | (1,000 | ) | |||||||||||||
Cash dividends on common stock ($0.24 per share) | 0 | 0 | (1,169 | ) | 0 | (1,169 | ) | |||||||||||||
Stock-based compensation | 0 | 119 | 0 | 0 | 119 | |||||||||||||||
Issuance of 4,208 shares common stock, dividend reinvestment plan | 5 | 72 | 0 | 0 | 77 | |||||||||||||||
Issuance of 8,073 shares common stock, stock incentive plan | 10 | (10 | ) | 0 | 0 | 0 | ||||||||||||||
Repurchase of 2,221 shares common stock, stock incentive plan | (2 | ) | (37 | ) | 0 | 0 | (39 | ) | ||||||||||||
Balance, June 30, 2021 | $ | 6,088 | $ | 6,295 | $ | 73,901 | $ | 2,398 | $ | 88,682 |
Common Stock | Surplus | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||
Balance, December 31, 2021 | $ | 7,785 | $ | 31,966 | $ | 76,990 | $ | 298 | $ | 117,039 | ||||||||||
Net income | 0 | 0 | 7,564 | 0 | 7,564 | |||||||||||||||
Other comprehensive loss | 0 | 0 | 0 | (23,000 | ) | (23,000 | ) | |||||||||||||
Cash dividends on common stock ($0.28 per share) | 0 | 0 | (1,750 | ) | 0 | (1,750 | ) | |||||||||||||
Stock-based compensation | 0 | 541 | 0 | 0 | 541 | |||||||||||||||
Issuance of 5,120 shares common stock, dividend reinvestment plan | 6 | 98 | 0 | 0 | 104 | |||||||||||||||
Issuance of 27,134 shares common stock, stock incentive plan | 34 | (34 | ) | 0 | 0 | 0 | ||||||||||||||
Repurchase of 8,283 shares common stock, stock incentive plan | (10 | ) | (173 | ) | 0 | 0 | (183 | ) | ||||||||||||
Balance, June 30, 2022 | $ | 7,815 | $ | 32,398 | $ | 82,804 | $ | (22,702 | ) | $ | 100,315 |
Common Stock | Surplus | Retained Earnings | Accumulated Other Comprehensive (Loss) | Total | ||||||||||||||||
Balance, December 31, 2022 | $ | 7,831 | $ | 32,716 | $ | 90,284 | $ | (22,471 | ) | $ | 108,360 | |||||||||
Adoption of new accounting standard (ASU 2016-13) | — | — | (1,952 | ) | — | (1,952 | ) | |||||||||||||
Net income | — | — | 3,849 | — | 3,849 | |||||||||||||||
Other comprehensive income | — | — | — | 2,255 | 2,255 | |||||||||||||||
Cash dividends on common stock ($0.15 per share) | — | — | (942 | ) | — | (942 | ) | |||||||||||||
Stock-based compensation | — | 338 | — | — | 338 | |||||||||||||||
Issuance of 2,216 shares of common stock, dividend reinvestment plan | 3 | 38 | — | — | 41 | |||||||||||||||
Issuance of 21,302 shares of common stock, stock incentive plan | 27 | (27 | ) | — | — | — | ||||||||||||||
Repurchase of 1,557 shares of common stock, stock repurchase plan | (2 | ) | (23 | ) | — | — | (25 | ) | ||||||||||||
Repurchase of 6,495 shares of common stock, stock incentive plan | (8 | ) | (105 | ) | — | — | (113 | ) | ||||||||||||
Balance, March 31, 2023 | $ | 7,851 | $ | 32,937 | $ | 91,239 | $ | (20,216 | ) | $ | 111,811 |
See Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements (Unaudited)
Note 1. General
Basis of Presentation
The accompanying unaudited consolidated financial statements of First National Corporation (the Company) and its subsidiary, First Bank (the Bank), have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in accordance with guidance provided by the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for annual year-end financial statements. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial positions at June 30, 2022March 31, 2023 and December 31, 20212022, the statements of income and comprehensive income (loss) income for the three and six months ended June 30, 2022March 31, 2023 and 20212022, the cash flows for the sixthree months ended June 30, 2022March 31, 2023 and 20212022, and the changes in shareholders’ equity for the three and six months ended June 30, 2022March 31, 2023 and 20212022. The statements should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 20212022. Operating results for the three and six months ended June 30, 2022March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. Certain items in the prior period financial statements have been reclassified to conform to the current presentation. These reclassifications had no effect on prior year net income or shareholders' equity.
Adoption of New Accounting Pronouncements
ASU 2016-13:On January 1, 2023, the Company adopted Accounting Standards Update (ASU) No.2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (Accounting Standards Codification (ASC) 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses.
In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not that they will be required to sell.
The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included an increase in the allowance for credit losses on loans of $2.2 million, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded commitments of $153 thousand, which is recorded within other liabilities. The Company recorded an allowance for credit losses for held to maturity securities of $132 thousand, which is presented as a reduction to held to maturity securities outstanding. The Company recorded a net decrease to retained earnings of $2.0 million as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards.
The Company adopted ASC 326 using the prospective transition approach for PCD assets that were previously classified as purchase credit impaired (“PCI”) under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. As of March 31, 2023, the Company had no loans classified as PCD.
The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporary impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale securities was not required.
The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.
January 1, 2023 | December 31, 2022 | |||||||||||
As reported Under | Pre-ASC 326 | Impact of ASC | ||||||||||
(dollars in thousands) | ASC 326 | Adoption | 326 Adoption | |||||||||
Assets: | ||||||||||||
Allowance for credit losses on held to maturity securities: | - | - | ||||||||||
Corporate securities | 132 | - | 132 | |||||||||
Allowance for credit losses on loans: | - | |||||||||||
Construction and land development | 233 | 546 | (313 | ) | ||||||||
Secured by 1-4 family residential | 2,517 | 1,108 | 1,409 | |||||||||
Other real estate loans | 5,311 | 3,609 | 1,702 | |||||||||
Commercial and industrial loans | 1,487 | 1,874 | (387 | ) | ||||||||
Consumer and other loans | 84 | 309 | (225 | ) | ||||||||
Allowance for credit losses on loans | 9,632 | 7,446 | 2,186 | |||||||||
Liabilities: | ||||||||||||
Allowance for credit losses for unfunded commitments | 153 | - | 153 |
Allowance for Credit Losses – Held-to-Maturity Securities
The Company estimates expected credit losses on held-to-maturity securities on an individual basis based on a Probability of Default/Loss Given Default (“PD/LGD”) methodology primarily using security-level credit ratings. The primary indicators of credit quality for the Company’s held-to-maturity portfolio are security type and credit ratings, which are influenced by a number of factors including obligor cash flow, geography, seniority, among other factors. The Company’s held-to-maturity securities with credit risk are municipal bonds and corporate debt securities. All other held-to-maturity securities are covered by the explicit or implied guarantee of the United States government or one if its agencies.
Change in the allowance for credit loss are recorded as provision for (or recovery of) credit losses in the Consolidated Statements of Income. The Company recorded an allowance for credit losses on held-to-maturity securities of $132 thousand upon adoption of ASC 326 and the allowance was unchanged as of March 31, 2023.
Allowance for Credit Losses – Available-for-Sale Securities
Management evaluates all available-for-sale securities in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.
If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specific to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any deficiency is recorded as an allowance for credit loss, 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 allowance for credit loss is recognized in other comprehensive income.
Changes in the allowance for credit loss are recorded as a provision for (or recovery of) credit losses in the Consolidated Statements of Income. Losses are charged against the allowance for credit loss when management believes an available-for-sale 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 allowance for credit loss related to the available-for-sale portfolio.
Accrued interest receivable on available-for-sale securities totaled $803 thousand at March 31, 2023 and was excluded from the estimate of credit losses.
The Company is utilizing a discounted cash flow model to estimate its current expected credit losses. For the purposes of calculating its quantitative reserves, the Company has segmented its loan portfolio based on loans which share similar risk characteristics. Within the quantitative portion of the calculation, the Company utilizes at least one or a combination of loss drivers, which may include unemployment rates, home price indices, and/or gross domestic product (“GDP”), to adjust its loss rates over a reasonable and supportable forecast period of one year. A straight-line reversion technique is used for the following eight quarters, at which time the Company reverts to historical averages. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider qualitative factors, including but not limited to: variability in the economic forecast, changes in volume and severity of adversity classified loans, changes in concentrations of credit, changes in the nature and volume of the loan segments, factors related to credit administration, and other idiosyncratic risks not embedded in the data used in the model.
Loans that do not share risk characteristics are evaluated on an individual basis. The Company designates individually evaluated loans on nonaccrual status as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk and loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.
The adoption of CECL did not result in a significant change to any other credit risk management and monitoring processes, including identification of past due or delinquent borrowers, nonaccrual practices or charge-off policy.
Notes to Consolidated Financial Statements (Unaudited)
Allowance for Credit Losses – Unfunded Commitments
Financial Instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit losses in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company records all allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for (or recovery of) credit losses in the Consolidated Statement of Income. The allowances for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit losses model using the same methodology as the loan portfolio, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheet.
Accrued Interest Receivable
The Company has elected to exclude the accrued interest from the amortized cost basis in its determination of the allowance for credit losses for both loans and held-to-maturity securities, as well as elected the policy to write-off accrued interest receivable directly through the reversal of interest income. Accrued interest receivable totaled $4.4 million on loans and $600 thousand on held-to-maturity securities at March 31, 2023, and is included in “Accrued Interest Receivable” on the Company’s Consolidated Balance Sheets.
On January 1, 2023, the Company adopted ASU 2022-01, "Derivatives and Hedging (Topic 815), Fair Value Hedging—Portfolio Layer Method.” ASU 2022-01 clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization’s risk management strategies. In 2017, FASB issued ASU 2017-12 to better align the economic results of risk management activities with hedge accounting. One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 renames that method the portfolio layer method. The Company adopted ASU 2022-01 prospectively and it did not have a material impact on its consolidated financial statements.
ASU 2022-02:On January 1, 2023, the Company adopted ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standards (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings (TDR's) by creditors that have adopted the CECL model and enhance the disclosure requirements for certain loan refinancings by creditors when a borrower is experiencing financial difficulty. In addition, the amendments require that the Company disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The Company adopted the standard prospectively and it did not have a material impact on the financial statements.
Recent Accounting Pronouncements
Notes to Consolidated Financial Statements (Unaudited)
Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.
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” (ASU 2020-04). These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU No. 2021-01 “Reference Rate Reform (Topic 848): Scope” (ASU 2021-01). This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. 2020.The Company has identified loans and other financial instruments that are directly or indirectly influenced by LIBOR. The Company is assessingdoes not expect the adoption of ASU 2020-04 and itsto have a material impact on the Company's transition away from LIBOR for its loan and otherconsolidated financial instruments.statements.
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements.
In March 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-01, “Leases (Topic 842): Common Control Arrangements”. These amendments require entities to amortize leasehold improvements associated with common control leases over the useful life to the common control group. The ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period. Transition can be done either retrospectively or prospectively. The Company does not expect the adoption of ASU 2023-01 to have a material impact on its consolidated financial statements.
In March 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The Company does not expect the adoption of ASU 2023-02 to have a material impact on its consolidated financial statements.
Notes to Consolidated Financial Statements (Unaudited)
Note 2. Securities
The Company invests in U.S. Treasury securities, U.S. agency and mortgage-backed securities, obligations of state and political subdivisions, and corporate debt securities. Amortized costscosts, gross unrealized gains and losses, allowance for credit losses, and fair values of debt securities at June 30, 2022March 31, 2023 and December 31, 20212022 were as follows (in thousands):
June 30, 2022 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | |||||||||||||
Securities available for sale: | ||||||||||||||||
U.S. Treasury securities | $ | 59,815 | $ | 0 | $ | (3,559 | ) | $ | 56,256 | |||||||
U.S. agency and mortgage-backed securities | 164,623 | 120 | (16,929 | ) | 147,814 | |||||||||||
Obligations of states and political subdivisions | 69,258 | 27 | (10,604 | ) | 58,681 | |||||||||||
Corporate debt securities | 2,003 | 0 | (4 | ) | 1,999 | |||||||||||
Total securities available for sale | $ | 295,699 | $ | 147 | $ | (31,096 | ) | $ | 264,750 | |||||||
Securities held to maturity: | ||||||||||||||||
U.S. agency and mortgage-backed securities | $ | 65,302 | $ | 0 | $ | (5,400 | ) | $ | 59,902 | |||||||
Obligations of states and political subdivisions | 8,849 | 2 | (1,174 | ) | 7,677 | |||||||||||
Corporate debt securities | 3,000 | 0 | (87 | ) | 2,913 | |||||||||||
Total securities held to maturity | $ | 77,151 | $ | 2 | $ | (6,661 | ) | $ | 70,492 | |||||||
Total securities | $ | 372,850 | $ | 149 | $ | (37,757 | ) | $ | 335,242 |
December 31, 2021 | March 31, 2023 | |||||||||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | Amortized Cost | Gross Unrealized | Gross Unrealized | Fair Value | Allowance for Credit Losses | ||||||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||||||||||||||
U.S. Treasury securities | $ | 39,871 | $ | 37 | $ | (250 | ) | $ | 39,658 | $ | 12,471 | $ | — | $ | (1,026 | ) | $ | 11,445 | $ | — | ||||||||||||||||
U.S. agency and mortgage-backed securities | 177,131 | 1,085 | (1,837 | ) | 176,379 | 106,764 | 86 | (11,944 | ) | 94,906 | — | |||||||||||||||||||||||||
Obligations of states and political subdivisions | 71,037 | 910 | (509 | ) | 71,438 | 64,301 | 16 | (8,313 | ) | 56,004 | — | |||||||||||||||||||||||||
Corporate debt securities | 2,019 | 1 | 0 | 2,020 | ||||||||||||||||||||||||||||||||
Total securities available for sale | $ | 290,058 | $ | 2,033 | $ | (2,596 | ) | $ | 289,495 | $ | 183,536 | $ | 102 | $ | (21,283 | ) | $ | 162,355 | $ | — | ||||||||||||||||
Securities held to maturity: | ||||||||||||||||||||||||||||||||||||
U.S. Treasury securities | $ | 38,423 | $ | — | $ | (300 | ) | $ | 38,123 | $ | — | |||||||||||||||||||||||||
U.S. agency and mortgage-backed securities | $ | 26,392 | $ | 124 | $ | (53 | ) | $ | 26,463 | 98,048 | — | (7,866 | ) | 90,182 | — | |||||||||||||||||||||
Obligations of states and political subdivisions | 7,049 | 118 | (13 | ) | 7,154 | 11,962 | 37 | (1,045 | ) | 10,954 | — | |||||||||||||||||||||||||
Corporate debt securities | 3,000 | — | (303 | ) | 2,697 | (132 | ) | |||||||||||||||||||||||||||||
Total securities held to maturity | $ | 33,441 | $ | 242 | $ | (66 | ) | $ | 33,617 | $ | 151,433 | $ | 37 | $ | (9,514 | ) | $ | 141,956 | $ | (132 | ) | |||||||||||||||
Total securities | $ | 323,499 | $ | 2,275 | $ | (2,662 | ) | $ | 323,112 | $ | 334,969 | $ | 139 | $ | (30,797 | ) | $ | 304,311 | $ | (132 | ) |
December 31, 2022 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | |||||||||||||
Securities available for sale: | ||||||||||||||||
U.S. Treasury securities | $ | 12,468 | $ | — | $ | (1,239 | ) | $ | 11,229 | |||||||
U.S. agency and mortgage-backed securities | 109,972 | 95 | (13,149 | ) | 96,918 | |||||||||||
Obligations of states and political subdivisions | 64,386 | 4 | (9,630 | ) | 54,760 | |||||||||||
Total securities available for sale | $ | 186,826 | $ | 99 | $ | (24,018 | ) | $ | 162,907 | |||||||
Securities held to maturity: | ||||||||||||||||
U.S. Treasury securities | $ | 38,211 | $ | — | $ | (568 | ) | $ | 37,643 | |||||||
U.S. agency and mortgage-backed securities | 99,374 | — | (9,189 | ) | 90,185 | |||||||||||
Obligations of states and political subdivisions | 12,573 | — | (1,252 | ) | 11,321 | |||||||||||
Corporate debt securities | 3,000 | — | (352 | ) | 2,648 | |||||||||||
Total securities held to maturity | $ | 153,158 | $ | — | $ | (11,361 | ) | $ | 141,797 | |||||||
Total securities | $ | 339,984 | $ | 99 | $ | (35,379 | ) | $ | 304,704 |
Notes to Consolidated Financial Statements (Unaudited)
At June 30, 2022Information pertaining to securities with gross unrealized losses aggregated by investment category and December 31, 2021, investmentslength of time that individual securities have been in an unrealizeda continuous loss position that were temporarily impaired wereis as follows (in thousands):
June 30, 2022 | March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||||||||||||
Fair Value | Unrealized (Loss) | Fair Value | Unrealized (Loss) | Fair Value | Unrealized (Loss) | Fair Value | Unrealized (Loss) | Fair Value | Unrealized (Loss) | Fair Value | Unrealized (Loss) | |||||||||||||||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury securities | $ | 56,256 | $ | (3,559 | ) | $ | 0 | $ | 0 | $ | 56,256 | $ | (3,559 | ) | $ | — | $ | — | $ | 11,445 | $ | (1,026 | ) | $ | 11,445 | $ | (1,026 | ) | ||||||||||||||||||||
U.S. agency and mortgage-backed securities | 114,629 | (12,586 | ) | 24,426 | (4,343 | ) | 139,055 | (16,929 | ) | 4,232 | (55 | ) | 84,936 | (11,889 | ) | 89,168 | (11,944 | ) | ||||||||||||||||||||||||||||||
Obligations of states and political subdivisions | 48,145 | (8,873 | ) | 6,296 | (1,731 | ) | 54,441 | (10,604 | ) | 7,840 | (116 | ) | 41,831 | (8,197 | ) | 49,671 | (8,313 | ) | ||||||||||||||||||||||||||||||
Corporate debt securities | 1,999 | (4 | ) | 0 | 0 | 1,999 | (4 | ) | ||||||||||||||||||||||||||||||||||||||||
Total securities available for sale | $ | 221,029 | $ | (25,022 | ) | $ | 30,722 | $ | (6,074 | ) | $ | 251,751 | $ | (31,096 | ) | $ | 12,072 | $ | (171 | ) | $ | 138,212 | $ | (21,112 | ) | $ | 150,284 | $ | (21,283 | ) | ||||||||||||||||||
Securities held to maturity: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. agency and mortgage-backed securities | $ | 59,902 | $ | (5,400 | ) | $ | 0 | $ | 0 | $ | 59,902 | $ | (5,400 | ) | ||||||||||||||||||||||||||||||||||
Obligations of states and political subdivisions | 6,767 | (1,174 | ) | 0 | 0 | 6,767 | (1,174 | ) | ||||||||||||||||||||||||||||||||||||||||
Corporate debt securities | 2,913 | (87 | ) | 0 | 0 | 2,913 | (87 | ) | ||||||||||||||||||||||||||||||||||||||||
Total securities held to maturity | $ | 69,582 | $ | (6,661 | ) | $ | 0 | $ | 0 | $ | 69,582 | $ | (6,661 | ) | ||||||||||||||||||||||||||||||||||
Total securities | $ | 290,611 | $ | (31,683 | ) | $ | 30,722 | $ | (6,074 | ) | $ | 321,333 | $ | (37,757 | ) |
December 31, 2021 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||||||||||||
Fair Value | Unrealized (Loss) | Fair Value | Unrealized (Loss) | Fair Value | Unrealized (Loss) | Fair Value | Unrealized (Loss) | Fair Value | Unrealized (Loss) | Fair Value | Unrealized (Loss) | |||||||||||||||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury securities | $ | 29,656 | $ | (250 | ) | $ | 0 | $ | 0 | $ | 29,656 | $ | (250 | ) | $ | 9,041 | $ | (932 | ) | $ | 2,188 | $ | (307 | ) | $ | 11,229 | $ | (1,239 | ) | |||||||||||||||||||
U.S. agency and mortgage-backed securities | 109,950 | (1,335 | ) | 14,749 | (502 | ) | 124,699 | (1,837 | ) | 27,282 | (1,945 | ) | 62,342 | (11,204 | ) | 89,624 | (13,149 | ) | ||||||||||||||||||||||||||||||
Obligations of states and political subdivisions | 34,611 | (500 | ) | 1,009 | (9 | ) | 35,620 | (509 | ) | 24,689 | (2,581 | ) | 26,362 | (7,049 | ) | 51,051 | (9,630 | ) | ||||||||||||||||||||||||||||||
Total securities available for sale | $ | 174,217 | $ | (2,085 | ) | $ | 15,758 | $ | (511 | ) | $ | 189,975 | $ | (2,596 | ) | $ | 61,012 | $ | (5,458 | ) | $ | 90,892 | $ | (18,560 | ) | $ | 151,904 | $ | (24,018 | ) | ||||||||||||||||||
Securities held to maturity: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury securities | $ | 19,302 | $ | (258 | ) | $ | 18,342 | $ | (310 | ) | $ | 37,644 | $ | (568 | ) | |||||||||||||||||||||||||||||||||
U.S. agency and mortgage-backed securities | $ | 5,411 | $ | (53 | ) | $ | 0 | $ | 0 | $ | 5,411 | $ | (53 | ) | 58,019 | (6,848 | ) | 32,167 | (2,341 | ) | 90,186 | (9,189 | ) | |||||||||||||||||||||||||
Obligations of states and political subdivisions | 999 | (13 | ) | 0 | 0 | 999 | (13 | ) | 8,648 | (1,008 | ) | 2,672 | (244 | ) | 11,320 | (1,252 | ) | |||||||||||||||||||||||||||||||
Corporate debt securities | 2,648 | (352 | ) | — | — | 2,648 | (352 | ) | ||||||||||||||||||||||||||||||||||||||||
Total securities held to maturity | $ | 6,410 | $ | (66 | ) | $ | 0 | $ | 0 | $ | 6,410 | $ | (66 | ) | $ | 88,617 | $ | (8,466 | ) | $ | 53,181 | $ | (2,895 | ) | $ | 141,798 | $ | (11,361 | ) | |||||||||||||||||||
Total securities | $ | 180,627 | $ | (2,151 | ) | $ | 15,758 | $ | (511 | ) | $ | 196,385 | $ | (2,662 | ) | $ | 149,629 | $ | (13,924 | ) | $ | 144,073 | $ | (21,455 | ) | $ | 293,702 | $ | (35,379 | ) |
The tables above provide information about securities that have been in an unrealized loss position for less than twelve consecutive months and securities that have been in an unrealized loss position for twelve consecutive months or more. Management evaluates securities for other-than-temporaryto determine whether the impairment is due to credit-related factors or noncredit-related factors at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. ImpairmentConsideration is consideredgiven to be other-than-temporary ifthe extent to which fair the fair value is less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company (1) intends to sellretains its investment in the security (2) more likely than not will be requiredfor a period of time sufficient to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis. allow for any anticipated recovery in fair value. Presently, the Company does not intend to sell any of these securities, does not expect to be required to sell these securities, and expects to recover the entire amortized cost of all the securities.
Accrued interest receivable on securities available for sale and securities held to maturity totaled $803 thousand and $600 thousand, respectively at March 31, 2023.
Notes to Consolidated Financial Statements (Unaudited)
At June 30, 2022March 31, 2023, there were 113 out of 123 U.S. Treasury securities, 12494 out of 145 U.S. agency and mortgage-backed securities, 102 out of 116 obligations of states and political subdivisions, and two out of two corporate debt securities in an unrealized loss position. One hundred percent of the Company’s investment portfolio is considered investment grade. The weighted-average re-pricing term of the portfolio was 6.1 years at June 30, 2022. At December 31, 2021, there weresix out of eight U.S. Treasury securities, 58 out of 135109 U.S. agency and mortgage-backed securities, and 3780 out of 11898 obligations of states and political subdivisions in an unrealized loss position. One hundred percent of the Company’s investment portfolio is considered investment grade. The weighted-average re-pricing term of the portfolio was 6.5 years at March 31, 2023. One hundred percent of the Company’s investment portfolio was considered investment grade at December 31, 20212022. The weighted-average re-pricing term of the portfolio was 5.26.5 years at December 31, 20212022. The unrealized losses at June 30, 2022March 31, 2023 in the U.S. Treasury securities portfolio, U.S. agency and mortgage-backed securities portfolio, obligations of states and political subdivisions portfolio, and the corporate debt securities portfolio were related to changes in market interest rates and not credit concerns of the issuers.
On September 1, 2022, the Bank transferred 24 securities designated as available for sale with a combined book value of $82.2 million, market value of $74.4 million, and unrealized loss of $7.8 million, to securities designated held to maturity. The unrealized loss is being amortized monthly over the life of the securities with an increase to the carrying value of securities and a decrease to the related accumulated other comprehensive loss, which is included in the shareholders’ equity section of the Company’s balance sheet. The amortization of the unrealized loss on the transferred securities totaled $316 thousand for the first quarter of 2023. The securities selected for transfer had larger potential decreases in their fair market values in higher interest rate environments than most of the other securities in the available for sale portfolio and included U.S. Treasury, agency, municipal and commercial mortgage-backed securities. The securities were transferred to mitigate the potential unfavorable impact that higher market interest rates may have on the carrying value of the securities and on the related accumulated other comprehensive loss.
Notes to Consolidated Financial Statements (Unaudited)
The amortized cost and fair value of securities at June 30, 2022March 31, 2023 by contractual maturity are shown below (in thousands). Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.
Available for Sale | Held to Maturity | Available for Sale | Held to Maturity | |||||||||||||||||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||||||||
Due within one year | $ | 2,003 | $ | 1,999 | $ | 607 | $ | 610 | $ | 500 | $ | 500 | $ | 19,949 | $ | 19,779 | ||||||||||||||||
Due after one year through five years | 57,501 | 54,848 | 6,511 | 6,308 | 20,323 | 19,219 | 27,721 | 27,181 | ||||||||||||||||||||||||
Due after five years through ten years | 62,062 | 57,133 | 19,173 | 17,970 | 40,251 | 37,157 | 24,100 | 21,910 | ||||||||||||||||||||||||
Due after ten years | 174,133 | 150,770 | 50,860 | 45,604 | 122,462 | 105,479 | 79,663 | 73,086 | ||||||||||||||||||||||||
$ | 295,699 | $ | 264,750 | $ | 77,151 | $ | 70,492 | $ | 183,536 | $ | 162,355 | $ | 151,433 | $ | 141,956 |
Federal Home Loan Bank, Federal Reserve Bank, and Community Bankers’ Bank stock are generally viewed as long-term investments and as restricted securities, which are carried at cost, because there is a minimal market for the stock. Therefore, when evaluating restricted securities for impairment, their value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider these investments to be other-than-temporarily impaired at June 30, 2022, and 0 impairment has been recognized.
The composition of restricted securities at June 30, 2022March 31, 2023 and December 31, 20212022 was as follows (in thousands):
June 30, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | |||||||||||||
Federal Home Loan Bank stock | $ | 796 | $ | 701 | $ | 691 | $ | 796 | ||||||||
Federal Reserve Bank stock | 980 | 980 | 980 | 980 | ||||||||||||
Community Bankers’ Bank stock | 132 | 132 | 132 | 132 | ||||||||||||
$ | 1,908 | $ | 1,813 | $ | 1,803 | $ | 1,908 |
The Company also holds limited partnership investments in Small Business Investment Companies (SBICs), which are included in other assets in the Consolidated Balance Sheets. The limited partnership investments are measured as equity investments without readily determinable fair values at their cost, less any impairment. The amounts included in other assets for the limited partnership investments were $566$636 thousand and $504$599 thousand at June 30, 2022March 31, 2023 and December 31, 20212022, respectively.
Credit Quality Indicators & Allowance for Credit Losses - HTM
The Company monitors the credit quality of the debt securities held to maturity through the use of credit ratings from Moody's, S&P, and Egan-Jones. The Company monitors the credit ratings on a quarterly basis. The following table summarizes the amortized cost of debt securities held to maturity at March 31, 2023, aggregated by credit quality indicators.
U.S. Treasury securities | U.S. agency and mortgage-backed securities | Obligations of states and political subdivisions | Corporate debt securities | Total Held to Maturity Securities | ||||||||||||||||
March 31, 2023 | ||||||||||||||||||||
Aaa | $ | 38,423 | $ | 22,763 | $ | 2,911 | $ | — | $ | 64,097 | ||||||||||
Aa1 / Aa2 / Aa3 | — | — | 9,051 | — | 9,051 | |||||||||||||||
Baa1 / Baa2 / Baa3 | — | — | — | 3,000 | 3,000 | |||||||||||||||
Not rated - Agency (1) | — | 75,285 | — | — | 75,285 | |||||||||||||||
Total | $ | 38,423 | $ | 98,048 | $ | 11,962 | $ | 3,000 | $ | 151,433 | ||||||||||
December 31, 2022 | ||||||||||||||||||||
Aaa | $ | 38,211 | $ | 22,706 | $ | 3,126 | $ | — | $ | 64,043 | ||||||||||
Aa1 / Aa2 / Aa3 | — | — | 9,447 | — | 9,447 | |||||||||||||||
Baa1 / Baa2 / Baa3 | — | — | — | 3,000 | 3,000 | |||||||||||||||
Not rated - Agency (1) | — | 76,668 | — | — | 76,668 | |||||||||||||||
Total | $ | 38,211 | $ | 99,374 | $ | 12,573 | $ | 3,000 | $ | 153,158 |
(1) Generally considered not to have credit risk given the implied governmental guarantees associated with these agencies
The following table summarizes the change in the allowance for credit losses on held to maturity securities for the three months ended March 31, 2023.
U.S. Treasury securities | U.S. agency and mortgage-backed securities | Obligations of states and political subdivisions | Corporate debt securities | Total Held to Maturity Securities | ||||||||||||||||
Balance, December 31, 2022 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Adjustment for adoption of ASU 2016-13 | — | — | — | 132 | 132 | |||||||||||||||
Provision for credit losses | — | — | — | — | — | |||||||||||||||
Charge-offs of securities | — | — | — | — | — | |||||||||||||||
Recoveries | — | — | — | — | — | |||||||||||||||
Balance, March 31, 2023 | $ | — | $ | — | $ | — | $ | 132 | $ | 132 |
At March 31, 2023, the Company had no securities held-to-maturity that were past due 30 days or more as to principal and interest payments. The Company had no securities held-to-maturity classified as nonaccrual for the three months ended March 31, 2023.
Notes to Consolidated Financial Statements (Unaudited)
Note 3. Loans
Loans at June 30, 2022March 31, 2023 and December 31, 20212022 are summarized as follows (in thousands):
June 30, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | |||||||||||||
Real estate loans: | ||||||||||||||||
Construction and land development | $ | 49,118 | $ | 55,721 | $ | 48,610 | $ | 51,840 | ||||||||
Secured by 1-4 family residential | 312,083 | 291,990 | 334,302 | 331,421 | ||||||||||||
Other real estate loans | 401,037 | 364,921 | 416,001 | 418,456 | ||||||||||||
Commercial and industrial loans | 109,548 | 99,805 | 110,937 | 111,225 | ||||||||||||
Consumer and other loans | 8,303 | 12,681 | 8,117 | 7,581 | ||||||||||||
Total loans | $ | 880,089 | $ | 825,118 | $ | 917,967 | $ | 920,523 | ||||||||
Allowance for loan losses | (6,202 | ) | (5,710 | ) | ||||||||||||
Allowance for credit losses | (8,717 | ) | (7,446 | ) | ||||||||||||
Loans, net | $ | 873,887 | $ | 819,408 | $ | 909,250 | $ | 913,077 |
Net deferred loan fees included in the above loan categories were $873$864 thousand and $871$838 thousand at June 30, 2022March 31, 2023 and December 31, 20212022, respectively. Consumer and other loans included $292$179 thousand and $175$197 thousand of demand deposit overdrafts at June 30, 2022March 31, 2023 and December 31, 20212022, respectively.
Risk characteristics of each loan portfolio class that are considered by the Company include:
• | 1-4 family residential mortgage loans carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral. |
• | Real estate construction and land development loans carry risks that the project may not be finished according to schedule, the project may not be finished according to budget, and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure or other factors unrelated to the project. |
• | Other real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because repayment of these loans may be dependent upon the profitability and cash flows of the business or project. |
• | Commercial and industrial loans carry risks associated with the successful operation of a business because repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much reliability. Commercial and industrial loans also include purchased loans which could have been originated outside of the Company's market area. |
• | Consumer and other loans carry |
Loans acquired in business combinations are recorded in the Consolidated Balance Sheets at fair value at the acquisition date under the acquisition method of accounting. The principal balance of purchased loans is included in the allowance for credit losses calculation. The remaining net discount on purchased loans at March 31, 2023 was $2.4 million. The outstanding principal balance and the carrying amount at June 30,March 31, 2023 and December 31, 2022of loans acquired in business combinations were as follows:
March 31, 2023 | December 31, 2022 | |||||||||||
Acquired Loans- | Acquired Loans- | Acquired Loans- | ||||||||||
Purchased | Non-Purchased | Non-Purchased | ||||||||||
(Dollars in thousands) | Performing | Credit Deteriorated | Credit Deteriorated | |||||||||
Outstanding principal balance | $ | 188,626 | $ | 178,664 | $ | 187,017 | ||||||
Carrying amount | ||||||||||||
Real estate loans: | ||||||||||||
Construction and land development | $ | 14,611 | $ | 9,876 | $ | 9,823 | ||||||
Secured by 1-4 family residential | 47,340 | 41,013 | 42,915 | |||||||||
Other real estate loans | 93,864 | 99,115 | 103,521 | |||||||||
Commercial and industrial loans | 25,566 | 22,737 | 24,661 | |||||||||
Consumer and other loans | 4,296 | 3,531 | 3,560 | |||||||||
Total acquired loans | $ | 185,677 | $ | 176,272 | $ | 184,480 |
Notes to Consolidated Financial Statements (Unaudited)
The following tables provide a summary of loan classes and an aging of past due loans as of June 30, 2022March 31, 2023 and December 31, 20212022 (in thousands):
June 30, 2022 | March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | > 90 Days Past Due | Total Past Due | Current | Total Loans | Non-accrual Loans | 90 Days or More Past Due and Accruing | 30-59 Days Past Due | 60-89 Days Past Due | > 90 Days Past Due | Total Past Due | Current | Total Loans | Non-accrual Loans | 90 Days or More Past Due and Accruing | |||||||||||||||||||||||||||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction and land development | $ | 0 | $ | 43 | $ | 47 | $ | 90 | $ | 49,028 | $ | 49,118 | $ | 0 | $ | 47 | $ | 427 | $ | — | $ | 1,003 | $ | 1,430 | $ | 47,180 | $ | 48,610 | $ | 1,044 | $ | — | ||||||||||||||||||||||||||||||||
Secured by 1-4 family residential | 272 | 185 | 68 | 525 | 311,558 | 312,083 | 420 | 19 | 1,422 | 16 | 82 | 1,520 | 332,782 | 334,302 | 474 | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Other real estate loans | 9 | 0 | 0 | 9 | 401,028 | 401,037 | 22 | 0 | 17 | — | 109 | 126 | 415,875 | 416,001 | 73 | 47 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | 764 | 258 | 23 | 1,045 | 108,503 | 109,548 | 0 | 23 | 5 | 16 | — | 21 | 110,916 | 110,937 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer and other loans | 6 | 35 | 3 | 44 | 8,259 | 8,303 | 0 | 3 | 3 | 14 | — | 17 | 8,100 | 8,117 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,051 | $ | 521 | $ | 141 | $ | 1,713 | $ | 878,376 | $ | 880,089 | $ | 442 | $ | 92 | $ | 1,874 | $ | 46 | $ | 1,194 | $ | 3,114 | $ | 914,853 | $ | 917,967 | $ | 1,591 | $ | 47 |
December 31, 2021 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | > 90 Days Past Due | Total Past Due | Current | Total Loans | Non-accrual Loans | 90 Days or More Past Due and Accruing | 30-59 Days Past Due | 60-89 Days Past Due | > 90 Days Past Due | Total Past Due | Current | Total Loans | Non-accrual Loans | 90 Days or More Past Due and Accruing | |||||||||||||||||||||||||||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction and land development | $ | 0 | $ | 115 | $ | 0 | $ | 115 | $ | 55,606 | $ | 55,721 | $ | 0 | $ | 0 | $ | 115 | $ | 20 | $ | 1,045 | $ | 1,180 | $ | 50,660 | $ | 51,840 | $ | 1,045 | $ | — | ||||||||||||||||||||||||||||||||
Secured by 1-4 family residential | 1,293 | 100 | 372 | 1,765 | 290,225 | 291,990 | 766 | 0 | 1,033 | 60 | 207 | 1,300 | 330,121 | 331,421 | 530 | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Other real estate loans | 186 | 0 | 0 | 186 | 364,735 | 364,921 | 29 | 0 | 109 | — | — | 109 | 418,347 | 418,456 | 13 | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | 1,474 | 0 | 0 | 1,474 | 98,331 | 99,805 | 1,509 | 0 | 31 | 130 | 1,085 | 1,246 | 109,979 | 111,225 | 1,085 | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer and other loans | 56 | 11 | 0 | 67 | 12,614 | 12,681 | 0 | 0 | 26 | 25 | — | 51 | 7,530 | 7,581 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 3,009 | $ | 226 | $ | 372 | $ | 3,607 | $ | 821,511 | $ | 825,118 | $ | 2,304 | $ | 0 | $ | 1,314 | $ | 235 | $ | 2,337 | $ | 3,886 | $ | 916,637 | $ | 920,523 | $ | 2,673 | $ | — |
Credit Quality Indicators
As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grading of specified classes of loans. The Company utilizes a risk grading matrix to assign a rating to each of its loans. The loan ratings are summarized into the following categories: pass, special mention, substandard, doubtful, and loss. Pass rated loans include all risk rated credits other than those included in special mention, substandard, or doubtful. Loans classified as loss are charged-off. Loan officers assign risk grades to loans at origination and as renewals arise. The Bank’s Credit Administration department reviews risk grades for accuracy on a quarterly basis and as credit issues arise. In addition, a certain amount of loans are reviewed each year through the Company’s internal and external loan review process. A description of the general characteristics of the loan grading categories is as follows:
Pass – Loans classified as pass exhibit acceptable operating trends, balance sheet trends, and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower as agreed.
Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the Bank’s credit position at some future date.
Notes to Consolidated Financial Statements (Unaudited)
Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The Company considers all doubtful loans to be impaired and places the loan on non-accrual status.
Loss – Loans classified as loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the Company's recorded investment in loans by credit quality indicators by year of origination as of March 31, 2023 (in thousands).
March 31, 2023 | ||||||||||||||||||||||||||||||||
Term Loans by Year of Origination | ||||||||||||||||||||||||||||||||
2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Total | |||||||||||||||||||||||||
Construction and land development | ||||||||||||||||||||||||||||||||
Pass | $ | 627 | $ | 3,598 | $ | 8,074 | $ | 2,695 | $ | 2,327 | $ | 3,863 | $ | 26,382 | $ | 47,566 | ||||||||||||||||
Special Mention | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Substandard | — | — | — | — | — | 1,044 | — | 1,044 | ||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total Construction and land development | $ | 627 | $ | 3,598 | $ | 8,074 | $ | 2,695 | $ | 2,327 | $ | 4,907 | $ | 26,382 | $ | 48,610 | ||||||||||||||||
Current period gross write-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Secured by 1-4 family residential | ||||||||||||||||||||||||||||||||
Pass | $ | 8,910 | $ | 65,912 | $ | 65,803 | $ | 41,706 | $ | 32,203 | $ | 74,313 | $ | 44,685 | $ | 333,532 | ||||||||||||||||
Special Mention | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Substandard | — | — | — | — | — | 770 | — | 770 | ||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total Secured by 1-4 family residential | $ | 8,910 | $ | 65,912 | $ | 65,803 | $ | 41,706 | $ | 32,203 | $ | 75,083 | $ | 44,685 | $ | 334,302 | ||||||||||||||||
Current period gross write-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Other real estate loans | ||||||||||||||||||||||||||||||||
Pass | $ | 2,488 | $ | 94,258 | $ | 88,542 | $ | 42,553 | $ | 41,713 | $ | 135,868 | $ | 9,137 | $ | 414,559 | ||||||||||||||||
Special Mention | — | — | — | 1,369 | — | — | — | 1,369 | ||||||||||||||||||||||||
Substandard | — | — | — | — | — | 73 | — | 73 | ||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total Other real estate loans | $ | 2,488 | $ | 94,258 | $ | 88,542 | $ | 43,922 | $ | 41,713 | $ | 135,941 | $ | 9,137 | $ | 416,001 | ||||||||||||||||
Current period gross write-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||||||||||
Pass | $ | 5,659 | $ | 35,448 | $ | 29,514 | $ | 4,743 | $ | 7,709 | $ | 11,446 | $ | 16,349 | $ | 110,868 | ||||||||||||||||
Special Mention | — | — | — | 69 | — | — | — | 69 | ||||||||||||||||||||||||
Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total Commercial and industrial | $ | 5,659 | $ | 35,448 | $ | 29,514 | $ | 4,812 | $ | 7,709 | $ | 11,446 | $ | 16,349 | $ | 110,937 | ||||||||||||||||
Current period gross write-offs | $ | — | $ | — | $ | — | $ | 623 | $ | — | $ | 228 | $ | — | $ | 851 | ||||||||||||||||
Consumer and other loans | ||||||||||||||||||||||||||||||||
Pass | $ | 1,365 | $ | 2,028 | $ | 606 | $ | 1,643 | $ | 2,344 | $ | 96 | $ | 35 | $ | 8,117 | ||||||||||||||||
Special Mention | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total Consumer and other loans | $ | 1,365 | $ | 2,028 | $ | 606 | $ | 1,643 | $ | 2,344 | $ | 96 | $ | 35 | $ | 8,117 | ||||||||||||||||
Current period gross write-offs | $ | 82 | $ | 26 | $ | 1 | $ | 14 | $ | — | $ | 3 | $ | — | $ | 126 |
The following tables provide an analysis of the credit risk profile of each loan class as of June 30, 2022 and December 31, 20212022 (in thousands):
June 30, 2022 | ||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
Real estate loans: | ||||||||||||||||||||
Construction and land development | $ | 49,118 | $ | 0 | $ | 0 | $ | 0 | $ | 49,118 | ||||||||||
Secured by 1-4 family residential | 311,355 | 0 | 728 | 0 | 312,083 | |||||||||||||||
Other real estate loans | 401,015 | 0 | 22 | 0 | 401,037 | |||||||||||||||
Commercial and industrial | 109,548 | 0 | 0 | 0 | 109,548 | |||||||||||||||
Consumer and other loans | 8,303 | 0 | 0 | 0 | 8,303 | |||||||||||||||
Total | $ | 879,339 | $ | 0 | $ | 750 | $ | 0 | $ | 880,089 |
December 31, 2021 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Total | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||||||||||||||
Construction and land development | $ | 55,721 | $ | 0 | $ | 0 | $ | 0 | $ | 55,721 | $ | 50,795 | $ | — | $ | 1,045 | $ | — | $ | 51,840 | ||||||||||||||||||||
Secured by 1-4 family residential | 290,909 | 0 | 1,081 | 0 | 291,990 | 330,590 | — | 831 | — | 331,421 | ||||||||||||||||||||||||||||||
Other real estate loans | 364,892 | 0 | 29 | 0 | 364,921 | 416,559 | 1,884 | 13 | — | 418,456 | ||||||||||||||||||||||||||||||
Commercial and industrial | 97,215 | 1,081 | 1,509 | 0 | 99,805 | 110,065 | 75 | 1,085 | — | 111,225 | ||||||||||||||||||||||||||||||
Consumer and other loans | 12,681 | 0 | 0 | 0 | 12,681 | 7,581 | — | — | — | 7,581 | ||||||||||||||||||||||||||||||
Total | $ | 821,418 | $ | 1,081 | $ | 2,619 | $ | 0 | $ | 825,118 | $ | 915,590 | $ | 1,959 | $ | 2,974 | $ | — | $ | 920,523 |
Notes to Consolidated Financial Statements (Unaudited)
Note 4. Allowance for LoanCredit Losses
The following tables present, as of and during the periods ended June 30, 2022March 31, 2023, December 31, 20212022 and June 30, 2021March 31, 2022, the total allowance for loan losses,activity in the allowanceACLL by impairment methodology,portfolio, and information about individually evaluated and collectively evaluated loans by impairment methodology (in thousands):
June 30, 2022 | ||||||||||||||||||||||||
Construction and Land Development | Secured by 1-4 Family Residential | Other Real Estate | Commercial and Industrial | Consumer and Other Loans | Total | |||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning Balance, December 31, 2021 | $ | 345 | $ | 1,077 | $ | 3,230 | $ | 718 | $ | 340 | $ | 5,710 | ||||||||||||
Charge-offs | 0 | (5 | ) | 0 | (8 | ) | (200 | ) | (213 | ) | ||||||||||||||
Recoveries | 7 | 10 | 4 | 146 | 138 | 305 | ||||||||||||||||||
Provision for (recovery of) loan losses | (9 | ) | (40 | ) | 334 | 20 | 95 | 400 | ||||||||||||||||
Ending Balance, June 30, 2022 | $ | 343 | $ | 1,042 | $ | 3,568 | $ | 876 | $ | 373 | $ | 6,202 | ||||||||||||
Ending Balance: | ||||||||||||||||||||||||
Individually evaluated for impairment | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Collectively evaluated for impairment | 343 | 1,042 | 3,568 | 876 | 373 | 6,202 | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Ending Balance | $ | 49,118 | $ | 312,083 | $ | 401,037 | $ | 109,548 | $ | 8,303 | $ | 880,089 | ||||||||||||
Individually evaluated for impairment | 0 | 420 | 22 | 0 | 0 | 442 | ||||||||||||||||||
Collectively evaluated for impairment | 49,118 | 311,663 | 401,015 | 109,548 | 8,303 | 879,647 |
March 31, 2023 | ||||||||||||||||||||||||
Construction and Land Development | Secured by 1-4 Family Residential | Other Real Estate | Commercial and Industrial | Consumer and Other Loans | Total | |||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||
Beginning Balance, December 31, 2022 | $ | 546 | $ | 1,108 | $ | 3,609 | $ | 1,874 | $ | 309 | $ | 7,446 | ||||||||||||
Adjustment to allowance for adoption of ASU 2016-13 | (313 | ) | 1,409 | 1,705 | (391 | ) | (224 | ) | 2,186 | |||||||||||||||
Charge-offs | — | — | — | (851 | ) | (126 | ) | (977 | ) | |||||||||||||||
Recoveries | — | 5 | 2 | — | 55 | 62 | ||||||||||||||||||
Provision for (recovery of) credit losses | 11 | 74 | (150 | ) | (15 | ) | 80 | — | ||||||||||||||||
Ending Balance, March 31, 2023 | $ | 244 | $ | 2,596 | $ | 5,166 | $ | 617 | $ | 94 | $ | 8,717 | ||||||||||||
Ending Balance: | ||||||||||||||||||||||||
Individually evaluated | — | — | — | — | — | — | ||||||||||||||||||
Collectively evaluated | 244 | 2,596 | 5,166 | 617 | 94 | 8,717 | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Ending Balance | $ | 48,610 | $ | 334,302 | $ | 416,001 | $ | 110,937 | $ | 8,117 | $ | 917,967 | ||||||||||||
Individually evaluated | 1,044 | 474 | 73 | — | — | 1,591 | ||||||||||||||||||
Collectively evaluated | 47,566 | 333,828 | 415,928 | 110,937 | 8,117 | 916,376 |
December 31, 2021 | ||||||||||||||||||||||||
Construction and Land Development | Secured by 1-4 Family Residential | Other Real Estate | Commercial and Industrial | Consumer and Other Loans | Total | |||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning Balance, December 31, 2020 | $ | 306 | $ | 1,022 | $ | 4,956 | $ | 784 | $ | 417 | $ | 7,485 | ||||||||||||
Charge-offs | 0 | (15 | ) | (992 | ) | (6 | ) | (434 | ) | (1,447 | ) | |||||||||||||
Recoveries | 6 | 65 | 3 | 7 | 241 | 322 | ||||||||||||||||||
Provision for (recovery of) loan losses | 33 | 5 | (737 | ) | (67 | ) | 116 | (650 | ) | |||||||||||||||
Ending Balance, December 31, 2021 | $ | 345 | $ | 1,077 | $ | 3,230 | $ | 718 | $ | 340 | $ | 5,710 | ||||||||||||
Ending Balance: | ||||||||||||||||||||||||
Individually evaluated for impairment | 0 | 0 | 0 | 55 | 0 | 55 | ||||||||||||||||||
Collectively evaluated for impairment | 345 | 1,077 | 3,230 | 663 | 340 | 5,655 | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Ending Balance | $ | 55,721 | $ | 291,990 | $ | 364,921 | $ | 99,805 | $ | 12,681 | $ | 825,118 | ||||||||||||
Individually evaluated for impairment | 0 | 765 | 30 | 1,509 | 0 | 2,304 | ||||||||||||||||||
Collectively evaluated for impairment | 55,721 | 291,225 | 364,891 | 98,296 | 12,681 | 822,814 |
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2021 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
Construction and Land Development | Secured by 1-4 Family Residential | Other Real Estate | Commercial and Industrial | Consumer and Other Loans | Total | Construction and Land Development | Secured by 1-4 Family Residential | Other Real Estate | Commercial and Industrial | Consumer and Other Loans | Total | |||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||||||||||||
Beginning Balance, December 31, 2020 | $ | 306 | $ | 1,022 | $ | 4,956 | $ | 784 | $ | 417 | $ | 7,485 | ||||||||||||||||||||||||||||||||||||
Beginning Balance, December 31, 2021 | $ | 345 | $ | 1,077 | $ | 3,230 | $ | 718 | $ | 340 | $ | 5,710 | ||||||||||||||||||||||||||||||||||||
Charge-offs | 0 | 0 | (992 | ) | 0 | (159 | ) | (1,151 | ) | — | (6 | ) | — | (32 | ) | (491 | ) | (529 | ) | |||||||||||||||||||||||||||||
Recoveries | 0 | 4 | 1 | 4 | 122 | 131 | 10 | 19 | 15 | 145 | 226 | 415 | ||||||||||||||||||||||||||||||||||||
Provision for (recovery of) loan losses | (32 | ) | (11 | ) | (893 | ) | (30 | ) | (34 | ) | (1,000 | ) | 191 | 18 | 364 | 1,043 | 234 | 1,850 | ||||||||||||||||||||||||||||||
Ending Balance, June 30, 2021 | $ | 274 | $ | 1,015 | $ | 3,072 | $ | 758 | $ | 346 | $ | 5,465 | ||||||||||||||||||||||||||||||||||||
Ending Balance, December 31, 2022 | $ | 546 | $ | 1,108 | $ | 3,609 | $ | 1,874 | $ | 309 | $ | 7,446 | ||||||||||||||||||||||||||||||||||||
Ending Balance: | ||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | 0 | 0 | 0 | 78 | 0 | 78 | — | — | — | 888 | — | 888 | ||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 273 | 1,015 | 3,072 | 680 | 347 | 5,387 | 546 | 1,108 | 3,609 | 986 | 309 | 6,558 | ||||||||||||||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||||||||||||||
Ending Balance | $ | 25,035 | $ | 235,158 | $ | 245,455 | $ | 102,966 | $ | 8,734 | $ | 617,348 | $ | 51,840 | $ | 331,421 | $ | 418,456 | $ | 111,225 | $ | 7,581 | $ | 920,523 | ||||||||||||||||||||||||
Individually evaluated for impairment | 0 | 410 | 158 | 1,534 | 0 | 2,102 | 1,045 | 530 | 13 | 1,085 | — | 2,673 | ||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 25,035 | 234,748 | 245,297 | 101,432 | 8,734 | 615,246 | 50,795 | 330,891 | 418,443 | 110,140 | 7,581 | 917,850 |
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2022 | ||||||||||||||||||||||||
Construction and Land Development | Secured by 1-4 Family Residential | Other Real Estate | Commercial and Industrial | Consumer and Other Loans | Total | |||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning Balance, December 31, 2021 | $ | 345 | $ | 1,077 | $ | 3,230 | $ | 718 | $ | 340 | $ | 5,710 | ||||||||||||
Charge-offs | — | — | — | (8 | ) | (98 | ) | (106 | ) | |||||||||||||||
Recoveries | 4 | 5 | 2 | 140 | 73 | 224 | ||||||||||||||||||
(Recovery of) provision for loan losses | (1 | ) | (113 | ) | 145 | (40 | ) | 9 | — | |||||||||||||||
Ending Balance, March 31, 2022 | $ | 348 | $ | 969 | $ | 3,377 | $ | 810 | $ | 324 | $ | 5,828 | ||||||||||||
Ending Balance: | ||||||||||||||||||||||||
Individually evaluated for impairment | — | — | — | — | — | — | ||||||||||||||||||
Collectively evaluated for impairment | 348 | 969 | 3,377 | 810 | 324 | 5,828 | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Ending Balance | $ | 49,308 | $ | 290,408 | $ | 384,191 | $ | 103,682 | $ | 8,834 | $ | 836,423 | ||||||||||||
Individually evaluated for impairment | — | 619 | 28 | 1,483 | — | 2,130 | ||||||||||||||||||
Collectively evaluated for impairment | 49,308 | 289,789 | 384,163 | 102,199 | 8,834 | 834,293 |
Nonaccrual loans
The following is a summary of the Company's nonaccrual loans by major categories for the periods indicated (in thousands):
CECL | Incurred Loss | |||||||||||||||
March 31, 2023 | December 31, 2022 | |||||||||||||||
Nonaccrual Loans with No Allowance | Nonaccrual loans with an Allowance | Total Nonaccrual Loans | Nonaccrual Loans | |||||||||||||
Real estate loans: | ||||||||||||||||
Construction and land development | $ | 1,044 | $ | — | $ | 1,044 | $ | 1,045 | ||||||||
Secured by 1-4 family residential | 474 | — | 474 | 530 | ||||||||||||
Other real estate loans | 73 | — | 73 | 13 | ||||||||||||
Commercial and industrial | — | — | — | 1,085 | ||||||||||||
Total | $ | 1,591 | $ | — | $ | 1,591 | $ | 2,673 |
Prior to the adoption of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans included loans on nonaccrual status and accruing troubled debt restructurings. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower's capacity to pay, which included such factors as the borrower's current financial statements, an analysis of global cash flow sufficient to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value. The Company individually assessed for impairment all nonaccrual loans and troubled debt restructurings. The tables below include information on all loans deemed impaired. Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis.
Notes to Consolidated Financial Statements (Unaudited)
Impaired loans and the related allowance as of and for the periods ended June 30, 2022, December 31, 20212022 and June 30, 2021March 31, 2022, were as follows (in thousands):
June 30, 2022 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment with No Allowance | Recorded Investment with Allowance | Total Recorded Investment | Related Allowance | Average Recorded Investment | Interest Income Recognized | Unpaid Principal Balance | Recorded Investment with No Allowance | Recorded Investment with Allowance | Total Recorded Investment | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||||||||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction and land development | $ | 2,412 | $ | 1,045 | $ | — | $ | 1,045 | $ | — | $ | 30 | $ | 75 | ||||||||||||||||||||||||||||||||||||||||||
Secured by 1-4 family residential | $ | 552 | $ | 420 | $ | 0 | $ | 420 | $ | 0 | $ | 650 | $ | 0 | 680 | 530 | — | 530 | — | 580 | 11 | |||||||||||||||||||||||||||||||||||
Other real estate loans | 34 | 22 | 0 | 22 | 0 | 26 | 0 | 26 | 13 | — | 13 | — | 22 | — | ||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | 0 | 0 | 0 | 0 | 0 | 1,241 | 0 | 1,084 | — | 1,085 | 1,085 | 888 | 650 | 40 | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 586 | $ | 442 | $ | 0 | $ | 442 | $ | 0 | $ | 1,917 | $ | 0 | $ | 4,202 | $ | 1,588 | $ | 1,085 | $ | 2,673 | $ | 888 | $ | 1,282 | $ | 126 |
December 31, 2021 | ||||||||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment with No Allowance | Recorded Investment with Allowance | Total Recorded Investment | Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||
Construction and land development | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 91 | $ | 0 | ||||||||||||||
Secured by 1-4 family residential | 889 | 766 | 0 | 766 | 0 | 429 | 9 | |||||||||||||||||||||
Other real estate loans | 40 | 29 | 0 | 29 | 0 | 2,384 | 0 | |||||||||||||||||||||
Commercial and industrial | 1,673 | 0 | 1,509 | 1,509 | 55 | 1,613 | 0 | |||||||||||||||||||||
Total | $ | 2,602 | $ | 795 | $ | 1,509 | $ | 2,304 | $ | 55 | $ | 4,517 | $ | 9 |
June 30, 2021 | March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment with No Allowance | Recorded Investment with Allowance | Total Recorded Investment | Related Allowance | Average Recorded Investment | Interest Income Recognized | Unpaid Principal Balance | Recorded Investment with No Allowance | Recorded Investment with Allowance | Total Recorded Investment | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||||||||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction and land development | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 273 | $ | 0 | ||||||||||||||||||||||||||||||||||||||||||
Secured by 1-4 family residential | 544 | 410 | 0 | 410 | 0 | 429 | 0 | $ | 743 | $ | 618 | $ | — | $ | 618 | $ | — | $ | 732 | $ | 1 | |||||||||||||||||||||||||||||||||||
Other real estate loans | 169 | 158 | 0 | 158 | 0 | 4,447 | 1 | 39 | 28 | — | 28 | — | 29 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | 1,653 | 0 | 1,534 | 1,534 | 78 | 1,548 | 0 | 1,680 | 1,484 | — | 1,484 | — | 1,491 | — | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 2,366 | $ | 568 | $ | 1,534 | $ | 2,102 | $ | 78 | $ | 6,697 | $ | 1 | $ | 2,462 | $ | 2,130 | $ | — | $ | 2,130 | $ | — | $ | 2,252 | $ | 1 |
The “Recorded Investment” amounts in the table above represent the outstanding principal balance on each loan represented in the table. The “Unpaid Principal Balance” represents the outstanding principal balance on each loan represented in the table plus any amounts that have been charged off on each loan and/or payments that have been applied towards principal on non-accrual loans. Only loan classes with balances are included in the tables above.
As of June 30,December 31, 2022, and March 31, 2022, loans classified as troubled debt restructurings (TDRs) and included in impaired loans in the disclosure above totaled $116 thousand.$101 thousand and $1.6 million, respectively. At June 30,December 31, 2022, and March 31, 2022, none of the loans classified as TDRs were performing under the restructured terms and all were considered non-performing assets. There were $1.6 million in TDRs at December 31, 2021, $7 thousand of which were performing under the restructured terms. Modified terms under TDRs may includeincluded rate reductions, extension of terms that are considered to be below market, conversion to interest only, and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. There were 0 loans modified under TDRs duringDuring the three andmonths ended sixMarch 31, 2022, there were no loans classified as TDRs.
For the three months ended June 30, 2022 and 2021.
For the three and six months ended June 30, 2022March 31, 2023 and 20212022, there were 0no TDRs that subsequently defaulted within twelve months of the loan modification. Management defines default as over ninety days past due or the foreclosure and repossession of the collateral or charge-off of the loan during the twelve month period subsequent to the modification.
DuringCollateral-Dependent Loans
The Company may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the fourth quarterloans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of 2020,the Company modified termsallowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of certain loans for customers that continuedthe loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be negatively impacted bycollateral dependent when, based upon management's assessment, the COVID-19 pandemic. The loan modifications lowered borrower loan payments by allowing interest only payments for periods ranging between 6is experiencing financial difficulty and 24 months. As of June 30, 2022, loans that were modified totaled $4.7 million. All modified loans were performing and were not considered TDRs because they were modified in accordance with relief provisionsrepayment is expected to be provided substantially through the operation or sale of the CARES Act.collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans:
• | Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate. |
• | Residential real estate loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage. | |
• | Home equity lines of credit are generally secured by second mortgages on residential real estate property. | |
• | Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral. |
The following table presents the amortized cost of collateral-dependent loans (in thousands):
March 31, 2023 | ||||||||||||
(Dollars in thousands) | Real Estate Secured | Non-Real Estate Secured | Total Collateral-Dependent Loans | |||||||||
Real estate loans: | ||||||||||||
Construction and land development | $ | 1,044 | $ | — | $ | 1,044 | ||||||
Secured by 1-4 family residential | 474 | — | 474 | |||||||||
Other real estate loans | 73 | — | 73 | |||||||||
Total | $ | 1,591 | $ | — | $ | 1,591 |
At March 31, 2023, there was no allowance for credit losses on collateral-dependent loans.
Notes to Consolidated Financial Statements (Unaudited)
Modifications Made to Borrowers Experiencing Financial Difficulty
The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.
In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. For the real estate loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period. The combination is at least two of the following: a term extension, principal forgiveness, and interest rate reduction.
The following table shows the amortized cost basis as of March 31, 2023 of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of loans and type of concession granted and describes the financial effect of the modifications made to borrowers experiencing financial difficulty:
Term Extension | |||||||||
(Dollars in thousands) | Amortized Cost Basis | % of Total Loan Type | Financial Effect | ||||||
Real estate loans: | |||||||||
Construction and land development | $ | — | 0.00 | % | |||||
Secured by 1-4 family residential | 76 | 0.02 | % | Converted HELOC to 15 year term loan. | |||||
Other real estate loans | — | 0.00 | % | ||||||
Commercial and industrial | — | 0.00 | % | ||||||
Total | $ | 76 | 0.02 | % |
Principal Forgiveness | |||||||||
(Dollars in thousands) | Amortized Cost Basis | % of Total Loan Type | Financial Effect | ||||||
Real estate loans: | |||||||||
Construction and land development | $ | — | 0.00 | % | |||||
Secured by 1-4 family residential | 20 | 0.01 | % | Reduced the amortized cost basis of the loan by $29 thousand. | |||||
Other real estate loans | — | 0.00 | % | ||||||
Commercial and industrial | — | 0.00 | % | ||||||
Total | $ | 20 | 0.01 | % |
Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. For the three months ended March 31, 2023 and 2022, there were no payment defaults of modified loans that were modified during the previous twelve months.
Unfunded Commitments
The Company maintains a separate reserve for credit losses on off-balance-sheet credit exposures, including unfunded loan commitments, which is included in other liabilities on the consolidated balance sheet. The reserve for credit losses on off-balance-sheet credit exposures is adjusted as a provision for credit losses in the income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life, utilizing the same models and approaches for the Company's other loan portfolio segments described in Note 1, as these unfunded commitments share similar risk characteristics as its loan portfolio segments. The Company has identified the unfunded portion of certain lines of credit as unconditionally cancellable credit exposures, meaning the Company can cancel the unfunded commitment at any time. No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the Company or for undrawn amounts under such arrangements that may be drawn prior to the cancellation of the arrangement.
On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $153 thousand for the adoption of ASC Topic 326. For the three months ended March 31, 2023, the Company did not record a provision for credit losses for unfunded commitments. At March 31, 2023, the liability for credit losses on off-balance-sheet exposures included in other liabilities was $153 thousand.
Note 5. Earnings per Common Share
Basic earnings per common share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.
The following table presents the computation of basic and diluted earnings per share for the three and sixmonths ended June 30, 2022March 31, 2023 and 20212022 (dollars in thousands, except per share data):
Three Months Ended | Six Months Ended | Three Months Ended | ||||||||||||||||||||||
June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | March 31, 2023 | March 31, 2022 | |||||||||||||||||||
(Numerator): | ||||||||||||||||||||||||
Net income | $ | 3,835 | $ | 3,342 | $ | 7,564 | $ | 5,778 | $ | 3,849 | $ | 3,729 | ||||||||||||
(Denominator): | ||||||||||||||||||||||||
Weighted average shares outstanding – basic | 6,250,329 | 4,868,901 | 6,244,682 | 4,866,376 | 6,273,913 | 6,238,973 | ||||||||||||||||||
Potentially dilutive common shares – restricted stock units | 7,149 | 4,385 | 5,991 | 6,330 | 7,203 | 6,732 | ||||||||||||||||||
Weighted average shares outstanding – diluted | 6,257,478 | 4,873,286 | 6,250,673 | 4,872,706 | 6,281,116 | 6,245,705 | ||||||||||||||||||
Income per common share | ||||||||||||||||||||||||
Basic | $ | 0.61 | $ | 0.69 | $ | 1.21 | $ | 1.19 | $ | 0.61 | $ | 0.60 | ||||||||||||
Diluted | $ | 0.61 | $ | 0.69 | $ | 1.21 | $ | 1.19 | $ | 0.61 | $ | 0.60 |
There were 0 antidilutiveRestricted stock units for 882 shares of common stock were not considered in computing diluted earnings per share for the three months andended sixMarch 31, 2023 because they were antidilutive. There were restricted stock units for 193 shares of common stock considered antidilutive for the three months ended June 30, 2022March 31, 2023 and 2021.
Note 6. Fair Value Measurements
Determination of Fair Value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurement and Disclosures” topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a 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 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.
Notes to Consolidated Financial Statements (Unaudited)
Fair Value Hierarchy
In accordance with this guidance, the Company groups its assets and liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 - | Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. |
Level 2 - | Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. |
Level 3 - | Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires a significant management judgment or estimation. |
An instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a recurring basis in the financial statements:
Securities available for sale
Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).
Derivative asset/liability - cash flow hedges
Cash flow hedges are recorded at fair value on a recurring basis. The fair value of the Company's cash flow hedges is determined by a third party vendor using the discounted cash flow method (Level 2).
Notes to Consolidated Financial Statements (Unaudited)
The following tables present the balances of assets measured at fair value on a recurring basis as of June 30, 2022March 31, 2023 and December 31, 20212022 (in thousands).
Fair Value Measurements at June 30, 2022 | Fair Value Measurements at March 31, 2023 | |||||||||||||||||||||||||||||||
Description | Balance as of June 30, 2022 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance as of March 31, 2023 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||||||||||
U.S. Treasury securities | $ | 56,256 | $ | 0 | $ | 56,256 | $ | 0 | $ | 11,445 | $ | — | $ | 11,445 | $ | — | ||||||||||||||||
U.S. agency and mortgage-backed securities | 147,814 | 0 | 147,814 | 0 | 94,906 | — | 94,906 | — | ||||||||||||||||||||||||
Obligations of states and political subdivisions | 58,681 | 0 | 58,681 | 0 | 56,004 | — | 56,004 | — | ||||||||||||||||||||||||
Corporate debt securities | 1,999 | 0 | 1,999 | 0 | ||||||||||||||||||||||||||||
Total securities available for sale | $ | 264,750 | $ | 0 | $ | 264,750 | $ | 0 | $ | 162,355 | $ | — | $ | 162,355 | $ | — | ||||||||||||||||
Derivatives - cash flow hedges | 2,213 | 0 | 2,213 | 0 | 2,396 | — | 2,396 | — | ||||||||||||||||||||||||
Total assets | $ | 266,963 | $ | 0 | $ | 266,963 | $ | 0 | $ | 164,751 | $ | — | $ | 164,751 | $ | — |
Fair Value Measurements at December 31, 2021 | Fair Value Measurements at December 31, 2022 | |||||||||||||||||||||||||||||||
Description | Balance as of December 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance as of December 31, 2022 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||||||||||
U.S. Treasury securities | $ | 39,658 | $ | 0 | $ | 39,658 | $ | 0 | $ | 11,229 | $ | — | $ | 11,229 | $ | — | ||||||||||||||||
U.S. agency and mortgage-backed securities | 176,379 | 0 | 176,379 | 0 | 96,918 | — | 96,918 | — | ||||||||||||||||||||||||
Obligations of states and political subdivisions | 71,438 | 0 | 71,438 | 0 | 54,760 | — | 54,760 | — | ||||||||||||||||||||||||
Corporate debt securities | 2,020 | 0 | 2,020 | 0 | ||||||||||||||||||||||||||||
Total securities available for sale | $ | 289,495 | $ | 0 | $ | 289,495 | $ | 0 | $ | 162,907 | $ | — | $ | 162,907 | $ | — | ||||||||||||||||
Derivatives - cash flow hedges | 941 | 0 | 941 | 0 | 2,679 | — | 2,679 | — | ||||||||||||||||||||||||
Total assets | $ | 290,436 | $ | 0 | $ | 290,436 | $ | 0 | $ | 165,586 | $ | — | $ | 165,586 | $ | — |
Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.
The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:
ImpairedCollateral Dependent Loans with an ACLL
LoansIn accordance with ASC 326, the Company 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 allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts due according toowed, collateral deficiencies, the contractual termsrelative risk grade of the loan agreements will notand economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collected. The measurement of loss associated with impaired loans cancollateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be based onprovided substantially through the present value of expected future cash flows discounted at the loan’s effective interest rate, 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 lessat the measurement date, adjusted for estimated selling costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majorityif satisfaction of the Company’sloan depends on the sale of the collateral. We reevaluate the fair value of collateral is real estate.supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is determined utilizingevaluated by appraisal services using a market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Levelmethodology that is consistent with the Uniform Standards of Professional Appraisal Practice. There was 2no) within the last twelve months. However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loancredit losses on the Consolidated Statements of Income.collateral dependent loans at March 31, 2023.
Other Real Estate Owned
Certain assets such as OREO are measured at fair value less cost to sell. Valuation of OREO is determined using current appraisals from independent parties, a Level 2 input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.
Notes to Consolidated Financial Statements (Unaudited)
The following tables summarize the Company’s assets that were measured at fair value on a nonrecurring basis during the periods (dollars in thousands):
Fair Value Measurements at June 30, 2022 | Fair Value Measurements at March 31, 2023 | |||||||||||||||||||||||||||||||
Description | Balance as of June 30, 2022 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance as of March 31, 2023 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
Other real estate owned, net | $ | 1,665 | $ | 0 | $ | 0 | $ | 1,665 | ||||||||||||||||||||||||
Other real estate owned | $ | 184 | $ | — | $ | — | $ | 184 | ||||||||||||||||||||||||
Collateral dependent loans | 1,591 | — | — | 1,591 |
Fair Value Measurements at December 31, 2021 | Fair Value Measurements at December 31, 2022 | |||||||||||||||||||||||||||||||
Description | Balance as of December 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance as of December 31, 2022 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
Other real estate owned, net | $ | 1,848 | $ | 0 | $ | 0 | $ | 1,848 | ||||||||||||||||||||||||
Other real estate owned | $ | 1,848 | $ | — | $ | — | $ | 184 | ||||||||||||||||||||||||
Impaired loans, net | 1,454 | 0 | 0 | 1,454 | 197 | — | — | 197 |
Quantitative information about Level 3 Fair Value Measurements for June 30, 2022 | ||||||||||||||
Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) (1) | |||||||||||
Other real estate owned, net | $ | 1,665 | Property appraisals | Selling cost | 10.00 | % |
Quantitative information about Level 3 Fair Value Measurements for March 31, 2023 | |||||||||||
Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) (1) | ||||||||
Other real estate owned | $ | 184 | Property appraisals | Selling cost | 10.00 | % | |||||
Collateral dependent loans | $ | 1,591 | Present value of cash flows | Discount rate | 6.50 | % |
Quantitative information about Level 3 Fair Value Measurements for December 31, 2021 | Quantitative information about Level 3 Fair Value Measurements for December 31, 2022 | ||||||||||||||||||||||||
Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) (1) | Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) (1) | ||||||||||||||||||
Other real estate owned, net | $ | 1,848 | Property appraisals | Selling cost | 10.00 | % | |||||||||||||||||||
Other real estate owned | $ | 184 | Property appraisals | Selling cost | 10.00 | % | |||||||||||||||||||
Impaired loans, net | 1,454 | Present value of cash flows | Discount rate | 6.50 | % | 197 | Present value of cash flows | Discount rate | 6.50 | % |
(1) | Unobservable inputs were weighted by the relative fair value of the instruments. |
Notes to Consolidated Financial Statements (Unaudited)
Accounting guidance requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The carrying values and estimated fair values of the Company’s financial instruments at June 30, 2022March 31, 2023 and December 31, 20212022 are as follows (in thousands):
Fair Value Measurements at June 30, 2022 Using | Fair Value Measurements at March 31, 2023 Using | |||||||||||||||||||||||||||||||||||||||
Carrying Amount | Quoted Prices in Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Fair Value | Carrying Amount | Quoted Prices in Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Fair Value | |||||||||||||||||||||||||||||||
Financial Assets | ||||||||||||||||||||||||||||||||||||||||
Cash and interest-bearing deposits in banks | $ | 124,415 | $ | 124,415 | $ | 0 | $ | 0 | $ | 124,415 | $ | 77,801 | $ | 77,801 | $ | — | $ | — | $ | 77,801 | ||||||||||||||||||||
Securities available for sale | 264,750 | 0 | 264,750 | 0 | 264,750 | 162,355 | — | 162,355 | — | 162,355 | ||||||||||||||||||||||||||||||
Securities held to maturity | 77,151 | 0 | 70,492 | 0 | 70,492 | 151,301 | — | 141,956 | — | 141,956 | ||||||||||||||||||||||||||||||
Restricted securities | 1,908 | 0 | 1,908 | 0 | 1,908 | 1,803 | — | 1,803 | — | 1,803 | ||||||||||||||||||||||||||||||
Loans, net | 873,887 | 0 | 0 | 871,253 | 871,253 | 909,250 | — | — | 877,833 | 877,833 | ||||||||||||||||||||||||||||||
Bank owned life insurance | 24,569 | 0 | 24,569 | 0 | 24,569 | 24,424 | — | 24,424 | — | 24,424 | ||||||||||||||||||||||||||||||
Accrued interest receivable | 4,154 | 0 | 4,154 | 0 | 4,154 | 4,389 | — | 4,389 | — | 4,389 | ||||||||||||||||||||||||||||||
Derivatives - cash flow hedges | 2,213 | 0 | 2,213 | 0 | 2,213 | 2,396 | — | 2,396 | — | 2,396 | ||||||||||||||||||||||||||||||
Financial Liabilities | ||||||||||||||||||||||||||||||||||||||||
Deposits | $ | 1,296,150 | $ | 0 | $ | 1,162,417 | $ | 129,645 | $ | 1,292,062 | $ | 1,241,525 | $ | — | 1,086,894 | 150,040 | $ | 1,236,934 | ||||||||||||||||||||||
Subordinated debt | 4,994 | 0 | 0 | 5,483 | 5,483 | 4,996 | — | — | 5,318 | 5,318 | ||||||||||||||||||||||||||||||
Junior subordinated debt | 9,279 | 0 | 0 | 7,547 | 7,547 | 9,279 | — | — | 5,936 | 5,936 | ||||||||||||||||||||||||||||||
Accrued interest payable | 115 | 0 | 115 | 0 | 115 | 354 | — | 354 | — | 354 |
Fair Value Measurements at December 31, 2021 Using | Fair Value Measurements at December 31, 2022 Using | |||||||||||||||||||||||||||||||||||||||
Carrying Amount | Quoted Prices in Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Fair Value | Carrying Amount | Quoted Prices in Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Fair Value | |||||||||||||||||||||||||||||||
Financial Assets | ||||||||||||||||||||||||||||||||||||||||
Cash and interest-bearing deposits in banks | $ | 176,006 | $ | 176,006 | $ | 0 | $ | 0 | $ | 176,006 | $ | 66,914 | $ | 66,914 | $ | — | $ | — | $ | 66,914 | ||||||||||||||||||||
Securities available for sale | 289,495 | 0 | 289,495 | 0 | 289,495 | 162,907 | — | 162,907 | — | 162,907 | ||||||||||||||||||||||||||||||
Securities held to maturity | 33,441 | 0 | 33,617 | 0 | 33,617 | 153,158 | — | 141,797 | — | 141,797 | ||||||||||||||||||||||||||||||
Restricted securities | 1,813 | 0 | 1,813 | 0 | 1,813 | 1,908 | — | 1,908 | — | 1,908 | ||||||||||||||||||||||||||||||
Loans held for sale | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||
Loans, net | 819,408 | 0 | 0 | 827,248 | 827,248 | 913,077 | — | — | 880,473 | 880,473 | ||||||||||||||||||||||||||||||
Bank owned life insurance | 24,294 | 0 | 24,294 | 0 | 24,294 | 24,531 | — | 24,531 | — | 24,531 | ||||||||||||||||||||||||||||||
Accrued interest receivable | 3,903 | 0 | 3,903 | 0 | 3,903 | 4,543 | — | 4,543 | — | 4,543 | ||||||||||||||||||||||||||||||
Derivatives - cash flow hedges | 941 | 0 | 941 | 0 | 941 | 2,679 | — | 2,679 | — | 2,679 | ||||||||||||||||||||||||||||||
Financial Liabilities | ||||||||||||||||||||||||||||||||||||||||
Deposits | $ | 1,248,752 | $ | 0 | $ | 1,103,186 | $ | 145,101 | $ | 1,248,287 | $ | 1,241,332 | $ | — | $ | 1,104,483 | $ | 131,304 | $ | 1,235,787 | ||||||||||||||||||||
Subordinated debt | 9,993 | 0 | 0 | 8,932 | 8,932 | 4,995 | — | — | 5,267 | 5,267 | ||||||||||||||||||||||||||||||
Junior subordinated debt | 9,279 | 0 | 0 | 8,145 | 8,145 | 9,279 | — | — | 6,067 | 6,067 | ||||||||||||||||||||||||||||||
Accrued interest payable | 152 | 0 | 152 | 0 | 152 | 163 | — | 163 | — | 163 |
Notes to Consolidated Financial Statements (Unaudited)
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
Note 7. Stock Compensation Plans
On May 13, 2014, the Company’s shareholders approved the First National Corporation 2014 Stock Incentive Plan, which makes available up to 240,000 shares of common stock for the granting of stock options, restricted stock awards, stock appreciation rights, and other stock-based awards. Awards are made at the discretion of the Board of Directors and compensation cost equal to the fair value of the award is recognized over the vesting period.
Stock Awards
Whenever the Company deems it appropriate to grant a stock award, the recipient receives a specified number of unrestricted shares of employer stock. Stock awards may be made by the Company at its discretion without cash consideration and may be granted as settlement of a performance-based compensation award.
Compensation expense related to stock awards totaled $0$200 thousand and $351$352 thousand for the three months and six months ended June 30, 2022March 31, 2023, respectively. The Company did not have compensation expense related to stock awards for the three months and six months ended June 30, 2022 and 2021.
Restricted Stock Units
Restricted stock units are an award of units that correspond in number and value to a specified number of shares of employer stock which the recipient receives according to a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with the employer for a particular length of time. Each restricted stock unit that vests entitles the recipient to receive one share of common stock on a specified issuance date.
During the first quarter of 20222023, 10,11013,727 restricted stock units were granted to employees, with 3,3754,580 units vesting immediately, and 6,7359,147 units subject to a two year vesting schedule with one half of the units vesting each year. The recipient does not have any stockholder rights, including voting, dividend, or liquidation rights, with respect to the shares underlying awarded restricted stock units until vesting has occurred and the recipient becomes the record holder of those shares. The unvested restricted stock units will vest on the established schedule if the employees remain employed by the Company on future vesting dates.
A summary of the activity for the Company’s restricted stock units for the period indicated is presented in the following table:
Six Months Ended | Three Months Ended | |||||||||||||||
June 30, 2022 | March 31, 2023 | |||||||||||||||
Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | |||||||||||||
Unvested, beginning of year | 30,781 | $ | 19.79 | 29,181 | $ | 20.31 | ||||||||||
Granted | 10,110 | 22.19 | 13,727 | 17.54 | ||||||||||||
Vested | (11,643 | ) | 20.58 | (11,401 | ) | 19.2 | ||||||||||
Forfeited | 0 | 0 | — | — | ||||||||||||
Unvested, end of period | 29,248 | $ | 20.31 | 31,507 | $ | 20.31 |
At June 30, 2022March 31, 2023, based on restricted stock unit awards outstanding at that time, the total unrecognized pre-tax compensation expense related to unvested restricted stock unit awards was $423$411 thousand. This expense is expected to be recognized through 2026. Compensation expense related to restricted stock unit awards recognized for the three and six months ended June 30, 2022March 31, 2023 and 20212022 totaled $56$138 thousand and $190$134 thousand, respectively. Compensation expense related
On May 11, 2023, the Company’s shareholders approved the First National Corporation 2023 Stock Incentive Plan, which makes available up to 325,000 shares of common stock for the granting of stock options, restricted stock unit awards, stock appreciation rights, and other stock-based awards. Awards are made at the discretion of the Board of Directors and compensation cost is equal to the fair value of the award and recognized forover the vesting period. Beginning on May 11, 2023, equity awards granted by the Company would be from the three2023 Stock Incentive Plan and would sixnot months endedbe granted from the June 30, 2022 2014and 2021 totaled $45 thousand and $119 thousand, respectively. Stock Incentive Plan.
Notes to Consolidated Financial Statements (Unaudited)
Note 8. Accumulated Other Comprehensive Income (Loss)
Changes in each component of accumulated other comprehensive income (loss) were as follows (in thousands):
Net Unrealized Gains (Losses) on Securities | Change in Fair Value of Cash Flow Hedges | Accumulated Other Comprehensive Income (Loss) | ||||||||||
Balance at March 31, 2021 | $ | 1,404 | $ | 1,078 | $ | 2,482 | ||||||
Unrealized holding gains (net of tax, $78) | 292 | 0 | 292 | |||||||||
Change in fair value of cash flow hedge (net of tax, ($100)) | 0 | (376 | ) | (376 | ) | |||||||
Change during period | 292 | (376 | ) | (84 | ) | |||||||
Balance at June 30, 2021 | $ | 1,696 | $ | 702 | $ | 2,398 | ||||||
Balance at March 31, 2022 | $ | (14,688 | ) | $ | 1,296 | $ | (13,392 | ) | ||||
Unrealized holding losses (net of tax, ($2,595)) | (9,762 | ) | 0 | (9,762 | ) | |||||||
Change in fair value of cash flow hedge (net of tax, $120) | 0 | 452 | 452 | |||||||||
Change during period | (9,762 | ) | 452 | (9,310 | ) | |||||||
Balance at June 30, 2022 | $ | (24,450 | ) | $ | 1,748 | $ | (22,702 | ) |
Net Unrealized (Losses) on Securities | Change in Fair Value of Cash Flow Hedges | Accumulated Other Comprehensive Income (Loss) | ||||||||||
Balance at December 31, 2020 | $ | 3,058 | $ | 340 | $ | 3,398 | ||||||
Unrealized holding losses (net of tax, ($354)) | (1,333 | ) | 0 | (1,333 | ) | |||||||
Reclassification adjustment (net of tax, ($8)) | (29 | ) | 0 | (29 | ) | |||||||
Change in fair value of cash flow hedges (net of tax, $95) | 0 | 362 | 362 | |||||||||
Change during period | (1,362 | ) | 362 | (1,000 | ) | |||||||
Balance at June 30, 2021 | $ | 1,696 | $ | 702 | $ | 2,398 | ||||||
Balance at December 31, 2021 | $ | (445 | ) | $ | 743 | $ | 298 | |||||
Unrealized holding losses (net of tax, ($6,381)) | (24,005 | ) | 0 | (24,005 | ) | |||||||
Change in fair value of cash flow hedge (net of tax, $267) | 0 | 1,005 | 1,005 | |||||||||
Change during period | (24,005 | ) | 1,005 | (23,000 | ) | |||||||
Balance at June 30, 2022 | $ | (24,450 | ) | $ | 1,748 | $ | (22,702 | ) |
Net Unrealized Gains (Losses) on Securities | Change in Fair Value of Cash Flow Hedges | Accumulated Other Comprehensive Income (Loss) | ||||||||||
Balance at December 31, 2021 | $ | (445 | ) | $ | 743 | $ | 298 | |||||
Unrealized holding losses (net of tax, ($3,786)) | (14,243 | ) | — | (14,243 | ) | |||||||
Change in fair value of cash flow hedge (net of tax, $146) | — | 553 | 553 | |||||||||
Change during period | (14,243 | ) | 553 | (13,690 | ) | |||||||
Balance at March 31, 2022 | $ | (14,688 | ) | $ | 1,296 | $ | (13,392 | ) | ||||
Balance at December 31, 2022 | $ | (24,587 | ) | $ | 2,116 | $ | (22,471 | ) | ||||
Unrealized holding losses (net of tax, $576) | 2,162 | — | 2,162 | |||||||||
Amortization of unrealized holding losses on available-for-sale securities transferred to held to maturity (net of tax of $84) | 316 | — | 316 | |||||||||
Change in fair value of cash flow hedge (net of tax, ($60)) | — | (223 | ) | (223 | ) | |||||||
Change during period | 2,478 | (223 | ) | 2,255 | ||||||||
Balance at March 31, 2023 | $ | (22,109 | ) | $ | 1,893 | $ | (20,216 | ) |
The following table presents information related to reclassifications from accumulated other comprehensive income (loss) income for the three and sixmonths ended June 30, 2022March 31, 2023 and 20212022 (in thousands):
Details About Accumulated Other Comprehensive Income (Loss) | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | Affected Line Item in the Consolidated Statements of Income | |||||||
Three Months Ended | |||||||||
June 30, 2022 | June 30, 2021 | ||||||||
Securities available for sale: | |||||||||
Net securities gains reclassified into earnings | $ | 0 | $ | 0 | Net gains on securities available for sale | ||||
Related income tax expense | 0 | 0 | Income tax expense | ||||||
Total reclassifications | $ | 0 | $ | 0 | Net of tax |
Details About Accumulated Other Comprehensive (Loss) Income | Amount Reclassified from Accumulated Other Comprehensive (Loss) Income | Affected Line Item in the Consolidated Statements of Income | |||||||
Six Months Ended | |||||||||
June 30, 2022 | June 30, 2021 | ||||||||
Securities available for sale: | |||||||||
Net securities gains reclassified into earnings | $ | 0 | $ | (37 | ) | Net gains on securities available for sale | |||
Related income tax expense | 0 | 8 | Income tax expense | ||||||
Total reclassifications | $ | 0 | $ | (29 | ) | Net of tax |
Details About Accumulated Other Comprehensive Income (Loss) | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | Affected Line Item in the Consolidated Statements of Income | |||||||
Three Months Ended | |||||||||
March 31, 2023 | March 31, 2022 | ||||||||
Securities available for sale: | |||||||||
Net securities gains reclassified into earnings | $ | — | $ | — | Net gains on securities available for sale | ||||
Related income tax expense | — | — | Income tax expense | ||||||
Total reclassifications | $ | — | $ | — | Net of tax |
Notes to Consolidated Financial Statements (Unaudited)
Note 9. Revenue Recognition
Most revenue associated with financial instruments, including interest income, loan origination fees, and credit card fees, is outside the scope of ASC topic 606. Gains and losses on investment securities, derivatives, financial guarantees, and sales of financial instruments are similarly excluded from the scope. The guidance is applicable to noninterest revenue streams such as service charges on deposit accounts, ATM and check card fees, wealth management fees, and fees for other customer services. Noninterest revenue streams within the scope of Topic 606 are discussed below.
Service charges on deposit accounts
Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds fees, and other deposit account related fees. The Company's performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers' accounts. Overdraft and nonsufficient funds fees and other deposit account related fees are transactional based, and therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a point in time.
ATM and check card fees
ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. ATM fees are transactional based, and therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a point in time. Check card fees are primarily comprised of interchange fee income. Interchange fees are earned whenever the Company's debit cards are processed through card payment networks, such as Visa. The Company's performance obligation for interchange fee income is largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. In compliance with Topic 606, debit card fee income is presented net of associated expense.
Wealth management fees
Wealth management fees are primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company's performance obligation is generally satisfied over time and the resulting fees are primarily recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month-end through a direct charge to customers' accounts. Estate management fees are based upon the size of the estate. Revenue for estate management fees are recorded periodically, according to a fee schedule, and are based on the services that have been provided.
Brokered mortgage fees
Brokered mortgage fees are comprised of loan fee income earned from generating loans in the secondary market. Brokered mortgage fee income is recognized at loan closing.
Fees for other customer services
Fees for other customer services include fees for brokered loans, check ordering charges, merchant services income, safe deposit box rental fees, and other service charges. Check ordering charges are transactional based, and therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a point in time. Merchant services income mainly represent fees charged to merchants to process their debit and credit card transactions. The Company's performance obligation for merchant services income is largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.
The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and sixmonths ended June 30, 2022March 31, 2023 and 20212022 (in thousands):
Three Months Ended | Six Months Ended | Three Months Ended | ||||||||||||||||||||||
June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | March 31, 2023 | March 31, 2022 | |||||||||||||||||||
Noninterest Income | ||||||||||||||||||||||||
Service charges on deposit accounts | $ | 698 | $ | 447 | $ | 1,307 | $ | 889 | $ | 646 | $ | 609 | ||||||||||||
ATM and check card fees | 797 | 682 | 1,547 | 1,283 | 800 | 750 | ||||||||||||||||||
Wealth management fees | 760 | 657 | 1,563 | 1,300 | 776 | 803 | ||||||||||||||||||
Brokered mortgage fees | 58 | 157 | 152 | 262 | — | 94 | ||||||||||||||||||
Fees for other customer services | 188 | 150 | 421 | 331 | 196 | 233 | ||||||||||||||||||
Noninterest income (in-scope of Topic 606) | $ | 2,501 | $ | 2,093 | $ | 4,990 | $ | 4,065 | $ | 2,418 | $ | 2,489 | ||||||||||||
Noninterest income (out-of-scope of Topic 606) | 279 | 342 | 501 | 513 | 360 | 222 | ||||||||||||||||||
Total noninterest income | $ | 2,780 | $ | 2,435 | $ | 5,491 | $ | 4,578 | $ | 2,778 | $ | 2,711 |
Notes to Consolidated Financial Statements (Unaudited)
Note 10. Derivative Financial Instruments
On April 21, 2020, the Company entered into 2two interest rate swap agreements related to its outstanding junior subordinated debt. One swap agreement was related to the Company’s junior subordinated debt with a redemption date of June 17, 2034, which became effective on March 17, 2020. The notional amount of the interest rate swap was $5.0 million and terminates on June 17, 2034. Under the terms of the agreement, the Company pays interest quarterly at a fixed rate of 0.79% and receives interest quarterly at a variable rate of three-month LIBOR. The variable rate resets on each interest payment date. The other swap agreement was related to the Company’s junior subordinated debt with a redemption date of October 1, 2036, which became effective on April 1, 2020. The notional amount of the interest rate swap was $4.0 million and terminates on October 1, 2036. Under the terms of the agreement, the Company pays interest quarterly at a fixed rate of 0.82% and receives interest quarterly at a variable rate of three-month LIBOR. The variable rate resets on each interest payment date. The Company expects the junior subordinated debt instruments to transition from a LIBOR-indexed floating rate of interest to a SOFR-indexed floating rate by June 30, 2023.
The Company entered into interest rate swaps to reduce interest rate risk and to manage interest expense. By entering into these agreements, the Company converted variable rate debt into fixed rate debt. Alternatively, the Company may enter into interest rate swap agreements to convert fixed rate debt into variable rate debt. Interest differentials paid or received under interest rate swap agreements are reflected as adjustments to interest expense. The Company designated the interest rate swaps as hedging instruments in qualifying cash flow hedges. Changes in fair value of these designated hedging instruments is reported as a component of other comprehensive (loss) income. 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 as earnings. As of June 30, 2022March 31, 2023, the Company has designated cash flow hedges to manage its exposure to variability in cash flows on certain variable rate borrowings for periods that end between June 2034 and October 2036. The notional amounts of the interest rate swaps were not exchanged and do not represent exposure to credit loss. In the event of default by a counterparty, the risk in these transactions is the cost of replacing the agreements at current market rates.
All interest rate swaps were entered into with counterparties that met the Company's credit standards and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in these derivative contracts is not significant.
Unrealized gains or losses recorded in other comprehensive (loss) income related to cash flow hedges are reclassified into earnings in the same period(s) during which the hedged interest payments affect earnings. When a designated hedging instrument is terminated and the hedged interest payments remain probable of occurring, any remaining unrecognized gain or loss in other comprehensive (loss) 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.
The following table summarizes key elements of the Company's derivative instruments at June 30, 2022March 31, 2023 and December 31, 2021 (2022in (in thousands):
June 30, 2022 | March 31, 2023 | |||||||||||||||||||||||||||||||
Notional Amount | Assets | Liabilities | Collateral Pledged(1) | Notional Amount | Assets | Liabilities | Collateral Pledged(1) | |||||||||||||||||||||||||
Cash Flow Hedges | ||||||||||||||||||||||||||||||||
Interest rate swap contracts | $ | 9,000 | $ | 2,213 | $ | 0 | $ | 0 | $ | 9,000 | $ | 2,396 | $ | — | $ | — |
December 31, 2021 | December 31, 2022 | |||||||||||||||||||||||||||||||
Notional Amount | Assets | Liabilities | Collateral Pledged(1) | Notional Amount | Assets | Liabilities | Collateral Pledged(1) | |||||||||||||||||||||||||
Cash Flow Hedges | ||||||||||||||||||||||||||||||||
Interest rate swap contracts | $ | 9,000 | $ | 941 | $ | 0 | $ | 0 | $ | 9,000 | $ | 2,679 | $ | — | $ | — |
(1) | Collateral pledged may be comprised of cash or securities. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
First National Corporation (the Company) makes forward-looking statements in this Form 10-Q that are subject to risks and uncertainties. These forward-looking statements include, but are not limited to, statements regarding profitability, liquidity, adequacy of capital, allowance for loancredit losses, interest rate sensitivity, market risk, growth strategy, and the impact of the Company’s acquisitions of The Bank of Fincastle (Fincastle) and the SmartBank loan portfolio, including the expected benefits of the acquisition of Fincastle (Merger) and the potential impact of the acquisitions on the Company’s and First Bank’s (the Bank) financial and other goals.strategy. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements. These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by factors including:
• | general business conditions, as well as conditions within the financial markets; |
• | general economic conditions, including unemployment levels, inflation and slowdowns in economic growth; |
• | the Company’s branch and market expansions, technology initiatives and other strategic initiatives; |
• | the impact of competition from banks and non-banks, including financial technology companies (Fintech); |
• | the composition of the loan and deposit portfolio, including the types of accounts and customers, may change, which could impact the amount of net interest income and noninterest income in future periods, including revenue from service charges on deposits; |
• | limited availability of financing or inability to raise capital; |
• | reliance on third parties for key services; |
• | the Company’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses; |
• | the quality of the loan portfolio and the value of the collateral securing those loans; | |
• | demand for loan products; | |
• | deposit flows; |
• | the level of net charge-offs on loans and the adequacy of the allowance for loan losses; |
• | the concentration in loans secured by real estate may adversely affect earnings due to changes in the real estate markets; |
• | the value of securities held in the Company's investment portfolio; |
• | legislative or regulatory changes or actions, including the effects of changes in tax laws; |
• | changes in accounting principles, policies and guidelines and elections made by the Company thereunder; |
• | cyber threats, attacks or events; |
• | the ability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the Company’s or the Industry's reputation |
• | monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Federal Reserve Board, and the effect of those policies on interest rates and business in the Company's markets; |
• | changes in interest rates could have a negative impact on the value of the Company’s securities portfolio and its net interest income and an unfavorable impact on the Company’s customers’ ability to repay loans; | |
• | geopolitical conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad; and |
• | other factors identified in Item 1A. Risk Factors of the Company’s Form 10-K for the year ending December 31, |
Because of these and other uncertainties, actual results may be materially different from the results indicated by these forward-looking statements. In addition, past results of operations do not necessarily indicate future results. The following discussion and analysis of the financial condition at June 30, 2022March 31, 2023 and statements of income of the Company for thethree andsix months ended June 30,March 31, 2023 and 2022 and 2021 should be read in conjunction with the consolidated financial statements and related notes included in Part I, Item 1, of this Form 10-Q and in Part II, Item 8, of the Form 10-K for the period ending December 31, 2021.2022. The statements of income for thethree andsix months ended June 30, 2022March 31, 2023 may not be indicative of the results to be achieved for the year.
Executive Overview
The Company
First National Corporation (the Company) is the bank holding company of:
• | First Bank (the Bank). The Bank owns: |
• | First Bank Financial Services, Inc. |
• | Bank of Fincastle Services, Inc. | |
• | ESF, LLC | |
• | Shen-Valley Land Holdings, LLC |
• | First National (VA) Statutory Trust II (Trust II) |
• | First National (VA) Statutory Trust III (Trust III and, together with Trust II, the Trusts) |
First Bank Financial Services, Inc. investsowns an interest in entitiesan entity that provideprovides title insurance and investment services. Bank of Fincastle Services, Inc. ownsis no longer an entity that provides mortgage services.active operating entity. Shen-Valley Land Holdings, LLC and ESF, LLC were formed to hold other real estate owned and future office sites. The Trusts were formed for the purpose of issuing redeemable capital securities, commonly known as trust preferred securities and are not included in the Company’s consolidated financial statements in accordance with authoritative accounting guidance because management has determined that the Trusts qualify as variable interest entities.
Products, Services, Customers and Locations
The Bank offers loan, deposit, and wealth management products and services. Loan products and services include consumer loans, residential mortgages, home equity loans, and commercial loans. Deposit products and services include checking accounts, treasury management solutions, savings accounts, money market accounts, certificates of deposit, and individual retirement accounts. Wealth management services include estate planning, investment management of assets, trustee under an agreement, trustee under a will, individual retirement accounts, and estate settlement. Customers include small and medium-sized businesses, individuals, estates, local governmental entities, and non-profit organizations. The Bank’s office locations are well-positioned in attractive markets along the Interstate 81, Interstate 66, and Interstate 64 corridors in the Shenandoah Valley, the Roanoke Valley, central regions of Virginia, and the city of Richmond. Within these markets, there are diverse types of industry including medical and professional services, manufacturing, retail, warehousing, Federal and local government, hospitality, and higher education. The Bank’s products and services are delivered through 20 bank branch offices, a loan production office and customer service centers in two retirement villages. For the location and general character of each of these offices, see Item 2 of the Company's Form 10-K for the year ended December 31, 2021.2022. Many of the Bank’s services are also delivered through the Bank’s mobile banking platform, its website, www.fbvirginia.com, and a network of ATMs located throughout its market area.
Revenue Sources and Expense Factors
The primary source of revenue is from net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense and typically represents between 70% and 80% of the Company’s total revenue. Interest income is determined by the amount of interest-earning assets outstanding during the period and the interest rates earned on those assets. The Bank’s interest expense is a function of the amount of interest-bearing liabilities outstanding during the period and the interest rates paid. In addition to net interest income, noninterest income is the other source of revenue for the Company. Noninterest income is derived primarily from service charges on deposits, fee income from wealth management services, and ATM and check card fees.
Primary expense categories are salaries and employee benefits, which comprised 58% of noninterest expenses for the sixthree months ended June 30, 2022,March 31, 2023, followed by occupancy and equipment expense, which comprised 13%12% of noninterest expenses. The provision for loancredit losses is also typically a primary expense of the Bank. The provision is determined by factors that include net charge-offs, asset quality, economic conditions, and loan growth. Changing economic conditions caused by inflation, recession, unemployment, or other factors beyond the Company’s control have a direct correlation with asset quality, net charge-offs, and ultimately the required provision for loancredit losses.
Overview of Quarterly Financial Performance
The following items had the most significant impact on financial performance, when comparing the second quarter of 2022 to the same period in 2021.
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Net income increased by $493$120 thousand, or 15%3%, to $3.8 million, or $0.61 per diluted share, for the three months ended June 30, 2022,March 31, 2023, compared to $3.3$3.7 million, or $0.69$0.60 per diluted share, for the same period in 2021.2022. Return on average assets was 1.08%1.15% and return on average equity was 15.04%14.2% for the secondfirst quarter of 2022,2023, compared to 1.31%1.06% and 15.33%13.4%, respectively, for the same period in 2021.2022.
The increase in net income resulted primarily from a $3.8 million,$628 thousand, or 51%6%, increase in net interest income, and a $345$67 thousand, or 14%2%, increase in total noninterest income, which were partially offset by a $2.3 million,$556 thousand, or 35%6%, increase in total noninterest expense and an increaseexpense. There was no provision for credit losses in the provision for loan losses. The provision for loan losses totaled $400 thousand for the secondfirst quarter of 2022, compared to a recovery of loan losses of $1.0 million for the same period of 2021.2023 or 2022.
The $3.8Net interest income increased by $628 thousand from a $2.5 million, or 51%23%, increase in net interest income resulted from an increase in total interest income, and no changewas partially offset by a $1.9 million, or 394%, increase in total interest expense. NetAlthough total average earning assets decreased by 6% in the first quarter of 2023 compared to the same period of 2022, total interest income increased as the net interest margin expanded by 32 basis points and average earning assets increased by 37%. The margin expansion resulted from an increase in the yield on all earning asset yields,classes and a change in the composition of earning asset composition, and a decreaseassets. Average loans increased $88.7 million, while average interest-bearing deposits in the cost of funds. Earning asset yieldsbanks decreased $142.7 million. Total interest expense increased by 25 basis points from a higher interest rate environment during the second quarter of 2022, while the cost of funds decreased by 7 basis points, primarily from lower interest rates paid on deposits and subordinated debt. The changewas partially offset by a $73.8 million decrease in average interest-bearing deposits.
Accretion of discounts on purchased loans, net of premium amortization, and accretion of fee income on Paycheck Protection Program (PPP) loans, net of costs, which were recorded in interest income and fees on loans, both decreased comparing the periods. Net accretion of discounts on purchased loans totaled $145 thousand in the earning asset composition favorably impactedfirst quarter of 2023, compared to $367 thousand in the net interest margin as average total securities increased and average interest-bearing deposits in banks decreased. The growth in earning assets resulted from both the acquisition of Fincastle and from deposit growth.
The provision for loan losses totaled $400 thousand for the secondfirst quarter of 2022, and net accretion from PPP fee income, net of costs, totaled $8 thousand in contrast to the secondfirst quarter of 2021 when2023, compared to $323 thousand in the Bank recorded a $1.0 million recoveryfirst quarter of loan losses.2022.
There was no provision for credit losses in the first quarter of 2023 or 2022. The allowance for loancredit losses on loans totaled $6.2$8.7 million, or 0.70%0.95% of total loans, on June 30, 2022, 0.69%March 31, 2023, 0.81% of total loans on December 31, 2021,2022, and 0.89%0.70% of total loans on June 30, 2021.March 31, 2022. Although net charge-offs of loans totaled $915 thousand in the first quarter of 2023, there was no impact on the provision for credit losses as the Bank established adequate specific reserves for the charged-off portion of the loans in its allowance for loan losses in a prior period. In addition to the allowance for credit losses on loans, the Bank established a $132 thousand allowance for credit losses on securities held to maturity along with the adoption of CECL on January 1, 2023. The allowance for credit losses on securities held to maturity was unchanged at $132 thousand at March 31, 2023, and as a result, it was not necessary to record a provision for credit losses on securities held to maturity in the first quarter of 2023. The Bank also recorded an allowance for credit losses on off-balance sheet credit exposures of $153 thousand upon adoption of CECL on January 1, 2023. The allowance for credit losses on off-balance sheet credit exposures was unchanged at $153 thousand at March 31, 2023, and as a result, it was not necessary to record a provision for credit losses on off-balance sheet credit exposures in the first quarter of 2023.
The $345Total noninterest income increased $67 thousand, or 14%2%, year-over-year quarterly increase in noninterest income was primarily a result of a $251 thousandfrom an increase in service charges on deposits, followed by increases in ATM and check card fees, wealth management fees, and an increase in fees for other customer services. The merger with Fincastle contributed to all increasedoperating income, categories, except for wealth management fees. The increaseswhich were partially offset by decreases in fee income from other customer services and brokered mortgage feesfee income.
Total noninterest expense increased $556 thousand, or 6%, primarily from increases in salaries and employee benefits, marketing, ATM and check card expense, bank franchise tax, and other operating income.
Noninterest expense, increased $2.3 million, or 35%, and was primarily attributable to the increase in the number of employees, branch offices and customers that resulted from the acquisition of Fincastle and the acquisition of the SmartBank loan portfolio. Salaries and employee benefits increasedwhich were partially offset by $1.4 million, followed by increasesdecreases in occupancy, equipment,FDIC assessment, and other operatingdata processing expense.
For a more detailed discussion of the Company's quarterly performance, see "Net Interest Income,” “Provision for LoanCredit Losses,” "Noninterest Income," "Noninterest Expense" and "Income Taxes" below.
Acquisition of The Bank of Fincastle
On July 1, 2021, the Company completed the acquisition of The Bank of Fincastle for an aggregate purchase price of $33.8 million of cash and stock. The Company paid cash consideration of $6.8 million and issued 1,348,065 shares of its common stock to the shareholders of Fincastle. Upon completion of the transaction, Fincastle was merged with and into First Bank. At the time of closing of the acquisition, The Bank of Fincastle had six bank branch offices operating in the Roanoke Valley region of Virginia and reported total assets of $267.9 million, total loans of $194.5 million and total deposits of $236.3 million. After the merger, the former Fincastle branches continued to operate as The Bank of Fincastle, a division of First Bank, until the systems were converted on October 16, 2021. All branch offices have been operating as First Bank since the system conversion. For the three and six months ended June 30, 2022, the Company recorded merger related expenses of $20 thousand in connection with the acquisition of Fincastle.
Purchased performing loans were recorded at fair value, including a credit discount. The fair value discount will be accreted as an adjustment to yield over the estimated lives of the loans. A provision for loan losses on the purchased loans is expected in future periods as the accretion decreases the fair value discount amount. A provision may also be required for any deterioration in these loans in future periods.
The Company expected to benefit from cost savings after the acquisition of Fincastle. As of June 30, 2022, the Company had substantially achieved all expected cost savings related to the merger of Fincastle with and into First Bank.
Acquisition of SmartBank Loan Portfolio
On September 30, 2021, the Bank acquired $82.6 million of loans and certain fixed assets from SmartBank related to its Richmond area branch, located in Glen Allen, Virginia. First Bank paid cash consideration of $83.7 million for the loans and fixed assets. Additionally, an experienced team of bankers based out of the SmartBank location have transitioned to become employees of First Bank. First Bank did not assume any deposit liabilities from SmartBank in connection with the transaction, and SmartBank closed their branch operation on December 31, 2021. First Bank assumed the facility lease and acquired the remaining assets at the branch on December 31, 2021 and now operates a loan production office in the location of the former SmartBank branch. The Company incurred expenses totaling $101 thousand related to the acquisition of loans and fixed assets of SmartBank in the fourth quarter of 2021. There were no additional expenses related to the acquisition for the three and six months ended June 30, 2022.
Non-GAAP Financial Measures
This report refers to the efficiency ratio, which is computed by dividing noninterest expense, excluding amortization of intangibles, net gains on disposal of premises and equipment, and merger related expenses, by the sum of net interest income on a tax-equivalent basis and noninterest income, excluding securities gains. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. Such information is not prepared in accordance with GAAP and should not be construed as such. Management believes, however, such financial information is meaningful to the reader in understanding operating performance, but cautions that such information not be viewed as a substitute for GAAP. The methodology for determining this measurement may differ among companies. The Company, in referring to its net income, is referring to income under GAAP. The components of the efficiency ratio calculation are summarized in the following table (dollars in thousands).
Efficiency Ratio | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
Noninterest expense | $ | 8,918 | $ | 6,630 | $ | 17,562 | $ | 13,280 | ||||||||
Add/(Subtract): other real estate owned (expense), net | (41 | ) | — | (69 | ) | — | ||||||||||
Subtract: amortization of intangibles | (5 | ) | (5 | ) | (9 | ) | (19 | ) | ||||||||
Add: gains on disposal of premises and equipment, net | — | 14 | — | 26 | ||||||||||||
Subtract: loss on disposal of premises and equipment, net | — | — | (2 | ) | — | |||||||||||
Subtract: merger related expenses | — | (277 | ) | (20 | ) | (682 | ) | |||||||||
$ | 8,872 | $ | 6,362 | $ | 17,462 | $ | 12,605 | |||||||||
Tax-equivalent net interest income | $ | 11,372 | $ | 7,560 | $ | 22,008 | $ | 15,128 | ||||||||
Noninterest income | 2,780 | 2,435 | 5,491 | 4,578 | ||||||||||||
Subtract: securities gains, net | — | — | — | (37 | ) | |||||||||||
$ | 14,152 | $ | 9,995 | $ | 27,499 | $ | 19,669 | |||||||||
Efficiency ratio | 62.69 | % | 63.65 | % | 63.50 | % | 64.09 | % |
Efficiency Ratio | ||||||||
Three Months Ended | ||||||||
March 31, 2023 | March 31, 2022 | |||||||
Noninterest expense | $ | 9,200 | $ | 8,644 | ||||
Add/(Subtract): other real estate owned expense, net | (3 | ) | (28 | ) | ||||
Subtract: amortization of intangibles | (5 | ) | (4 | ) | ||||
Subtract: merger related expenses | — | (20 | ) | |||||
$ | 9,192 | $ | 8,592 | |||||
Tax-equivalent net interest income | $ | 11,258 | $ | 10,634 | ||||
Noninterest income | 2,778 | 2,711 | ||||||
$ | 14,036 | $ | 13,345 | |||||
Efficiency ratio | 65.49 | % | 64.38 | % |
This report also refers to net interest margin, which is calculated by dividing tax equivalent net interest income by total average earning assets. Because a portion of interest income earned by the Company is nontaxable, the tax equivalent net interest income is considered in the calculation of this ratio. Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit for both 20222023 and 20212022 is 21%. The reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below (in thousands).
Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income | Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income | |||||||||||||||||||||||
Three Months Ended | Six Months Ended | Three Months Ended | ||||||||||||||||||||||
June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | March 31, 2023 | March 31, 2022 | |||||||||||||||||||
GAAP measures: | ||||||||||||||||||||||||
Interest income – loans | $ | 9,963 | $ | 7,074 | $ | 19,459 | $ | 14,217 | $ | 11,512 | $ | 9,496 | ||||||||||||
Interest income – investments and other | 1,876 | 971 | 3,404 | 1,923 | 2,016 | 1,528 | ||||||||||||||||||
Interest expense – deposits | (413 | ) | (328 | ) | (753 | ) | (691 | ) | (2,216 | ) | (340 | ) | ||||||||||||
Interest expense – subordinated debt | (69 | ) | (154 | ) | (138 | ) | (308 | ) | (69 | ) | (69 | ) | ||||||||||||
Interest expense – junior subordinated debt | (67 | ) | (68 | ) | (134 | ) | (134 | ) | (67 | ) | (67 | ) | ||||||||||||
Total net interest income | $ | 11,290 | $ | 7,495 | $ | 21,838 | $ | 15,007 | $ | 11,176 | $ | 10,548 | ||||||||||||
Non-GAAP measures: | ||||||||||||||||||||||||
Tax benefit realized on non-taxable interest income – loans | $ | - | $ | 8 | $ | 7 | $ | 16 | $ | — | $ | 8 | ||||||||||||
Tax benefit realized on non-taxable interest income – municipal securities | 82 | 57 | 163 | 105 | 82 | 81 | ||||||||||||||||||
Total tax benefit realized on non-taxable interest income | $ | 82 | $ | 65 | $ | 170 | $ | 121 | $ | 82 | $ | 89 | ||||||||||||
Total tax-equivalent net interest income | $ | 11,372 | $ | 7,560 | $ | 22,008 | $ | 15,128 | $ | 11,258 | $ | 10,637 |
General
The Company’s consolidated financial statements and related notes are prepared in accordance with GAAP. The financial information contained within theour statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. The Bank uses historical losses as one factor in determining the inherent loss that may be present in the loan portfolio. Actual losses could differ significantly from the historical factors used. In addition, GAAP itself may change from one previously acceptable method to another. Although the economics of the Company’s transactions would be the same,may not change, the timing of events that would impact the transactions could change.
Presented below is a discussion of thoseCritical accounting policies that management believes are the most important (Critical Accounting Policies) to the portrayal and understanding of the Company’s financial condition andor results of operations. The Critical Accounting Policiesoperations and require management’s most difficult, subjective, and complex judgments about matters that are inherently uncertain. In the eventIf conditions occur that differentdiffer from our assumptions, or conditions were to prevail, and depending upon the severity of such changes,differences, the possibility of materially differentCompany’s financial condition or results of operations is a reasonable likelihood.
may be materially impacted. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. Allowance for Loan LossesThe Company provides additional information on its critical accounting policies and estimates under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in its 2022 Form 10-K and in Note 1 “Significant Accounting Policies and Estimates” in Part I, Item 1 of this Quarterly Report.
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management determines that the loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance. For further information about the Company’s loans and the allowance for loan losses, see Notes 3 and 4 to the Consolidated Financial Statements included in this Form 10-Q.
The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The Company performs regular credit reviews of the loan portfolio to review credit quality and adherence to underwriting standards. The credit reviews consist of reviews by its internal credit administration department and reviews performed by an independent third party. Upon origination, each loan is assigned a risk rating ranging from one to nine, with loans closer to one having less risk. This risk rating scale is the Company's primary credit quality indicator. The Company has various committees that review and ensure that the allowance for loans losses methodology is in accordance with GAAP and loss factors used appropriately reflect the risk characteristics of the loan portfolio.
The allowance represents an amount that, in management’s judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. Management’s judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of the collateral, overall portfolio quality, and review of specific potential losses. The evaluation also considers the following risk characteristics of each loan portfolio class:
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The allowance for loan losses consists of specific and general components. The specific component relates to loans that are classified as impaired, and is established when the discounted cash flows, fair value of collateral less estimated costs to sell, or observable market price of the impaired loan is lower than the carrying value of that loan. For collateral dependent loans, an updated appraisal is ordered if a current one is not on file. Appraisals are typically performed by independent third-party appraisers with relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties or general market conditions among other considerations.
The general component covers loans that are not considered impaired and is based on historical loss experience adjusted for qualitative factors. The historical loss experience is calculated by loan type and uses an average loss rate during the preceding twelve quarters. The qualitative factors are assigned by management based on delinquencies and asset quality, national and local economic trends, effects of the changes in the value of underlying collateral, trends in volume and nature of loans, effects of changes in the lending policy, the experience and depth of management, concentrations of credit, quality of the loan review system, and the effect of external factors such as competition and regulatory requirements. The factors assigned differ by loan type. The general allowance estimates losses whose impact on the portfolio has yet to be recognized by a specific allowance. Allowance factors and the overall size of the allowance may change from period to period based on management’s assessment of the above described factors and the relative weights given to each factor. For further information regarding the allowance for loan losses, see Note 4 to the Consolidated Financial Statements included in this Form 10-Q.
Loans acquired from Fincastle and SmartBank were recorded at fair value. There was $254 thousand of allowance for loan losses attributable to purchased loans at June 30, 2022.
Loans Acquired in a Business Combination
Acquired loans are classified as either (i) purchased credit-impaired (PCI) loans or (ii) purchased performing loans and are recorded at fair value on the date of acquisition.
PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Corporation will not collect all contractually required principal and interest payments. When determining fair value, PCI loans are aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. There were no acquired loans classified as PCI in the acquisition of the Fincastle and the SmartBank loan portfolios.
Goodwill and Other Intangible Assets
Goodwill arises from business combinations and is determined as the excess fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company has selected June 30 as the date to perform the annual impairment test. Intangible assets with finite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the balance sheet.
Other intangible assets consist of core deposit intangible assets arising from whole bank and branch acquisitions and are amortized on an accelerated method over their estimated useful lives, which range from 6 to 10 years.
Lending Policies
There have been no material changes in the Company’s lending policies disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021.2022.
Results of Operations
General
Net interest income represents the primary source of earnings for the Company. Net interest income equals the amount by which interest income on interest-earning assets, predominantly loans and securities, exceeds interest expense on interest-bearing liabilities, including deposits, other borrowings, subordinated debt, and junior subordinated debt. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, are the components that impact the level of net interest income. The net interest margin is calculated by dividing tax-equivalent net interest income by average earning assets. The provision for loancredit losses, noninterest income, and noninterest expense are the other components that determine net income. Noninterest income and expense primarily consistsconsist of income from service charges on deposit accounts, revenue from wealth management services, ATM and check card income, revenue from other customer services, income from bank owned life insurance, general and administrative expenses, amortization expense, and other real estate owned expense.
Net Income
Three Month Period Ended June 30, 2022
Net income increased by $493$120 thousand, or 15%3%, to $3.8 million, or $0.61 per diluted share, for the three months ended June 30, 2022,March 31, 2023, compared to $3.3$3.7 million, or $0.69$0.60 per diluted share, for the same period in 2021.2022. Return on average assets was 1.08%1.15% and return on average equity was 15.04%14.20% for the secondfirst quarter of 2022,2023, compared to 1.31%1.06% and 15.33%13.40%, respectively, for the same period in 2021.2022.
The increase in net income resulted primarily from a $3.8 million,$628 thousand, or 51%6%, increase in net interest income and a $345$67 thousand, or 14%2%, increase in total noninterest income, which were partially offset by a $2.3 million,$556 thousand, or 35%6%, increase in total noninterest expense and ana $19 thousand increase in theincome tax expense. There was no provision for loan losses. The provision for loancredit losses totaled $400 thousand for the secondfirst quarter of 2022, compared to a recovery of loan losses of $1.0 million for the same period of 2021.
Six Month Period Ended June 30, 2022
Net income increased by $1.8 million,2023 or 31%, to $7.6 million, or $1.21 per diluted share, for the six months ended June 30, 2022, compared to $5.8 million, or $1.19 per diluted share, for the same period in 2021. Return on average assets was 1.07% and return on average equity was 14.16% for the six months ended June 30, 2022, compared to 1.15% and 13.44%, respectively, for the same period in 2021.
The increase in net income resulted primarily from a $6.8 million, or 46%, increase in net interest income and a $913 thousand, or 20%, increase in total noninterest income, which were partially offset by a $4.3 million, or 32%, increase in total noninterest expense and an increase in the provision for loan losses. The provision for loan losses totaled $400 thousand for the six months ended June 30, 2022, compared to a recovery of loan losses of $1.0 million for the same period of 2021.2022.
Net Interest Income
Three Month Period Ended June 30, 2022
Net interest income increased $3.8by $628 thousand from a $2.5 million increase in total interest income, which was partially offset by a $1.9 million increase in total interest expense. Although total average earning assets decreased by 6%, total interest income increased from a change in the composition of earning assets and from higher yields earned on interest-bearing deposits in banks, securities, and loans. The composition of earning assets changed as average loans increased $88.7 million, while average interest-bearing deposits in banks decreased $142.7 million. Interest income and fees on loans increased $2.0 million, or 51%21%, comparinginterest income on deposits in banks increased $274 thousand, or 391%, and interest income on total securities increased $214 thousand, or 15%.
The increase in total interest expense resulted from a $1.9 million, or 552%, increase in interest expense on deposits. Interest expense on deposits increased as the secondBank increased interest rates on certain deposit accounts while there were customer deposits that shifted from accounts paying lower interest rates to accounts paying higher interest rates. The unfavorable impact of the Bank’s increase of interest rates paid on deposits and the customers' shift of their deposits into accounts paying higher interest rates was partially offset by a $73.8 million decrease in average interest-bearing deposits.
The net interest margin increased by 41-basis points from 3.19% in the first quarter of 2022 to 3.60% in the same periodfirst quarter of 2021,2023 and was positively impactedpartially offset by a higher interest rate environment, a significant increasethe 6% decrease in average earning assets, and a changeassets. The increase in the Company’s earning asset composition. During the second quarter of 2022, the high-end of the Federal funds target increasednet interest margin resulted from 0.50% to 1.75%, compared to a Federal funds rate that remained at 0.25% throughout the second quarter of 2021. The higher rate environment resulted in a 14-basis102-basis point increase in the yield on loansearning assets and was partially offset by a 72-basis61-basis point increase in interest expense as a percentage of average earning assets.
The 102-basis point increase in the yield on interest-bearing depositsearning assets was attributable to higher yields in other banks, whileall earning asset categories and a change in the total costearning asset composition. Average loans as a percentage of interest-bearing deposits decreased two basis points. The cost of subordinated debt decreased by 64-basis points from the redemption of $5.0 million of higher rate subordinated debt on January 1, 2022. Although the Federal funds rate increased by 150 basis points, the Company’s total cost of funds decreased seven basis points, when comparing the periods. Average earning assets increased $358.0 million, or 37%, as a result of the acquisition of Fincastleto 72% in the thirdfirst quarter of 2021 and growth2023 from 61% in the first quarter of the Bank’s deposit portfolio over the last twelve months. Additionally, the composition of earning assets contributed to the increase in total interest and dividend income as total average securities increased from 20% to 27% of average earning assets,2022, while average interest-bearing deposits in other banks decreased to 3% from 16%13%, and average securities decreased to 9%. Average loans were unchanged at 64%25% from 26% of average earning assets.
The 61-basis point increase in interest expense as a percentage of average earning assets when comparing the same periods.
The $3.8 million increase in net interest income resulted from a $3.8 million, or 47%, increase in total interest and dividend income, while total interest expense was unchanged. The increase in total interest and dividend income was attributable to a $2.9 millionan increase in the cost of interest-bearing deposits, which increased to 1.11% for the first quarter of 2023 from 0.16% for the first quarter of 2022.
Accretion of discounts on purchased loans, net of premium amortization, and accretion of fee income on PPP loans, net of costs, was recorded in interest income and fees on loans a $214 thousand increase in interest on deposits in banks, and a $691 thousand increase in interest income and dividends on securities. There was no change in total interest expense as an increase in interest expense on deposits was offset by a decrease in interest expense on subordinated debt. Thepositively impacted net interest margin increased to 3.42%, a 32-basis point increase from 3.10% in the same period one year ago.
Accretion of PPP income, net of costs, and accretion of discounts on purchased loans, net of premiums, were included in interest and fees on loans. Net accretion of PPP income totaled $35 thousand in the second quarter of 2022, compared to $509 thousand for the same period of 2021.income. Net accretion of discounts on purchased loans totaled $351$145 thousand in the secondfirst quarter of 2023, compared to $367 thousand in the first quarter of 2022. There were no purchased loans in the second quarter of 2021, and as a result, there was no netNet accretion of discounts on purchased loans during the period.
Six Month Period Ended June 30, 2022
Net interest income increased $6.8 million, or 46%, comparing the six months ended June 30, 2022, to the same period of 2021, and was positively impacted by a higher interest rate environment, a significant increase in average earning assets, and a change in the Company’s earning asset composition. During the six months ended June 30, 2022, the high-end of the Federal funds target increased from 0.25% to 1.75%, compared to a Federal funds rate that remained at 0.25% throughout the same period of 2021. The higher rate environment resulted in a 11-basis point increase in the yield on loans and a 34-basis point increase in the yield on interest-bearing deposits in other banks, while the cost of interest-bearing deposits decreased six basis points. The cost of subordinated debt decreased by 133-basis points from the redemption of $5.0 million of higher rate subordinated debt on January 1, 2022. Although the Federal funds rate increased by 150 basis points, the Company’s total cost of funds decreased nine basis points, when comparing the periods. Average earning assets increased $353.8 million, or 37%, as a result of the acquisition of Fincastle in the third quarter of 2021 and growth of the Bank’s deposit portfolio over the last twelve months. Additionally, the composition of earning assets contributed to the increase in total interest and dividend income as total average securities increased from 18% to 24% of average earning assets, while average interest-bearing deposits in other banks decreased from 16% to 12% and average loans decreased from 66% to 64%.
The $6.8 million increase in net interest income resulted from a $6.7 million, or 42%, increase in total interest and dividend income, while total interest expense decreased by $108 thousand. The increase in total interest and dividend income was attributable to a $5.2 million increase in interest income and fees on loans, a $251 thousand increase in interest on deposits in banks, and a $1.2 million increase in interest income and dividends on securities. The decrease in total interest expense resulted from a $170 thousand decrease in interest expense on subordinated debt, which was partially offset by a $62 thousand increase in interest expense on deposits. The net interest margin increased to 3.39%, a 30-basis point increase from 3.19% in the same period one year ago.
Accretion of PPP fee income, net of costs, and accretiontotaled $8 thousand in the first quarter of discounts on purchased loans, net of premiums, were included in interest and fees on loans. Net accretion of PPP income totaled $358 thousand for the six months ended June 30, 2022,2023, compared to $1.1 million for the same period of 2021. Net accretion of discounts on purchased loans totaled $718$323 thousand for the six months ended June 30, 2022. There were no purchased loans in the six months ended June 30, 2021, and as a result, there was no net accretionfirst quarter of discounts on purchased loans during the period.
2022.
The following tables show interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the periods indicated (dollars in thousands):
Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis)
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
June 30, 2022 | June 30, 2021 | March 31, 2023 | March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||
Average Balance | Interest Income/Expense | Yield/Rate | Average Balance | Interest Income/Expense | Yield/Rate | Average Balance | Interest Income/Expense | Yield/Rate | Average Balance | Interest Income/Expense | Yield/Rate | |||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | $ | 296,318 | $ | 1,295 | 1.75 | % | $ | 147,285 | $ | 697 | 1.90 | % | $ | 260,034 | $ | 1,339 | 2.09 | % | $ | 284,016 | $ | 1,132 | 1.62 | % | ||||||||||||||||||||||||
Tax-exempt (1) | 55,908 | 391 | 2.81 | % | 42,712 | 271 | 2.54 | % | 54,733 | 388 | 2.87 | % | 61,308 | 386 | 2.55 | % | ||||||||||||||||||||||||||||||||
Restricted | 1,908 | 21 | 4.48 | % | 1,631 | 22 | 5.37 | % | 1,905 | 27 | 5.85 | % | 1,825 | 21 | 4.72 | % | ||||||||||||||||||||||||||||||||
Total securities | $ | 354,134 | $ | 1,707 | 1.93 | % | $ | 191,628 | $ | 990 | 2.07 | % | $ | 316,672 | $ | 1,754 | 2.25 | % | $ | 347,149 | $ | 1,539 | 1.80 | % | ||||||||||||||||||||||||
Loans: (2) | ||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | $ | 858,045 | $ | 9,963 | 4.66 | % | $ | 625,587 | $ | 7,044 | 4.52 | % | $ | 915,863 | $ | 11,512 | 5.10 | % | $ | 824,988 | $ | 9,477 | 4.66 | % | ||||||||||||||||||||||||
Tax-exempt (1) | — | — | — | 3,400 | 38 | 4.49 | % | — | — | — | 2,223 | 27 | 4.49 | % | ||||||||||||||||||||||||||||||||||
Total loans | $ | 858,045 | $ | 9,963 | 4.66 | % | $ | 628,987 | $ | 7,082 | 4.52 | % | $ | 915,863 | $ | 11,512 | 5.10 | % | $ | 827,211 | $ | 9,504 | 4.66 | % | ||||||||||||||||||||||||
Federal funds sold | — | — | — | — | — | — | 1 | — | 0 | — | — | — | ||||||||||||||||||||||||||||||||||||
Interest-bearing deposits with other institutions | 122,797 | 251 | 0.82 | % | 156,317 | 38 | 0.10 | % | 35,293 | 344 | 3.95 | % | 177,951 | 70 | 0.16 | % | ||||||||||||||||||||||||||||||||
Total earning assets | $ | 1,334,976 | $ | 11,921 | 3.58 | % | $ | 976,932 | $ | 8,110 | 3.33 | % | $ | 1,267,829 | $ | 13,610 | 4.35 | % | $ | 1,352,311 | $ | 11,113 | 3.33 | % | ||||||||||||||||||||||||
Less: allowance for loan losses | (5,845 | ) | (7,466 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Less: allowance for credit losses on loans | (9,534 | ) | (5,766 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Total non-earning assets | 90,747 | 57,117 | 93,334 | 83,979 | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 1,419,878 | $ | 1,026,583 | $ | 1,351,629 | $ | 1,430,524 | ||||||||||||||||||||||||||||||||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest bearing deposits: | ||||||||||||||||||||||||||||||||||||||||||||||||
Checking | $ | 300,473 | $ | 157 | 0.21 | % | $ | 233,720 | $ | 100 | 0.17 | % | $ | 276,611 | $ | 942 | 1.38 | % | $ | 289,475 | $ | 100 | 0.14 | % | ||||||||||||||||||||||||
Regular savings | 209,513 | 26 | 0.05 | % | 134,266 | 20 | 0.06 | % | 194,751 | 61 | 0.13 | % | 206,798 | 25 | 0.05 | % | ||||||||||||||||||||||||||||||||
Money market accounts | 220,182 | 75 | 0.14 | % | 160,462 | 45 | 0.11 | % | 198,177 | 746 | 1.53 | % | 246,958 | 52 | 0.08 | % | ||||||||||||||||||||||||||||||||
Time deposits: | ||||||||||||||||||||||||||||||||||||||||||||||||
$100,000 and over | 62,346 | 80 | 0.51 | % | 40,212 | 83 | 0.83 | % | ||||||||||||||||||||||||||||||||||||||||
Under $100,000 | 75,025 | 75 | 0.40 | % | 55,485 | 80 | 0.57 | % | ||||||||||||||||||||||||||||||||||||||||
Brokered | 553 | — | 0.12 | % | 578 | — | 0.20 | % | ||||||||||||||||||||||||||||||||||||||||
Time deposits | 143,070 | 467 | 1.32 | % | 143,201 | 163 | 0.46 | % | ||||||||||||||||||||||||||||||||||||||||
Total interest-bearing deposits | $ | 868,092 | $ | 413 | 0.19 | % | $ | 624,723 | $ | 328 | 0.21 | % | $ | 812,609 | $ | 2,216 | 1.11 | % | $ | 886,432 | $ | 340 | 0.16 | % | ||||||||||||||||||||||||
Federal funds purchased | 2 | — | — | % | — | — | 0.00 | % | 6 | — | 0.05 | — | — | 0.00 | % | |||||||||||||||||||||||||||||||||
Subordinated debt | 4,994 | 69 | 5.56 | % | 9,992 | 155 | 6.20 | % | 4,995 | 69 | 5.62 | % | 6,244 | 69 | 4.50 | % | ||||||||||||||||||||||||||||||||
Junior subordinated debt | 9,279 | 67 | 2.91 | % | 9,279 | 67 | 2.91 | % | 9,279 | 67 | 2.91 | % | 9,279 | 67 | 2.91 | % | ||||||||||||||||||||||||||||||||
Other borrowings | 222 | — | — | % | — | — | — | % | ||||||||||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | $ | 882,367 | $ | 549 | 0.25 | % | $ | 643,994 | $ | 550 | 0.34 | % | $ | 827,111 | $ | 2,352 | 1.15 | % | $ | 901,955 | $ | 476 | 0.21 | % | ||||||||||||||||||||||||
Non-interest bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Demand deposits | 431,995 | 292,960 | 409,777 | 411,576 | ||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 3,247 | 2,187 | 4,817 | 4,171 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | $ | 1,317,609 | $ | 939,141 | $ | 1,241,705 | $ | 1,317,702 | ||||||||||||||||||||||||||||||||||||||||
Shareholders’ equity | 102,269 | 87,442 | 109,924 | 112,822 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and Shareholders’ equity | $ | 1,419,878 | $ | 1,026,583 | $ | 1,351,629 | $ | 1,430,524 | ||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 11,372 | $ | 7,560 | $ | 11,258 | $ | 10,637 | ||||||||||||||||||||||||||||||||||||||||
Interest rate spread | 3.33 | % | 2.99 | % | 3.20 | % | 3.12 | % | ||||||||||||||||||||||||||||||||||||||||
Cost of funds | 0.17 | % | 0.24 | % | 0.77 | % | 0.15 | % | ||||||||||||||||||||||||||||||||||||||||
Interest expense as a percent of average earning assets | 0.16 | % | 0.23 | % | 0.75 | % | 0.14 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest margin | 3.42 | % | 3.10 | % | 3.60 | % | 3.19 | % |
(1) | Income and yields are reported on a taxable-equivalent basis assuming a federal tax rate of 21%. The tax-equivalent adjustment was $82 and |
(2) | Loans on non-accrual status are reflected in the balances. |
Six Months Ended | ||||||||||||||||||||||||
June 30, 2022 | June 30, 2021 | |||||||||||||||||||||||
Average Balance | Interest Income/Expense | Yield/Rate | Average Balance | Interest Income/Expense | Yield/Rate | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Securities: | ||||||||||||||||||||||||
Taxable | $ | 257,529 | $ | 2,427 | 1.90 | % | $ | 135,305 | $ | 1,413 | 2.11 | % | ||||||||||||
Tax-exempt (1) | 58,647 | 777 | 2.67 | % | 38,856 | 499 | 2.59 | % | ||||||||||||||||
Restricted | 1,867 | 42 | 4.60 | % | 1,738 | 44 | 5.12 | % | ||||||||||||||||
Total securities | $ | 318,043 | $ | 3,246 | 2.06 | % | $ | 175,899 | $ | 1,956 | 2.24 | % | ||||||||||||
Loans: (2) | ||||||||||||||||||||||||
Taxable | $ | 841,608 | $ | 19,439 | 4.66 | % | $ | 628,012 | $ | 14,157 | 4.55 | % | ||||||||||||
Tax-exempt (1) | 1,106 | 27 | 4.49 | % | 3,412 | 76 | 4.49 | % | ||||||||||||||||
Total loans | $ | 842,714 | $ | 19,466 | 4.66 | % | $ | 631,424 | $ | 14,233 | 4.55 | % | ||||||||||||
Federal funds sold | — | — | — | 67 | — | 0.10 | % | |||||||||||||||||
Interest-bearing deposits with other institutions | 150,222 | 321 | 0.43 | % | 149,786 | 70 | 0.09 | % | ||||||||||||||||
Total earning assets | $ | 1,310,979 | $ | 23,033 | 3.54 | % | $ | 957,176 | $ | 16,259 | 3.43 | % | ||||||||||||
Less: allowance for loan losses | (5,806 | ) | (7,475 | ) | ||||||||||||||||||||
Total non-earning assets | 120,409 | 59,929 | ||||||||||||||||||||||
Total assets | $ | 1,425,582 | $ | 1,009,630 | ||||||||||||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||||||||||
Interest bearing deposits: | ||||||||||||||||||||||||
Checking | $ | 295,005 | $ | 256 | 0.17 | % | $ | 230,723 | $ | 217 | 0.19 | % | ||||||||||||
Regular savings | 208,163 | 51 | 0.05 | % | 130,262 | 39 | 0.06 | % | ||||||||||||||||
Money market accounts | 233,496 | 126 | 0.11 | % | 157,902 | 88 | 0.11 | % | ||||||||||||||||
Time deposits: | ||||||||||||||||||||||||
$100,000 and over | 63,429 | 163 | 0.52 | % | 41,392 | 182 | 0.88 | % | ||||||||||||||||
Under $100,000 | 76,566 | 154 | 0.40 | % | 55,667 | 164 | 0.60 | % | ||||||||||||||||
Brokered | 558 | 3 | 1.03 | % | 586 | 1 | 0.43 | % | ||||||||||||||||
Total interest-bearing deposits | $ | 877,217 | $ | 753 | 0.17 | % | $ | 616,532 | $ | 691 | 0.23 | % | ||||||||||||
Federal funds purchased | 2 | — | — | 1 | — | 0.47 | % | |||||||||||||||||
Subordinated debt | 5,708 | 138 | 4.89 | % | 9,992 | 308 | 6.22 | % | ||||||||||||||||
Junior subordinated debt | 9,279 | 134 | 2.91 | % | 9,279 | 134 | 2.91 | % | ||||||||||||||||
Other borrowings | — | — | — | % | — | — | 0.00 | % | ||||||||||||||||
Total interest-bearing liabilities | $ | 892,206 | $ | 1,025 | 0.23 | % | $ | 635,804 | $ | 1,133 | 0.36 | % | ||||||||||||
Non-interest bearing liabilities | ||||||||||||||||||||||||
Demand deposits | 421,785 | 284,542 | ||||||||||||||||||||||
Other liabilities | 3,904 | 2,617 | ||||||||||||||||||||||
Total liabilities | $ | 1,317,895 | $ | 922,963 | ||||||||||||||||||||
Shareholders’ equity | 107,686 | 86,667 | ||||||||||||||||||||||
Total liabilities and Shareholders’ equity | $ | 1,425,581 | $ | 1,009,630 | ||||||||||||||||||||
Net interest income | $ | 22,008 | $ | 15,126 | ||||||||||||||||||||
Interest rate spread | 3.31 | % | 3.07 | % | ||||||||||||||||||||
Cost of funds | 0.16 | % | 0.25 | % | ||||||||||||||||||||
Interest expense as a percent of average earning assets | 0.16 | % | 0.24 | % | ||||||||||||||||||||
Net interest margin | 3.39 | % | 3.19 | % |
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Provision for LoanCredit Losses
Three Month Period Ended June 30, 2022
TheThere was no provision for loancredit losses totaled $400 thousand forin the secondfirst quarter of 2022, compared to a $1.0 million recovery of loan losses for the same period of 2021. The provision for loan losses resulted primarily from an increase in the general reserve component of the allowance for loan losses, which was attributable to loan growth during the quarter. There were no specific reserves on impaired loans at June 30, 2022, compared to $78 thousand of specific reserves at June 30, 2021. Net charge-offs totaled $26 thousand during the second quarter of 2022, compared to $1.0 million of net charge-offs for the same period of 2021.
The $1.0 million recovery of loan losses for the second quarter of 2021 resulted from the resolution of a previously impaired loan and a related decrease of the specific reserve component of the allowance for loan losses during the period.
2023 or 2022. The allowance for loancredit losses on loans totaled $6.2$8.7 million, or 0.95% of total loans on March 31, 2023, $7.4 million, or 0.81% of total loans on December 31, 2022, and $5.8 million, or 0.70% of total loans at June 30, 2022, compared to $5.5 million, or 0.89%on March 31, 2022. Although net charge-offs of total loans at June 30, 2021. The net discount on purchased loans totaled $2.9 million, or 0.33%$916 thousand in the first quarter of total loans at June 30, 2022. There were2023, there was no discountsimpact on purchased loans at June 30, 2021.
Six Month Period Ended June 30, 2022
The provision for loan losses also totaled $400 thousand for the six months ended June 30, 2022, compared to a $1.0 million recovery of loan losses for the same period of 2021. Like the second quarter ended June 30, 2022, the provision for loancredit losses as the Bank established adequate specific reserves for the six-month period resulted primarily from an increasecharged-off off portion of the loans in the general reserve component of theits allowance for loan losses and was attributable to loan growth.in a prior period. There were net recoveries of previously charged-off loans totaling $92 thousand forno qualitative factor adjustments to the general reserve in the first six monthsquarter of 2022, compared to $1.0 of net charge-offs for the same period of 2021.2023.
Noninterest IncomeThe Bank established a $132 thousand allowance for credit losses on securities held to maturity along with the adoption of CECL on January 1, 2023. The allowance for credit losses on securities held to maturity was unchanged at $133 thousand at March 31, 2023, and as a result, it was not necessary to record a provision for credit losses for securities held to maturity in the first quarter of 2023. The Bank also recorded an allowance for credit losses on off-balance sheet credit exposures of $153 thousand upon adoption of CECL on January 1, 2023. The allowance for credit losses on off-balance sheet credit exposures was unchanged at $153 thousand at March 31, 2023, and as a result, it was not necessary to record a provision for credit losses on off-balance sheet credit exposures in the first quarter of 2023.
Three Month Period Ended June 30, 2022Noninterest Income
NoninterestTotal noninterest income increased $345$67 thousand, or 14%3%, to $2.8 million for the second quarter of 2022, compared to the same period of 2021. Service charges on deposits increased $251 thousand, or 56%, ATM and check card fees increased $115 thousand, or 17%, fees for other customer services increased $38 thousand, or 25%, and wealth management fees increased $103 thousand, or 16%. The increases were partially offset by a $99 thousand, or 63%, decrease in brokered mortgage fees, and a $77 thousand, or 34%, decrease in other operating income.
The increasesprimarily from an increase in service charges on deposits, ATM and check card fees, and other operating income, which were partially offset by decreases in fee income for other customer services and brokered mortgage fee income. Changes in the volume of customer transactions impacted service charges of deposits, ATM and check fees, fees for other customer services, were favorably impacted by an increase in customer transactions and additional deposit accounts that resulted from the acquisition of Fincastle.brokered mortgage fee income. The increase in wealth management income was attributable to an increase in the number of client accounts. Brokered mortgage fees and net gains on sale of loans held for sale decreased from a reduction in the number of mortgage loans originated, as well as an increase in the number of mortgage loans retained in the Bank’s loan portfolio and not sold or brokered when comparing the periods. The decrease in other operating income was a result of income earned from an investment in a small business investment company partnership in the second quarter of 2021.
Six Month Period Ended June 30, 2022
Noninterest income increased $913 thousand, or 20%, to $5.5 million for the six months ended June 30, 2022, compared to the same period of 2021. Service charges on deposits increased $418 thousand, or 47%, ATM and check card fees increased $264 thousand, or 21%, fees for other customer services increased $90 thousand, or 27%, and wealth management fees increased $263 thousand, or 20%. The increases were partially offset by a $110 thousand, or 42%, decrease in brokered mortgage fees and a $25 thousand decrease in gains on sale of loans held for sale.
The increases in service charges on deposits, ATM and check card fees, and fees for other customer services were favorably impacted by an increase in customer transactions and additional deposit accounts that resulted from the acquisition of Fincastle. The increase in wealth management income was attributable to an increase in the number of client accounts. Brokered mortgage fees and net gains on sale of loans held for sale decreaseda death benefit payment received from a reduction in the number of mortgage loans originated, as well as an increase in the number of mortgage loans retained in the Bank’s loan portfolio and not sold or brokered when comparing the periods.bank-owned life insurance policy.
Noninterest Expense
Three Month Period Ended June 30, 2022
NoninterestTotal noninterest expense increased $2.3 million,$556 thousand, or 35%6%, to $8.9 million for the three-month period ended June 30, 2022, compared to the same period one year ago. The increase was primarily attributable to a $1.4 million, or 38% increasefrom increases in salaries and employee benefits, a $146 thousand, or 37%, increase in occupancy expense, a $187 thousand, or 43%, increase in equipment expense, an $85 thousand, or 62%, increase in marketing, a $79 thousand, or 30%, increase in ATM and check card expense, bank franchise tax, and a $280other operating expense, which were partially offset by decreases in occupancy, FDIC assessment, and data processing expense. Other operating expense increased from recruiting, education and training, loan collections, and losses from fraudulent check and debit card activity in customer accounts.
Salaries and employee benefits expense increased $222 thousand, or 42%4%, primarily from increases in employee salaries and wages. Marketing expenses increased $117 thousand, or 78%, primarily from the timing of marketing initiatives. ATM and check card expense increased $97 thousand, or 32%, from an increase in the volume of customer transactions and an increase in transaction costs. The $181 thousand increase in other operating expense. Theseexpense was attributable to several items, including an increase in miscellaneous losses, education and training, director fees, loan collection expense, and an increase in losses related to customer account fraud. The increases were partially offset by a $102 thousand decrease in legal and professional fees.
The increases were primarily attributable to the increase in the number of employees, branch offices and customers that resulted from the acquisition of Fincastle and the acquisition of the loan portfolio, branch assets and the addition of employees from the SmartBank office. The increase in marketing was also related to the timing of campaigns and promotion activities. The decrease in legal and professional fees was primarily attributable to merger related costs in the second quarter of 2021. Although there were no merger expenses in the second quarter of 2022, merger expenses totaled $277 thousand in the second quarter of 2021.
Six Month Period Ended June 30, 2022
Noninterest expense increased $4.3 million, or 32%, to $17.6 million for the six-month period ended June 30, 2022, compared to the same period one year ago. The increase was primarily attributable to a $3.0 million, or 41% increase in salaries and employee benefits, a $315 thousand, or 36%, increase in equipment expense, a $271 thousand, or 32%, increasedecreases in occupancy, expense, a $151 thousand, or 30%, increase in ATMFDIC assessments, and check card expense, a $137 thousand, or 93%, increase in FDIC assessment, a $130 thousand, or 53%, increase in marketing, a $114 thousand, or 34%, increase in bank franchise tax, and a $510 thousand, or 40%, increase in other operatingdata processing expense. These increases were partially offset by a $506 thousand, or 41%, decrease in legal and professional fees.
The increases were primarily attributable to the increase in the number of employees, branch offices and customers that resulted from the acquisition of Fincastle and the acquisition of the loan portfolio, branch assets and the addition of employees from the SmartBank office. The increase in marketing was also related to the timing of campaigns and promotion activities. The decrease in legal and professional fees was primarily attributable to merger related costs during the first six months of 2021. Merger expenses totaled $20 thousand for the first six months of 2022 compared to $682 thousand for the same period of 2021.
Income Taxes
Three Month Period Ended June 30, 2022
Income tax expense decreased $41increased $19 thousand for the secondfirst quarter of 2022,2023, compared to the same period one year ago. The effective tax rate for the secondfirst quarter of 20222023 was 19.3%19.0% compared to 22.3%19.2% for the same period in 2021.2022. The reduced effective tax rate for 20222023 was primarily the result of lower non-deductible expenseshigher non-taxable income relative to taxable income in 20222023 compared to 2021.2022. The Company’s income tax expense differed from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the three months ended June 30, 2022,March 31, 2023, and 2021.2022. The difference was a result of net permanent tax deductions, primarily comprised of tax-exempt interest income, and income from bank owned life insurance. A more detailed discussion of the Company’s tax calculation is contained in Note 11 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Six Month Period Ended June 30, 2022
Income tax expense increased $276 thousand, or 18%, for the first six months of 2022 compared with the same period in 2021. The effective tax rate for the first six months of 2022 was 19.2% compared with 20.9% for the same period in 2021. Like the three month period ended June 30, 2022, the reduced effective tax rate for 2022 was also the result of lower non-deductible expenses in 2022 compared to 2021.
2022.
Financial Condition
General
TotalAt March 31, 2023, assets increased $25.3 million tototaled $1.4 billion, at June 30, 2022, compared to which was an increase of $2.9 million from December 31, 2021.2022. The increase from the prior period was primarily attributabledue to an $54.5a $13.7 million or 7.0%, increase in loans, net of allowance for loan losses, and a $43.7 million, or 130.7%, increase in securities held to maturity. These increases were partially offset by a decrease in interest-bearing deposits in banks and was partially offset by decreases in cash and due from banks, securities, loans, and other assets.
Total liabilities decreased slightly by $548 thousand as total deposits increased by $193 thousand, which was offset by accrued interest payable and other liabilities that decreased by $742 thousand during the quarter. Although total deposits increased slightly, the composition of $52.8deposits changed as noninterest-bearing deposits and savings and interest-bearing deposits decreased $17.3 million or 33.5%, and a decrease in securities available for sale of $24.7$264 thousand, respectively, while time deposits increased $17.8 million.
Total shareholders’ equity increased by $3.5 million or 8.5%, during the first quarter of 2022.
At June 30, 2022, total liabilities increased $42.0 million to $1.3 billion compared to December 31, 2021. The increase was primarily attributable to anfrom a $955 thousand increase in savingsretained earnings and interest-bearing demand deposits of $41.1 million and in increase in noninterest-bearing deposits of $18.1 million. These increases were partially offset by a decrease in time deposits of $11.8 million during the first six months of 2022 and the Company's repayment of $5.0 million of subordinated debt on January 1, 2022.
Total shareholders’ equity decreased $16.7 million to $100.3 million at June 30, 2022, compared to $117.0 million at December 31, 2021. This was primarily attributable to a $23.0$2.3 million decrease in accumulated other comprehensive (loss) income (AOCI).loss. The decrease in AOCI is relatedaccumulated other comprehensive loss was attributable to an improvement in unrealized losses in the available-for-sale securities portfolio, stemmingprimarily from changes in market rate increases duringrates. During the first quarter. Thisquarter, retained earnings increased after absorbing cash dividend payments to common shareholders of $0.15 per share and a $1.9 million decrease was partially offset by a $5.8 million increase into retained earnings.earnings on January 1, 2023 from the adoption of CECL. The Company's capital ratios continued to exceed the minimum capital requirements for regulatory purposes.
Loans
Loans net of the allowance for loan losses, increased $54.5 million to $873.9totaled $918.0 million at June 30, 2022, compared to $819.4March 31, 2023, which was a decrease of $2.6 million atfrom December 31, 2021. This change was primarily due to increases in residential real estate, commercial real estate and commercial and industrial2022. Average loans of $20.1totaled $915.9 million $36.1 million and $9.7 million, respectively, duringfor the first six monthsquarter of 2022. Construction loans and consumer and other loans decreased by $6.62023, which was an increase of $1.0 million and $4.4 million, respectively, during the first six months of 2022.
The Bank actively participated as a lender in the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) to support local small businesses and non-profit organizations by providing forgivable loans. Loan fees received from the SBA are accreted by the Bank into income evenly over the life of the loans, net of loan origination costs, through interest and fees on loans. PPP loans totaled $845 thousand at June 30, 2022, with $32 thousand scheduled to mature in the second and third quarters of 2022, and $813 thousand scheduled to mature in the first and second quarters of 2026. The total amount of deferred PPP income, net of origination costs, that has not yet been recognized through interest and fees on loans totaled $8 thousand at June 30, 2022. The Company believes the majority of these loans will ultimately be forgiven and repaid by the SBA in accordance with the terms of the program. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan losses through additional provision for loan losses charged to earnings.
During the fourth quarter of 2020, the Bank modified terms of certain loans for customers that continued to be negatively impacted by the pandemic. The loan modifications lowered borrower loan payments by allowing interest only payments for periods ranging between 6 and 24 months. All loans modified2022. There were no significant changes in the lodging sector of the Bank’s commercial real estate loan portfolio and totaled $4.7 million at June 30, 2022. All modified loans were performing under their modified terms at June 30, 2022.composition during the first quarter.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances less the allowance for loancredit losses and any deferred fees or costs on originated loans. Interest income is accrued and credited to income based on the unpaid principal balance. Loan origination fees, net of certain origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Interest income includes amortization of purchase premiums and discounts, recognized evenly over the life of the loans.
A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are generally placed on non-accrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. Loans greater than 90 days past due and still accruing totaled $92$47 thousand at June 30, 2022.at March 31, 2023. There were no loans greater than 90 days past due and still accruing atat December 31, 2021.2022. For those loans that are carried on non-accrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. These policies are applied consistently across the loan portfolio.
All interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. When a loan is returned to accrual status, interest income is recognized based on the new effective yield to maturity of the loan.
Any unsecured loan that is deemed uncollectible is charged-off in full. Any secured loan that is considered by management to be uncollectible is partially charged-off and carried at the fair value of the collateral less estimated selling costs. This charge-off policy applies to all loan segments.
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value (net of selling costs), and the probability of collecting scheduled principal and interest payments when due. Additionally, management generally evaluates substandard and doubtful loans greater than $250 thousand for impairment. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair market value of the collateral, net of selling costs, if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company typically does not separately identify individual consumer, residential, and certain small commercial loans that are less than $250 thousand for impairment disclosures, except for troubled debt restructurings (TDRs) as noted below. The recorded investment in impaired loans totaled $586 thousand and $2.3 million at June 30, 2022 and December 31, 2021, respectively.
Troubled Debt Restructurings (TDR)
In situations where, for economic or legal reasons related to a borrower’s financial condition, management grants a concession to the borrower that it would not otherwise consider, the related loan is classified as a TDR. TDRs are considered impaired loans. Upon designation as a TDR, the Company evaluates the borrower’s payment history, past due status, and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to being modified as a TDR and if the Company concludes that the borrower is able to make such payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on non-accrual status at the time of the TDR, the loan will remain on non-accrual status following the modification and may be returned to accrual status based on the policy for returning loans to accrual status as noted above. There were $116 thousand in loans classified as TDRs as of June 30, 2022 and $1.6 million as of December 31, 2021.
Asset Quality
Management classifies non-performing assets as non-accrual loans and OREO. Non-performing assets totaled $1.8 million and $2.9 million at March 31, 2023 and December 31, 2022, representing approximately 0.13% and 0.21% of total assets, respectively. OREO represents real property taken by the Bank when its customers do not meet the contractual obligation of their loans, either through foreclosure or through a deed in lieu thereof from the borrower and properties originally acquired for, or used in branch operations, or expansion but no longer intended to be used for that purpose. OREO is recorded at the lower of cost or fair value, less estimated selling costs, and is marketed by the Bank through brokerage channels. The Bank had $1.7 million and $1.8 million$184 thousand in assetsunimproved real estate classified as OREO at June 30, 2022March 31, 2023 and December 31, 2021, respectively.
Non-performing assets totaled $2.1 million and $4.2 million at June 30, 2022 and December 31, 2021, representing approximately 0.15% and 0.30% of total assets, respectively. Non-performing assets consisted of OREO and non-accrual loans at June 30, 2022 and December 31, 2021. Non-performing assets included $1.7 million in properties formerly classified as bank premises by2022. The Bank did not have any consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings were in process as of Fincastle which are now classified as held for sale.March 31, 2023.
At June 30, 2022, 4%March 31, 2023, 27% of non-performing assets were commercial real estate loans and 21% werecomprised of residential real estate loans. Additionally, 79%10% was related to bank-owned properties acquired from The Bankcomprised of Fincastle which will not be used in the Company's operations and are classified as held for sale.OREO. Non-performing assets could increase due to other loans identified by management as potential problem loans. Other potential problem loans are defined as performing loans that possess certain risks, including the borrower’s ability to pay and the collateral value securing the loan, that management has identified that may result in the loans not being repaid in accordance with their terms. Other potential problem loans totaled $308 thousand$1.7 million and $1.1$2.3 million at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The amount of other potential problem loans in future periods may be dependent on economic conditions and other factors influencing a customers’ ability to meet their debt requirements.
Loans greater than 90 days past due and still accruing totaled $92 thousand at June 30, 2022. There were no loans greater than 90 days past due and still accruing at December 31, 2021.
The allowance for loan losses represents management’s analysis of the existing loan portfolio and related credit risks. The provision for loan losses is based upon management’s current estimate of the amount required to maintain an adequate allowance for loan losses reflective of the risks in the loan portfolio. The allowance for loan losses totaled $6.2 million at June 30, 2022 and $5.7 million December 31, 2021, representing 0.70% and 0.69% of total loans, respectively. For further discussion regarding the allowance for loan losses, see “Provision for Loan Losses” above.
Recoveries of loan losses of $9 thousand and $40 thousand were recorded in the construction and land development and 1-4 family residential loans classes respectively, during the six months ended June 30, 2022. This recovery was offset by provision for loan losses totaling $334 thousand, $20 thousand, and $95 thousand in the other real estate, commercial and industrial, and consumer and other loan classes, respectively. For more detailed information regarding the (recovery of) provision for loan losses, see Note 4 to the Consolidated Financial Statements.
Impaired loans totaled $586 thousand and $2.3 million at June 30, 2022 and December 31, 2021, respectively. There was no related allowance for loan losses recorded for these loans at June 30, 2022. The related allowance for loan losses provided for these loans totaled $55 thousand at December 31, 2021. The average recorded investment in impaired loans during the six months ended June 30, 2022 and the year ended December 31, 2021 was $1.9 million and $4.5 million, respectively. Included in the impaired loans total are loans classified as TDRs totaling $116 thousand and $1.6 million at June 30, 2022 and December 31, 2021, respectively. Loans classified as TDRs represent situations in which a modification to the contractual interest rate or repayment structure has been granted to address a financial hardship. As of June 30, 2022, none of these TDRs were performing under the restructured terms and all were considered non-performing assets.
Management believes, based upon its review and analysis, that the Bank has sufficient reserves to cover losses inherent within the loan portfolio. For each period presented, the provision for loancredit losses charged to expense was based on management’s judgment after taking into consideration all factors connected with the collectability of the existing portfolio. Management considers economic conditions, historical loss factors, past due percentages, internally generated loan quality reports, and other relevant factors when evaluating the loan portfolio. There can be no assurance, however, that an additional provision for loancredit losses will not be required in the future, including as a result of changes in the qualitative factors underlying management’s estimates and judgments, changes in accounting standards, adverse developments in the economy, on a national basis or in the Company’s market area, loan growth, or changes in the circumstances of particular borrowers. For further discussion regarding the allowance for loancredit losses, see “Critical Accounting Policies” above.
Securities
The securities portfolio plays a primary role in the management of the Company’s interest rate sensitivity and serves as a source of liquidity. The portfolio is used as needed to meet collateral requirements, such as those related to secure public deposits and balances with the Reserve Bank. The investment portfolio consists of held to maturity, available for sale, and restricted securities. Securities are classified as available for sale or held to maturity based on the Company’s investment strategy and management’s assessment of the intent and ability to hold the securities until maturity. Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold the investment securities to maturity, they are classified as investment securities held to maturity and are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Investment securities which the Company may not hold to maturity are classified as investment securities available for sale, as management has the intent and ability to hold such investment securities for an indefinite period of time, but not necessarily to maturity. Securities available for sale may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors and are carried at estimated fair value. Restricted securities, including Federal Home Loan Bank, Federal Reserve Bank, and Community Bankers’ Bank stock, are generally viewed as long-term investments because there is minimal market for the stock and are carried at cost.
Securities at June 30, 2022On March 31, 2023 securities totaled $343.8$315.5 million, an increasea decrease of $18.9$2.5 million, or 6.0%0.8%, from $324.7$318.0 million at December 31, 2021.2022. Investment securities are comprised of U.S. Treasury securities, U.S. agency and mortgage-backed securities, obligations of state and political subdivisions, corporate debt securities, and restricted securities. As of June 30, 2022,March 31, 2023, neither the Company nor the Bank held any derivative financial instruments in their respective investment security portfolios. Gross unrealized gains in the available for sale portfolio totaled $147$102 thousand and $2.0 million$99 thousand at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. Gross unrealized losses in the available for sale portfolio totaled $31.1$21.3 million and $2.6$24.0 million at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. Gross unrealized gains in the held to maturity portfolio totaled $2$37 thousand and $242 thousand$0 at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. Gross unrealized losses in the held to maturity portfolio totaled $6.7$9.5 million and $66 thousand$11.4 million at June 30, 2022March 31, 2023 and December 31, 2021. Investments in an unrealized loss position were considered temporarily impaired at June 30, 2022, and December 31, 2021. respectively. The change in the unrealized gains and losses of investment securities from December 31, 20212022 to June 30, 2022March 31, 2023 was related to changes in market interest rates and was not related to credit concerns of the issuers.
At June 30,On September 1, 2022,, the Bank transferred 24 securities portfolio was comprised of $264.8 million of securitiesdesignated as available for sale with a combined book value of $82.2 million, market value of $74.4 million, and $77.2unrealized loss of $7.8 million, to securities designated held to maturity. The unrealized loss is being amortized monthly over the life of the securities with an increase to the carrying value of securities and a decrease to the related accumulated other comprehensive loss, which is included in the shareholders’ equity section of the Company’s balance sheet. The amortization of the unrealized loss on the transferred securities totaled $400 thousand, or $316 thousand net of tax, for the first quarter of 2023. Securities designated as held to maturity compared to $289.5 million and $33.4 millionare carried on the balance sheet at December 31, 2021, respectively. Securities held to maturity increased by $43.8 million during the first six months of 2022 from new purchasesamortized cost, while securities designated as a part of the Company's strategy to mitigate the risk of potential fluctuations in value and the related impact on shareholders' equity. The Company has not transferred any securities from available for sale to held to maturity during the first six monthsare carried at fair market value.
Deposits
At June 30, 2022, depositsDeposits totaled $1.3$1.2 billion at March 31, 2023, which was an increase of $47.4 million,$193 thousand from $1.2 billion at December 31, 2021. There was a slight change in the deposit mix when comparing the periods. At June 30, 2022, noninterest-bearing2022. Noninterest-bearing demand deposits decreased $17.3 million and savings and interest-bearing demand deposits anddecreased $264 thousand, while time deposits composed 33%, 57%, and 10%increased $17.8 million. Average deposits totaled $1.2 billion for the first quarter of total deposits, respectively,2023, a decrease of $42.7 million, or 3%, compared to 33%, 57%, and 10% at December 31, 2021.the fourth quarter of 2022. The decrease in the average balance of deposits was primarily a result of typical fluctuations in customer deposit balances.
Liquidity
Liquidity represents the abilitysources available to meet present and future financial obligations through either the sale or maturity of existing assets or with borrowings from correspondent banks or other deposit markets. The Company classifies cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold, investment securities, and loans maturing within one year as liquid assets. As part of the Bank’s liquidity risk management, stress tests and cash flow modeling are performed quarterly.
As a result of the Bank’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Bank, maintains overall liquidity sufficient to satisfy its depositors’ requirementsincluding interest-bearing deposits in banks, unpledged securities available for sale, at fair value, and to meet its customers’ borrowing needs.
At June 30, 2022, cash, interest-bearingavailable lines of credit, totaled $471.2 million, $417.2 million, and noninterest-bearing deposits with banks, securities, and loans maturing within one year totaled $210.8 million. At June 30, 2022, 9.5% or $83.7 million of the loan portfolio matured within one year. Non-deposit sources of available funds totaled $385.0$535.7 million at June 30,March 31, 2023, December 31, 2022,, which included $287.8 million of secured funds available from Federal Home Loan Bank of Atlanta (FHLB), $46.2 million of secured funds available through and March 31, 2022, respectively. Additionally, unpledged securities held-to-maturity, at par, that were eligible to be pledged to the Federal Reserve Discount Window,Bank through its Bank Term Funding Program (the “BTFP” or the “Program”), totaled $91.2 million at March 31, 2023.
The BTFP was first made available on March 13, 2023, and $51.0provides any U.S. federally insured depository institution, including the Bank, with a line of credit facility equal to the par value of securities pledged to the Federal Reserve Bank under the Program. Advances from the BTFP may be requested by the Bank for a term up to one year and until March 11, 2024. The Bank did not pledge securities to, or borrow from, the BTFP facility during the first quarter of 2023.
The Bank maintains on-balance sheet liquidity and off-balance sheet liquidity to fund loan growth and meet the potential demand from its deposit customers, including potential volatile deposits. The estimated amount of uninsured customer deposits totaled $212.3 million at March 31, 2023, $261.7 million at December 31, 2022, and $235.3 million at March 31, 2022. Excluding municipal deposits, the estimated amount of uninsured customer deposits totaled $135.2 million at March 31, 2023, $185.3 million at December 31, 2022, and $169.5 million at March 31, 2022.
The Bank’s on-balance sheet liquidity was comprised of interest-bearing deposits in banks and unpledged securities, available for sale, at fair value, and totaled $142.1 million at March 31, 2023, $129.4 million at December 31, 2022, and $294.6 at March 31, 2022.
The following table provides on-balance sheet liquidity information at the periods ended (dollars in thousands):
March 31, 2023 | December 31, 2022 | March 31, 2022 | ||||||||||
Interest-bearing deposits in banks | $ | 59,851 | $ | 46,130 | $ | 129,801 | ||||||
Securities, available for sale, at fair | 162,355 | 162,907 | 284,893 | |||||||||
Pledged securities, available for sale, at fair value | (80,221 | ) | (79,590 | ) | (120,093 | ) | ||||||
Unpledged securities, available for sale, at fair value | 82,134 | 83,317 | 164,800 | |||||||||
Totals | $ | 141,985 | $ | 129,447 | $ | 294,601 |
The Bank also has access to off-balance sheet liquidity through its available lines of credit from other institutions, which totaled $329.1 million at March 31, 2023, $287.3 million at December 31, 2022, and $241.1 million at March 31, 2022. The available lines of credit were comprised of secured and unsecured federal fundslines of credit. The Bank had no borrowings on the lines of credit at March 31, 2023, December 31, 2022, or March 31, 2022.
The following table provides information about off-balance sheet liquidity available to the Bank through lines of credit with other correspondent banks.institutions at the periods ended (dollars in thousands):
March 31, 2023 | December 31, 2022 | March 31, 2022 | ||||||||||
Available unsecured Federal funds lines | $ | 51,000 | $ | 51,000 | $ | 51,000 | ||||||
Available secured lines of credit: | ||||||||||||
Federal Home Loan Bank of Atlanta | 219,026 | 182,839 | 141,697 | |||||||||
Federal Reserve Bank Discount Window | 59,068 | 53,923 | 48,420 | |||||||||
Total available secured lines of credit | 278,094 | 236,762 | 190,117 | |||||||||
Totals | $ | 329,094 | $ | 287,762 | $ | 241,117 |
Additionally, unpledged securities, held to maturity, at par, that were eligible to be pledged as collateral to the BTFP, totaled $91.2 million at March 31, 2023. The BTFP was first made available on March 13, 2023, and provides any U.S. federally insured depository institution, including the Bank, with a line of credit facility equal to the par value of securities pledged to the Federal Reserve Bank under the Program. Advances from the BTFP may be requested by the Bank for up to one year until March 11, 2024. The Bank did not pledge securities to, or borrow from, the BTFP facility during the first quarter of 2023.
Capital Resources
The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to the size, composition, and quality of the Company’s asset and liability levels and consistent with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and absorb potential losses. The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement issued in February 2015 and is not obligated to report consolidated regulatory capital.
Effective January 1, 2015, the Bank became subject to capital rules adopted by federal bank regulators implementing the Basel III regulatory capital reforms adopted by the Basel Committee on Banking Supervision (the Basel Committee), and certain changes required by the Dodd-Frank Act.
The minimum capital level requirements applicable to the Bank under the final rules are as follows: a new common equity Tier 1 capital ratio of 4.5%; a Tier 1 capital ratio of 6%; a total capital ratio of 8%; and a Tier 1 leverage ratio of 4% for all institutions. The final rules also established a “capital conservation buffer” above the new regulatory minimum capital requirements. The capital conservation buffer was phased-in over four years and, as fully implemented effective January 1, 2019, requires a buffer of 2.5% of risk-weighted assets. This results in the following minimum capital ratios beginning in 2019: a common equity Tier 1 capital ratio of 7.0%, a Tier 1 capital ratio of 8.5%, and a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions. Management believes, as of June 30, 2022March 31, 2023 and December 31, 20212022, that the Bank met all capital adequacy requirements to which it is subject, including the capital conservation buffer.
The following table shows the Bank’s regulatory capital ratios at June 30, 2022:March 31, 2023:
First Bank | ||||
Total capital to risk-weighted assets | % | |||
Tier 1 capital to risk-weighted assets | % | |||
Common equity Tier 1 capital to risk-weighted assets | % | |||
Tier 1 capital to average assets | % | |||
Capital conservation buffer ratio(1) | % |
(1) | Calculated by subtracting the regulatory minimum capital ratio requirements from the Company’s actual ratio for Common equity Tier 1, Tier 1, and Total risk based capital. The lowest of the three measures represents the Bank’s capital conservation buffer ratio. |
The prompt corrective action framework is designed to place restrictions on insured depository institutions if their capital levels begin to show signs of weakness. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following capital level requirements in order to qualify as “well capitalized:” a common equity Tier 1 capital ratio of 6.5%; a Tier 1 capital ratio of 8%; a total capital ratio of 10%; and a Tier 1 leverage ratio of 5%. The Bank met the requirements to qualify as "well capitalized" as of June 30, 2022March 31, 2023 and December 31, 20212022.
On September 17, 2019 the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.
In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. The CARES Act temporarily lowered the tier 1 leverage ratio requirement to 8% until December 31, 2020. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the "well-capitalized" ratio requirements under the prompt corrective action regulations and will not be required to report or calculate risk-based capital. Although, the Company did not opt into the CBLR framework at June 30, 2022, it may opt into the CBLR framework in a future quarterly period.
During the fourth quarter of 2019,2022, the Board of Directors of the Company authorized a stock repurchase plan pursuant to which the Company was authorized tocould repurchase up to $5.0 million of the Company’sits outstanding common stock through December 31, 2020. During 2020, the2023. The Company repurchased and retired 129,0351,557 shares under this plan during the first quarter of 2023 at an average price paidof $16.06 per share of $16.05, for a total of $2.1 million. The Company’s stock repurchase plan was suspended in the second quarter of 2020, and remained suspended until it ended on December 31, 2020. The Company has not authorized another stock repurchase plan as ofshare. June 30, 2022.
Contractual Obligations
There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022.
Off-Balance Sheet Arrangements
The Company, through the Bank, is a party to credit related financial instruments with risk not reflected in the consolidated financial statements in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Bank’s exposure to credit loss is represented by the contractual amount of these commitments. The Bank follows the same credit policies in making commitments as it does for on-balance sheet instruments.
Commitments to extend credit, which amountedamounted to $161.3$170.2 million at aJune 30, 2022t March 31, 2023, and $161.4$158.3 million at December 31, 20212022, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management’s credit evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are collateralized as deemed necessary and may or may not be drawn upon to the total extent to which the Bank is committed.
On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $153 thousand for the adoption of ASC Topic 326. For the three months ended March 31, 2023, the Company did not record a provision for credit losses for unfunded commitments. At March 31, 2023, the liability for credit losses on off-balance sheet exposures included in other liabilities was $153 thousand.
Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments if deemed necessary. At June 30, 2022March 31, 2023 and December 31, 20212022, the Bank had $18.1$17.6 million and $18.9$18.0 million in outstanding standby letters of credit, respectively.
On April 21, 2020, the Company entered into interest rate swap agreements related to its outstanding junior subordinated debt. The Company uses derivatives to manage exposure to interest rate risk through the use of interest rate swaps. Interest rate swaps involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date with no exchange of underlying principal amounts.
The interest rate swaps qualified and are designated as cash flow hedges. The Company’s cash flow hedges effectively modify the Company’s exposure to interest rate risk by converting variable rates of interest on $9.0 million of the Company’s junior subordinated debt to fixed rates of interest. The cash flow hedges end and the junior subordinated debt matures between June 2034 and October 2036. The cash flow hedges’ total notional amount is $9.0 million. At June 30, 2022March 31, 2023, the cash flow hedges had a fair value of $2.2$2.4 million, which is recorded in other assets. The net gain/loss on the cash flow hedges is recognized as a component of other comprehensive (loss) income and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings. The Company’s derivative financial instruments are described more fully in Note 1610 to the Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to provide assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods required by the SEC and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2022March 31, 2023 was carried out under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer. Based on and as of the date of such evaluation, the aforementioned officers concluded that the Company’s disclosure controls and procedures were effective.
The Company’s management is also responsible for establishing and maintaining adequateadequate internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting, except for the following.
Effective January 1, 2023, the Company adopted ASC 326, Financial Instruments – Credit Losses. We implemented changes to the policies, processes, and controls over the estimation of the allowance for credit losses to support the adoption of ASC 326. Many controls under this new standard mirror controls under prior GAAP. New controls were established over the review of economic forecasting projections obtained from an independent third party. Except as related to the adoption of ASC 326, there were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company is a party or to which the property of the Company is subject.
There were no material changes to the Company’s risk factors as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021.2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
NoneIssuer Purchases of Equity Securities
During the fourth quarter of 2022, the Board of Directors of the Company authorized a stock repurchase plan pursuant to which the Company could repurchase up to $5.0 million of its outstanding common stock. The repurchase plan was publicly announced on October 23, 2022. Repurchases under the plan can be made through privately negotiated transactions or in the open market in accordance with Securities and Exchange Commission rules. The Company's Board of Directors authorized the purchase plan through December 31, 2023, unless the entire amount authorized to repurchase has been acquired before that date.
The following table summarizes the Company's purchases of its common stock during the three months ended March 31, 2023 (dollars in thousands, except per share data):
Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan | |||||||||||||
March 1, 2023 - March 31, 2023 | 1,557 | $ | 16.06 | 1,557 | $ | 4,974,995 |
Item 3. Defaults upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
None
The following documents are attached hereto as Exhibits:
31.1 | Certification of Chief Executive Officer, Section 302 Certification. |
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31.2 | Certification of Chief Financial Officer, Section 302 Certification. |
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32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. |
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32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. |
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101 | The following materials from First National Corporation’s Quarterly Report on Form 10-Q for the quarter ended |
104 | The cover page from First National Corporation's Quarterly Report on Form 10-Q for the quarter ended |
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.
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FIRST NATIONAL CORPORATION |
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(Registrant) |
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/s/ Scott C. Harvard |
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Scott C. Harvard |
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President and Chief Executive Officer |
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/s/ M. Shane Bell |
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M. Shane Bell |
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Executive Vice President and Chief Financial Officer |
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