FXNC 10-Q
First National Corp /Va/ (FXNC)
S
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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| (Address of principal executive offices) | (Zip Code) |
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(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 |
| | | The |
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.
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).
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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| 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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 3, 2023,
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| Item 1. |
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Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST NATIONAL CORPORATION
Consolidated Balance Sheets
(in thousands, except share and per share data)
| (unaudited) | ||||||||
| September 30, | December 31, | |||||||
| 2023 | 2022* | |||||||
| Assets | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest-bearing deposits in banks | ||||||||
| Securities available for sale, at fair value | ||||||||
| Securities held to maturity, at amortized cost (net of allowance for credit losses of $ at September 30, 2023) | ||||||||
| Restricted securities, at cost | ||||||||
| Loans, net of allowance for credit losses, 2023, $; 2022, $ | ||||||||
| Other real estate owned, net of valuation allowance | ||||||||
| Premises and equipment, net | ||||||||
| Accrued interest receivable | ||||||||
| Bank owned life insurance | ||||||||
| Goodwill | ||||||||
| Core deposit intangibles, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Shareholders’ Equity | ||||||||
| Liabilities | ||||||||
| Deposits: | ||||||||
| Noninterest-bearing demand deposits | $ | $ | ||||||
| Savings and interest-bearing demand deposits | ||||||||
| Time deposits | ||||||||
| Total deposits | $ | $ | ||||||
| Subordinated debt, net of issuance cost | ||||||||
| Junior subordinated debt | ||||||||
| Accrued interest payable and other liabilities | ||||||||
| Total liabilities | $ | $ | ||||||
| Commitments and contingencies | ||||||||
| Shareholders’ Equity | ||||||||
| Preferred stock, par value $ per share; authorized shares; issued and outstanding | $ | $ | ||||||
| Common stock, par value $ per share; authorized shares; issued and outstanding, 2023, shares; 2022, shares | ||||||||
| Surplus | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss, net | ( | ) | ( | ) | ||||
| Total shareholders’ equity | $ | $ | ||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
*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 |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
September 30, |
September 30, |
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| 2023 |
2022 |
2023 |
2022 |
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| Interest and Dividend Income |
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| Interest and fees on loans |
$ | $ | $ | $ | ||||||||||||
| Interest on deposits in banks |
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| Interest and dividends on securities: |
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| Taxable interest |
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| Tax-exempt interest |
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| Dividends |
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| Total interest and dividend income |
$ | $ | $ | $ | ||||||||||||
| Interest Expense |
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| Interest on deposits |
$ | $ | $ | $ | ||||||||||||
| Interest on subordinated debt |
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| Interest on junior subordinated debt |
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| Interest on other borrowings |
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| Total interest expense |
$ | $ | $ | $ | ||||||||||||
| Net interest income |
$ | $ | $ | $ | ||||||||||||
| Provision for credit losses |
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| Net interest income after provision for credit losses |
$ | $ | $ | $ | ||||||||||||
| Noninterest Income |
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| Service charges on deposit accounts |
$ | $ | $ | $ | ||||||||||||
| ATM and check card fees |
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| Wealth management fees |
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| Fees for other customer services |
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| Brokered mortgage fees |
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| Income from bank owned life insurance |
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| Other operating income |
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| Total noninterest income |
$ | $ | $ | $ | ||||||||||||
| Noninterest Expense |
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| Salaries and employee benefits |
$ | $ | $ | $ | ||||||||||||
| Occupancy |
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| Equipment |
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| Marketing |
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| Supplies |
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| Legal and professional fees |
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| ATM and check card expense |
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| FDIC assessment |
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| Bank franchise tax |
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| Data processing expense |
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| Amortization expense |
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| Other real estate owned (income) expense, net |
( |
) | ||||||||||||||
| Other operating expense |
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| Total noninterest expense |
$ | $ | $ | $ | ||||||||||||
See Notes to Consolidated Financial Statements
FIRST NATIONAL CORPORATION
Consolidated Statements of Income (Unaudited)
(Continued)
(in thousands, except per share data)
| Three Months Ended |
Nine Months Ended |
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| September 30, |
September 30, |
September 30, |
September 30, |
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| 2023 |
2022 |
2023 |
2022 |
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| Income before income taxes |
$ | $ | $ | $ | ||||||||||||
| Income tax expense |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Earnings per common share |
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| Basic |
$ | $ | $ | $ | ||||||||||||
| Diluted |
$ | $ | $ | $ | ||||||||||||
See Notes to Consolidated Financial Statements
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in thousands)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss), net of tax, | ||||||||||||||||
| Unrealized holding (losses) gains on available for sale securities, net of tax ($) and $ for the three months and ($) and ($) for the nine months ended September 30, 2023 and 2022, respectively | ( | ) | ( | ) | ( | ) | ||||||||||
| Unrealized holding losses on securities transferred from available for sale to held to maturity, net of tax ($) for the three months and nine months ended September 31, 2022 | ( | ) | ( | ) | ||||||||||||
| Amortization of unrealized holding losses on available-for-sale securities transferred to held to maturity, net of tax of $ and $ for the three months and $ and $ for the nine months ended September 30, 2023 and 2022, respectively | ||||||||||||||||
| Change in fair value of cash flow hedges, net of tax $ and $ for the three months and $ and $ for the nine months ended September 30, 2023 and 2022, respectively | ||||||||||||||||
| Total other comprehensive (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total comprehensive (loss) income | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
See Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
| Nine Months Ended |
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| September 30, | September 30, | |||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Depreciation and amortization of premises and equipment |
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| Amortization of core deposit intangibles |
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| Amortization of debt issuance costs |
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| Provision for credit losses on loans |
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| (Recovery of) credit losses on securities held to maturity |
( |
) | ||||||
| Provision for credit losses on unfunded commitments |
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| Net (gain) loss on sale of other real estate owned |
( |
) | ||||||
| Increase in cash value of bank owned life insurance |
( |
) | ( |
) | ||||
| Accretion of discounts and amortization of premiums on securities, net |
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| Accretion of premium on time deposits |
( |
) | ( |
) | ||||
| Accretion of certain acquisition-related loan discounts, net |
( |
) | ( |
) | ||||
| Stock-based compensation |
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| Excess tax benefits on stock-based compensation |
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| (Gain) loss on disposal of premises and equipment, net |
( |
) | ||||||
| Deferred income tax expense |
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| Changes in assets and liabilities: |
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| Decrease (increase) in interest receivable |
( |
) | ||||||
| (Increase) decrease in other assets |
( |
) | ||||||
| (Decrease) in accrued interest payable and other liabilities |
( |
) | ( |
) | ||||
| Net cash provided by operating activities |
$ | $ | ||||||
| Cash Flows from Investing Activities |
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| Proceeds from maturities, calls, and principal payments of securities available for sale |
$ | $ | ||||||
| Proceeds from maturities, calls, and principal payments of securities held to maturity |
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| Purchases of securities available for sale |
( |
) | ||||||
| Purchases of restricted securities |
( |
) | ||||||
| Purchases of securities held to maturity |
( |
) | ( |
) | ||||
| Net redemption (purchase) of restricted securities |
( |
) | ||||||
| Purchase of premises and equipment |
( |
) | ( |
) | ||||
| Proceeds from sale of premises and equipment |
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| Proceeds from sale of other real estate owned |
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| Proceeds from cash value of bank owned life insurance |
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| Net (increase) in loans |
( |
) | ( |
) | ||||
| Net cash (used in) investing activities |
$ | ( |
) | $ | ( |
) | ||
See Notes to Consolidated Financial Statements
FIRST NATIONAL CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
(Continued)
(in thousands)
| Nine Months Ended |
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| September 30, | September 30, | |||||||
| 2023 | 2022 | |||||||
| Cash Flows from Financing Activities |
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| Net (decrease) increase in demand deposits and savings accounts |
$ | ( |
) | $ | ||||
| Net increase (decrease) in time deposits |
( |
) | ||||||
| Repayment of subordinated debt |
( |
) | ||||||
| Cash dividends paid on common stock, net of reinvestment |
( |
) | ( |
) | ||||
| Repurchase of common stock, stock incentive plan |
( |
) | ( |
) | ||||
| Repurchase of common stock, stock repurchase plan |
( |
) | ||||||
| Net cash (used in) provided by financing activities |
$ | ( |
) | $ | ||||
| Decrease in cash and cash equivalents |
$ | ( |
) | $ | ( |
) | ||
| Cash and Cash Equivalents |
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| Beginning |
$ | $ | ||||||
| Ending |
$ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information |
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| Cash payments for: |
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| Interest |
$ | $ | ||||||
| Income taxes |
$ | $ | ||||||
| Supplemental Disclosures of Noncash Investing and Financing Activities |
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| Unrealized losses on securities available for sale |
$ | ( |
) | $ | ( |
) | ||
| Unrealized losses on securities transferred from available for sale to held to maturity |
$ | $ | ( |
) | ||||
| Fair value of securities transferred from available for sale to held to maturity |
$ | $ | ||||||
| Change in fair value of cash flow hedges |
$ | $ | ||||||
| Transfer from premises and equipment to other real estate owned, net |
$ | $ | ( |
) | ||||
| Issuance of common stock, dividend reinvestment plan |
$ | $ | ||||||
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 (Loss) | Total | ||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net income | ||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||
| Cash dividends on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Issuance of shares common stock, dividend reinvestment plan | ||||||||||||||||||||
| Issuance of shares common stock, stock incentive plan | ( | ) | ||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Common Stock | Surplus | Retained Earnings | Accumulated Other Comprehensive (Loss) | Total | ||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net income | ||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||
| Cash dividends on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Issuance of shares of common stock, dividend reinvestment plan | ||||||||||||||||||||
| Repurchase of shares of common stock, stock incentive plan | ( | ) | ||||||||||||||||||
| Repurchase of shares of common stock, stock repurchase plan | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Common Stock | Surplus | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | |||||||||||||||
| Net income | ||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||
| Cash dividends on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Issuance of shares common stock, dividend reinvestment plan | ||||||||||||||||||||
| Issuance of shares common stock, stock incentive plan | ( | ) | ||||||||||||||||||
| Repurchase of shares common stock, stock incentive plan | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Common Stock | Surplus | Retained Earnings | Accumulated Other Comprehensive (Loss) | Total | ||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Adoption of new accounting standard (ASU 2016-13) | ( | ) | ( | ) | ||||||||||||||||
| Net income | ||||||||||||||||||||
| Other comprehensive (loss) | ( | ) | ( | ) | ||||||||||||||||
| Cash dividends on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Issuance of shares common stock, dividend reinvestment plan | ||||||||||||||||||||
| Issuance of shares common stock, stock incentive plan | ( | ) | ||||||||||||||||||
| Repurchase of shares common stock, stock incentive plan | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Repurchase of shares common stock, stock repurchase plan | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
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 Securities and Exchange Commission (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 September 30, 2023 and December 31, 2022, the statements of income and comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022, the cash flows for the nine months ended September 30, 2023 and 2022, and the changes in shareholders’ equity for the three and nine months ended September 30, 2023 and 2022. 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, 2022. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. 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 $
The Company adopted ASC 326 using the prospective transition approach for purchase credit deteriorated (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 September 30, 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 | ||||||||||||
| Allowance for credit losses on loans: | - | |||||||||||
| Construction and land development | ( | ) | ||||||||||
| Secured by 1-4 family residential | ||||||||||||
| Other real estate loans | ||||||||||||
| Commercial and industrial loans | ( | ) | ||||||||||
| Consumer and other loans | ( | ) | ||||||||||
| Allowance for credit losses on loans | ||||||||||||
| Liabilities: | ||||||||||||
| Allowance for credit losses for unfunded commitments | ||||||||||||
Notes to Consolidated Financial Statements (Unaudited)
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.
Changes 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 $
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 September 30, 2023, there was no allowance for credit loss related to the available-for-sale portfolio.
Accrued interest receivable on available-for-sale securities totaled $
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 $
ASU 2022-01:
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 (TDRs) 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
In July 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)”. This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.
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 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 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 costs, gross unrealized gains and losses, allowance for credit losses, and fair values of debt securities at September 30, 2023 and December 31, 2022 were as follows (in thousands):
| September 30, 2023 | ||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | Allowance for Credit Losses | ||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||
| U.S. Treasury securities | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| U.S. agency and mortgage-backed securities | ( | ) | ||||||||||||||||||
| Obligations of states and political subdivisions | ( | ) | ||||||||||||||||||
| Total securities available for sale | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| Securities held to maturity: | ||||||||||||||||||||
| U.S. Treasury securities | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| U.S. agency and mortgage-backed securities | ( | ) | ||||||||||||||||||
| Obligations of states and political subdivisions | ( | ) | ||||||||||||||||||
| Corporate debt securities | ( | ) | ( | ) | ||||||||||||||||
| Total securities held to maturity | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||
| Total securities | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||
| December 31, 2022 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | |||||||||||||
| Securities available for sale: | ||||||||||||||||
| U.S. Treasury securities | $ | $ | $ | ( | ) | $ | ||||||||||
| U.S. agency and mortgage-backed securities | ( | ) | ||||||||||||||
| Obligations of states and political subdivisions | ( | ) | ||||||||||||||
| Total securities available for sale | $ | $ | $ | ( | ) | $ | ||||||||||
| Securities held to maturity: | ||||||||||||||||
| U.S. Treasury securities | $ | $ | $ | ( | ) | $ | ||||||||||
| U.S. agency and mortgage-backed securities | ( | ) | ||||||||||||||
| Obligations of states and political subdivisions | ( | ) | ||||||||||||||
| Corporate debt securities | ( | ) | ||||||||||||||
| Total securities held to maturity | $ | $ | $ | ( | ) | $ | ||||||||||
| Total securities | $ | $ | $ | ( | ) | $ | ||||||||||
Notes to Consolidated Financial Statements (Unaudited)
Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position is as follows (in thousands):
| September 30, 2023 | ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| Fair Value | Unrealized (Loss) | Fair Value | Unrealized (Loss) | Fair Value | Unrealized (Loss) | |||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||
| U.S. Treasury securities | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||
| U.S. agency and mortgage-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Obligations of states and political subdivisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total securities available for sale | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| Fair Value | Unrealized (Loss) | Fair Value | Unrealized (Loss) | Fair Value | Unrealized (Loss) | |||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||
| U.S. Treasury securities | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| U.S. agency and mortgage-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Obligations of states and political subdivisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total securities available for sale | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Securities held to maturity: | ||||||||||||||||||||||||
| U.S. Treasury securities | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| U.S. agency and mortgage-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Obligations of states and political subdivisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Corporate debt securities | ( | ) | ( | ) | ||||||||||||||||||||
| Total securities held to maturity | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Total securities | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
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 to 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. Consideration is given to the extent to which 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 to retain its investment in the security for a period of time sufficient to 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 $
At September 30, 2023, there were
On September 1, 2022, the Bank transferred
Notes to Consolidated Financial Statements (Unaudited)
The amortized cost and fair value of securities at September 30, 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 | |||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
| Due within one year | $ | $ | $ | $ | ||||||||||||
| Due after one year through five years | ||||||||||||||||
| Due after five years through ten years | ||||||||||||||||
| Due after ten years | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
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 composition of restricted securities at September 30, 2023 and December 31, 2022 was as follows (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| Federal Home Loan Bank stock | $ | $ | ||||||
| Federal Reserve Bank stock | ||||||||
| Community Bankers’ Bank stock | ||||||||
| $ | $ | |||||||
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 $
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 September 30, 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 | ||||||||||||||||
| September 30, 2023 | ||||||||||||||||||||
| Aaa | $ | $ | $ | $ | $ | |||||||||||||||
| Aa1 / Aa2 / Aa3 | ||||||||||||||||||||
| Baa1 / Baa2 / Baa3 | ||||||||||||||||||||
| Not rated - Agency (1) | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Aaa | $ | $ | $ | $ | $ | |||||||||||||||
| Aa1 / Aa2 / Aa3 | ||||||||||||||||||||
| Baa1 / Baa2 / Baa3 | ||||||||||||||||||||
| Not rated - Agency (1) | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
________________________________________
(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 nine months ended September 30, 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 | ||||||||||||||||||||
| Provision for credit losses | ||||||||||||||||||||
| Charge-offs of securities | ||||||||||||||||||||
| Recoveries | ( | ) | ( | ) | ||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
At September 30, 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 as of September 30, 2023.
Notes to Consolidated Financial Statements (Unaudited)
Note 3. Loans
Loans at September 30, 2023 and December 31, 2022 are summarized as follows (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| Real estate loans: | ||||||||
| Construction and land development | $ | $ | ||||||
| Secured by 1-4 family residential | ||||||||
| Other real estate loans | ||||||||
| Commercial and industrial loans | ||||||||
| Consumer and other loans | ||||||||
| Total loans | $ | $ | ||||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| Loans, net | $ | $ | ||||||
Net deferred loan fees included in the above loan categories were $
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 risks associated with the continued creditworthiness of the borrower and the value of the collateral, if any. Consumer loans are typically either unsecured or secured by rapidly depreciating assets such as automobiles. They are also likely to be immediately and adversely affected by job loss, divorce, illness, personal bankruptcy, or other changes in circumstances. Consumer and other loans also include purchased consumer loans which could have been originated outside of the Company's market area. Other loans included in this category include loans to states and political subdivisions. |
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 September 30, 2023 was $
| September 30, 2023 | December 31, 2022 | |||||||
| Acquired Loans- | Acquired Loans- | |||||||
| Non-Purchased | Non-Purchased | |||||||
| (Dollars in thousands) | Credit Deteriorated | Credit Deteriorated | ||||||
| Outstanding principal balance | $ | $ | ||||||
| Carrying amount | ||||||||
| Real estate loans: | ||||||||
| Construction and land development | $ | $ | ||||||
| Secured by 1-4 family residential | ||||||||
| Other real estate loans | ||||||||
| Commercial and industrial loans | ||||||||
| Consumer and other loans | ||||||||
| Total acquired loans | $ | $ | ||||||
Notes to Consolidated Financial Statements (Unaudited)
The following tables provide a summary of loan classes and an aging of past due loans as of September 30, 2023 and December 31, 2022 (in thousands):
| September 30, 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 | |||||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||||||
| Construction and land development | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Secured by 1-4 family residential | ||||||||||||||||||||||||||||||||
| Other real estate loans | ||||||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||
| Consumer and other loans | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||||||
| Construction and land development | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Secured by 1-4 family residential | ||||||||||||||||||||||||||||||||
| Other real estate loans | ||||||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||
| Consumer and other loans | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
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.
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 September 30, 2023 (in thousands).
| September 30, 2023 | ||||||||||||||||||||||||||||||||
| Term Loans by Year of Origination | ||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Total | |||||||||||||||||||||||||
| Construction and land development | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total Construction and land development | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Secured by 1-4 family residential | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total Secured by 1-4 family residential | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Other real estate loans | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total Other real estate loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total Commercial and industrial | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Consumer and other loans | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total Consumer and other loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The following tables provide an analysis of the credit risk profile of each loan class as of December 31, 2022 (in thousands):
| December 31, 2022 | ||||||||||||||||||||
| Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
| Real estate loans: | ||||||||||||||||||||
| Construction and land development | $ | $ | $ | $ | $ | |||||||||||||||
| Secured by 1-4 family residential | ||||||||||||||||||||
| Other real estate loans | ||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||
| Consumer and other loans | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
Notes to Consolidated Financial Statements (Unaudited)
Note 4. Allowance for Credit Losses
The following tables present, as of and during the periods ended September 30, 2023, December 31, 2022 and September 30, 2022, the activity in the Allowance for Credit Losses on Loans (ACLL) (previously Allowance for Loan Losses) by portfolio, and information about individually evaluated and collectively evaluated loans (in thousands):
| September 30, 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Adjustment to allowance for adoption of ASU 2016-13 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision for (recovery of) credit losses | ( | ) | ( | ) | ||||||||||||||||||||
| Ending Balance, September 30, 2023 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Ending Balance: | ||||||||||||||||||||||||
| Individually evaluated | ||||||||||||||||||||||||
| Collectively evaluated | ||||||||||||||||||||||||
| Loans: | ||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Individually evaluated | ||||||||||||||||||||||||
| Collectively evaluated | ||||||||||||||||||||||||
| December 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision for (recovery of) loan losses | ||||||||||||||||||||||||
| Ending Balance, December 31, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Ending Balance: | ||||||||||||||||||||||||
| Individually evaluated for impairment | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||
| Loans: | ||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Individually evaluated for impairment | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||
Notes to Consolidated Financial Statements (Unaudited)
| September 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision for (recovery of) loan losses | ( | ) | ||||||||||||||||||||||
| Ending Balance, September 30, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Ending Balance: | ||||||||||||||||||||||||
| Individually evaluated for impairment | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||
| Loans: | ||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Individually evaluated for impairment | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||
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 | |||||||||||||||
| September 30, 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 | $ | $ | $ | $ | ||||||||||||
| Secured by 1-4 family residential | ||||||||||||||||
| Other real estate loans | ||||||||||||||||
| Commercial and industrial | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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 December 31, 2022 and September 30, 2022, were as follows (in thousands):
| 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 | ||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||
| Construction and land development | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Secured by 1-4 family residential | ||||||||||||||||||||||||||||
| Other real estate loans | ||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| September 30, 2022 | ||||||||||||||||||||||||||||
| 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: | ||||||||||||||||||||||||||||
| Secured by 1-4 family residential | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Other real estate loans | ||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
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 December 31, 2022, loans classified as TDRs and included in impaired loans in the disclosure above totaled $
For the nine months ended September 30, 2023 and 2022, there were
Collateral-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 loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The Company reevaluates 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):
| September 30, 2023 | ||||||||||||
| (Dollars in thousands) | Real Estate Secured | Non-Real Estate Secured | Total Collateral-Dependent Loans | |||||||||
| Real estate loans: | ||||||||||||
| Construction and land development | $ | $ | $ | |||||||||
| Secured by 1-4 family residential | ||||||||||||
| Other real estate loans | ||||||||||||
| Commercial and industrial | ||||||||||||
| Total | $ | $ | $ | |||||||||
At September 30, 2023, there was an allowance for credit losses of $307 thousand 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 September 30, 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 | $ | % | |||||||
| Secured by 1-4 family residential | % |
| |||||||
| Other real estate loans | % | ||||||||
| Commercial and industrial | % | Decrease in loan payment | |||||||
| Total | $ | % | |||||||
| Principal Forgiveness | |||||||||
| (Dollars in thousands) | Amortized Cost Basis | % of Total Loan Type | Financial Effect | ||||||
| Real estate loans: | |||||||||
| Construction and land development | $ | % | |||||||
| Secured by 1-4 family residential | % |
| |||||||
| Other real estate loans | % | ||||||||
| Commercial and industrial | % | ||||||||
| Total | $ | % | |||||||
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 nine months ended September 30, 2023 and 2022, there were no payment defaults of modified loans that were modified during the previous twelve months. At September 30, 2023, there was an allowance for credit losses of $
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 $
Notes to Consolidated Financial Statements (Unaudited)
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 nine months ended September 30, 2023 and 2022 (dollars in thousands, except per share data):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||
| (Numerator): | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| (Denominator): | ||||||||||||||||
| Weighted average shares outstanding – basic | ||||||||||||||||
| Potentially dilutive common shares – restricted stock units | ||||||||||||||||
| Weighted average shares outstanding – diluted | ||||||||||||||||
| Income per common share | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
Restricted stock units for
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.
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 September 30, 2023 and December 31, 2022 (in thousands).
| Fair Value Measurements at September 30, 2023 |
||||||||||||||||
| Description |
Balance as of September 30, 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 |
$ | $ | $ | $ | ||||||||||||
| U.S. agency and mortgage-backed securities |
||||||||||||||||
| Obligations of states and political subdivisions |
||||||||||||||||
| Total securities available for sale |
$ | $ | $ | $ | ||||||||||||
| Derivatives - cash flow hedges |
||||||||||||||||
| Total assets |
$ | $ | $ | $ | ||||||||||||
| Fair Value Measurements at December 31, 2022 |
||||||||||||||||
| Description |
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 |
$ | $ | $ | $ | ||||||||||||
| U.S. agency and mortgage-backed securities |
||||||||||||||||
| Obligations of states and political subdivisions |
||||||||||||||||
| Total securities available for sale |
$ | $ | $ | $ | ||||||||||||
| Derivatives - cash flow hedges |
||||||||||||||||
| Total assets |
$ | $ | $ | $ | ||||||||||||
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:
Collateral Dependent Loans with an ACLL
In 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 evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice. There was no allowance for credit losses on collateral dependent loans at September 30, 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 September 30, 2023 |
||||||||||||||||
| Description |
Balance as of September 30, 2023 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
| Collateral dependent loans |
$ | $ | $ | $ | ||||||||||||
| Fair Value Measurements at December 31, 2022 |
||||||||||||||||
| Description |
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 |
$ | $ | $ | $ | ||||||||||||
| Impaired loans, net |
||||||||||||||||
| Quantitative information about Level 3 Fair Value Measurements for September 30, 2023 |
|||||||||||
| Fair Value |
Valuation Technique |
Unobservable Input |
Range (Weighted Average) (1) |
||||||||
| Collateral dependent loans |
$ | Property appraisals |
Selling cost |
% | |||||||
| Quantitative information about Level 3 Fair Value Measurements for December 31, 2022 |
|||||||||||
| Fair Value |
Valuation Technique |
Unobservable Input |
Range (Weighted Average) (1) |
||||||||
| Other real estate owned |
$ | Property appraisals |
Selling cost |
% | |||||||
| Impaired loans, net |
Present value of cash flows |
Discount rate |
% | ||||||||
| (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 September 30, 2023 and December 31, 2022 are as follows (in thousands):
| Fair Value Measurements at September 30, 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 |
||||||||||||||||
| Financial Assets |
||||||||||||||||||||
| Cash and interest-bearing deposits in banks |
$ | $ | $ | $ | $ | |||||||||||||||
| Securities available for sale |
||||||||||||||||||||
| Securities held to maturity, net |
||||||||||||||||||||
| Restricted securities |
||||||||||||||||||||
| Loans, net |
901,921 | |||||||||||||||||||
| Bank owned life insurance |
||||||||||||||||||||
| Accrued interest receivable |
||||||||||||||||||||
| Derivatives - cash flow hedges |
||||||||||||||||||||
| Financial Liabilities |
||||||||||||||||||||
| Deposits |
$ | $ | 1,050,754 | 179,959 | $ | |||||||||||||||
| Subordinated debt |
5,161 | |||||||||||||||||||
| Junior subordinated debt |
6,290 | |||||||||||||||||||
| Accrued interest payable |
||||||||||||||||||||
| 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 |
||||||||||||||||
| Financial Assets |
||||||||||||||||||||
| Cash and interest-bearing deposits in banks |
$ | $ | $ | $ | $ | |||||||||||||||
| Securities available for sale |
||||||||||||||||||||
| Securities held to maturity, net |
||||||||||||||||||||
| Restricted securities |
||||||||||||||||||||
| Loans, net |
||||||||||||||||||||
| Bank owned life insurance |
||||||||||||||||||||
| Accrued interest receivable |
||||||||||||||||||||
| Derivatives - cash flow hedges |
||||||||||||||||||||
| Financial Liabilities |
||||||||||||||||||||
| Deposits |
$ | $ | $ | $ | $ | |||||||||||||||
| Subordinated debt |
||||||||||||||||||||
| Junior subordinated debt |
||||||||||||||||||||
| Accrued interest payable |
||||||||||||||||||||
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 10, 2023, the Company’s shareholders approved the First National Corporation 2023 Stock Incentive Plan, which replaced the 2014 Stock Incentive Plan and makes available up to
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 $
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 2023,
A summary of the activity for the Company’s restricted stock units for the period indicated is presented in the following table:
| Nine Months Ended | ||||||||
| September 30, 2023 | ||||||||
| Shares | Weighted Average Grant Date Fair Value | |||||||
| Unvested, beginning of year | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ||||||||
| Unvested, end of period | $ | |||||||
At September 30, 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 $
On May 11, 2023, the Company’s shareholders approved the First National Corporation 2023 Stock Incentive Plan, which makes available up to
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 June 30, 2022 | $ | ( | ) | $ | $ | ( | ) | |||||
| Unrealized holding losses (net of tax, $) | ||||||||||||
| Unrealized holding losses transferred from available for sale to held to maturity (net of tax and amortization of ($) and ($), respectively) | ( | ) | ( | ) | ||||||||
| Change in fair value of cash flow hedge (net of tax, $) | ||||||||||||
| Change during period | ( | ) | ( | ) | ||||||||
| Balance at September 30, 2022 | $ | ( | ) | $ | $ | ( | ) | |||||
| Balance at June 30, 2023 | $ | ( | ) | $ | $ | ( | ) | |||||
| Unrealized holding losses (net of tax, ($)) | ( | ) | ( | ) | ||||||||
| Amortization of unrealized holding losses on available-for-sale securities transferred to held to maturity (net of tax of $) | ||||||||||||
| Change in fair value of cash flow hedge (net of tax, $) | ||||||||||||
| Change during period | ( | ) | ( | ) | ||||||||
| Balance at September 30, 2023 | $ | ( | ) | $ | $ | ( | ) | |||||
| Net Unrealized (Losses) on Securities | Change in Fair Value of Cash Flow Hedges | Accumulated Other Comprehensive Income (Loss) | ||||||||||
| Balance at December 31, 2021 | $ | ( | ) | $ | $ | |||||||
| Unrealized holding losses (net of tax, ($)) | ( | ) | ( | ) | ||||||||
| Unrealized holding losses transferred from available for sale to held to maturity (net of tax and amortization of ($) and ($), respectively) | ( | ) | ( | ) | ||||||||
| Change in fair value of cash flow hedge (net of tax, $) | ||||||||||||
| Change during period | ( | ) | ( | ) | ||||||||
| Balance at September 30, 2022 | $ | ( | ) | $ | $ | ( | ) | |||||
| Balance at December 31, 2022 | $ | ( | ) | $ | $ | ( | ) | |||||
| Unrealized holding losses (net of tax, ($)) | ( | ) | ( | ) | ||||||||
| Amortization of unrealized holding losses on available-for-sale securities transferred to held to maturity (net of tax of $) | ||||||||||||
| Change in fair value of cash flow hedge (net of tax, $) | ||||||||||||
| Change during period | ( | ) | ( | ) | ||||||||
| Balance at September 30, 2023 | $ | ( | ) | $ | $ | ( | ) | |||||
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.
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 Accounting Standards Codification Topic 606, for the three and nine months ended September 30, 2023 and 2022 (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||
| Noninterest Income | ||||||||||||||||
| Service charges on deposit accounts | $ | $ | $ | $ | ||||||||||||
| ATM and check card fees | ||||||||||||||||
| Wealth management fees | ||||||||||||||||
| Brokered mortgage fees | ||||||||||||||||
| Income from bank owned life insurance | ||||||||||||||||
| Fees for other customer services | ||||||||||||||||
| Noninterest income (in-scope of Topic 606) | $ | $ | $ | $ | ||||||||||||
| Noninterest income (out-of-scope of Topic 606) | ||||||||||||||||
| Total noninterest income | $ | $ | $ | $ | ||||||||||||
Notes to Consolidated Financial Statements (Unaudited)
Note 10. Derivative Financial Instruments
On April 21, 2020, the Company entered into
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 September 30, 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 September 30, 2023 and December 31, 2022 (in thousands):
| September 30, 2023 | ||||||||||||||||
| Notional Amount | Assets | Liabilities | Collateral Pledged(1) | |||||||||||||
| Cash Flow Hedges | ||||||||||||||||
| Interest rate swap contracts | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Notional Amount | Assets | Liabilities | Collateral Pledged(1) | |||||||||||||
| Cash Flow Hedges | ||||||||||||||||
| Interest rate swap contracts | $ | $ | $ | $ | ||||||||||||
| (1) | Collateral pledged may be comprised of cash or securities. |
Note 11. Subsequent Events
During the month of October 2023, the Company signed two new leases for real estate to be occupied in 2024. The first lease is for a new retail branch office expected to be opened in Roanoke, Virginia. This lease is for a 120-month term and includes an option to renew the term of the lease for two additional 60-month periods. Occupancy is expected to begin no later than June 1, 2024. The second lease will replace an existing lease for a loan production office in Glen Allen, Virginia. This lease is for an 86-month term. Occupancy is expected to begin no later than February 1, 2024.
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 credit losses, interest rate sensitivity, market risk, growth 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 were to become damaged; |
| • |
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, 2022. |
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 September 30, 2023 and statements of income of the Company for the three and nine months ended September 30, 2023 and 2022 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, 2022. The statements of income for the three and nine months ended September 30, 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. owns an interest in an entity that provides title insurance services. Bank of Fincastle Services, Inc. is no longer an 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, 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 57% of noninterest expenses for the nine months ended September 30, 2023, followed by occupancy and equipment expense, which comprised 12% of noninterest expenses. The provision for credit 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 credit losses.
Overview of Quarterly Financial Performance
Comparing the Three-Month Periods Ending September 30, 2023 and September 30, 2023
Net income decreased $1.3 million, or 30%, to $3.1 million, or $0.50 per diluted share, for the three months ended September 30, 2023, compared to $4.5 million, or $0.71 per diluted share, for the same period in 2022. Return on average assets was 0.91% and return on average equity was 10.96% for the third quarter of 2023, compared to 1.27% and 17.27%, respectively, for the same period in 2022.
The decrease in net income resulted from a $1.0 million, or 9%, decrease in net interest income and a $701 thousand, or 8%, increase in total noninterest expense, which were partially offset by a $26 thousand, or 1%, increase in total noninterest income, a $100 thousand decrease in the provision for credit losses, and a $286 thousand decrease in income tax expense.
Net interest income decreased from a 23-basis point decrease in the net interest margin and a 1% decrease in average earning assets. The net interest margin was impacted by changes in market interest rates, including the Federal funds target rate, which averaged 5.43% in the third quarter of 2023, compared to 2.35% for the same period one year ago. The rise in the Federal funds rate had an impact on the Company’s cost of funds, which increased 94 basis points. The higher cost of funds was partially offset by a 68-basis point increase in the yield on earning assets.
The net interest margin decreased by 1 basis point in the third quarter of 2023 compared to the linked second quarter of 2023, which was an improvement compared to a 24-basis point decrease in the second quarter of 2023 compared to the linked first quarter of 2023, and a 10-basis point decrease in the first quarter of 2023 compared to the linked fourth quarter of 2022.
Total noninterest expenses increased by $701 thousand, or 8%, and was primarily attributable to increases in salaries and employee benefits, legal and professional expenses, ATM and check card expenses, and FDIC assessment costs.
Comparing the Nine-Month Periods Ending September 30, 2023 and September 30, 2023
Net income decreased $1.5 million, or 13%, to $10.5 million, or $1.67 per diluted share, for the nine months ended September 30, 2023, compared to $12.0 million, or $1.92 per diluted share, for the same period in 2022. Return on average assets was 1.03% and return on average equity was 12.57% for the nine months ending 2023, compared to 1.14% and 15.12%, respectively, for the same period in 2022.
The decrease in net income resulted from a $961 thousand, or 3%, decrease in net interest income and a $1.5 million, or 6%, increase in total noninterest expense, which were partially offset by a $197 thousand, or 2%, increase in total noninterest income, a $400 thousand decrease in the provision for credit losses, and a $318 thousand decrease in income tax expense.
Net interest income decreased from a 13-basis point decrease in the net interest margin, which was partially offset by a 1% increase in average earning assets. The net interest margin was impacted by changes in market interest rates, including the Federal funds target rate, which averaged 5.09% for the nine months ending September 30, 2023, compared to 1.20% for the same period one year ago. The rise in the Federal funds rate had an impact on the Company’s cost of funds, which increased 85 basis points. The higher cost of funds was partially offset by a 68 basis point increase in the yield on earning assets.
Total noninterest expense increased by $1.5 million, or 6%, and was primarily attributable to increases in salaries and employee benefits, marketing expense, ATM and check card expenses, and other operating expenses.
For a more detailed discussion of the Company's quarterly performance, see "Net Interest Income,” “Provision for Credit Losses,” "Noninterest Income," "Noninterest Expense" and "Income Taxes" below.
Non-GAAP Financial Measures
This report refers to the efficiency ratio, which is computed by dividing noninterest expense, excluding amortization of intangibles, net gains (loss) on disposal of premises and equipment, other real estate owned (income) expense, net, 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 |
Nine Months Ended |
|||||||||||||||
| September 30, 2023 |
September 30, 2022 |
September 30, 2023 |
September 30, 2022 |
|||||||||||||
| Noninterest expense |
$ | 9,784 | $ | 9,083 | $ | 28,142 | $ | 26,645 | ||||||||
| Add/(Subtract): other real estate owned (income) expense, net |
(15 | ) | (14 | ) | 201 | (83 | ) | |||||||||
| Subtract: amortization of intangibles |
(5 | ) | (6 | ) | (14 | ) | (15 | ) | ||||||||
| Subtract: merger related expenses |
— | — | — | (20 | ) | |||||||||||
| $ | 9,764 | $ | 9,063 | $ | 28,329 | $ | 26,527 | |||||||||
| Tax-equivalent net interest income |
$ | 10,764 | $ | 11,809 | $ | 32,848 | $ | 33,818 | ||||||||
| Noninterest income |
3,053 | 3,027 | 8,715 | 8,515 | ||||||||||||
| $ | 13,817 | $ | 14,836 | $ | 41,563 | $ | 42,333 | |||||||||
| Efficiency ratio |
70.67 | % | 61.09 | % | 68.16 | % | 62.66 | % | ||||||||
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 2023 and 2022 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 |
||||||||||||||||
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, 2023 |
September 30, 2022 |
September 30, 2023 |
September 30, 2022 |
|||||||||||||
| GAAP measures: |
||||||||||||||||
| Interest income – loans |
$ | 12,640 | $ | 10,759 | $ | 36,038 | $ | 30,218 | ||||||||
| Interest income – investments and other |
1,991 | 2,033 | 6,407 | 5,437 | ||||||||||||
| Interest expense – deposits |
(3,810 | ) | (927 | ) | (9,428 | ) | (1,680 | ) | ||||||||
| Interest expense – subordinated debt |
(69 | ) | (70 | ) | (207 | ) | (208 | ) | ||||||||
| Interest expense – junior subordinated debt |
(69 | ) | (68 | ) | (203 | ) | (202 | ) | ||||||||
| Interest expense – other borrowings |
— | — | (3 | ) | — | |||||||||||
| Total net interest income |
$ | 10,683 | $ | 11,727 | $ | 32,604 | $ | 33,565 | ||||||||
| Non-GAAP measures: |
||||||||||||||||
| Tax benefit realized on non-taxable interest income – loans |
$ | — | $ | — | $ | — | $ | 8 | ||||||||
| Tax benefit realized on non-taxable interest income – municipal securities |
81 | 82 | 244 | 245 | ||||||||||||
| Total tax benefit realized on non-taxable interest income |
$ | 81 | $ | 82 | $ | 244 | $ | 253 | ||||||||
| Total tax-equivalent net interest income |
$ | 10,764 | $ | 11,809 | $ | 32,848 | $ | 33,818 | ||||||||
The Company’s consolidated financial statements are prepared in accordance with GAAP. The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. Although the economics of the Company’s transactions may not change, the timing of events that would impact the transactions could change.
Critical accounting policies are most important to the portrayal of the Company’s financial condition or results of operations and require management’s most difficult, subjective, and complex judgments about matters that are inherently uncertain. If conditions occur that differ from our assumptions, depending upon the severity of such differences, the Company’s financial condition or results of operations may be materially impacted. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. The 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.
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, 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 credit losses, noninterest income, and noninterest expense are the other components that determine net income. Noninterest income and expense primarily consist 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 September 30, 2023
Net income decreased $1.3 million, or 30%, to $3.1 million, or $0.50 per diluted share, for the three months ended September 30, 2023, compared to $4.5 million, or $0.71 per diluted share, for the same period in 2022. Return on average assets was 0.91% and return on average equity was 10.96% for the third quarter of 2023, compared to 1.27% and 17.27%, respectively, for the same period in 2022.
The decrease in net income resulted from a $1.0 million, or 9%, decrease in net interest income, and a $701 thousand, or 8%, increase in total noninterest expense, which were partially offset by a $26 thousand, or 1%, increase in total noninterest income, a $100 thousand decrease in the provision for credit losses, and a $286 thousand decrease in income tax expense.
Nine Month Period Ended September 30, 2023
Net income decreased $1.5 million, or 13%, to $10.5 million, or $1.67 per diluted share, for the nine months ended September 30, 2023, compared to $12.0 million, or $1.92 per diluted share, for the same period in 2022. Return on average assets was 1.03% and return on average equity was 12.57% for the nine months ended September 30, 2023, compared to 1.14% and 15.12%, respectively, for the same period in 2022.
The decrease in net income was attributable to a $1.5 million, or 6%, increase in noninterest expenses, and a $961 thousand decrease in net interest income. These changes were partially offset by a $197 thousand increase in noninterest income, and a $400 thousand decrease in the provision for credit losses, and a $318 thousand decrease in income tax expense.
Net Interest Income
Three Month Period Ended September 30, 2023
Net interest income decreased from a 23-basis point decrease in the net interest margin and a 1% decrease in average earning assets. The net interest margin was impacted by changes in market interest rates, including the Federal funds target rate, which averaged 5.43% in the third quarter of 2023, compared to 2.35% for the same period one year ago. The rise in the Federal funds rate had an impact on the Company’s cost of funds, which increased 94 basis points. The higher cost of funds was partially offset by a 68-basis point increase in the yield on earning assets.
The net interest margin decreased by 1 basis point in the third quarter of 2023 compared to the linked second quarter of 2023, which was an improvement compared to a 24-basis point decrease in the second quarter of 2023 compared to the linked first quarter of 2023, and a 10-basis point decrease in the first quarter of 2023 compared to the linked fourth quarter of 2022.
Net interest income decreased by $1.0 million as total interest income increased by $1.8 million, which was offset by a $2.9 million increase in total interest expense. Although both interest income and interest expense increased as a result of the higher interest rate environment in 2023, interest expense increased more than interest income, comparing the third quarter of 2023 with the same period of the prior year.
Total interest income increased primarily from interest and fees on loans, which resulted from both higher yields and higher average balances, while interest on deposits in banks increased solely from higher yields, as their average balances decreased compared to the same period of the prior year. The yield on loans increased by 52 basis points to 5.31% and the average balance of loans increased to 74% of average earning assets, compared to 68% for the same period one year ago. The yield on interest-bearing deposits in banks increased by 344 basis points to 5.39%, while the average balance decreased to 2% of average earning assets, compared to 6% for the same period of the prior year.
Net accretion of discounts on purchased loans totaled $61 thousand in the third quarter of 2023 compared to $295 thousand for the third quarter of 2022.
The increase in interest expense was attributable to higher interest expense on deposits. Deposit costs increased from higher interest rates paid on deposit accounts in 2023, as well as a change in the deposit portfolio composition, as interest-bearing deposits increased as a percentage of total deposits, while noninterest-bearing deposits decreased. Additionally, within the interest-bearing deposit portfolio, higher cost time deposit balances and money market balances increased, while lower cost checking and savings balances decreased. The average balance of time deposits increased to 22% of average interest-bearing deposits, compared to 16% for the same period of the prior year. The cost of interest-bearing deposits increased by 139 basis points to 1.82% for the current period, compared to 0.43% for the same period of the prior year. The total cost of funds increased 94-basis points to 1.27% for the current period compared to 0.33% for the same period of the prior year.
Nine Month Period Ended September 30, 2023
Net interest income decreased from a 13-basis point decrease in the net interest margin, which was partially offset by a 1% increase in average earning assets. The net interest margin was impacted by changes in market interest rates, including the Federal funds target rate, which averaged 5.09% for the nine months ending September 30, 2023, compared to 1.20% for the same period one year ago. The rise in the Federal funds rate had an impact on the Company’s cost of funds, which increased 85 basis points. The higher cost of funds was partially offset by a 68-basis point increase in the yield on earning assets.
Net interest income decreased $961 thousand as total interest income increased $6.8 million and was offset by a $7.8 million increase in total interest expense. Although both interest income and interest expense increased as a result of the higher interest rate environment in 2023, the increase in interest income was offset by the increase in interest expense, comparing the nine-month period of 2023 with the same period of the prior year.
Total interest income increased from interest and fees on loans and from interest on deposits in banks. Interest and fees on loans increased from higher yields and higher average balances. Interest on deposits in banks increased solely from higher yields, as their average balances decreased compared to the same period of the prior year. The yield on loans increased by 49 basis points to 5.19% and the average balance increased to 73% of total average earning assets, compared to 68% for the same period of the prior year. The yield on interest-bearing deposits in banks increased by 420 basis points to 4.95%, while the average balance of interest-bearing deposits decreased to 3% of average earning assets, compared to 10% for the same period of the prior year.
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. There was no accretion of PPP income for the nine months ended September 30, 2023, compared to $358 thousand for the same period of 2022. Net accretion of discounts on purchased loans totaled $510 thousand for the nine-month period ended September 30, 2023, compared to $1.0 million for the same period of 2022.
The increase in interest expense was attributable to higher interest expense on deposits and a change in the deposit portfolio composition. Interest expense on deposits increased from higher interest rates paid on deposit accounts in 2023, as well as an increase in the average balances of higher cost deposits and a decrease in the average balances of lower cost deposits. The average balance of time deposits balances increased to 20% of total average interest-bearing deposits, compared to 16% for the same period one year ago. The cost of interest-bearing deposits increased by 126 basis points to 1.52% for the current period, compared to 0.26% for the same period of the prior year. The total cost of funds increased 85-basis points to 1.06% for the current period compared to 0.21% for the same period of the prior year.
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 |
||||||||||||||||||||||||
| September 30, 2023 |
September 30, 2022 |
|||||||||||||||||||||||
| Average Balance | Interest Income/Expense | Yield/Rate | Average Balance | Interest Income/Expense | Yield/Rate | |||||||||||||||||||
| Assets |
||||||||||||||||||||||||
| Securities: |
||||||||||||||||||||||||
| Taxable |
$ | 251,623 | $ | 1,323 | 2.09 | % | $ | 285,482 | $ | 1,323 | 1.84 | % | ||||||||||||
| Tax-exempt (1) |
53,238 | 384 | 2.87 | % | 54,319 | 389 | 2.84 | % | ||||||||||||||||
| Restricted |
1,904 | 27 | 5.57 | % | 1,908 | 23 | 4.75 | % | ||||||||||||||||
| Total securities |
$ | 306,765 | $ | 1,734 | 2.24 | % | $ | 341,709 | $ | 1,735 | 2.01 | % | ||||||||||||
| Loans: (2) |
||||||||||||||||||||||||
| Taxable |
$ | 943,452 | $ | 12,640 | 5.31 | % | $ | 890,696 | $ | 10,759 | 4.79 | % | ||||||||||||
| Tax-exempt (1) |
— | — | — | — | — | 0.00 | % | |||||||||||||||||
| Total loans |
$ | 943,452 | $ | 12,640 | 5.31 | % | $ | 890,696 | $ | 10,759 | 4.79 | % | ||||||||||||
| Federal funds sold |
— | — | — | 1 | — | — | ||||||||||||||||||
| Interest-bearing deposits with other institutions |
24,894 | 338 | 5.39 | % | 77,388 | 380 | 1.95 | % | ||||||||||||||||
| Total earning assets |
$ | 1,275,111 | $ | 14,712 | 4.58 | % | $ | 1,309,794 | $ | 12,874 | 3.90 | % | ||||||||||||
| Less: allowance for credit losses on loans |
(8,847 | ) | (6,152 | ) | ||||||||||||||||||||
| Total non-earning assets |
88,914 | 89,666 | ||||||||||||||||||||||
| Total assets |
$ | 1,355,178 | $ | 1,393,308 | ||||||||||||||||||||
| Liabilities and Shareholders’ Equity |
||||||||||||||||||||||||
| Interest bearing deposits: |
||||||||||||||||||||||||
| Checking |
$ | 264,193 | $ | 1,194 | 1.79 | % | $ | 293,169 | $ | 416 | 0.56 | % | ||||||||||||
| Regular savings |
163,550 | 49 | 0.12 | % | 205,608 | 56 | 0.11 | % | ||||||||||||||||
| Money market accounts |
223,121 | 1,348 | 2.40 | % | 215,199 | 284 | 0.52 | % | ||||||||||||||||
| Time deposits |
180,729 | 1,219 | 2.68 | % | 133,293 | 171 | 0.51 | % | ||||||||||||||||
| Total interest-bearing deposits |
$ | 831,593 | $ | 3,810 | 1.82 | % | $ | 847,269 | $ | 927 | 0.43 | % | ||||||||||||
| Subordinated debt |
4,996 | 69 | 5.50 | % | 4,995 | 70 | 5.50 | % | ||||||||||||||||
| Junior subordinated debt |
9,279 | 69 | 2.95 | % | 9,279 | 68 | 2.91 | % | ||||||||||||||||
| Total interest-bearing liabilities |
$ | 845,868 | $ | 3,948 | 1.85 | % | $ | 861,542 | $ | 1,065 | 0.49 | % | ||||||||||||
| Non-interest bearing liabilities |
||||||||||||||||||||||||
| Demand deposits |
391,342 | 425,630 | ||||||||||||||||||||||
| Other liabilities |
4,909 | 3,795 | ||||||||||||||||||||||
| Total liabilities |
$ | 1,242,119 | $ | 1,290,967 | ||||||||||||||||||||
| Shareholders’ equity |
113,059 | 102,341 | ||||||||||||||||||||||
| Total liabilities and Shareholders’ equity |
$ | 1,355,178 | $ | 1,393,308 | ||||||||||||||||||||
| Net interest income |
$ | 10,764 | $ | 11,809 | ||||||||||||||||||||
| Interest rate spread |
2.73 | % | 3.41 | % | ||||||||||||||||||||
| Cost of funds |
1.27 | % | 0.33 | % | ||||||||||||||||||||
| Interest expense as a percent of average earning assets |
1.23 | % | 0.32 | % | ||||||||||||||||||||
| Net interest margin |
3.35 | % | 3.58 | % | ||||||||||||||||||||
| (1) |
Income and yields are reported on a taxable-equivalent basis assuming a federal tax rate of 21%. The tax-equivalent adjustment was $81 and $82 thousand for the three months ended September 30, 2023 and 2022, respectively. |
| (2) |
Loans on non-accrual status are reflected in the balances. |
| Nine Months Ended |
||||||||||||||||||||||||
| September 30, 2023 |
September 30, 2022 |
|||||||||||||||||||||||
| Average Balance |
Interest Income/Expense |
Yield/Rate |
Average Balance |
Interest Income/Expense |
Yield/Rate |
|||||||||||||||||||
| Assets |
||||||||||||||||||||||||
| Securities: |
||||||||||||||||||||||||
| Taxable |
$ | 255,648 | $ | 3,968 | 2.08 | % | $ | 221,708 | $ | 3,750 | 2.26 | % | ||||||||||||
| Tax-exempt (1) |
54,134 | 1,161 | 2.87 | % | 57,359 | 1,166 | 2.72 | % | ||||||||||||||||
| Restricted |
1,871 | 81 | 5.82 | % | 1,881 | 65 | 4.65 | % | ||||||||||||||||
| Total securities |
$ | 311,653 | $ | 5,210 | 2.24 | % | $ | 280,948 | $ | 4,981 | 2.37 | % | ||||||||||||
| Loans: (2) |
||||||||||||||||||||||||
| Taxable |
$ | 927,525 | $ | 36,038 | 5.19 | % | $ | 858,150 | $ | 30,202 | 4.70 | % | ||||||||||||
| Tax-exempt (1) |
— | — | 0.00 | % | 733 | 24 | 4.49 | % | ||||||||||||||||
| Total loans |
$ | 927,525 | $ | 36,038 | 5.19 | % | $ | 858,883 | $ | 30,226 | 4.70 | % | ||||||||||||
| Federal funds sold |
— | — | — | — | — | 0.00 | % | |||||||||||||||||
| Interest-bearing deposits with other institutions |
38,957 | 1,441 | 4.95 | % | 125,677 | 701 | 0.75 | % | ||||||||||||||||
| Total earning assets |
$ | 1,278,135 | $ | 42,689 | 4.47 | % | $ | 1,265,508 | $ | 35,908 | 3.79 | % | ||||||||||||
| Less: allowance for credit losses on loans |
(9,054 | ) | (5,923 | ) | ||||||||||||||||||||
| Total non-earning assets |
90,669 | 155,714 | ||||||||||||||||||||||
| Total assets |
$ | 1,359,750 | $ | 1,415,299 | ||||||||||||||||||||
| Liabilities and Shareholders’ Equity |
||||||||||||||||||||||||
| Interest bearing deposits: |
||||||||||||||||||||||||
| Checking |
$ | 270,076 | $ | 3,253 | 1.61 | % | $ | 294,386 | $ | 671 | 0.31 | % | ||||||||||||
| Regular savings |
178,924 | 165 | 12.00 | % | 207,302 | 108 | 0.07 | % | ||||||||||||||||
| Money market accounts |
215,468 | 3,380 | 2.10 | % | 227,330 | 410 | 0.24 | % | ||||||||||||||||
| Time deposits |
163,647 | 2,630 | 2.15 | % | 138,118 | 491 | 0.48 | % | ||||||||||||||||
| Total interest-bearing deposits |
$ | 828,115 | $ | 9,428 | 1.52 | % | $ | 867,136 | $ | 1,680 | 0.26 | % | ||||||||||||
| Federal funds purchased |
2 | — | 0.00 | % | 1 | — | 0.00 | % | ||||||||||||||||
| Subordinated debt |
4,997 | 207 | 5.56 | % | 5,494 | 208 | 5.05 | % | ||||||||||||||||
| Junior subordinated debt |
9,279 | 203 | 2.91 | % | 9,279 | 202 | 2.91 | % | ||||||||||||||||
| Other borrowings |
73 | 3 | 4.91 | % | — | — | 0.00 | % | ||||||||||||||||
| Total interest-bearing liabilities |
$ | 842,466 | $ | 9,841 | 1.56 | % | $ | 881,910 | $ | 2,090 | 0.32 | % | ||||||||||||
| Non-interest bearing liabilities |
||||||||||||||||||||||||
| Demand deposits |
401,162 | 423,069 | ||||||||||||||||||||||
| Other liabilities |
4,633 | 4,035 | ||||||||||||||||||||||
| Total liabilities |
$ | 1,248,261 | $ | 1,309,014 | ||||||||||||||||||||
| Shareholders’ equity |
111,489 | 106,285 | ||||||||||||||||||||||
| Total liabilities and Shareholders’ equity |
$ | 1,359,750 | $ | 1,415,299 | ||||||||||||||||||||
| Net interest income |
$ | 32,848 | $ | 33,818 | ||||||||||||||||||||
| Interest rate spread |
2.90 | % | 3.48 | % | ||||||||||||||||||||
| Cost of funds |
1.06 | % | 0.21 | % | ||||||||||||||||||||
| Interest expense as a percent of average earning assets |
1.03 | % | 0.22 | % | ||||||||||||||||||||
| Net interest margin |
3.44 | % | 3.57 | % | ||||||||||||||||||||
| (1) |
Income and yields are reported on a taxable-equivalent basis assuming a federal tax rate of 21%. The tax-equivalent adjustment was $244 and $245 thousand for the six months ended September 30, 2023 and 2022, respectively. |
| (2) |
Loans on non-accrual status are reflected in the balances. |
Provision for Credit Losses
Three Month Period Ended September 30, 2023
The provision for credit losses totaled $100 thousand for the third quarter of 2023, compared to $200 thousand for the same period of the prior year. The provision was comprised of a $120 thousand provision on loans, an $8 thousand recovery on unfunded commitments, and a $12 thousand recovery on held-to-maturity securities. The provision for credit losses on loans resulted from growth of the loan portfolio, net charge-offs, and an increase in the specific reserve component of the allowance for credit losses, which were partially offset by a decrease in the general reserve component from lower expected loss rates and an adjustment to a qualitative factor.
Nine Month Period Ended September 30, 2023
The provision for credit losses totaled $200 thousand for the nine-months ended September 30, 2023, compared to $600 thousand for the same period of the prior year. The provision was comprised of a $165 thousand provision on loans, a $36 thousand provision on unfunded commitments, and a $1 thousand net recovery on held-to-maturity securities. The provision for credit losses on loans resulted from growth of the loan portfolio, net charge-offs, and an increase in the specific reserve component of the allowance for credit losses, which were partially offset by a decrease in the general reserve component from lower expected loss rates and an adjustment to a qualitative factor.
Noninterest Income
Three Month Period Ended September 30, 2023
Noninterest income increased $26 thousand, or 1%, to $3.1 million for the third quarter of 2023, compared to the same period of 2022. ATM and check card fees increased $61 thousand, or 7%, and wealth management fees increased $72 thousand, or 10%. These increases were partially offset by a $58 thousand, or 32%, decrease in fees for other customer services, and a $34 thousand, or 47%, decrease in brokered mortgage fees.
The increases in ATM and check card fees were favorably impacted by an increase in customer transactions. The increase in wealth management fees resulted primarily from an increase in assets under management from higher market values.
Nine Month Period Ended September 30, 2023
Total noninterest income increased $197 thousand, or 2%, for the nine months ended September 30, 2023, compared to the same period of 2022. The increase resulted primarily from a $162 thousand, or 7%, increase in ATM and check card fees, a $150 thousand increase in other operating income, and a $47 thousand, or 2%, increase in service charges on deposit accounts, which were partially offset by a $151 thousand decrease in income from brokered mortgage fees. An increase in customer transactions favorably impacted ATM and check card fees. The increase in other operating income was attributable to a death benefit payment received from a bank-owned life insurance policy in 2023.
Noninterest Expense
Three Month Period Ended September 30, 2023
Noninterest expenses increased $701 thousand, or 8%, to $9.8 million for the three-month period ended September 30, 2023, compared to the same period one year ago. The increase was primarily attributable to a $331 thousand, or 6%, increase in salaries and employee benefits, a $78 thousand increase in legal and professional fees, a $108 thousand increase in ATM and check card expense, a $52 thousand increase in FDIC assessment, and a $52 thousand increase in equipment expense.
Salaries and employee benefits increased primarily from annual increases in employee salaries and wages. Legal and professional fees increased from wealth management advisory expense. ATM and check expenses increased from higher volume of customer transactions. FDIC assessment increased from higher assessed rates during 2023. The increase in equipment expense resulted primarily from higher depreciation expense on software.
Nine Month Period Ended September 30, 2023
Noninterest expense increased $1.5 million, or 6%, to $28.1 million for the nine-month period ended September 30, 2023, compared to the same period one year ago. The increase was primarily attributable to a $656 thousand, or 4% increase in salaries and employee benefits, a $135 thousand, or 23%, increase in marketing, a $283 thousand, or 29%, increase in ATM and check card expense, and a $387 thousand, or 13%, increase in other operating expenses. These increases were partially offset by a $284 thousand decrease in OREO expense, net, which resulted from gains on the sale of other real estate during 2023.
Salaries and employee benefits increased primarily from an annual increase in employee salaries and wages. Marketing expenses increased from additional advertising and active promotion initiatives. ATM and check card expense increased primarily from a higher volume of customer transactions. Other operating expenses increased primarily from higher recruiting expense, education and training expense, loan collection expense, and courier and armored services.
Income Taxes
Three Month Period Ended September 30, 2023
Income tax expense decreased $286 thousand for the third quarter of 2023, compared to the same period one year ago. The effective tax rate for the second quarter of 2023 was 19.0% compared to 18.6% for the same period in 2022. The increased effective tax rate for 2023 was the result of higher non-deductible expenses and lower nontaxable income in 2023 compared to 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 September 30, 2023, and 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, 2022.
Nine Month Period Ended September 30, 2023
Income tax expense decreased $318 thousand, or 11.3%, for the first nine months of 2023 compared with the same period in 2022. The effective tax rate for the first nine months of 2023 was 19.3% compared with 19.0% for the same period in 2022. Like the three month period ended September 30, 2023, the increased effective tax rate for 2023 was also the result of lower non-deductible expenses in 2023 compared to 2022.
Financial Condition
General
Assets totaled $1.4 billion on September 30, 2023, which was a slight decrease of $3.2 million from December 31, 2022. The asset composition changed during the first nine months of the year as cash and due from banks decreased by $3.6 million, interest-bearing deposits in banks decreased by $13.2 million, and total securities decreased by $14.7 million, while loans, net of the allowance for credit losses, increased by $30.5 million.
Total liabilities decreased by $6.8 million during the nine-month period ended September 30, 2023, primarily from a $6.2 million decrease in total deposits. Although total deposits decreased slightly, the composition of deposits changed as noninterest-bearing deposits and savings and interest-bearing deposits decreased $23.6 million and $30.2 million, respectively, while time deposits increased $47.6 million. The change in composition of the deposit portfolio during the period was attributable to customers shifting deposits into products with higher interest rates.
Total shareholders’ equity increased by $3.6 million during the first nine months of 2023, primarily from a $5.7 million increase in retained earnings, which was partially offset by a $2.2 million increase in accumulated other comprehensive loss. The increase in accumulated other comprehensive loss was attributable to higher unrealized losses in the available-for-sale securities portfolio. Retained earnings increased from $10.5 million of net income, which was partially offset by $2.8 million of cash dividends on common stock and a $2.0 million decrease from the adoption of CECL on January 1, 2023. The Bank's capital ratios continued to exceed the minimum capital requirements for regulatory purposes.
Loans
Loans totaled $952.5 million at September 30, 2023, which was a $32.0 million, or 5% annualized, increase from December 31, 2022, and a $46.0 million, or 5%, increase over September 30, 2023. The growth in loans over the periods did not have a significant impact on the composition of the loan portfolio. The loan portfolio was primarily comprised of loans secured by one-to-four family residential real estate, loans secured by commercial real estate, and commercial and industrial loans, which totaled 36%, 46%, and 12% of the loan portfolio, respectively, at September 30, 2023.
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 credit 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 $368 thousand at September 30, 2023 There were no loans greater than 90 days past due and still accruing at December 31, 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.
Asset Quality
Management classifies non-performing assets as non-accrual loans and OREO. Non-performing assets totaled $3.1 million and $2.9 million at September 30, 2023 and December 31, 2022, representing approximately 0.23% and 0.21% of total assets, respectively. Nonaccrual loans totaled $3.1 million and $2.7 million at September 30, 2023 and December 31, 2022, respectively. OREO totaled $0 and $185 thousand at September 30, 2023 and December 31, 2022, 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 bank operations, 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 did not have any consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings were in process as of September 30, 2023
On September 30, 2023 17.5% of non-performing assets were comprised of residential real estate loans. 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 $1.7 million and $2.3 million at September 30, 2023 and December 31, 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.
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 credit 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 losses, 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 credit 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 credit 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.
On September 30, 2023 securities totaled $300.2 million, a decrease of $17.8 million, or 5.6%, from $318.0 million at December 31, 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 September 30, 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 $64 thousand and $99 thousand at September 30, 2023 and December 31, 2022, respectively. Gross unrealized losses in the available for sale portfolio totaled $28.4 million and $24.0 million at September 30, 2023 and December 31, 2022, respectively. There were no gross unrealized gains in the held to maturity portfolio at September 30, 2023 and December 31, 2022, respectively. Gross unrealized losses in the held to maturity portfolio totaled $15.2 million and $11.4 million at September 30, 2023 and December 31, 2022, respectively. The change in the unrealized gains and losses of investment securities from December 31, 2022 to September 30, 2023 was related to changes in market interest rates and was not related to 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 an 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 $1.2 million, or $972 thousand net of tax, for the first nine months of 2023. Securities designated as held to maturity are carried on the balance sheet at amortized cost, while securities designated as available for sale are carried at fair market value.
Deposits
Deposits totaled $1.2 billion on September 30, 2023, which was a $6.2 million decrease from December 31, 2022, and a $30.3 million, or 2%, decrease from September 30, 2022. The composition of the deposit portfolio has changed compared to prior periods. Noninterest-bearing deposits, savings and interest-bearing deposits, and time deposits, totaled 33%, 52%, and 15%, of total deposits, respectively on September 30, 2023, compared to 34%, 55%, and 11% on December 31, 2022, and 34%, 55%, and 11%, on September 30, 2022. The change in deposit composition was attributable to deposits that shifted into products paying higher interest rates.
Liquidity
Liquidity sources available to the Bank, including interest-bearing deposits in banks, unpledged securities available for sale, at fair value, unpledged securities held-to-maturity, at par, eligible to be pledged to the Federal Reserve Bank through its Bank Term Funding Program, and available lines of credit totaled $532.1 million on September 30, 2023, and $417.2 million on December 31, 2022.
The Bank maintains 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 $346.9 million on September 30, 2023, and $261.7 million on December 31, 2022. Excluding municipal deposits, the estimated amount of uninsured customer deposits totaled $268.4 million on September 30, 2023, and $185.3 million on December 31, 2022.
The Bank also has access to off-balance sheet liquidity through its available lines of credit from other institutions, which totaled $347.1 million at September 30, 2023, $287.3 million at December 31, 2022, and $379.0 million at September 30, 2023. The available lines of credit were comprised of secured and unsecured lines of credit. The Bank had no borrowings on the lines of credit at September 30, 2023, December 31, 2022, or September 30, 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 and is not obligated to report consolidated regulatory capital.
The Bank is subject to capital rules adopted by federal bank regulators that implemented 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 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. There is also a capital conservation buffer, which is 2.5% above the regulatory minimum capital requirements. If capital levels fall below the required minimum ratios plus the buffer, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions. This results in the following minimum capital ratios required to exceed the buffer: 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%. Management believes, as of September 30, 2023 and December 31, 2022, 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 September 30, 2023:
| First Bank |
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| Total capital to risk-weighted assets |
14.80 | % | ||
| Tier 1 capital to risk-weighted assets |
13.86 | % | ||
| Common equity Tier 1 capital to risk-weighted assets |
13.86 | % | ||
| Tier 1 capital to average assets |
9.96 | % | ||
| Capital conservation buffer ratio(1) |
6.80 | % | ||
| (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 September 30, 2023 and December 31, 2022.
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 through December 31, 2023. The Company repurchased 37,532 shares under this plan during the first nine months of 2023 at an average price of $15.14 per share.
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, 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 amounted to $171.9 million at September 30, 2023, and $158.3 million at December 31, 2022, 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. The Company recorded an additional provision for credit losses for unfunded commitments of $36 thousand during the nine months ended September 30, 2023. At September 30, 2023, the liability for credit losses on off-balance sheet exposures included in other liabilities was $189 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 September 30, 2023 and December 31, 2022, the Bank had $12.1 million and $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 September 30, 2023, the cash flow hedges had a fair value of $3.1 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 10 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 September 30, 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 adequate 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.
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, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer 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 September 30, 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 |
|||||||||||||
| July 1, 2023 - July 31, 2023 |
1,078 | $ | 16.54 | 1,078 | $ | 4,475,675 | ||||||||||
| August 1, 2023 - August 31, 2023 |
1,196 | 17.05 | 1,196 | 4,455,279 | ||||||||||||
| September 1, 2023 - September 30, 2023 |
1,400 | 16.74 | 1,400 | 4,431,843 | ||||||||||||
| 3,674 | $ | 16.78 | 3,674 | $ | 4,431,843 | |||||||||||
Item 3. Defaults upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
None
The following documents are attached hereto as Exhibits:
| 10.1 | Form of First National Corporation Restricted Stock Unit Agreement |
| 10.2 | Form of First National Corporation Director Stock Award Agreement |
| 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 September 30, 2023 formatted in Inline eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss) (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Shareholders’ Equity, and (vi) Notes to Consolidated Financial Statements. |
| 104 | The cover page from First National Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (included with Exhibit 101). |
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.
| FIRST NATIONAL CORPORATION |
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| (Registrant) |
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| /s/ Scott C. Harvard |
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November 13, 2023 |
| Scott C. Harvard |
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Date |
| President and Chief Executive Officer |
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| /s/ M. Shane Bell |
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November 13, 2023 |
| M. Shane Bell |
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Date |
| Executive Vice President and Chief Financial Officer |
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