VIRGINIA NATIONAL BANKSHARES CORPORATION The following discussion should be read in conjunction with the unaudited consolidated financial statements, and notes thereto, ofVirginia National Bankshares Corporation included in this report and the audited consolidated financial statements, and notes thereto, of the Company included in the Company's Form 10-K for the year endedDecember 31, 2021 . Operating results for the three and nine months endedSeptember 30, 2022 are not necessarily indicative of the results for the year endingDecember 31, 2022 or any future period.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT COULD AFFECT FUTURE RESULTS
Certain statements contained or incorporated by reference in this quarterly report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, statements with respect to the Company's operations, performance, future strategy and goals, and are often characterized by use of qualified words such as "expect," "believe," "estimate," "project," "anticipate," "intend," "will," "should," or words of similar meaning or other statements concerning the opinions or judgement of the Company and its management about future events. While Company management believes such statements to be reasonable, future events and predictions are subject to circumstances that are not within the control of the Company and its management. Actual results may differ materially from those included in the forward-looking statements due to a number of factors, including, without limitation, the effects of and changes in: general economic and market conditions, including the effects of declines in real estate values, an increase in unemployment levels and general economic contraction as a result of COVID-19 or other pandemics; fluctuations in interest rates, deposits, loan demand, and asset quality; assumptions that underlie the Company's ALLL; the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (e.g., COVID-19 or other pandemics), and of governmental and societal responses thereto; the performance of vendors or other parties with which the Company does business; competition; technology; changes in laws, regulations and guidance; changes in accounting principles or guidelines; performance of assets under management; expected revenue synergies and cost savings from the recently completed merger withFauquier may not be fully realized or realized within the expected timeframe; the businesses of the Company andFauquier may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; revenues following the Merger may be lower than expected; customer and employee relationships and business operations may be disrupted by the merger; and other factors impacting financial services businesses. Many of these factors and additional risks and uncertainties are described in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 and other reports filed from time to time by the Company with theSecurities and Exchange Commission . These statements speak only as of the date made, and the Company does not undertake to update any forward-looking statements to reflect changes or events that may occur after this release.
MERGER WITH
OnApril 1, 2021 , the Company completed its Merger withFauquier . The Merger ofFauquier with and into the Company was effected pursuant to the terms and conditions of the Agreement and Plan of Reorganization, dated as ofSeptember 30, 2020 , between the Company andFauquier , and a related Plan of Merger. Immediately after the Merger,The Fauquier Bank ,Fauquier's wholly-owned bank subsidiary, merged with and intoVirginia National Bank , the Company's wholly-owned bank subsidiary. Pursuant to the Merger Agreement, former holders of shares of Fauquier common stock received 0.675 shares of the Company's common stock for each share ofFauquier common stock held immediately prior to the Merger, with cash paid in lieu of fractional shares. Each share of common stock of the Company outstanding immediately prior to the Merger remained outstanding and was unaffected by the Merger. Refer to Note 2 - Business Combinations, in the Notes to Consolidated Financial Statements, for further detail on the accounting policy for business combinations, fair values of assets and liabilities assumed, assumptions used in determining the fair values of assets and liabilities and the resulting goodwill. 36 --------------------------------------------------------------------------------
OVERVIEW
Our primary financial goal is to maximize the Company's earnings to increase long-term shareholder value. We monitor three key financial performance measures to determine our success in realizing this goal: 1) return on average assets, 2) return on average equity, and 3) net income per share. (Refer to Reconcilement of Non-GAAP Measures within the Non-GAAP presentations section for further detail and calculation of amounts labeled as "Non-GAAP.")
•
ROAA for the three months endedSeptember 30, 2022 was 1.30% compared to 0.65% (0.96% excluding merger and merger-related expenses, a non-GAAP measure) realized in the same period in the prior year, as the increase in net income was significantly higher in the current period and no merger or merger-related expenses were incurred in the current period. ROAA for the nine months endedSeptember 30, 2022 was 1.20% compared to 0.41% (0.94% excluding merger and merger-related expenses, a non-GAAP measure) realized in the same period in the prior year.
•
ROAE for the three months endedSeptember 30, 2022 was 16.50% compared to 7.70% (11.29% excluding merger and merger-related expenses, a non-GAAP measure) realized in same period in the prior year. ROAE for the nine months endedSeptember 30, 2022 was 14.98% compared to 4.80% (11.00% excluding merger and merger-related expenses, a non-GAAP measure) realized in same period in the prior year.
•
Net income per diluted share was$1.08 for the three months endedSeptember 30, 2022 , compared to$0.59 ($0.86 excluding merger and merger-related expenses, a non-GAAP measure) for the same period in the prior year, due to the increase of$2.6 million in net income. Net income per diluted share was$3.06 for the nine months endedSeptember 30, 2022 , compared to$1.07 ($2.45 excluding merger and merger-related expenses, a non-GAAP measure) for the same period in the prior year, due to the increase of$11.6 million in net income. We also manage our capital levels through growth, quarterly cash dividends, periodic stock dividends and share repurchases, when prudent, while maintaining a strong capital position. Refer to the Results of Operations, Non-GAAP Presentation section, later in this Management's Discussion and Analysis for more discussion on these financial performance measures.
IMPACT OF COVID-19
The Company's financial performance generally, and in particular the ability of its borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is dependent on the business environment in its primary markets. COVID-19 has had, and may have in the future, a wide range of economic impacts nationally and in the Company's primary markets. Continuing cases of COVID-19, including the emergence of variants of the COVID-19 virus, continue to be a public health concern in the Company's markets. There have been encouraging signs of strength in the economic recovery, including growth in consumer spending and improvement in the labor market, but many businesses continue to face difficulty in hiring desirable employees and meeting consumer demand, and certain portions of the global supply chain remain challenged by shortages and delays that first occurred due to the initial COVID-19 outbreak. There remains uncertainty about the pace of economic recovery, including uncertainty related to the labor market, inflation and fiscal and monetary policy responses from the federal government. There remains a risk that consumers and borrowers who have been supported during the pandemic by government stimulus measures may not return to employment and may not be able to repay debts as agreed following the cessation of government stimulus programs, including expanded unemployment benefits. Management will carefully monitor any future impacts attributable to the COVID-19 pandemic and its impact on the Company's markets, customers and employees, and believes that the pandemic continues to present risks of elevated loan losses, sustained net interest margin compression and falling demand for loans? however, at this time management cannot determine the ultimate impact of the pandemic on the results of operations of the Company.
Throughout the onset of this pandemic, the Company has maintained its high
standards of credit quality on organic loan funding to limit credit risk
exposure. There were no COVID-19 related loan deferrals as of
As ofSeptember 30, 2022 , capital ratios of the Company were in excess of regulatory requirements. While currently included in the category of "well capitalized" by bank regulators, a prolonged economic recession could adversely impact reported and regulatory capital ratios. The Company maintains access to multiple sources of liquidity. Management also revisited its capital and liquidity stress tests, as well as capital and liquidity contingency plans, to validate that the Company can react effectively to an economic downturn. 37 --------------------------------------------------------------------------------
Operations, Processes, Controls and Business Continuity Plan
The Company reacted quickly to the COVID-19 pandemic. Since the start of the pandemic, the Company has taken and is continuing to take precautions to protect the safety and well-being of the Bank's employees and customers. We began internal social distancing in mid-March of 2020, as well as distancing from the public by keeping our drive-thru services available, and encouraging customers to conduct transactions at ATMs, through online banking and/or the mobile app. The Company also increased consumer and business mobile deposit limits to encourage customers to make deposits remotely from the safety of their home or business. The Company implemented a temporary schedule whereby most staff members worked remotely, allowing the remaining essential staff to create more distance between each other within the offices. We temporarily increased the number of staff in the client service center to assist more customers by telephone and encourage them to utilize online and mobile banking. The client service center was also moved on a short-term basis to a larger location to allow for appropriate social distancing. In addition, the Company enhanced disinfecting procedures to include hospital-grade cleaning solution and foggers, increased the frequency of cleaning and issued personal protective equipment, including N-95 and disposable face masks, face shields, sneeze guards, gloves and thermometers, to employees, along with specific instructions for use, to enhance their safety. We also installed disinfecting protective strips to high touch areas and placed free-standing air filter machines throughout our facilities. We purchased COVID-19 instant test kits that we have on-site, ready to be deployed when needed, and we provided antibody testing options to all employees. Management provides frequent email communications and social media updates regarding COVID-19, helpful tips and status of Company initiatives, as well as warning customers of potential scams during this pandemic. The Bank remains very focused on the safety and well-being of its employees and customers during COVID-19 and is committed to safely and responsibly operating its branches and operating facilities, as all branches have reopened and work schedules have returned to normal. The Company's preparedness resulted in minimal impact to the Company's operations as a result of COVID-19. Business continuity planning allowed for successful deployment of most of our employees to work in a remote environment. No material operational or internal control risks have been identified to date, and the Company has enhanced fraud-related controls.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accounting and reporting policies followed by the Company conform, in all material respects, to GAAP and to general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. The Company considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company's consolidated financial statements. The Company's accounting policies are fundamental to understanding management's discussion and analysis of financial condition and results of operations. For additional information regarding critical accounting policies, refer to the Application of Critical Accounting Policies and Critical Accounting Estimates section under Item 7 in the Company's 2021 Form 10-K. There have been no significant changes in the Company's application of critical accounting policies sinceDecember 31, 2021 . FINANCIAL CONDITION Total assets The total assets of the Company as ofSeptember 30, 2022 were$1.7 billion . This is a$238 million , or 12.1%, decrease from total assets reported atDecember 31, 2021 and a$178.1 million , or 9.3%, decrease from total assets reported atSeptember 30, 2021 . The decreases were substantially within gross loans, as legacy organic loan balances declined due to business sales, property sales, loan refinances and participation fluctuations, Acquired Loan balances declined due to successful execution of paydowns to improve asset quality, SBA PPP loans were forgiven, and other curtailments (see more detail in the Loan portfolio section following). 38 --------------------------------------------------------------------------------
Interest-bearing deposits in other banks
The Company had$76.2 million of interest-bearing deposits in other banks as ofSeptember 30, 2022 , compared to$336.0 million as ofDecember 31, 2021 and$254.2 million as ofSeptember 30, 2021 . Significant excess liquidity has been deployed into short-term investment securities in the nine months endedSeptember 30, 2022 to earn a higher yield.
Federal funds sold
The Company had overnight federal funds sold of$53.1 million as ofSeptember 30, 2022 ,$152.5 million as ofDecember 31, 2021 and$152.4 million as ofSeptember 30, 2021 . Any excess funds are sold on a daily basis in the federal funds market. The Company intends to maintain sufficient liquidity at all times to meet its funding commitments. The Company continues to participate in the Excess Balance Account of theFederal Reserve Bank of Richmond . The EBA is a limited-purpose account at the FRB for the maintenance of excess cash balances held by financial institutions. The EBA eliminates the potential of concentration risk that comes with depositing excess balances with one or multiple correspondent banks.
Securities
The Company's investment securities portfolio as ofSeptember 30, 2022 totaled$543.6 million , an increase of$234.8 million compared with the$308.8 million reported atDecember 31, 2021 and an increase of$263.9 million from the$279.7 million reported atSeptember 30, 2021 . The increase from year-end and the same period in the prior year is the result of deploying excess funds into higher yielding assets. Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company. AtSeptember 30, 2022 andDecember 31, 2021 , the investment securities holdings represented 31.4% and 15.7% of the Company's total assets, respectively. The Company's investment securities portfolio included restricted securities totaling$5.1 million as ofSeptember 30, 2022 , compared to$5.0 million as ofDecember 31, 2021 and$2.6 million as ofSeptember 30, 2021 . These securities represent stock in the FRB, the FHLB,CBB Financial Corporation (the holding company forCommunity Bankers' Bank ), and an investment in an SBA loan fund. The level of FRB and FHLB stock that the Company is required to hold is determined in accordance with membership guidelines provided by theFederal Reserve and the FHLB, respectively. Stock ownership in the bank holding company forCommunity Bankers' Bank provides the Company with several benefits that are not available to non-shareholder correspondent banks. None of these restricted securities are traded on the open market and can only be redeemed by the respective issuer. AtSeptember 30, 2022 , the unrestricted securities portfolio totaled$538.5 million . The following table summarizes the Company's AFS securities by type as ofSeptember 30, 2022 ,December 31, 2021 , andSeptember 30, 2021 (dollars in thousands): September 30, 2022 December 31, 2021 September 30, 2021 % of % of % of Balance Total Balance Total Balance Total U.S. Government treasuries$ 241,375 44.8 % $ - - $ - - U.S. Government agencies 28,905 5.4 % 31,581 10.4 % 32,538 11.7 % Mortgage-backed securities/CMOs 160,461 29.8 % 170,964 56.3 % 145,998 52.7 % Corporate bonds 29,295 5.4 % - - - - Municipal bonds 78,423 14.6 % 101,272 33.3 % 98,510 35.6 % Total available for sale securities$ 538,459 100.0 %$ 303,817 100.0 %$ 277,046 100.0 % The securities are held primarily for earnings, liquidity, and asset/liability management purposes and are reviewed quarterly for possible other-than-temporary impairments. During this review, management analyzes the length of time the fair value has been below cost, the expectation for that security's performance, the creditworthiness of the issuer, and the Company's intent and ability to hold the security to recovery or maturity. These factors are analyzed for each individual security. 39
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Loan portfolio
A management objective is to grow loan balances while maintaining the asset quality of the loan portfolio. The Company seeks to achieve this objective by maintaining rigorous underwriting standards coupled with regular evaluation of the creditworthiness of, and the designation of lending limits for, each borrowing relationship. The portfolio strategies include seeking industry, loan size, and loan type diversification to minimize credit exposure and originating loans in markets with which the Company is familiar. The Company's geographical trade area includes localities inVirginia ,Maryland and theDistrict of Columbia that are within a 100-mile radius of any office of the Company. As ofSeptember 30, 2022 , total loans were$942.3 million , compared to$1.1 billion as ofDecember 31, 2021 and$1.1 billion atSeptember 30, 2021 . Loans as a percentage of total assets atSeptember 30, 2022 were 54.4%, compared to 58.2% as ofSeptember 30, 2021 . Loans as a percentage of deposits atSeptember 30, 2022 were 59.0%, compared to 64.0% as ofSeptember 30, 2021 . The following table summarizes the Company's loan portfolio by type of loan as ofSeptember 30, 2022 ,December 31, 2021 , andSeptember 30, 2021 (dollars in thousands): September 30, 2022 December 31, 2021 September 30, 2021 % of % of % of Balance Total Balance Total Balance Total Commercial loans$ 72,685 7.7 %$ 96,696 9.1 %$ 119,959 10.8 % Real estate mortgage: Construction and land 49,668 5.3 % 79,331 7.5 % 92,082 8.3 % 1-4 family residential mortgages 324,891 34.5 % 358,148 33.8 % 372,474 33.5 % Commercial 447,185 47.5 % 473,632 44.6 % 464,866 41.8 % Total real estate mortgage 821,744 87.3 % 911,111 85.9 % 929,422 83.6 % Consumer 47,918 5.0 % 53,404 5.0 % 63,069 5.6 % Total loans$ 942,347 100.0 %$ 1,061,211 100.0 %$ 1,112,450 100.0 % The Company's planned strategy to further improve asset quality through negotiation of loan paydowns and PPP forgiveness resulted in a decrease in loan balances fromSeptember 30, 2021 andDecember 31, 2021 toSeptember 30, 2022 . The decrease fromDecember 31, 2021 is due predominantly to: 1) paydowns of legacy organic loans due mainly to business sales, property sales, refinances and participation fluctuations of$59.3 million , 2) workouts and paydowns of Acquired Loans of$51.9 million , and 3) the forgiveness of SBA PPP loans in the amount of$24.2 million . As ofSeptember 30, 2022 , only$254 thousand of PPP loans remain outstanding on the Bank's balance sheet.
Loan quality
Non-accrual loans, comprised of only three loans to two borrowers, totaled$607 thousand atSeptember 30, 2022 , compared to balances of$495 thousand and$777 thousand reported atDecember 31, 2021 andSeptember 30, 2021 , respectively. PCI loans which otherwise would be in non-accrual status are not included in the balances, as they earn interest through the yield accretion. The Company had loans in its portfolio totaling$859 thousand ,$801 thousand and$678 thousand , as ofSeptember 30, 2022 ,December 31, 2021 andSeptember 30, 2021 , respectively, that were 90 or more days past due and still accruing interest as the Company deemed them to be collectible. The balance as ofSeptember 30, 2022 includes a government-guaranteed loan in the amount of$709 thousand . The portfolio includes three non-insured student loans that are 90 days or more past due and still accruing interest, amounting to$21 thousand . 40 -------------------------------------------------------------------------------- The Company had loans classified as impaired loans in the amount of$1.5 million as ofSeptember 30, 2022 ,$1.5 million as ofDecember 31, 2021 , and$1.6 million atSeptember 30, 2021 . Based on regulatory guidance on student lending, the Company has classified 48 of its Purchased Student Loans as TDRs for a total of$756 thousand as ofSeptember 30, 2022 . These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered TDRs. Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. Management has evaluated these loans individually for impairment and included any probable loss in the allowance for loan loss; interest continues to accrue on these TDRs during any deferment and forbearance periods.
Management identifies potential problem loans through its periodic loan review process and considers potential problem loans as those loans classified as special mention, substandard, or doubtful.
Allowance for loan losses
In general, the Company determines the adequacy of its ALLL by considering the risk classification and delinquency status of loans and other factors. Management may also establish specific allowances for loans which management believes require allowances greater than those allocated according to their risk classification. The purpose of the allowance is to provide for losses inherent in the loan portfolio. Since risks to the loan portfolio include general economic trends as well as conditions affecting individual borrowers, the allowance is an estimate. The Company is committed to determining, on an ongoing basis, the adequacy of its ALLL. The Company applies historical loss rates to various pools of loans based on risk rating classifications. In addition, the adequacy of the ALLL is further evaluated by applying estimates of loss that could be attributable to any one of the following eight qualitative factors:
1)
Changes in national and local economic conditions, including the condition of
various market segments;
2)
Changes in the value of underlying collateral;
3)
Changes in volume of classified assets, measured as a percentage of capital;
4)
Changes in volume of delinquent loans;
5)
The existence and effect of any concentrations of credit and changes in the
level of such concentrations;
6)
Changes in lending policies and procedures, including underwriting standards;
7)
Changes in the experience, ability and depth of lending management and staff;
and
8)
Changes in the level of policy exceptions.
The Company utilizes a loss migration model, which uses loan level attributes to
track the movement of loans through various risk classifications in order to
estimate the percentage of losses likely in the portfolio. If economic
conditions improve or worsen, the Company could experience changes in the
required ALLL. It is possible that asset quality metrics could decline in the
future if there are further challenges to the economic recovery, including a
resurgence in COVID-19 cases or the emergence of variants of the COVID-19 virus.
The relationship of the ALLL to total loans and nonaccrual loans appears below
(dollars in thousands):
September 30, 2022 December 31, 2021 September 30, 2021
Total loans $ 942,347 $ 1,061,211 $ 1,112,450
Nonaccrual loans $ 607 $ 495 $ 777
Allowance for loan
losses $ 5,485 $ 5,984 $ 5,623
Nonaccrual loans to
total loans 0.06 % 0.05 % 0.07 %
ALLL to total loans 0.58 % 0.56 % 0.51 %
ALLL to nonaccrual loans 903.62 % 1208.89 % 723.68 %
The ALLL as a percentage of loans was 0.58% as of September 30, 2022 , 0.56% as
of December 31, 2021 , and 0.51% as of September 30, 2021 . The ALLL as a
percentage of gross loans, excluding the impact of the Acquired loans and fair
value mark (a non-GAAP financial measure), would have been 0.90% as of September
30, 2022 , unchanged from 0.90% as of September 30, 2021 . The total of the ALLL
and the fair value mark as a percentage of gross loans (a non-GAAP financial
measure) amounted to 2.38% as of September 30, 2022 , compared to 2.24% as of
September 30, 2021 . The fair value mark that was allocated to the acquired loans
was $21.3 million as of the Effective Date, with a remaining balance of
41
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$17.0 million as of September 30, 2022 . Refer to the Reconcilement of Non-GAAP
Measures table within the Non-GAAP presentations section for a reconcilement of
GAAP to non-GAAP ALLL as a percentage of loans.
A recovery of provision for loan losses totaling $30 thousand and a provision
for loan losses totaling $477 thousand were recorded in the nine months ended
September 30, 2022 and 2021, respectively. The following is a summary of the
changes in the ALLL for the nine months ended September 30, 2022 and 2021
(dollars in thousands):
2022 2021
Allowance for loan losses,
(783 ) (605 )
Recoveries 314 296
Provision for (recovery of) loan losses (30 ) 477
Allowance for loan losses,
For additional insight into management's approach and methodology in estimating the ALLL, please refer to the earlier discussion of "Allowance for Loan Losses" in Note 5 of the Notes to Consolidated Financial Statements. In addition, Note 5 includes details regarding the rollforward of the allowance by loan portfolio segments. The rollforward tables indicate the activity for loans that are charged-off, amounts received from borrowers as recoveries of previously charged-off loan balances, and the allocation by loan portfolio segment of the provision made during the period. The events that can positively impact the amount of allowance in a given loan segment include any one or all of the following: the recovery of a previously charged-off loan balance; the decline in the amount of classified or delinquent loans in a loan segment from the previous period, which most commonly occurs when these loans are repaid or are foreclosed; or when there are improvements in the ratios used to estimate the probability of loan losses. Improvements to the ratios could include lower historical loss rates, improvements to any of the qualitative factors mentioned above, or reduced loss expectations for individually-classified loans.
Management reviews the ALLL on a quarterly basis to ensure it is adequate based
upon the calculated probable losses inherent in the portfolio. Management
believes the ALLL was adequately provided for as of
Premises and equipment
The Company's premises and equipment, net of depreciation, as ofSeptember 30, 2022 totaled$18.8 million compared to$25.1 million as ofDecember 31, 2021 and$25.2 million as ofSeptember 30, 2021 , decreasing due to the sale of two buildings during the current year. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of assets. Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon disposition, assets and related accumulated depreciation are removed from the books, and any resulting gain or loss is charged to income.
As of
The five-story office building at404 People Place ,Charlottesville, Virginia , located inAlbemarle County , also serves as the Company's corporate headquarters, operations center, and offices of bothMasonry Capital andSturman Wealth Advisors .VNB Trust & Estate Services is located at103 Third Street, SE ,Charlottesville, Virginia . Both theArlington Boulevard facility inCharlottesville and thePeople Place facility inAlbemarle County also contain office space that is currently under lease to tenants. 42 --------------------------------------------------------------------------------
Leases
As ofSeptember 30, 2022 , the Company has recorded$6.9 million of right-of-use assets and$6.6 million of lease liabilities, in accordance with ASU 2016-02 "Leases" (Topic 842). As ofDecember 31, 2021 ,$7.6 million of right-of-use assets and$7.1 million of lease liabilities were included on the balance sheet. Right-of-use assets are assets that represent the Company's right to use, or control the use of, a specified asset for the lease term, offset by the lease liability, which is the Company's obligation to make lease payments arising from a lease, measured on a discounted basis.
Deposits
Deposit accounts represent the Company's primary source of funds and are comprised of demand deposits, interest-bearing checking, money market, and savings accounts as well as time deposits. These deposits have been provided predominantly by individuals, businesses and charitable organizations in theCommonwealth of Virginia . Total deposits as ofSeptember 30, 2022 were$1.6 billion , a decrease of$199.5 million compared toDecember 31, 2021 , and a decrease of$140.5 million compared toSeptember 30, 2021 (dollars in thousands). September 30, 2022 December 31, 2021 September 30, 2021 % of % of % of Balance Total Balance Total Balance Total No cost and low cost deposits: Noninterest demand deposits$ 539,134 33.8 %$ 522,281 29.1 %$ 504,696 29.1 % Interest checking accounts 417,530 26.2 % 446,314 24.8 % 424,642 24.4 % Money market and savings deposit accounts 505,733 31.7 % 665,530 37.1 % 642,788 37.0 % Total noninterest and low cost deposit accounts 1,462,397 91.7 % 1,634,125 91.0 % 1,572,126 90.5 % Time deposit accounts: Certificates of deposit 129,038 8.0 % 155,901 8.7 % 158,113 9.1 % CDARS deposits 5,212 0.3 % 6,144 0.3 % 6,944 0.4 % Total certificates of deposit and other time deposits 134,250 8.3 % 162,045 9.0 % 165,057 9.5 % Total deposit account balances$ 1,596,647 100.0 %$ 1,796,170 100.0 %$ 1,737,183 100.0 % Noninterest-bearing demand deposits onSeptember 30, 2022 were$539.1 million , representing 33.8% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled$923.3 million , and represented 57.9% of total deposits atSeptember 30, 2022 . Collectively, noninterest-bearing and interest-bearing transaction, money market and savings accounts represented 91.7% of total deposit accounts atSeptember 30, 2022 . These account types are an excellent source of low-cost funding for the Company. The Company also offers insured cash sweep deposit products. ICS® deposit balances of$28.4 million and$110.1 million are included in the interest checking accounts and the money market and savings deposit accounts balances, respectively, in the table above, as ofSeptember 30, 2022 . As ofDecember 31, 2021 , ICS® deposit balances of$39.2 million and$225.9 million are included in the interest checking accounts and the money market and savings deposit account balances, respectively. All ICS accounts consist of reciprocal balances for the Company's customers. The remaining 8.3% of total deposits consisted of certificates of deposit and other time deposit accounts totaling$134.3 million atSeptember 30, 2022 . Included in these deposit totals are CDARSTM, whereby depositors can obtainFDIC deposit insurance on account balances of up to$50 million . CDARSTM deposits totaled$5.2 million as ofSeptember 30, 2022 and$6.1 million as ofDecember 31, 2021 , all of which were reciprocal balances for the Company's customers. 43 --------------------------------------------------------------------------------
Borrowings
Borrowings, consisting primarily of FHLB advances and federal funds purchased, are additional sources of funds for the Company. The level of these borrowings is determined by various factors, including customer demand and the Company's ability to earn a favorable spread on the funds obtained. The Company has a collateral dependent line of credit with the FHLB, with no outstanding borrowings as ofSeptember 30, 2022 orDecember 31, 2021 . The Company has an off-balance sheet letter of credit in the amount of$30 million as ofSeptember 30, 2022 and$60 million as ofDecember 31, 2021 , issued in favor of the Commonwealth ofVirginia Department of the Treasury to secure public fund depository accounts. This letter of credit is secured by commercial mortgages. Additional borrowing arrangements maintained by the Company include formal federal funds lines with five major regional correspondent banks and theFederal Reserve discount window. The Company had no outstanding balances on these lines or facilities as ofSeptember 30, 2022 ,December 31, 2021 orSeptember 30, 2021 .
Junior Subordinated Debt
In 2006, a subsidiary ofFauquier , Fauquier Statutory Trust II, privately issued$4.0 million face amount of the trust'sFloating Rate Capital Securities in a pooled capital securities offering. Simultaneously, the trust used the proceeds of that sale to purchase$4.0 million principal amount of theFauquier's Floating Rate Junior Subordinated Deferrable Interest Debentures due 2036. As ofSeptember 30, 2022 andDecember 31, 2021 , total capital securities were$3.4 million , as adjusted to fair value as of the date of the Merger. The interest rate on the capital security resets every three months at 1.70% above the then current three-month LIBOR and is paid quarterly. Management is in communication with the issuer regarding the alternative reference rate that will apply after the discontinuance of LIBOR. The Trust II issuance of capital securities and the respective subordinated debentures are callable at any time. The subordinated debentures are an unsecured obligation of the Company and are junior in right of payment to all present and future senior indebtedness of the Company. The capital securities are guaranteed by the Company on a subordinated basis.
Shareholders' equity and regulatory capital ratios
The following table displays the changes in shareholders' equity for the Company
from
Equity,December 31, 2021 $ 161,987 Net income 16,381 Other comprehensive loss (48,150 ) Cash dividends declared (4,791 ) Exercise of stock options 24 Equity increase due to expensing of stock options 125
Equity increase due to expensing of restricted stock 398
Equity,
$ 125,974 The Basel III capital rules require banks and bank holding companies to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%); (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%); and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter). The Company's Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were 16.41%, 16.41%, 16.97% and 9.17%, respectively, as ofSeptember 30, 2022 , thus exceeding the minimum requirements. The Bank's Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were 16.18%, 16.18%, 16.73% and 9.04%, respectively, as ofSeptember 30, 2022 , also exceeding the minimum requirements. 44 -------------------------------------------------------------------------------- As ofSeptember 30, 2022 , the Bank exceeded all of the following minimum capital ratios in order to be considered "well capitalized" under the PCA regulations, as revised: (i) a common equity Tier 1 capital ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%. RESULTS OF OPERATIONS Non-GAAP presentations The accounting and reporting policies of the Company conform to GAAP and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Company's performance. These include adjusted ROAA, adjusted ROAE, adjusted net income, adjusted earnings per share, adjusted ALLL to total loans, tangible book value per share and the following fully-taxable equivalent measures: net interest income-FTE, efficiency ratio-FTE and net interest margin-FTE. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented. Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods, other financial institutions, and between different sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of (1) items that do not reflect ongoing operating performance, (2) items that do not reflect the implicit percentage of the ALLL to total loans, such as the impact of fair value adjustment, (3) balances of intangible assets, including goodwill, that vary significantly between institutions, and (4) tax benefits that are not consistent across different opportunities for investment. These non-GAAP financial measures should not be considered an alternative to GAAP-basis financial statements, and other banks and bank holding companies may define or calculate these or similar measures differently. Net income is discussed in Management's Discussion and Analysis on a GAAP basis unless noted as "non-GAAP." 45 --------------------------------------------------------------------------------
A reconcilement of the non-GAAP financial measures used by the Company to evaluate and measure the Company's performance to the most directly comparable GAAP financial measures is presented below (dollars in thousands):
For the three months ended For the nine months ended
September 30, September 30, September 30, September 30,
2022 2021 2022 2021
Performance measures
Return on average assets
("ROAA") 1.30 % 0.65 % 1.20 % 0.41 %
Impact of merger and merger
related expenses, net of tax 0.00 % 0.31 % 0.00 % 0.53 %
ROAA, excluding merger and
merger related expenses
(non-GAAP) 1.30 % 0.96 % 1.20 % 0.94 %
Return on average equity
("ROAE") 16.50 % 7.70 % 14.98 % 4.80 %
Impact of merger and merger
related expenses, net of tax 0.00 % 3.59 % 0.00 % 6.20 %
ROAE, excluding merger and
merger related expenses
(non-GAAP) 16.50 % 11.29 % 14.98 % 11.00 %
Net income $ 5,772 $ 3,138 $ 16,381 $ 4,790
Impact of merger and merger
related expenses, net of tax - 1,465 - 6,188
Net income, excluding merger
and merger related expenses
(non-GAAP) $ 5,772 $ 4,603 $
16,381
Net income per share, diluted $ 1.08 $ 0.59 $
3.06 $ 1.07
Impact of merger and merger
related expenses, net of tax - 0.27 - 1.38
Net income per share,
excluding merger and merger
related expenses (non-GAAP),
diluted $ 1.08 $ 0.86 $ 3.06 $ 2.45
Fully tax-equivalent measures Net interest income$ 14,277 $ 13,504 $ 38,163 $ 32,629 Fully tax-equivalent adjustment 84 77 245 194 Net interest income (FTE)$ 14,361 $ 13,581 $ 38,408 $ 32,823 Efficiency ratio 57.3 % 75.5 % 59.4 % 83.9 % Fully tax-equivalent adjustment -0.3 % -0.3 % -0.3 % -0.4 % Efficiency ratio (FTE) 57.0 % 75.2 % 59.1 % 83.5 % Net interest margin 3.45 % 3.06 % 2.98 % 3.01 % Fully tax-equivalent adjustment 0.02 % 0.02 % 0.02 % 0.02 % Net interest margin (FTE) 3.47 % 3.08 % 3.00 % 3.03 % As of September 30, December 31, September 30, 2022 2021 2021 Other financial measures: ALLL to total loans 0.58 % 0.56 % 0.51 % Impact of acquired loans and fair value mark 0.32 % 0.39 % 0.39 % ALLL to total loans, excluding acquired loans and fair value mark (non-GAAP) 0.90 % 0.95 % 0.90 % ALLL to total loans 0.58 % 0.56 % 0.51 % Fair value mark to total loans 1.80 % 1.74 % 1.73 % ALLL + fair value mark to total loans (non-GAAP) 2.38 % 2.30 % 2.24 % Book value per share$ 23.65 $ 30.50$ 30.13 Impact of intangible assets (2.88 ) (3.14 ) (3.21 ) Tangible book value per share (non-GAAP)$ 20.77 $ 27.36$ 26.92 Total equity$ 125,974 $ 161,987 $ 159,910 Impact of intangible assets (15,353 ) (16,685 ) (17,043 ) Tangible equity$ 110,621 $ 145,302 $ 142,867 46
--------------------------------------------------------------------------------
Net income
Net income for the three months endedSeptember 30, 2022 was$5.8 million , a$2.6 million increase compared to net income reported for the three months endedSeptember 30, 2021 . Net income per diluted share was$1.08 for the quarter endedSeptember 30, 2022 compared to$0.59 ($0.86 excluding the impact of merger and merger related expenses, net of tax, a non-GAAP financial measure) per diluted share for the same quarter in the prior year. Net income for the nine months endedSeptember 30, 2022 was$16.4 million , compared to$4.8 million for the nine months endedSeptember 30, 2021 . Net income per diluted share was$3.06 for the nine months endedSeptember 30, 2022 , compared to$1.07 ($2.45 excluding the impact of merger and merger related expenses, net of tax, a non-GAAP financial measure) per diluted share for the same period in the prior year.
Net interest income
Net interest income (FTE) for the three months endedSeptember 30, 2022 was$14.4 million , a$780 thousand increase compared to net interest income (FTE) of$13.6 million for the three months endedSeptember 30, 2021 . Net interest income (FTE) increased primarily due to the increased volume of securities, increasing from an average of$274.1 million in the three months endedSeptember 30, 2021 to$511.7 million in the three months endedSeptember 30, 2022 , positively impacting interest income by$1.2 million . The increase in yield earned on such securities over the same period positively impacted interest income by$698 thousand , increasing from 1.68% for the three months endedSeptember 30, 2021 to 2.41% for the three months endedSeptember 30, 2022 . FFS and interest bearing deposits in other banks contributed an additional$254 thousand and$563 thousand , respectively, to net interest income (FTE) for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . The decline in average loan balances, from$1.1 billion for the three months endedSeptember 30, 2021 to$959.1 million for the three months endedSeptember 30, 2022 , negatively impacted interest income by$2.1 million . The fair value accretion on Acquired Loans positively impacted net interest income by 12 bps during the three months endedSeptember 30, 2022 . Net interest income (FTE) was mildly impacted by the$39 thousand increase in interest expense, as described below. Net interest income (FTE) for the nine months endedSeptember 30, 2022 was$38.4 million , a$5.6 million increase compared to net interest income (FTE) of$32.8 million for the nine months endedSeptember 30, 2021 . The increase in volume of securities held, from an average balance of$239.8 million for the nine months endedSeptember 30, 2021 to$406.1 million for the nine months endedSeptember 30, 2022 , positively impacted net interest income by$2.4 million , and the yield on such securities increased from 1.70% to 2.19% for the periods noted, positively impacting net interest income by$1.2 million . FFS and interest bearing deposits in other banks contributed an additional$584 thousand and$879 thousand , respectively, to net interest income (FTE) for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . Net interest income (FTE) was also positively impacted by the improved loan yields which increased from 4.28% for the nine months endedSeptember 30, 2021 to 4.37% for the nine months endedSeptember 30, 2022 , positively impacting net interest income by$846 thousand . The decrease in volume of loans negatively impacted interest income by$347 thousand . The fair value accretion on Acquired Loans positively impacted net interest income by 12 bps during the nine months endedSeptember 30, 2022 . Net interest income (FTE) was slightly impacted by the$11 thousand decrease in interest expense, as described below. Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets for the period. The level of interest rates, together with the volume and mix of earning assets and interest-bearing liabilities, impact net interest income (FTE) and net interest margin (FTE). The net interest margin (FTE) of 3.47% for the three months endedSeptember 30, 2022 was 39 bps higher than the 3.08% for the three months endedSeptember 30, 2021 . The net interest margin (FTE) of 3.00% for the nine months endedSeptember 30, 2022 was 3 bps lower than the 3.03% for the nine months endedSeptember 30, 2021 . Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP net interest margin. 47 -------------------------------------------------------------------------------- Interest expense increased$39 thousand for the three months endedSeptember 30, 2022 compared to the same period in the prior year. Overall, the cost of interest-bearing deposits declined period over period, from a cost of 31 bps to 22 bps, due to decreased volume of interest-bearing deposits, declining$111.0 million for the period noted, positively impacting interest expense by$109 thousand , coupled with lower rates paid on deposits, positively impacting interest expense by$228 thousand . The slight increase in total interest expense is due to the impact of the Company prepaying 100% of its outstanding FHLB advances during the quarter endingSeptember 30, 2021 , which positively impacted interest expense by$416 thousand as a result of accelerating the fair value accretion on such TFB debt. During the three months endedSeptember 30, 2021 , the Bank's average outstanding borrowing with the FHLB prior to repayment was$22.3 million , incurring interest expense of$41 thousand . No such borrowings were outstanding during the three months endedSeptember 30, 2022 . Interest expense decreased$11 thousand for the nine months endedSeptember 30, 2022 compared to the same period in the prior year, primarily due to the decline in rates paid on deposits, from 34 bps to 25 bps, lowering interest expense by$659 thousand . The increase in the volume of interest-bearing deposits from period to period negatively impacted interest expense by$319 thousand . The prepayment of 100% of outstanding FHLB advances, as noted above, positively impacted interest expense by$416 thousand as a result of accelerating the fair value accretion on such TFB debt, offsetting the interest expense incurred during the nine months endedSeptember 30, 2021 of$136 thousand , netting to a positive impact on interest expense during the prior period presented of$280 thousand . 48
-------------------------------------------------------------------------------- The following tables detail the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest-bearing liabilities, for the three and nine months endedSeptember 30, 2022 and 2021. These tables also include rate/volume analyses for these same periods (dollars in thousands). Consolidated Average Balance Sheet and Analysis of Net Interest Income
For the Three Months Ended
September 30, 2022 September 30, 2021 Change in Interest Income/ Expense
Average Interest Average Average Interest Average Change Due to : 4 Total
Balance Income/ Yield/Cost Balance Income/ Yield/Cost Volume Rate Increase/
Expense Expense (Decrease)
ASSETS
Interest Earning Assets:
Securities:
Taxable Securities $445,854 $2,692 2.42% $214,194 $797 1.49% $1,203 $692 $1,895
355 2.37% 36 6 42
Total Securities 1 511,690 3,089 2.41% 274,063 1,152 1.68% 1,239 698 1,937
Loans:
Real Estate 834,323 9,485 4.51% 929,017 10,005 4.27% (1,056) 538 (518)
Commercial 74,970 846 4.48% 141,388 1,810 5.08% (770) (194) (964)
Consumer 49,793 693 5.52% 69,876 1,144 6.50% (296) (155) (451)
Total Loans 959,086 11,024 4.56% 1,140,281 12,959 4.51% (2,122) 189 (1,933)
Fed Funds Sold 52,908 299 2.24% 137,472 45 0.13% (44) 298 254
Other interest-bearing
deposits 120,440 618 2.04% 198,983 55 0.11% (30) 593 563
Total Earning Assets 1,644,124 15,030 3.63% 1,750,799
14,211 3.22% (957) 1,778 821
Less: Allowance for Loan
Losses (5,530) (5,607)
Total Non-Earning Assets 124,247 159,106
Total Assets $1,762,841 $1,904,298
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest Bearing
Liabilities:
Interest Bearing
Deposits:
Interest Checking $401,886 $56 0.06% $410,504 $72 0.07% $(1) $(15) $(16)
Money Market and Savings
Deposits 547,878 415 0.30% 621,211 601 0.38% (66) (120) (186)
Time Deposits 142,195 147 0.41% 171,256 282 0.65% (42) (93) (135)
Total Interest-Bearing
Deposits 1,091,959 618 0.22% 1,202,971 955 0.31% (109) (228) (337)
Borrowings - - - 22,260 (375) -6.68% 375 - 375
Junior subordinated debt 3,394 51 5.96% 3,349 50 - 1 - 1
Total Interest-Bearing
Liabilities 1,095,353 669 0.24% 1,228,580 630 0.20% 267 (228) 39
Non-Interest-Bearing
Liabilities:
Demand deposits 519,759 499,068
Other liabilities 8,932 15,003
Total Liabilities 1,624,044 1,742,651
Shareholders' Equity 138,797 161,647
Total Liabilities &
Shareholders' Equity $1,762,841 $1,904,298
Net Interest Income
(FTE) $14,361 $13,581 $(1,224) $2,006 $782
Interest Rate Spread 2 3.38% 3.02%
Cost of Funds 0.16% 0.14%
Interest Expense as a
Percentage of Average
Earning Assets 0.16% 0.14%
Net Interest Margin
(FTE) 3 3.47% 3.08%
(1)
Tax-exempt income for investment securities has been adjusted to a fully
tax-equivalent basis (FTE), using a Federal income tax rate of 21%. Refer to the
Reconcilement of Non-GAAP Measures table within the Non-GAAP Presentations
earlier in this section.
(2)
Interest spread is the average yield earned on earning assets less the average
rate paid on interest-bearing liabilities.
(3)
Net interest margin (FTE) is net interest income expressed as a percentage of
average earning assets.
(4)
The impact on the net interest income (FTE) resulting from changes in average
balances and average rates is shown for the period indicated. The change in
interest due to both volume and rate has been allocated to volume and rate
changes in proportion to the relationship of the absolute dollar amounts of the
change in each.
49
--------------------------------------------------------------------------------
Consolidated Average Balance Sheet and Analysis of Net Interest Income
For the Nine Months Ended
September 30, 2022 September 30, 2021 Change in Interest Income/ Expense
Average Interest Average Average Interest Average Change Due to : 4 Total
Balance Income/ Yield/Cost Balance Income/ Yield/Cost Volume Rate Increase/
Expense Expense (Decrease)
ASSETS
Interest Earning Assets:
Securities:
Taxable Securities $340,692 $5,492 2.15% $189,250
923 2.43% 267 (19) 248
Total Securities 1 406,139 6,662 2.19% 239,809 3,050 1.70% 2,448 1,165 3,613
Loans:
Real Estate 855,632 27,567 4.31% 771,407 24,284 4.21% 2,703 580 3,283
Commercial 85,148 2,930 4.60% 158,691 4,967 4.18% (2,490) 453 (2,037)
Consumer 50,808 1,906 5.02% 65,426 2,653 5.42% (560) (187) (747)
Total Loans 991,588 32,403 4.37% 995,524 31,904 4.28% (347) 846 499
Fed Funds Sold 118,228 662 0.75% 94,502 78 0.11% 24 560 584
Other interest-bearing
deposits 196,801 973 0.66% 118,331 94 0.11% 99 780 879
Total Earning Assets 1,712,756 40,700 3.18% 1,448,166
35,126 3.24% 2,224 3,351 5,575
Less: Allowance for Loan
Losses (5,806) (5,618)
Total Non-Earning Assets 124,518 104,539
Total Assets $1,831,468 $1,547,087
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest Bearing
Liabilities:
Interest Bearing
Deposits:
Interest Checking $411,504 $175 0.06% $333,193 $191 0.08% $39 $(55) $(16)
Money Market and Savings
Deposits 584,597 1,470 0.34% 484,742 1,407 0.39% 266 (203) 63
Time Deposits 151,045 499 0.44% 148,715 886 0.80% 14 (401) (387)
Total Interest-Bearing
Deposits 1,147,146 2,144 0.25% 966,650 2,484 0.34% 319 (659) (340)
Borrowings - - - 31,967 (280) -1.17% 280 - 280
Junior subordinated debt 3,383 148 5.85% 2,324 99 - 46 3 49
Total Interest-Bearing
Liabilities 1,150,529 2,292 0.27% 1,000,941 2,303 0.31% 645 (656) (11)
Non-Interest-Bearing
Liabilities:
Demand deposits 524,592 402,163
Other liabilities 10,107 10,617
Total Liabilities 1,685,228 1,413,721
Shareholders' Equity 146,240 133,366
Total Liabilities &
Shareholders' Equity $1,831,468 $1,547,087
Net Interest Income
(FTE) $38,408 $32,823 $1,579 $4,007 $5,586
Interest Rate Spread 2 2.91% 2.94%
Cost of Funds 0.18% 0.22%
Interest Expense as a
Percentage of Average
Earning Assets 0.18% 0.21%
Net Interest Margin
(FTE) 3 3.00% 3.03%
(1)
Tax-exempt income for investment securities has been adjusted to a fully
tax-equivalent basis (FTE), using a Federal income tax rate of 21%. Refer to the
Reconcilement of Non-GAAP Measures table within the Non-GAAP Presentations
earlier in this section.
(2)
Interest spread is the average yield earned on earning assets less the average
rate paid on interest-bearing liabilities.
(3)
Net interest margin (FTE) is net interest income expressed as a percentage of
average earning assets.
(4)
The impact on the net interest income (FTE) resulting from changes in average
balances and average rates is shown for the period indicated. The change in
interest due to both volume and rate has been allocated to volume and rate
changes in proportion to the relationship of the absolute dollar amounts of the
change in each.
50
--------------------------------------------------------------------------------Provision for loan losses
A provision for loan losses of$39 thousand was recognized during the three months endedSeptember 30, 2022 compared to$267 thousand recognized during the three months endedSeptember 30, 2021 . A recovery of provision for loan losses of$30 thousand was recognized during the nine months endedSeptember 30, 2022 compared to a provision for loan losses recognized of$477 thousand during the nine months endedSeptember 30, 2021 . The period-end ALLL as a percentage of total loans was 0.58% as ofSeptember 30, 2022 , 0.56% as ofDecember 31, 2021 and 0.51% as ofSeptember 30, 2021 . The total of the ALLL and the fair value mark as a percentage of gross loans (a non-GAAP financial measure) amounted to 2.38% as ofSeptember 30, 2022 , compared to 2.30% as ofDecember 31, 2021 and 2.24% as ofSeptember 30, 2021 . Further discussion of management's assessment of the ALLL is provided earlier in the report and in Note 5 - Allowance for Loan Losses, found in the Notes to the Consolidated Financial Statements. In management's opinion, the allowance was adequately provided for atSeptember 30, 2022 . The ALLL calculation, provision for loan losses, asset quality and collateral values may be significantly impacted by deterioration in economic conditions. We have downgraded, then upgraded slightly, the qualitative factors pertaining to economic conditions within our ALLL methodology; should economic conditions worsen, we could experience further increases in our required ALLL and record additional provision for loan loss exposure.
Noninterest income
The components of noninterest income for the three months ended
For the Three Months Ended Variance
September 30, September 30,
2022 2021 $ %
Noninterest income:
Wealth management fees $ 590 $ 744 $ (154 ) -20.7 %
Advisory and brokerage income 213 358 (145 ) -40.5 %
Deposit account fees 443 396 47 11.9 %
Debit/credit card and ATM fees 660 808 (148 ) -18.3 %
Bank owned life insurance income 252 201 51 25.4 %
Gains on sale of assets 4 - 4 100.0 %
Other 138 971 (833 ) -85.8 %
Total noninterest income $ 2,300 $ 3,478 $ (1,178 ) -33.9 %
Noninterest income for the three months ended September 30, 2022 of $2.3 million
was $1.2 million or 33.9% lower than the amount recorded for the three months
ended September 30, 2021 . Noninterest income decreased predominantly due to the
prior period Other Income, as reported on the consolidated statements of income,
including a second partial recovery of $401 thousand of unearned insurance
premiums related to the loss of insurance on the student loan portfolio and a
recovery of $312 thousand from a TFB loan that was charged off prior to April 1,
2021 . In addition, wealth management fees, advisory and brokerage fees and
debit/credit card/ATM fees have each decreased approximately $150 thousand over
the prior period due to an anticipated reduction in the number of accounts in
each area.
The components of noninterest income for the nine months ended
For the Nine Months Ended Variance
September 30, September 30,
2022 2021 $ %
Noninterest income:
Wealth management fees $ 1,719 $ 2,053 $ (334 ) -16.3 %
Advisory and brokerage income 639 908 (269 ) -29.6 %
Deposit account fees 1,366 982 384 39.1 %
Debit/credit card and ATM fees 2,146 1,561 585 37.5 %
Bank owned life insurance income 709 507 202 39.8 %
Resolution of commercial dispute 2,400 - 2,400 N/A
Gain on sale of assets 1,117 - 1,117 N/A
Other 637 1,426 (789 ) -55.3 %
Total noninterest income $ 10,733 $ 7,437 $ 3,296 44.3 %
51-------------------------------------------------------------------------------- Noninterest income for the nine months endedSeptember 30, 2022 of$10.7 million was$3.3 million or 44.3% higher than the amount recorded for the nine months endedSeptember 30, 2021 . Noninterest income increased predominantly due to the receipt and recognition of a$2.4 million one-time payment to resolve a commercial dispute, the$1.1 million gain on the sale of two buildings and an increase of$585 thousand of debit/credit card and ATM fees due to increased number of retail accounts as a result of the Merger.
Noninterest expense
The components of noninterest expense for the three months ended
For the Three Months Ended Variance
September 30, September 30,
2022 2021 $ %
Noninterest expense:
Salaries and employee benefits $ 4,252 $ 4,562 $ (310 ) -6.8 %
Net occupancy 1,318 1,039 279 26.9 %
Equipment 249 205 44 21.5 %
Bank franchise tax 304 320 (16 ) -5.0 %
Computer software 287 361 (74 ) -20.5 %
Data processing 712 1,114 (402 ) -36.1 %
FDIC deposit insurance assessment 70 349 (279 ) -79.9 %
Marketing, advertising and promotion 347 337 10 3.0 %
Merger and merger-related expenses - 1,935 (1,935 ) -100.0 %
Debit/credit card and ATM expenses 91 212 (121 ) -57.1 %
Professional fees 310 186 124 66.7 %
Core deposit intangible amortization 415 417 (2 ) -0.5 %
Other 1,148 1,787 (639 ) -35.8 %
Total noninterest expense $ 9,503 $ 12,824 $ (3,321 ) -25.9 %
Noninterest expense for the quarter ended September 30, 2022 of $9.5 million was
$3.3 million or 25.9% lower than the quarter ended September 30, 2021 . This
decrease is due to merger and merger-related expenses incurred during the nine
months ended September 30, 2021 of $1.9 million , a reduction in salaries and
employee benefits of $310 thousand as a result of reduced headcount and a $402
thousand reduction in data processing costs as a result of efficiencies gained
in connection with the Merger.
The components of noninterest expense for the nine months ended
For the Nine Months Ended Variance
September 30, September 30,
2022 2021 $ %
Noninterest expense:
Salaries and employee benefits $ 13,069 $ 11,705 $ 1,364 11.7 %
Net occupancy 3,797 2,643 1,154 43.7 %
Equipment 786 661 125 18.9 %
Bank franchise tax 912 922 (10 ) -1.1 %
Computer software 907 744 163 21.9 %
Data processing 2,149 2,397 (248 ) -10.3 %
FDIC deposit insurance assessment 421 594 (173 ) -29.1 %
Marketing, advertising and promotion 873 706 167 23.7 %
Merger and merger-related expenses - 8,087 (8,087 ) -100.0 %
Debit/credit card and ATM expenses 322 589 (267 ) -45.3 %
Professional fees 1,051 873 178 20.4 %
Core deposit intangible amortization 1,281 845 436 51.6 %
Other 3,472 2,832 640 22.6 %
Total noninterest expense $ 29,040 $ 33,598 $ (4,558 ) -13.6 %
52-------------------------------------------------------------------------------- Noninterest expense for the nine months endedSeptember 30, 2022 of$29.0 million was$4.6 million or 13.6% lower than the nine months endedSeptember 30, 2021 . This decrease is due to merger and merger-related expenses incurred during the nine months endedSeptember 30, 2021 of$8.1 million , offset by increases in the following areas due to the Merger being effectiveApril 1, 2021 : 1) salaries and employee benefits increased$1.4 million , 2) net occupancy increased$1.2 million , and 3) core deposit intangible amortization increased$436 thousand . In addition, the Company incurred$685 thousand in expenses in the first quarter of 2022, included in other noninterest expense, related to the one-time payment to resolve a commercial dispute noted in the Noninterest income section earlier. The efficiency ratio (FTE) of 57.0% for the three months endedSeptember 30, 2022 compared favorably to the 75.2% for the same quarter of 2021, due to the increase in net interest income (FTE) and the decrease in noninterest expense, as described above. The efficiency ratio (FTE) of 59.1% for the nine months endedSeptember 30, 2022 also compared favorably to the 83.5% for the nine months endedSeptember 30, 2021 for the same reasons. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP efficiency ratio.
Provision for Income Taxes
For the three months endedSeptember 30, 2022 and 2021, the Company provided$1.3 million and$753 thousand for Federal income taxes, respectively, resulting in effective income tax rates of 18.0% and 19.4%, respectively. For the nine months endedSeptember 30, 2022 and 2021, the Company provided$3.5 million and$1.2 million for Federal income taxes, respectively, resulting in effective income tax rates of 17.6% and 20.0%, respectively. The effective income tax rate for the current quarter and current year-to-date was lower than the prior year, due to the non-deductibility of certain merger and merger-related expenses in the prior year. For all periods, the effective income tax rate differed from theU.S. statutory rate of 21% due to the effect of tax-exempt income from life insurance policies and municipal bonds and the recognition of low-income housing tax credits. OTHER SIGNIFICANT EVENTS None
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