UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
___________
FORM 10-Q
___________
(Mark One) | ||
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | ||
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from |
Commission File Number:000-55117
VIRGINIA NATIONAL BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Virginia | ||
(State or other jurisdiction of | ||
incorporation or organization) | ||
404 People Place, Charlottesville, Virginia | ||
(Address of principal executive offices) | 46-2331578 (I.R.S. Employer 22911 |
(434) 817-8621
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒ Yes ☐No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ | ||||
Non-accelerated filer | ☐ | Smaller reporting company | ☒ | ||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of November 7, 2017:August 6, 2019:
Class of Stock | Shares Outstanding | |
Common Stock, Par Value $2.50 | 2,688,005 |
VIRGINIA NATIONAL BANKSHARES CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Part I. Financial Information | ||||||
Item 1 | Financial Statements | |||||
Consolidated Balance Sheets (unaudited) | Page 3 | |||||
Consolidated Statements of Income (unaudited) | Page 4 | |||||
Consolidated Statements of Comprehensive Income (unaudited) | Page 5 | |||||
Consolidated Statements of Changes in Shareholders’ Equity (unaudited) | Page 6 | |||||
Consolidated Statements of Cash Flows (unaudited) | Page 7 | |||||
Notes to Consolidated Financial Statements (unaudited) | Page 8 | |||||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | Page 31 | ||||
Application of Critical Accounting Policies and Estimates | Page 31 | |||||
Financial Condition | Page 32 | |||||
Results of Operations | Page 37 | |||||
Item 3 | Quantitative and Qualitative Disclosures About Market Risk | Page 44 | ||||
Item 4 | Controls and Procedures | Page 44 | ||||
Part II. Other Information | ||||||
Item | Legal Proceedings | Page 44 | ||||
Item | Risk Factors | Page 44 | ||||
Item | Unregistered Sales of Equity Securities and Use of Proceeds | Page 44 | ||||
Item | Defaults Upon Senior Securities | Page 44 | ||||
Item 4 | Mine Safety Disclosures | Page 45 | ||||
Item | Other Information | Page 45 | ||||
Item | Exhibits | Page 45 | ||||
Signatures | Page 46 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIRGINIA NATIONAL BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollarsDollars in thousands, except per share data)
September 30, 2017 | December 31, 2016 * | |||||||
ASSETS | (Unaudited) | |||||||
Cash and due from banks | $ | 7,143 | $ | 10,047 | ||||
Federal funds sold | 3,155 | 28,453 | ||||||
Securities: | ||||||||
Available for sale, at fair value | 71,049 | 56,662 | ||||||
Restricted securities, at cost | 2,709 | 1,709 | ||||||
Total securities | 73,758 | 58,371 | ||||||
Loans | 501,024 | 482,135 | ||||||
Allowance for loan losses | (3,824 | ) | (3,688 | ) | ||||
Loans, net | 497,200 | 478,447 | ||||||
Premises and equipment, net | 7,437 | 8,046 | ||||||
Bank owned life insurance | 14,229 | 13,917 | ||||||
Goodwill | 372 | 372 | ||||||
Other intangible assets, net | 604 | 680 | ||||||
Accrued interest receivable and other assets | 6,430 | 6,697 | ||||||
Total assets | $ | 610,328 | $ | 605,030 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Liabilities: | ||||||||
Demand deposits: | ||||||||
Noninterest-bearing | $ | 166,544 | $ | 176,098 | ||||
Interest-bearing | 98,528 | 96,869 | ||||||
Money market deposit accounts | 128,149 | 136,658 | ||||||
Certificates of deposit and other time deposits | 114,049 | 115,026 | ||||||
Total deposits | 507,270 | 524,651 | ||||||
Repurchase agreements and other borrowings | 37,001 | 19,700 | ||||||
Accrued interest payable and other liabilities | 1,208 | 1,625 | ||||||
Total liabilities | 545,479 | 545,976 | ||||||
Shareholders' equity: | ||||||||
Preferred stock, $2.50 par value, 2,000,000 shares authorized, no shares outstanding | - | - | ||||||
Common stock, $2.50 par value, 10,000,000 shares authorized; 2,410,680 and 2,368,777 issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 6,027 | 5,922 | ||||||
Capital surplus | 22,036 | 21,152 | ||||||
Retained earnings | 37,082 | 32,759 | ||||||
Accumulated other comprehensive loss | (296 | ) | (779 | ) | ||||
Total shareholders' equity | 64,849 | 59,054 | ||||||
Total liabilities and shareholders' equity | $ | 610,328 | $ | 605,030 |
*Derived from audited Consolidated Financial Statements
See Notes to Consolidated Financial Statements
June 30, 2019 | December 31, 2018 * | |||||||
ASSETS | (Unaudited) | |||||||
Cash and due from banks | $ | 12,483 | $ | 11,741 | ||||
Federal funds sold | 12,311 | 7,133 | ||||||
Securities: | ||||||||
Available for sale, at fair value | 56,848 | 61,392 | ||||||
Restricted securities, at cost | 1,684 | 1,683 | ||||||
Total securities | 58,532 | 63,075 | ||||||
Loans | 521,763 | 537,190 | ||||||
Allowance for loan losses | (4,817 | ) | (4,891 | ) | ||||
Loans, net | 516,946 | 532,299 | ||||||
Premises and equipment, net | 6,594 | 7,042 | ||||||
Bank owned life insurance | 16,190 | 16,790 | ||||||
Goodwill | 372 | 372 | ||||||
Other intangible assets, net | 441 | 477 | ||||||
Accrued interest receivable and other assets | 9,904 | 5,871 | ||||||
Total assets | $ | 633,773 | $ | 644,800 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Liabilities: | ||||||||
Demand deposits: | ||||||||
Noninterest-bearing | $ | 158,166 | $ | 185,819 | ||||
Interest-bearing | 97,620 | 106,884 | ||||||
Money market and savings deposit accounts | 175,740 | 171,299 | ||||||
Certificates of deposit and other time deposits | 121,993 | 108,531 | ||||||
Total deposits | 553,519 | 572,533 | ||||||
Accrued interest payable and other liabilities | 5,911 | 1,525 | ||||||
Total liabilities | 559,430 | 574,058 | ||||||
Commitments and contingent liabilities | ||||||||
Shareholders' equity: | ||||||||
Preferred stock, $2.50 par value, 2,000,000 shares authorized, no shares outstanding | - | - | ||||||
Common stock, $2.50 par value, 10,000,000 shares authorized; 2,560,138 and 2,543,452 issued and outstanding at June 30, 2019 and December 31, 2018, respectively | 6,400 | 6,359 | ||||||
Capital stock dividend distributable | 320 | - | ||||||
Capital surplus | 32,138 | 27,013 | ||||||
Retained earnings | 35,522 | 38,647 | ||||||
Accumulated other comprehensive loss | (37 | ) | (1,277 | ) | ||||
Total shareholders' equity | 74,343 | 70,742 | ||||||
Total liabilities and shareholders' equity | $ | 633,773 | $ | 644,800 |
* | Derived from audited Consolidated Financial Statements |
VIRGINIA NATIONAL BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(dollarsDollars in thousands, except per share data)
(Unaudited)
For the three months ended | For the nine months ended | For the three months ended | For the six months ended | ||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | June 30, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | ||||||||||||||||||||||
Interest and dividend income: | |||||||||||||||||||||||||||||
Loans, including fees | $ | 5,348 | $ | 4,385 | $ | 15,454 | $ | 13,012 | $ | 6,105 | $ | 5,935 | $ | 12,202 | $ | 11,649 | |||||||||||||
Federal funds sold | 30 | 45 | 208 | 101 | 74 | 39 | 93 | 74 | |||||||||||||||||||||
Investment securities: | |||||||||||||||||||||||||||||
Taxable | 328 | 237 | 838 | 762 | 246 | 271 | 498 | 549 | |||||||||||||||||||||
Tax exempt | 78 | 78 | 203 | 242 | 76 | 86 | 157 | 171 | |||||||||||||||||||||
Dividends | 23 | 23 | 69 | 67 | 31 | 33 | 57 | 61 | |||||||||||||||||||||
Other | 1 | 3 | 7 | 7 | |||||||||||||||||||||||||
Total interest and dividend income | 5,808 | 4,771 | 16,779 | 14,191 | 6,532 | 6,364 | 13,007 | 12,504 | |||||||||||||||||||||
Interest expense: | |||||||||||||||||||||||||||||
Demand and savings deposits | 108 | 68 | 341 | 203 | 463 | 264 | 844 | 496 | |||||||||||||||||||||
Certificates and other time deposits | 179 | 157 | 516 | 474 | 586 | 262 | 1,045 | 402 | |||||||||||||||||||||
Repurchase agreements and other borrowings | 38 | 9 | 58 | 33 | 22 | 146 | 89 | 218 | |||||||||||||||||||||
Total interest expense | 325 | 234 | 915 | 710 | 1,071 | 672 | 1,978 | 1,116 | |||||||||||||||||||||
Net interest income | 5,483 | 4,537 | 15,864 | 13,481 | 5,461 | 5,692 | 11,029 | 11,388 | |||||||||||||||||||||
Provision for (recovery of) loan losses | 168 | 104 | 213 | (291 | ) | (64 | ) | 701 | 620 | 605 | |||||||||||||||||||
Net interest income after provision for (recovery of) loan losses | 5,315 | 4,433 | 15,651 | 13,772 | 5,525 | 4,991 | 10,409 | 10,783 | |||||||||||||||||||||
Noninterest income: | |||||||||||||||||||||||||||||
Trust income | 394 | 388 | 1,171 | 1,174 | 402 | 427 | 749 | 841 | |||||||||||||||||||||
Advisory and brokerage income | 132 | 106 | 387 | 287 | 156 | 142 | 292 | 282 | |||||||||||||||||||||
Royalty income | 22 | 11 | 198 | 20 | 4 | 34 | 8 | 552 | |||||||||||||||||||||
Customer service fees | 225 | 240 | 678 | 686 | |||||||||||||||||||||||||
Deposit account fees | 192 | 236 | 373 | 483 | |||||||||||||||||||||||||
Debit/credit card and ATM fees | 206 | 223 | 650 | 653 | 189 | 204 | 346 | 391 | |||||||||||||||||||||
Earnings/increase in value of bank owned life insurance | 103 | 111 | 312 | 331 | 466 | 111 | 576 | 220 | |||||||||||||||||||||
Fees on mortgage sales | 55 | 41 | 104 | 156 | 56 | 46 | 86 | 82 | |||||||||||||||||||||
Gains (losses) on sales and calls of securities | (78 | ) | 181 | (74 | ) | 189 | |||||||||||||||||||||||
Gains (losses) on sales of other assets | - | 6 | - | (21 | ) | ||||||||||||||||||||||||
Gains on sales of securities | 64 | - | 64 | - | |||||||||||||||||||||||||
Losses on sales of other assets | - | - | - | (33 | ) | ||||||||||||||||||||||||
Other | 99 | 106 | 308 | 312 | 171 | 107 | 265 | 203 | |||||||||||||||||||||
Total noninterest income | 1,158 | 1,413 | 3,734 | 3,787 | 1,700 | 1,307 | 2,759 | 3,021 | |||||||||||||||||||||
Noninterest expense: | |||||||||||||||||||||||||||||
Salaries and employee benefits | 1,998 | 1,939 | 5,770 | 5,704 | 2,321 | 1,982 | 4,667 | 3,973 | |||||||||||||||||||||
Net occupancy | 461 | 465 | 1,390 | 1,413 | 444 | 449 | 923 | 930 | |||||||||||||||||||||
Equipment | 124 | 134 | 398 | 401 | 114 | 118 | 231 | 245 | |||||||||||||||||||||
Data processing | 330 | 295 | 646 | 547 | |||||||||||||||||||||||||
Other | 1,334 | 1,283 | 3,897 | 3,859 | 1,476 | 1,183 | 2,629 | 2,349 | |||||||||||||||||||||
Total noninterest expense | 3,917 | 3,821 | 11,455 | 11,377 | 4,685 | 4,027 | 9,096 | 8,044 | |||||||||||||||||||||
Income before income taxes | 2,556 | 2,025 | 7,930 | 6,182 | 2,540 | 2,271 | 4,072 | 5,760 | |||||||||||||||||||||
Provision for income taxes | 811 | 629 | 2,530 | 1,921 | 425 | 439 | 711 | 1,132 | |||||||||||||||||||||
Net income | $ | 1,745 | $ | 1,396 | $ | 5,400 | $ | 4,261 | $ | 2,115 | $ | 1,832 | $ | 3,361 | $ | 4,628 | |||||||||||||
Net income per common share, basic | $ | 0.73 | $ | 0.59 | $ | 2.26 | $ | 1.80 | |||||||||||||||||||||
Net income per common share, diluted | $ | 0.72 | $ | 0.59 | $ | 2.24 | $ | 1.79 | |||||||||||||||||||||
Net income per common share, basic * | $ | 0.79 | $ | 0.69 | $ | 1.25 | $ | 1.74 | |||||||||||||||||||||
Net income per common share, diluted * | $ | 0.79 | $ | 0.68 | $ | 1.25 | $ | 1.72 | |||||||||||||||||||||
Weighted average common shares outstanding, basic * | 2,688,005 | 2,666,120 | 2,683,122 | 2,663,842 | |||||||||||||||||||||||||
Weighted average common shares outstanding, diluted * | 2,688,965 | 2,688,345 | 2,687,391 | 2,685,704 |
* | Share data has been retroactively adjusted to reflect the 5% stock dividend effective July 5, 2019. |
See Notes to Consolidated Financial Statements
VIRGINIA NATIONAL BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollarsDollars in thousands)
(Unaudited)
For the three months ended | For the nine months ended | For the three months ended | For the six months ended | ||||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | June 30, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | ||||||||||||||||||||||||
Net income | $ | 1,745 | $ | 1,396 | $ | 5,400 | $ | 4,261 | $ | 2,115 | $ | 1,832 | $ | 3,361 | $ | 4,628 | |||||||||||||||
Other comprehensive income (loss) | |||||||||||||||||||||||||||||||
Unrealized gain (loss) on securities, net of tax of ($105) and $224 for the three and nine months ended September 30, 2017; and net of tax of $54 and $388 for the three and nine months ended September 30, 2016 | (206 | ) | 104 | 434 | 756 | ||||||||||||||||||||||||||
Unrealized gain (loss) on securities, net of tax of $141 and $342 for the three and six months ended June 30, 2019; and net of tax of ($29) and ($226) for the three and six months ended June 30, 2018 | 537 | (105 | ) | 1,291 | (848 | ) | |||||||||||||||||||||||||
Reclassification adjustment net of tax of $27 and $25 for the three and nine months ended September 30, 2017; and net of tax of ($62) and ($64) for the three and nine months ended September 30, 2016 | 51 | (119 | ) | 49 | (125 | ) | |||||||||||||||||||||||||
Reclassification adjustment for realized gains on sales of securities, net of tax of ($13) and ($13) for the three and six months ended June 30, 2019; and net of tax of $0 and $0 for the three and six months ended June 30, 2018 | (51 | ) | - | (51 | ) | - | |||||||||||||||||||||||||
Total other comprehensive income (loss) | (155 | ) | (15 | ) | 483 | 631 | 486 | (105 | ) | 1,240 | (848 | ) | |||||||||||||||||||
Total comprehensive income | $ | 1,590 | $ | 1,381 | $ | 5,883 | $ | 4,892 | $ | 2,601 | $ | 1,727 | $ | 4,601 | $ | 3,780 |
See Notes to Consolidated Financial Statements
VIRGINIA NATIONAL BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINETHREE AND SIX MONTHS ENDED SEPTEMBERJUNE 30, 20172019 AND 20162018
(dollarsDollars in thousands, except per share data)
(Unaudited)
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||
Other | Other | |||||||||||||||||||||||||||||||||||||
Common | Capital | Retained | Comprehensive | Common | Capital | Retained | Comprehensive | |||||||||||||||||||||||||||||||
Stock | Surplus | Earnings | Income (Loss) | Total | Stock * | Surplus * | Earnings | Income (Loss) | Total | |||||||||||||||||||||||||||||
Balance, December 31, 2015 | $ | 6,031 | $ | 22,214 | $ | 28,170 | $ | (118 | ) | $ | 56,297 | |||||||||||||||||||||||||||
Balance, December 31, 2017 | $ | 6,027 | $ | 22,038 | $ | 37,923 | $ | (883 | ) | 65,105 | ||||||||||||||||||||||||||||
Stock options exercised | 28 | 151 | - | - | 179 | 16 | 128 | - | - | 144 | ||||||||||||||||||||||||||||
Stock purchased under stock repurchase plan | (137 | ) | (1,123 | ) | - | - | (1,260 | ) | ||||||||||||||||||||||||||||||
Stock option expense | - | 20 | - | - | 20 | - | 1 | - | - | 1 | ||||||||||||||||||||||||||||
Cash dividends declared ($0.36 per share) | - | - | (850 | ) | - | (850 | ) | |||||||||||||||||||||||||||||||
Stock dividend distributable * | 301 | 4,673 | (4,974 | ) | - | - | ||||||||||||||||||||||||||||||||
Cash dividends declared ($0.19 per share) | - | - | (482 | ) | - | (482 | ) | |||||||||||||||||||||||||||||||
Net income | - | - | 2,796 | - | 2,796 | |||||||||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | (743 | ) | (743 | ) | |||||||||||||||||||||||||||||||
Balance, March 31, 2018 | $ | 6,344 | $ | 26,840 | $ | 35,263 | $ | (1,626 | ) | $ | 66,821 | |||||||||||||||||||||||||||
Stock options exercised | 9 | 65 | - | - | 74 | |||||||||||||||||||||||||||||||||
Stock option expense | - | 16 | - | - | 16 | |||||||||||||||||||||||||||||||||
Cash dividends declared ($0.30 per share) | - | - | (763 | ) | - | (763 | ) | |||||||||||||||||||||||||||||||
Net income | - | - | 1,832 | - | 1,832 | |||||||||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | (105 | ) | (105 | ) | |||||||||||||||||||||||||||||||
Balance, June 30, 2018 | $ | 6,353 | $ | 26,921 | $ | 36,332 | $ | (1,731 | ) | $ | 67,875 | |||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||||||||
Common | Capital | Retained | Comprehensive | |||||||||||||||||||||||||||||||||||
Stock ** | Surplus ** | Earnings | Income (Loss) | Total | ||||||||||||||||||||||||||||||||||
Balance, December 31, 2018 | $ | 6,359 | $ | 27,013 | $ | 38,647 | $ | (1,277 | ) | 70,742 | ||||||||||||||||||||||||||||
Stock options exercised | 14 | 88 | - | - | 102 | |||||||||||||||||||||||||||||||||
Stock option expense | - | 24 | - | - | 24 | |||||||||||||||||||||||||||||||||
Stock grants | 27 | 397 | - | - | 424 | |||||||||||||||||||||||||||||||||
Cash dividends declared ($0.30 per share) | - | - | (767 | ) | - | (767 | ) | |||||||||||||||||||||||||||||||
Net income | - | - | 4,261 | - | 4,261 | - | - | 1,246 | - | 1,246 | ||||||||||||||||||||||||||||
Other comprehensive income | - | - | - | 631 | 631 | - | - | - | 754 | 754 | ||||||||||||||||||||||||||||
Balance, September 30, 2016 | $ | 5,922 | $ | 21,262 | $ | 31,581 | $ | 513 | $ | 59,278 | ||||||||||||||||||||||||||||
Balance, December 31, 2016 | $ | 5,922 | $ | 21,152 | $ | 32,759 | $ | (779 | ) | $ | 59,054 | |||||||||||||||||||||||||||
Stock options exercised | 105 | 876 | - | - | 981 | |||||||||||||||||||||||||||||||||
Balance, March 31, 2019 | $ | 6,400 | $ | 27,522 | $ | 39,126 | $ | (523 | ) | $ | 72,525 | |||||||||||||||||||||||||||
Stock option expense | - | 8 | - | - | 8 | - | 23 | - | - | 23 | ||||||||||||||||||||||||||||
Cash dividends declared ($0.45 per share) | - | - | (1,077 | ) | - | (1,077 | ) | |||||||||||||||||||||||||||||||
Stock dividend distributable ** | 320 | 4,593 | (4,913 | ) | - | - | ||||||||||||||||||||||||||||||||
Cash dividends declared ($0.30 per share) | - | - | (806 | ) | - | (806 | ) | |||||||||||||||||||||||||||||||
Net income | - | - | 5,400 | - | 5,400 | - | - | 2,115 | - | 2,115 | ||||||||||||||||||||||||||||
Other comprehensive income | - | - | - | 483 | 483 | - | - | - | 486 | 486 | ||||||||||||||||||||||||||||
Balance, September 30, 2017 | $ | 6,027 | $ | 22,036 | $ | 37,082 | $ | (296 | ) | $ | 64,849 | |||||||||||||||||||||||||||
Balance, June 30, 2019 | $ | 6,720 | $ | 32,138 | $ | 35,522 | $ | (37 | ) | $ | 74,343 |
* | Common stock and capital surplus as of March 31 and June 30, 2018 includes the 5% stock dividend distributed effective April 13, 2018. | |
** | Common stock and capital surplus as of June 30, 2019 includes the 5% stock dividend distributable effective July 5, 2019. |
See Notes to Consolidated Financial Statements
VIRGINIA NATIONAL BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
For the nine months ended | For the six months ended | |||||||||||||||
September 30, 2017 | September 30, 2016 | June 30, 2019 | June 30, 2018 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net income | $ | 5,400 | $ | 4,261 | $ | 3,361 | $ | 4,628 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Provision for (recovery of) loan losses | 213 | (291 | ) | |||||||||||||
Provision for loan losses | 620 | 605 | ||||||||||||||
Net amortization and accretion of securities | 327 | 335 | 133 | 140 | ||||||||||||
Net losses (gains) on sales and calls of securities | 74 | (189 | ) | |||||||||||||
Net gains on sale of securities | (64 | ) | - | |||||||||||||
Net losses on sales of assets | - | 21 | - | 33 | ||||||||||||
Earnings on bank owned life insurance | (312 | ) | (331 | ) | (576 | ) | (221 | ) | ||||||||
Amortization of intangible assets | 87 | 68 | 51 | 58 | ||||||||||||
Depreciation and other amortization | 858 | 879 | 532 | 565 | ||||||||||||
Stock option/stock grant expense | 8 | 20 | ||||||||||||||
Decrease in accrued interest receivable and other assets | 18 | 302 | ||||||||||||||
Decrease in accrued interest payable and other liabilities | (205 | ) | (540 | ) | ||||||||||||
Stock option expense | 47 | 17 | ||||||||||||||
Stock grants, unrestricted | 424 | - | ||||||||||||||
Net change in: | ||||||||||||||||
Accrued interest receivable and other assets | (48 | ) | 208 | |||||||||||||
Accrued interest payable and other liabilities | 64 | (289 | ) | |||||||||||||
Net cash provided by operating activities | 6,468 | 4,535 | 4,544 | 5,744 | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Net increase in restricted investments | (1 | ) | (887 | ) | ||||||||||||
Purchases of available for sale securities | (45,290 | ) | (18,982 | ) | (6,946 | ) | - | |||||||||
Net increase in restricted investments | (1,000 | ) | (28 | ) | ||||||||||||
Proceeds from maturities, calls and principal payments of available for sale securities | 7,212 | 21,473 | 2,547 | 2,706 | ||||||||||||
Proceeds from sales of available for sale securities | 24,022 | 2,672 | 10,443 | - | ||||||||||||
Net increase in organic loans | (9,109 | ) | (14,545 | ) | ||||||||||||
Net (increase) decrease in purchased loans | (9,857 | ) | 7,322 | |||||||||||||
Net decrease (increase) in organic loans | 14,168 | (9,470 | ) | |||||||||||||
Net decrease in purchased loans | 565 | 3,299 | ||||||||||||||
Cash payment for wealth management book of business | (300 | ) | (700 | ) | (50 | ) | (100 | ) | ||||||||
Proceeds from settlement of bank owned life insurance | 1,176 | - | ||||||||||||||
Purchase of bank premises and equipment | (249 | ) | (477 | ) | (84 | ) | (357 | ) | ||||||||
Net cash used in investing activities | (34,571 | ) | (3,265 | ) | ||||||||||||
Net cash provided by (used in) investing activities | 21,818 | (4,809 | ) | |||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Net (decrease) increase in demand deposits, NOW accounts, and money market accounts | (16,404 | ) | 4,925 | |||||||||||||
Net (decrease) increase in certificates of deposit and other time deposits | (977 | ) | 3,787 | |||||||||||||
Net decrease in demand deposits, NOW accounts, and money market accounts | (32,476 | ) | (28,472 | ) | ||||||||||||
Net increase in certificates of deposit and other time deposits | 13,462 | 22,256 | ||||||||||||||
Net decrease in repurchase agreements | (7,699 | ) | (9,616 | ) | - | (5,705 | ) | |||||||||
Net increase in short term borrowings | 25,000 | - | ||||||||||||||
Common stock repurchased | - | (1,260 | ) | |||||||||||||
Net increase in other short term borrowings | - | 20,000 | ||||||||||||||
Proceeds from stock options exercised | 981 | 179 | 102 | 218 | ||||||||||||
Cash dividends paid | (1,000 | ) | (784 | ) | (1,530 | ) | (941 | ) | ||||||||
Net cash used in financing activities | (99 | ) | (2,769 | ) | (20,442 | ) | 7,356 | |||||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | $ | (28,202 | ) | $ | (1,499 | ) | $ | 5,920 | $ | 8,291 | ||||||
CASH AND CASH EQUIVALENTS: | ||||||||||||||||
Beginning of period | $ | 38,500 | $ | 43,527 | $ | 18,874 | $ | 18,277 | ||||||||
End of period | $ | 10,298 | $ | 42,028 | $ | 24,794 | $ | 26,568 | ||||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||||||||||
Cash payments for: | ||||||||||||||||
Interest | $ | 899 | $ | 708 | $ | 1,904 | $ | 1,048 | ||||||||
Taxes | $ | 2,900 | $ | 2,029 | $ | 1,150 | $ | 1,415 | ||||||||
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES | ||||||||||||||||
Unrealized gain on available for sale securities | $ | 732 | $ | 955 | ||||||||||||
Unrealized gain (loss) on available for sale securities | $ | 1,569 | $ | (1,074 | ) | |||||||||||
Initial right-of-use assets obtained in exchange for new operating lease liabilities | $ | 4,279 | $ | - |
See Notes to Consolidated Financial Statements
VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SeptemberJune 30, 20172019
Note 1. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Virginia National Bankshares Corporation (the “Company”), and its subsidiarysubsidiaries Virginia National Bank (the “Bank”) and Masonry Capital Management, LLC (“Masonry Capital”), and the Bank’s subsidiary,a registered investment adviser. Effective July 1, 2018, VNBTrust, National Association which offers(“VNBTrust”), formerly a subsidiary of the Bank, was merged into Virginia National Bank, and the Bank continued to offer investment management, wealth advisory and trust and estate administration services under the name of VNB Wealth Management, (“VNBTrust”also referred to herein as “VNB Wealth.” All references herein to VNB Wealth Management or “VNB Wealth”).VNB Wealth refer to VNBTrust for periods prior to July 1, 2018. In 2019, the services offered by VNB Wealth are provided by Masonry Capital or by the Bank under VNB Trust & Estate Services or VNB Investment Services. All significant intercompany balances and transactions have been eliminated in consolidation.
The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included.
The preparation of financial statements in conformity with GAAP and the reporting guidelines prescribed by regulatory authorities requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses (including impaired loans), other-than-temporary impairment of securities, intangible assets, and fair value measurements, and deferred tax assets.measurements. Operating results for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20172019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2019.
The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2016.2018. If needed, certain previously reported amounts have been reclassified to conform to current period presentation. No such reclassifications were significant.
Adoption of New Accounting Standard
Accounting Standards Update (ASU) 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employer Share-Based Payment Accounting,” became effective with the quarter ended March 31, 2017. This ASU simplifies several aspects of the accounting for share-based payment award transactions, one of which is the recognition of excess tax benefits and deficiencies related to share-based payments. Prior to the adoption of ASU 2016-09, such tax consequences were recognized as components of additional paid-in capital. With the adoption of this ASU, tax benefits and deficiencies are recognized within income tax expense. In accordance with the adoption provisions of ASU 2016-09, the Company has prospectively applied the requirement to present excess tax benefits as an operating activity on the statement of cash flows. Further, the Company continues to estimate the number of award forfeitures in recording costs for share-based awards. The adoption did not have a material impact on our financial statements for the nine months ended September 30, 2017.
Recent Accounting Pronouncements
In January 2016, the FASB issued ASU 2016-01, “FinancialFinancial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 3) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and 4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.
Credit LossesIn February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, “Revenue from Contracts with Customers.” The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is in the early stages of assessing the impact that ASU 2016-02 will have on its consolidated financial statements, including evaluating leases and contracts which are covered and calculating the impact on its assets and liabilities. The Company does not expect the amendment to have a material impact on its net income but does anticipate an increase in assets and liabilities due to the recognition of the required right-of-use asset and corresponding liability for all lease obligations that are currently classified as operating leases, primarily real estate leases for office space, as well as additional disclosure on all our lease obligations.
During June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. However, on July 17, 2019, the FASB Board decided to delay the effective date of this ASU for smaller reporting companies, such as the Company. The FASB Board directed its staff to draft a proposed Accounting Standards Update for vote by written ballot on the proposed amendment regarding the CECL effective date. If the proposed amendment is approved, the effective date for the Company will extend to fiscal years beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. Early in 2017, the Company formed a cross-functional steering committee, including some members of senior management, to provide governance and guidance over the project plan. The steering committee has begunmeets regularly to address the compliance requirements, data requirements and sources, and analysis efforts which will bethat are required to adopt these new requirements. In addition to attending seminars and webinars on this topic with regulators and other experts, the committee is working closely with the Company’s vendor to gather additional loan data which is anticipated to be needed for this calculation.calculation and is attending training sessions on the software to be utilized to calculate the expected credit losses. The extent of the change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions and forecasts at that time. Upon adoption, the impact to the allowance for credit losses (currently allowance for loan losses) will have an offsetting one-time cumulative-effect adjustment to retained earnings.
During August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.
During January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business – inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. Goodwill Impairment TestingIn addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output, and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.
During January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
During March 2017,Disclosure Framework - Changes to the Disclosure Requirements for Fair Value MeasurementIn August 2018, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in this ASU shortenTopic 820 to add disclosures regarding changes in unrealized gains and losses, the amortization period for certain callable debt securities purchased at a premium. Upon adoptionrange and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity.narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2018,2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.
Financial Instruments – Credit Losses – Derivatives and HedgingIn April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” This ASU clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including improvements resulting from various Transition Resource Group meetings. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle.permitted. The Company is currently assessing the impact that ASU 2017-082019-04 will have on its consolidated financial statements.
DuringFinancial Instruments – Credit Losses – Targeted Transition ReliefIn May 2017,2019, the FASB issued ASU 2017-09, “Compensation – Stock Compensation2019-05, “Financial Instruments—Credit Losses (Topic 718)326): Scope of Modification Accounting.Targeted Transition Relief.” The amendments in this ASU provide guidanceentities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on determining whichan instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718.in fair value flowing through earnings. The amendments are effective for all entities for annual periods, includingfiscal years beginning after December 15, 2019, and interim periods within those annual periods, beginning after December 15, 2017.fiscal years. The amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the balance sheet. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued.permitted. The Company is currently assessing the impact that ASU 2017-092019-05 will have on its consolidated financial statements.
During August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company does not expect the adoption of ASU 2017-12 to have a material impact on its consolidated financial statements.
Note 2. Securities
The amortized cost and fair values of securities available for sale as of SeptemberJune 30, 20172019 and December 31, 20162018 were as follows (dollars in thousands):
September 30, 2017 | Amortized | Gross Unrealized | Gross Unrealized | Fair | ||||||||||||||||||||||
June 30, 2019 | Amortized | Gross Unrealized | Gross Unrealized | Fair | ||||||||||||||||||||||
Cost | Gains | (Losses) | Value | Cost | Gains | (Losses) | Value | |||||||||||||||||||
U.S. Government agencies | $ | 19,500 | $ | - | $ | (334 | ) | $ | 19,166 | $ | 19,500 | $ | - | $ | (39 | ) | $ | 19,461 | ||||||||
Mortgage-backed securities/CMOs | 31,819 | 2 | (197 | ) | 31,624 | 26,611 | 23 | (169 | ) | 26,465 | ||||||||||||||||
Municipal bonds | 20,178 | 125 | (44 | ) | 20,259 | 10,785 | 143 | (6 | ) | 10,922 | ||||||||||||||||
Total Securities Available for Sale | $ | 56,896 | $ | 166 | $ | (214 | ) | $ | 56,848 | |||||||||||||||||
$ | 71,497 | $ | 127 | $ | (575 | ) | $ | 71,049 | ||||||||||||||||||
December 31, 2016 | Amortized | Gross Unrealized | Gross Unrealized | Fair | ||||||||||||||||||||||
December 31, 2018 | Amortized | Gross Unrealized | Gross Unrealized | Fair | ||||||||||||||||||||||
Cost | Gains | (Losses) | Value | Cost | Gains | (Losses) | Value | |||||||||||||||||||
U.S. Government agencies | $ | 14,998 | $ | - | $ | (497 | ) | $ | 14,501 | $ | 19,500 | $ | - | $ | (526 | ) | $ | 18,974 | ||||||||
Corporate bonds | 2,017 | - | (7 | ) | 2,010 | |||||||||||||||||||||
Mortgage-backed securities/CMOs | 25,470 | 27 | (515 | ) | 24,982 | 25,901 | 1 | (839 | ) | 25,063 | ||||||||||||||||
Municipal bonds | 15,357 | 30 | (218 | ) | 15,169 | 17,608 | 12 | (265 | ) | 17,355 | ||||||||||||||||
$ | 57,842 | $ | 57 | $ | (1,237 | ) | $ | 56,662 | ||||||||||||||||||
Total Securities Available for Sale | $ | 63,009 | $ | 13 | $ | (1,630 | ) | $ | 61,392 |
As of SeptemberJune 30, 2017,2019, there were $55.1$36.9 million, or 4527 issues of individual securities, in a loss position. These securities have an unrealized loss of $575$214 thousand and consisted of 2319 mortgage-backed/CMOs, 7 agency4 municipal bonds, and 15 municipal4 agency bonds.
The following table summarizes all securities with unrealized losses, segregated by length of time in a continuous unrealized loss position, at SeptemberJune 30, 20172019, and December 31, 20162018 (dollars in thousands):
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||
June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or more | Total | Less than 12 Months | 12 Months or more | Total | |||||||||||||||||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | Unrealized | Unrealized | Unrealized | |||||||||||||||||||||||||||||||||||||
Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||||||||||||||
U.S. Government agencies | $ | 9,931 | $ | (69 | ) | $ | 9,235 | $ | (265 | ) | $ | 19,166 | $ | (334 | ) | $ | - | $ | - | $ | 11,961 | $ | (39 | ) | $ | 11,961 | $ | (39 | ) | |||||||||||||
Mortgage-backed/CMOs | 23,918 | (147 | ) | 2,145 | (50 | ) | 26,063 | (197 | ) | 4,041 | (7 | ) | 19,374 | (162 | ) | 23,415 | (169 | ) | ||||||||||||||||||||||||
Municipal bonds | 9,279 | (37 | ) | 612 | (7 | ) | 9,891 | (44 | ) | 1,048 | (5 | ) | 503 | (1 | ) | 1,551 | (6 | ) | ||||||||||||||||||||||||
$ | 43,128 | $ | (253 | ) | $ | 11,992 | $ | (322 | ) | $ | 55,120 | $ | (575 | ) | $ | 5,089 | $ | (12 | ) | $ | 31,838 | $ | (202 | ) | $ | 36,927 | $ | (214 | ) | |||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or more | Total | Less than 12 Months | 12 Months or more | Total | |||||||||||||||||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | Unrealized | Unrealized | Unrealized | |||||||||||||||||||||||||||||||||||||
Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||||||||||||||
U.S. Government agencies | $ | 14,501 | $ | (497 | ) | $ | - | $ | - | $ | 14,501 | $ | (497 | ) | $ | - | $ | - | $ | 18,974 | $ | (526 | ) | $ | 18,974 | $ | (526 | ) | ||||||||||||||
Corporate bonds | 2,010 | (7 | ) | - | - | 2,010 | (7 | ) | ||||||||||||||||||||||||||||||||||
Mortgage-backed/CMOs | 18,980 | (441 | ) | 2,629 | (74 | ) | 21,609 | (515 | ) | - | - | 24,657 | (839 | ) | 24,657 | (839 | ) | |||||||||||||||||||||||||
Municipal bonds | 10,382 | (218 | ) | - | - | 10,382 | (218 | ) | 4,983 | (34 | ) | 10,722 | (231 | ) | 15,705 | (265 | ) | |||||||||||||||||||||||||
$ | 45,873 | $ | (1,163 | ) | $ | 2,629 | $ | (74 | ) | $ | 48,502 | $ | (1,237 | ) | $ | 4,983 | $ | (34 | ) | $ | 54,353 | $ | (1,596 | ) | $ | 59,336 | $ | (1,630 | ) |
The Company’s securities portfolio is primarily made up of fixed rate bonds, the prices of which move inversely with interest rates. Any unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. At the end of any accounting period, the portfolio may have both unrealized gains and losses. Management does not believe any of the securities in an unrealized loss position are impaired due to credit quality. Accordingly, as of SeptemberJune 30, 2017,2019, management believes the impairments detailed in the table above are temporary, and no impairment loss has been realized in the Company’s consolidated income statement.
An “other-than-temporary impairment” (“OTTI”) is considered to exist if either of the following conditions are met: it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or the Company does not expect to recover the security’s entire amortized cost basis (even if the Company does not intend to sell). In the event that a security would suffer impairment for a reason that was “other than temporary,” the Company would be expected to write down the security’s value to its new fair value, and the amount of the write down would be included in earnings as a realized loss. As of SeptemberJune 30, 2017,2019, management has concluded that none of its investment securities have an OTTI based upon the information available. Additionally, management has the ability to hold any security with an unrealized loss until maturity or until such time as the value of the security has recovered from its unrealized loss position.
Securities having carrying values of $27.4$5.0 million at SeptemberJune 30, 20172019 were pledged as collateral to secure public deposits and repurchase agreements.deposits. At December 31, 2016,2018, securities having carrying values of $34.2$18.0 million were similarly pledged.
For the ninesix months ended SeptemberJune 30, 2017,2019, proceeds from the sales of securities amounted to $24.0$10.4 million, with grossand realized lossesgain on these securities of $74netted $64 thousand. For the ninesix months ended SeptemberJune 30, 2016, proceeds from the2018, there were no sales of securities amounted to $2.7 million, and gross realized gains on these securities were $44 thousand, and an additional $10.7 million in calls of securities accounted for the additional $145 thousand in realized gains.securities.
Restricted securities are securities with limited marketability and consist of stock in the Federal Reserve Bank of Richmond (“FRB”), the Federal Home Loan Bank of Atlanta (“FHLB”), and CBB Financial Corporation (“CBBFC”), the holding company for Community Bankers Bank. These restricted securities, totaling $2.7 million as of September 30, 2017 and $1.7 million as of both June 30, 2019 and December 31, 2016,2018 are carried at cost.
Note 3. Loans
The composition of the loan portfolio by loan classification at SeptemberJune 30, 20172019 and December 31, 20162018 appears below (dollars in thousands).
September 30, | December 31, | June 30, | December 31, | |||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
Commercial | ||||||||||||||||
Commercial and industrial - organic | $ | 42,230 | $ | 41,560 | $ | 39,376 | $ | 41,526 | ||||||||
Commercial and industrial - government guaranteed | 22,722 | 5,550 | 35,143 | 31,367 | ||||||||||||
Commercial and industrial - syndicated | 17,262 | 19,107 | 12,091 | 12,134 | ||||||||||||
Total commercial and industrial | 82,214 | 66,217 | 86,610 | 85,027 | ||||||||||||
Real estate construction and land | ||||||||||||||||
Residential construction | 2,310 | 395 | 1,021 | 1,552 | ||||||||||||
Commercial construction | 12,788 | 4,422 | 3,663 | 5,078 | ||||||||||||
Land and land development | 10,049 | 10,865 | 9,636 | 10,894 | ||||||||||||
Total construction and land | 25,147 | 15,682 | 14,320 | 17,524 | ||||||||||||
Real estate mortgages | ||||||||||||||||
1-4 family residential, first lien, investment | 39,251 | 37,538 | 40,807 | 40,311 | ||||||||||||
1-4 family residential, first lien, owner occupied | 16,809 | 16,629 | 16,304 | 16,775 | ||||||||||||
1-4 family residential, junior lien | 3,393 | 2,871 | 2,894 | 3,169 | ||||||||||||
1-4 family residential - purchased | 18,451 | 18,647 | ||||||||||||||
Home equity lines of credit, first lien | 8,968 | 7,912 | 8,544 | 8,325 | ||||||||||||
Home equity lines of credit, junior lien | 13,498 | 14,022 | 9,472 | 10,912 | ||||||||||||
Farm | 10,551 | 11,253 | 9,298 | 10,397 | ||||||||||||
Multifamily | 31,948 | 31,052 | 24,432 | 27,328 | ||||||||||||
Commercial owner occupied | 77,823 | 83,296 | 95,286 | 93,800 | ||||||||||||
Commercial non-owner occupied | 107,828 | 107,062 | 116,890 | 123,214 | ||||||||||||
Total real estate mortgage | 310,069 | 311,635 | 342,378 | 352,878 | ||||||||||||
Consumer | ||||||||||||||||
Consumer revolving credit | 22,459 | 20,373 | 24,341 | 21,540 | ||||||||||||
Consumer all other credit | 9,705 | 11,328 | 4,196 | 5,530 | ||||||||||||
Student loans purchased | 51,430 | 56,900 | 49,918 | 54,691 | ||||||||||||
Total consumer | 83,594 | 88,601 | 78,455 | 81,761 | ||||||||||||
Total loans | 501,024 | 482,135 | 521,763 | 537,190 | ||||||||||||
Less: Allowance for loan losses | (3,824 | ) | (3,688 | ) | (4,817 | ) | (4,891 | ) | ||||||||
Net loans | $ | 497,200 | $ | 478,447 | $ | 516,946 | $ | 532,299 |
The balances in the table above include unamortized premiums and net deferred loan costs and fees. As of SeptemberJune 30, 2017,2019, and December 31, 2018, unamortized premiums on loans purchased were $2.1$2.6 million with $700 thousand in unamortized premiums recorded as of December 31, 2016.and $2.5 million, respectively. Net deferred loan costs (fees) totaled $236$95 thousand and $344$129 thousand as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively.
Accounting guidance requires certain disclosures about investments in impaired loans, the allowance for loan losses and interest income recognized on impaired loans. A loan is considered impaired when it is probable that the Company will be unable to collect all principal and interest amounts when due according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, expected future cash flows, financial condition of the borrower, and current economic conditions.
Following is a breakdown by class of the loans classified as impaired loans as of SeptemberJune 30, 20172019 and December 31, 2016.2018. These loans are reported at their recorded investment, which is the carrying amount of the loan as reflected on the Company’s balance sheet, net of charge-offs and other amounts applied to reduce the net book balance. Average recorded investment in impaired loans is computed using an average of month-end balances for these loans for either the ninesix months ended SeptemberJune 30, 20172019 or the twelve months ended December 31, 2016.2018. Interest income recognized is for the ninesix months ended SeptemberJune 30, 20172019 or the twelve months ended December 31, 2016.2018. (Dollars below reported in thousands.)
September 30, 2017 | Unpaid | Average | Interest | |||||||||||||||||||||||||||
June 30, 2019 | Unpaid | Average | Interest | |||||||||||||||||||||||||||
Recorded | Principal | Associated | Recorded | Income | Recorded | Principal | Associated | Recorded | Income | |||||||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | Investment | Balance | Allowance | Investment | Recognized | |||||||||||||||||||||
Impaired loans without a valuation allowance: | ||||||||||||||||||||||||||||||
Land and land development | $ | 43 | $ | 96 | $ | - | $ | 47 | $ | - | $ | 28 | $ | 88 | $ | - | $ | 29 | $ | - | ||||||||||
1-4 family residential mortgages, first lien, owner occupied | 103 | 139 | - | 109 | - | - | - | - | 40 | - | ||||||||||||||||||||
1-4 family residential mortgages, junior lien | 384 | 386 | 362 | 12 | 122 | 122 | 124 | 3 | ||||||||||||||||||||||
Commercial non-owner occupied real estate | 983 | 983 | - | 997 | 35 | 903 | 903 | - | 913 | 24 | ||||||||||||||||||||
Total impaired loans without a valuation allowance | 1,053 | 1,113 | - | 1,106 | 27 | |||||||||||||||||||||||||
Impaired loans with a valuation allowance | ||||||||||||||||||||||||||||||
Student loans purchased | 937 | 937 | - | 918 | 47 | 1,591 | 1,591 | 51 | 1,597 | 37 | ||||||||||||||||||||
Impaired loans with a valuation allowance | - | - | - | - | - | |||||||||||||||||||||||||
Total impaired loans with a valuation allowance | 1,591 | 1,591 | 51 | 1,597 | 37 | |||||||||||||||||||||||||
Total impaired loans | $ | 2,450 | $ | 2,541 | $ | - | $ | 2,433 | $ | 94 | $ | 2,644 | $ | 2,704 | $ | 51 | $ | 2,703 | $ | 64 | ||||||||||
December 31, 2016 | Unpaid | Average | Interest | |||||||||||||||||||||||||||
December 31, 2018 | Unpaid | Average | Interest | |||||||||||||||||||||||||||
Recorded | Principal | Associated | Recorded | Income | Recorded | Principal | Associated | Recorded | Income | |||||||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | Investment | Balance | Allowance | Investment | Recognized | |||||||||||||||||||||
Impaired loans without a valuation allowance: | ||||||||||||||||||||||||||||||
Land and land development | $ | 51 | $ | 100 | $ | - | $ | 55 | $ | - | $ | 32 | $ | 90 | $ | - | $ | 37 | $ | - | ||||||||||
1-4 family residential mortgages, first lien, owner occupied | 116 | 147 | - | 123 | - | 82 | 127 | - | 90 | - | ||||||||||||||||||||
1-4 family residential mortgages, junior lien | 354 | 354 | 360 | 16 | 127 | 127 | 248 | 15 | ||||||||||||||||||||||
Commercial non-owner occupied real estate | 1,012 | 1,012 | - | 1,036 | 45 | 923 | 923 | - | 947 | 51 | ||||||||||||||||||||
Total impaired loans without a valuation allowance | 1,164 | 1,267 | - | 1,322 | 66 | |||||||||||||||||||||||||
Impaired loans with a valuation allowance | ||||||||||||||||||||||||||||||
Student loans purchased | 889 | 889 | - | 498 | 55 | 1,602 | 1,602 | 90 | 1,387 | 86 | ||||||||||||||||||||
Impaired loans with a valuation allowance | - | - | - | - | - | |||||||||||||||||||||||||
Total impaired loans with a valuation allowance | 1,602 | 1,602 | 90 | 1,387 | 86 | |||||||||||||||||||||||||
Total impaired loans | $ | 2,422 | $ | 2,502 | $ | - | $ | 2,072 | $ | 116 | $ | 2,766 | $ | 2,869 | $ | 90 | $ | 2,709 | $ | 152 |
Included in the impaired loans above are non-accrual loans. Generally, loans are placed on non-accrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more. Any unpaid interest previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other non-accrual loans is recognized only to the extent of interest payments received. The recorded investment in non-accrual loans is shown below by class (dollars in thousands):
September 30, 2017 | December 31, 2016 | |||||
Land and land development | $ | 44 | $ | 51 | ||
1-4 family residential mortgage, first lien, owner occupied | 103 | 116 | ||||
1-4 family residential mortgage, junior lien | 39 | - | ||||
Total nonaccrual loans | $ | 186 | $ | 167 |
June 30, 2019 | December 31, 2018 | |||||
Land and land development | $ | 27 | $ | 32 | ||
1-4 family residential mortgages, first lien, owner occupied | - | 82 | ||||
Student loans purchased | 363 | 445 | ||||
Commercial and industrial - organic | - | 56 | ||||
Total non-accrual loans | $ | 390 | $ | 615 |
Additionally, Troubled Debt Restructurings (“TDRs”) are considered impaired loans. TDRs occur when the Company agrees to modify the original terms of a loan by granting a concession that it would not otherwise consider due to the deterioration in the financial condition of the borrower. These concessions are done in an attempt to improve the paying capacity of the borrower, and in some cases to avoid foreclosure, and are made with the intent to restore the loan to a performing status once sufficient payment history can be demonstrated. These concessions could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.
Based on regulatory guidance on Student Lending, issued in May, 2016, the Company has classified 6168 of its student loans purchased as TDRs for a total of $937 thousand$1.2 million as of SeptemberJune 30, 2017.2019. 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 restructurings. 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. AsInitially, all student loans purchased arewere fully insured by a surety bond, and the Company doesdid not expect to experience a loss on these loans. Based on the loss of insurance after July 27, 2018 due to the insolvency of the insurer, management has evaluated these loans individually for impairment and included any potential loss in the allowance for loan losses; interest continues to accrue on these TDRs during any deferment and forbearance periods.
The following provides a summary, by class, of TDRs that continue to accrue interest under the terms of the restructuring agreement, which are considered to be performing, and TDRs that have been placed in non-accrual status, which are considered to be nonperforming (dollars in thousands).
Troubled debt restructurings (TDRs) | September 30, 2017 | December 31, 2016 | June 30, 2019 | December 31, 2018 | ||||||||||||||||
No. of | Recorded | No. of | Recorded | No. of | Recorded | No. of | Recorded | |||||||||||||
Loans | Investment | Loans | Investment | Loans | Investment | Loans | Investment | |||||||||||||
Performing TDRs | ||||||||||||||||||||
1-4 family residential mortgages, junior lien | 2 | $ | 345 | 2 | $ | 354 | - | $ | - | 1 | $ | 127 | ||||||||
Commercial non-owner occupied real estate | 1 | 983 | 1 | 1,012 | 1 | 903 | 1 | 923 | ||||||||||||
Student loans purchased | 61 | 937 | 50 | 889 | 68 | 1,229 | 65 | 1,157 | ||||||||||||
Total performing TDRs | 64 | $ | 2,265 | 53 | $ | 2,255 | 69 | $ | 2,132 | 67 | $ | 2,207 | ||||||||
Nonperforming TDRs | ||||||||||||||||||||
Student loans purchased | - | $ | - | 1 | $ | 4 | ||||||||||||||
Land and land development | 1 | $ | 25 | 1 | $ | 29 | 1 | 16 | 1 | 19 | ||||||||||
Total nonperforming TDRs | 1 | $ | 16 | 2 | $ | 23 | ||||||||||||||
Total TDRs | 65 | $ | 2,290 | 54 | $ | 2,284 | 70 | $ | 2,148 | 69 | $ | 2,230 |
A summary of loans shown above that were modified under the terms of a TDR during the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 is shown below by class (dollars in thousands). The Post-Modification Recorded Balance reflects the period end balances, inclusive of any interest capitalized to principal, partial principal paydowns, and principal charge-offs since the modification date. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported.
For three months ended | For three months ended | For three months ended | For three months ended | |||||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | June 30, 2019 | June 30, 2018 | |||||||||||||||||||||||||||||
Pre- | Post- | Pre- | Post- | Pre- | Post- | Pre- | Post- | |||||||||||||||||||||||||
Modification | Modification | Modification | Modification | Modification | Modification | Modification | Modification | |||||||||||||||||||||||||
Number | Recorded | Recorded | Number | Recorded | Recorded | Number | Recorded | Recorded | Number | Recorded | Recorded | |||||||||||||||||||||
of Loans | Balance | Balance | of Loans | Balance | Balance | of Loans | Balance | Balance | of Loans | Balance | Balance | |||||||||||||||||||||
Student loans purchased | 7 | $ | 42 | $ | 42 | 12 | $ | 134 | $ | 134 | 10 | $ | 78 | $ | 78 | 4 | $ | 41 | $ | 41 | ||||||||||||
Total loans modified during the period | 7 | $ | 42 | $ | 42 | 12 | $ | 134 | $ | 134 | 10 | $ | 78 | $ | 78 | 4 | $ | 41 | $ | 41 | ||||||||||||
For nine months ended | For nine months ended | For six months ended | For six months ended | |||||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | June 30, 2019 | June 30, 2018 | |||||||||||||||||||||||||||||
Pre- | Post- | Pre- | Post- | Pre- | Post- | Pre- | Post- | |||||||||||||||||||||||||
Modification | Modification | Modification | Modification | Modification | Modification | Modification | Modification | |||||||||||||||||||||||||
Number | Recorded | Recorded | Number | Recorded | Recorded | Number | Recorded | Recorded | Number | Recorded | Recorded | |||||||||||||||||||||
of Loans | Balance | Balance | of Loans | Balance | Balance | of Loans | Balance | Balance | of Loans | Balance | Balance | |||||||||||||||||||||
Student loans purchased | 16 | $ | 133 | $ | 133 | 50 | $ | 847 | $ | 868 | 12 | $ | 133 | $ | 133 | 7 | $ | 120 | $ | 120 | ||||||||||||
Total loans modified during the period | 16 | $ | 133 | $ | 133 | 50 | $ | 847 | $ | 868 | 12 | $ | 133 | $ | 133 | 7 | $ | 120 | $ | 120 |
ThereDuring the six months ended June 30, 2019, there were notwo loans modified as TDRs that subsequently defaulted during the nine months ended September 30, 2017 or the twelve months ended December 31, 2016 that werewhich had been modified as TDRs during the twelve months prior to default. These student loans had a balance of $2 thousand prior to being charged off. There was one loan modified as a TDR that subsequently defaulted during the year ending December 31, 2018 which had been modified as a TDR during the twelve months prior to default. This student loan had a balance of $33 thousand prior to being charged off.
There were no loans secured by 1-4 family residential property that were in the process of foreclosure at either SeptemberJune 30, 20172019 or December 31, 2016.2018.
Note 4. Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s quarterly evaluation of the collectability of the loan portfolio, credit concentrations, historical loss experience, specific impaired loans, and economic conditions. To determine the total allowance for loan losses, the Company estimates the reserves needed for each segment of the portfolio, including loans analyzed individually and loans analyzed on a pooled basis. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows.
For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type. Within these segments, the Company has sub-segmented its portfolio by classes within the segments, based on the associated risks within these classes.
Loan Classes by Segments
Commercial loan segment: |
Commercial and industrial - organic |
Commercial and industrial - government guaranteed |
Commercial and industrial - syndicated |
Real estate construction and land loan segment: |
Residential construction |
Commercial construction |
Land and land development |
Real estate mortgage loan segment: |
1-4 family residential, first lien, investment |
1-4 family residential, first lien, owner occupied |
1-4 family residential, junior lien |
Home equity lines of credit, first lien |
Home equity lines of credit, junior lien |
Farm |
Multifamily |
Commercial owner occupied |
Commercial non-owner occupied |
Consumer loan segment: |
Consumer revolving credit |
Consumer all other credit |
Student loans purchased |
Management utilizes a loss migration model for determining the quantitative risk assigned to unimpaired loans in order to capture historical loss information at the loan level, track loss migration through risk grade deterioration, and increase efficiencies related to performing the calculations. The quantitative risk factor for each loan class primarily utilizes a migration analysis loss method based on loss history for the prior twelve quarters.
The migration analysis loss method is used for all loan classes except for the following:
● | Student loans purchased |
● | Commercial and industrial syndicated loans - Prior to the quarter ended September 30, 2016, there was not an established loss history in the commercial |
● | Commercial and industrial government guaranteed loans – These loans require no reserve as these are 100% guaranteed |
Furthermore, a nominal loss reserve is applied to loans rated “Good”“Good,” as described below, in an abundance of caution.
Under the migration analysis method, average loss rates are calculated at the risk grade and class levels by dividing the twelve-quarter average net charge-off amount by the twelve-quarter average loan balances. Qualitative factors are combined with these quantitative factors to arrive at the overall general allowances.
The Company’s internal creditworthiness grading system is based on experiences with similarly graded loans. The Company performs regular credit reviews of the loan portfolio to review the credit quality and adherence to its underwriting standards. Additionally, external reviews of a portion of the credits are conducted on a semi-annual basis.
Loans that trend upward on the risk ratings scale, toward more positive risk ratings, generally exhibit lower risk factor characteristics. Conversely, loans that migrate toward more negative ratings generally will result in a higher risk factor being applied to those related loan balances.
Risk Ratings and Historical Loss Factor Assigned
Excellent
A 0% historical loss factor applied, as these loans are secured by cash or fully guaranteed by a U.S. government agency and represent a minimal risk. The Company has never experienced a loss within this category.
Good
A 0% historical loss factor applied, as these loans represent a low risk and are secured by marketable collateral within margin. The Company has never experienced a loss within this category.
Pass
Historical
Watch
These loans have an acceptable risk but require more attention than normal servicing. A historical loss factor for loans rated “Watch” is applied to current balances of like-rated loans pooled by class.
Special Mention
These potential problem loans are currently protected but are potentially weak. A historical loss factor for loans rated “Special Mention” is applied to current balances of like-rated loans pooled by class.
Substandard
These problem loans are inadequately protected by the sound worth and paying capacity of the borrower and/or the value of any collateral pledged. These loans may be considered impaired and evaluated on an individual basis. Otherwise, a historical loss factor for loans rated “Substandard” is applied to current balances of all other “Substandard” loans pooled by class.
Doubtful
Loans with this rating have significant deterioration in the sound worth and paying capacity of the borrower and/or the value of any collateral pledged, making collection or liquidation of the loan in full highly questionable. These loans would be considered impaired and evaluated on an individual basis.
The following represents the loan portfolio designated by the internal risk ratings assigned to each credit as of SeptemberJune 30, 20172019 and December 31, 20162018 (dollars in thousands). There were no loans rated “Doubtful” as of either period.
Special | Sub- | ||||||||||||||||||||
September 30, 2017 | Excellent | Good | Pass | Watch | Mention | standard | TOTAL | ||||||||||||||
Commercial | |||||||||||||||||||||
Commercial and industrial - organic | $ | 3,292 | $ | 19,482 | $ | 18,349 | $ | 120 | $ | 279 | $ | 708 | $ | 42,230 | |||||||
Commercial and industrial - government guaranteed | 22,722 | - | - | - | - | - | 22,722 | ||||||||||||||
Commercial and industrial - syndicated | - | - | 14,682 | - | - | 2,580 | 17,262 | ||||||||||||||
Real estate construction | |||||||||||||||||||||
Residential construction | - | - | 2,310 | - | - | - | 2,310 | ||||||||||||||
Commercial construction | - | - | 12,788 | - | - | - | 12,788 | ||||||||||||||
Land and land development | - | - | 9,493 | 3 | - | 553 | 10,049 | ||||||||||||||
Real estate mortgages | |||||||||||||||||||||
1-4 family residential, first lien, investment | - | - | 36,696 | 1,889 | 226 | 440 | 39,251 | ||||||||||||||
1-4 family residential, first lien, owner occupied | - | - | 15,946 | 132 | - | 731 | 16,809 | ||||||||||||||
1-4 family residential, junior lien | - | - | 2,753 | 269 | 196 | 175 | 3,393 | ||||||||||||||
Home equity lines of credit, first lien | - | - | 8,928 | 40 | - | - | 8,968 | ||||||||||||||
Home equity lines of credit, junior lien | - | - | 13,387 | - | - | 111 | 13,498 | ||||||||||||||
Farm | - | - | 9,162 | - | - | 1,389 | 10,551 | ||||||||||||||
Multifamily | - | - | 31,948 | - | - | - | 31,948 | ||||||||||||||
Commercial owner occupied | - | 676 | 76,685 | 462 | - | - | 77,823 | ||||||||||||||
Commercial non-owner occupied | - | - | 104,826 | 983 | - | 2,019 | 107,828 | ||||||||||||||
Consumer | |||||||||||||||||||||
Consumer revolving credit | 9 | 21,750 | 699 | 1 | - | - | 22,459 | ||||||||||||||
Consumer all other credit | 321 | 7,625 | 1,723 | 2 | - | 34 | 9,705 | ||||||||||||||
Student loans purchased | - | - | 50,493 | 937 | - | - | 51,430 | ||||||||||||||
Total Loans | $ | 26,344 | $ | 49,533 | $ | 410,868 | $ | 4,838 | $ | 701 | $ | 8,740 | $ | 501,024 | |||||||
Special | Sub- | ||||||||||||||||||||
December 31, 2016 | Excellent | Good | Pass | Watch | Mention | standard | TOTAL | ||||||||||||||
Commercial | |||||||||||||||||||||
Commercial and industrial - organic | $ | 816 | $ | 24,225 | $ | 15,840 | $ | 259 | $ | 236 | $ | 184 | $ | 41,560 | |||||||
Commercial and industrial - government guaranteed | 5,550 | - | - | - | - | - | 5,550 | ||||||||||||||
Commercial and industrial - syndicated | - | - | 16,175 | - | - | 2,932 | 19,107 | ||||||||||||||
Real estate construction | |||||||||||||||||||||
Residential construction | - | - | 395 | - | - | - | 395 | ||||||||||||||
Commercial construction | - | - | 4,422 | - | - | - | 4,422 | ||||||||||||||
Land and land development | - | - | 10,271 | 5 | - | 589 | 10,865 | ||||||||||||||
Real estate mortgages | |||||||||||||||||||||
1-4 family residential, first lien, investment | - | - | 35,102 | 1,724 | 229 | 483 | 37,538 | ||||||||||||||
1-4 family residential, first lien, owner occupied | - | - | 15,207 | 325 | - | 1,097 | 16,629 | ||||||||||||||
1-4 family residential, junior lien | - | - | 2,214 | 326 | 189 | 142 | 2,871 | ||||||||||||||
Home equity lines of credit, first lien | - | - | 7,872 | 40 | - | - | 7,912 | ||||||||||||||
Home equity lines of credit, junior lien | - | - | 13,911 | - | - | 111 | 14,022 | ||||||||||||||
Farm | - | - | 11,253 | - | - | - | 11,253 | ||||||||||||||
Multifamily | - | - | 31,052 | - | - | - | 31,052 | ||||||||||||||
Commercial owner occupied | - | 695 | 81,582 | 1,019 | - | - | 83,296 | ||||||||||||||
Commercial non-owner occupied | - | - | 104,963 | 1,012 | - | 1,087 | 107,062 | ||||||||||||||
Consumer | |||||||||||||||||||||
Consumer revolving credit | 65 | 19,766 | 539 | - | - | 3 | 20,373 | ||||||||||||||
Consumer all other credit | 284 | 9,977 | 1,027 | 4 | - | 36 | 11,328 | ||||||||||||||
Student loans purchased | - | - | 56,011 | 889 | - | - | 56,900 | ||||||||||||||
Total Loans | $ | 6,715 | $ | 54,663 | $ | 407,836 | $ | 5,603 | $ | 654 | $ | 6,664 | $ | 482,135 |
Special | Sub- | ||||||||||||||||||||
June 30, 2019 | Excellent | Good | Pass | Watch | Mention | standard | TOTAL | ||||||||||||||
Commercial | |||||||||||||||||||||
Commercial and industrial - organic | $ | 2,457 | $ | 20,638 | $ | 15,672 | $ | 176 | $ | - | $ | 433 | $ | 39,376 | |||||||
Commercial and industrial - government guaranteed | 35,143 | - | - | - | - | - | 35,143 | ||||||||||||||
Commercial and industrial - syndicated | - | - | 9,560 | - | - | 2,531 | 12,091 | ||||||||||||||
Real estate construction | |||||||||||||||||||||
Residential construction | - | - | 1,021 | - | - | - | 1,021 | ||||||||||||||
Commercial construction | - | - | 3,663 | - | - | - | 3,663 | ||||||||||||||
Land and land development | - | - | 8,675 | 484 | - | 477 | 9,636 | ||||||||||||||
Real estate mortgages | |||||||||||||||||||||
1-4 family residential, first lien, investment | - | - | 36,600 | 3,827 | 114 | 266 | 40,807 | ||||||||||||||
1-4 family residential, first lien, owner occupied | - | - | 15,181 | 1,060 | 9 | 54 | 16,304 | ||||||||||||||
1-4 family residential, junior lien | - | - | 2,357 | 39 | 20 | 478 | 2,894 | ||||||||||||||
1-4 family residential, first lien - purchased | - | - | 18,451 | - | - | - | 18,451 | ||||||||||||||
Home equity lines of credit, first lien | - | - | 7,866 | 338 | - | 340 | 8,544 | ||||||||||||||
Home equity lines of credit, junior lien | - | - | 9,291 | 99 | - | 82 | 9,472 | ||||||||||||||
Farm | - | - | 7,652 | 328 | - | 1,318 | 9,298 | ||||||||||||||
Multifamily | - | - | 24,432 | - | - | - | 24,432 | ||||||||||||||
Commercial owner occupied | - | - | 86,398 | 6,828 | - | 2,060 | 95,286 | ||||||||||||||
Commercial non-owner occupied | - | - | 113,143 | 2,684 | - | 1,063 | 116,890 | ||||||||||||||
Consumer | |||||||||||||||||||||
Consumer revolving credit | 75 | 23,786 | 469 | 11 | - | - | 24,341 | ||||||||||||||
Consumer all other credit | 245 | 3,430 | 492 | 2 | - | 27 | 4,196 | ||||||||||||||
Student loans purchased | - | - | 47,392 | 2,109 | 347 | 70 | 49,918 | ||||||||||||||
Total Loans | $ | 37,920 | $ | 47,854 | $ | 408,315 | $ | 17,985 | $ | 490 | $ | 9,199 | $ | 521,763 | |||||||
Special | Sub- | ||||||||||||||||||||
December 31, 2018 | Excellent | Good | Pass | Watch | Mention | standard | TOTAL | ||||||||||||||
Commercial | |||||||||||||||||||||
Commercial and industrial - organic | $ | 3,692 | $ | 23,381 | $ | 13,993 | $ | 264 | $ | 28 | $ | 168 | $ | 41,526 | |||||||
Commercial and industrial - government guaranteed | 31,367 | - | - | - | - | - | 31,367 | ||||||||||||||
Commercial and industrial - syndicated | - | - | 9,588 | - | - | 2,546 | 12,134 | ||||||||||||||
Real estate construction | |||||||||||||||||||||
Residential construction | - | - | 1,552 | - | - | - | 1,552 | ||||||||||||||
Commercial construction | - | - | 5,078 | - | - | - | 5,078 | ||||||||||||||
Land and land development | - | - | 9,888 | 501 | - | 505 | 10,894 | ||||||||||||||
Real estate mortgages | |||||||||||||||||||||
1-4 family residential, first lien, investment | - | - | 36,314 | 3,607 | 117 | 273 | 40,311 | ||||||||||||||
1-4 family residential, first lien, owner occupied | - | - | 15,540 | 1,087 | 11 | 137 | 16,775 | ||||||||||||||
1-4 family residential, junior lien | - | - | 2,573 | 58 | 22 | 516 | 3,169 | ||||||||||||||
1-4 family residential, first lien - purchased | - | - | 18,647 | - | - | - | 18,647 | ||||||||||||||
Home equity lines of credit, first lien | - | - | 7,911 | 414 | - | - | 8,325 | ||||||||||||||
Home equity lines of credit, junior lien | - | - | 10,704 | 97 | - | 111 | 10,912 | ||||||||||||||
Farm | - | - | 8,719 | 339 | - | 1,339 | 10,397 | ||||||||||||||
Multifamily | - | - | 27,328 | - | - | - | 27,328 | ||||||||||||||
Commercial owner occupied | - | - | 86,868 | 6,932 | - | - | 93,800 | ||||||||||||||
Commercial non-owner occupied | - | - | 120,720 | 1,519 | - | 975 | 123,214 | ||||||||||||||
Consumer | |||||||||||||||||||||
Consumer revolving credit | 44 | 20,852 | 644 | - | - | - | 21,540 | ||||||||||||||
Consumer all other credit | 263 | 4,699 | 535 | 4 | - | 29 | 5,530 | ||||||||||||||
Student loans purchased | - | - | 51,494 | 2,401 | 431 | 365 | 54,691 | ||||||||||||||
Total Loans | $ | 35,366 | $ | 48,932 | $ | 428,096 | $ | 17,223 | $ | 609 | $ | 6,964 | $ | 537,190 |
In addition, the adequacy of the Company’s allowance for loan losses is evaluated through reference to eight qualitative factors, listed below and ranked in order of importance:
1) | Changes in national and local economic conditions, including the condition of various market | ||
2) | Changes in the value of underlying | ||
3) | Changes in volume of classified assets, measured as a percentage of | ||
4) | Changes in volume of delinquent | ||
5) | The existence and effect of any concentrations of credit and changes in the level of such | ||
6) | Changes in lending policies and procedures, including underwriting | ||
7) | Changes in the experience, ability and depth of lending management and | ||
8) | Changes in the level of policy |
It has been the Company’s experience that the first five factors drive losses to a much greater extent than the last three factors; therefore, the first five factors are weighted more heavily. Qualitative factors are not assessed against loans rated “Excellent” or “Good.“Good,” as the Company has never experienced a loss within these categories.
For each segment and class of loans, management must exercise significant judgment to determine the estimation method that fits the credit risk characteristics of its various segments. Although this evaluation is inherently subjective, qualified management utilizes its significant knowledge and experience related to both the Company’s market and the history of the Company’s loan losses.
Impaired loans are individually evaluated and, if deemed appropriate, a specific allocation is made for these loans. In reviewing the loans classified as impaired loans totaling $2.5$2.6 million at SeptemberJune 30, 2017, there was no2019, specific valuation allowance on any of these loanswas recognized after consideration was given for each borrowing as to the fair value of the collateral on the loan or the present value of expected future cash flows from the borrower. The $51 thousand in the allowance total shown below as individually evaluated for impairment was attributed to the impaired student loans that required an allowance as of June 30, 2019 due to the loss of the insurance on this portfolio as discussed previously.
A summary of the transactions in the Allowance for Loan Losses by loan portfolio segment for the ninesix months ended SeptemberJune 30, 20172019 and the year ended December 31, 20162018 appears below (dollars in thousands):
Allowance for Loan Losses Rollforward by Portfolio SegmentAs of and for the period ended September 30, 2017
Allowance for Loan Losses Rollforward by Portfolio Segment | Allowance for Loan Losses Rollforward by Portfolio Segment | |||||||||||||||||||||||||||||||||||||||
As of and for the period ended June 30, 2019 | As of and for the period ended June 30, 2019 | |||||||||||||||||||||||||||||||||||||||
Real Estate | Real Estate | |||||||||||||||||||||||||||||||||||||||
Commercial | Construction | Real Estate | Consumer | Commercial | Construction | Real Estate | Consumer | |||||||||||||||||||||||||||||||||
Loans | and Land | Mortgages | Loans | Total | Loans | and Land | Mortgages | Loans | Total | |||||||||||||||||||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2017 | $ | 824 | $ | 127 | $ | 2,506 | $ | 231 | $ | 3,688 | ||||||||||||||||||||||||||||||
Balance as of January 1, 2019 | $ | 811 | $ | 119 | $ | 2,611 | $ | 1,350 | $ | 4,891 | ||||||||||||||||||||||||||||||
Charge-offs | (111 | ) | - | - | - | (111 | ) | - | - | - | (823 | ) | (823 | ) | ||||||||||||||||||||||||||
Recoveries | 21 | - | 2 | 11 | 34 | 35 | - | 15 | 79 | 129 | ||||||||||||||||||||||||||||||
Provision for (recovery of) loan losses | 216 | 68 | (30 | ) | (41 | ) | 213 | 2 | (18 | ) | 16 | 620 | 620 | |||||||||||||||||||||||||||
Ending Balance | $ | 950 | $ | 195 | $ | 2,478 | $ | 201 | $ | 3,824 | $ | 848 | $ | 101 | $ | 2,642 | $ | 1,226 | $ | 4,817 | ||||||||||||||||||||
Ending Balance: | ||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 51 | $ | 51 | ||||||||||||||||||||
Collectively evaluated for impairment | 950 | 195 | 2,478 | 201 | 3,824 | 848 | 101 | 2,642 | 1,175 | 4,766 | ||||||||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | 43 | $ | 1,470 | $ | 937 | $ | 2,450 | $ | - | $ | 28 | $ | 1,025 | $ | 1,591 | $ | 2,644 | ||||||||||||||||||||
Collectively evaluated for impairment | 82,214 | 25,104 | 308,599 | 82,657 | 498,574 | 86,610 | 14,292 | 341,353 | 76,864 | 519,119 | ||||||||||||||||||||||||||||||
Ending Balance | $ | 82,214 | $ | 25,147 | $ | 310,069 | $ | 83,594 | $ | 501,024 | $ | 86,610 | $ | 14,320 | $ | 342,378 | $ | 78,455 | $ | 521,763 | ||||||||||||||||||||
As of and for the year ended December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||
As of and for the year ended December 31, 2018 | As of and for the year ended December 31, 2018 | |||||||||||||||||||||||||||||||||||||||
Real Estate | Real Estate | |||||||||||||||||||||||||||||||||||||||
Commercial | Construction | Real Estate | Consumer | Commercial | Construction | Real Estate | Consumer | |||||||||||||||||||||||||||||||||
Loans | and Land | Mortgages | Loans | Total | Loans | and Land | Mortgages | Loans | Total | |||||||||||||||||||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2016 | $ | 797 | $ | 159 | $ | 2,592 | $ | 19 | $ | 3,567 | ||||||||||||||||||||||||||||||
Balance as of January 1, 2018 | $ | 885 | $ | 206 | $ | 2,730 | $ | 222 | $ | 4,043 | ||||||||||||||||||||||||||||||
Charge-offs | (25 | ) | - | (12 | ) | - | (37 | ) | (75 | ) | - | - | (1,022 | ) | (1,097 | ) | ||||||||||||||||||||||||
Recoveries | 32 | - | 3 | 12 | 47 | 54 | - | 2 | 16 | 72 | ||||||||||||||||||||||||||||||
Provision for (recovery of) loan losses | 20 | (32 | ) | (77 | ) | 200 | 111 | (53 | ) | (87 | ) | (121 | ) | 2,134 | 1,873 | |||||||||||||||||||||||||
Ending Balance | $ | 824 | $ | 127 | $ | 2,506 | $ | 231 | $ | 3,688 | $ | 811 | $ | 119 | $ | 2,611 | $ | 1,350 | $ | 4,891 | ||||||||||||||||||||
Ending Balance: | ||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 90 | $ | 90 | ||||||||||||||||||||
Collectively evaluated for impairment | 824 | 127 | 2,506 | 231 | 3,688 | 811 | 119 | 2,611 | 1,260 | 4,801 | ||||||||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | 51 | $ | 1,482 | $ | 889 | $ | 2,422 | $ | - | $ | 32 | $ | 1,132 | $ | 1,602 | $ | 2,766 | ||||||||||||||||||||
Collectively evaluated for impairment | 66,217 | 15,631 | 310,153 | 87,712 | 479,713 | 85,027 | 17,492 | 351,746 | 80,159 | 534,424 | ||||||||||||||||||||||||||||||
Ending Balance | $ | 66,217 | $ | 15,682 | $ | 311,635 | $ | 88,601 | $ | 482,135 | $ | 85,027 | $ | 17,524 | $ | 352,878 | $ | 81,761 | $ | 537,190 |
As previously mentioned, one of the major factors that the Company uses in evaluating the adequacy of its allowance for loan losses is changes in the volume of delinquent loans. Management monitors payment activity on a regular basis. For all classes of loans, the Company considers the entire balance of the loan to be contractually delinquent if the minimum payment is not received by the due date. Interest and fees continue to accrue on past due loans until they are changed to non-accrual status.
The following tables show the aging of past due loans as of SeptemberJune 30, 20172019 and December 31, 2016. Also included are loans that are 90 or more days past due but still accruing, because they are well secured and in the process of collection.2018. (Dollars below reported in thousands.)
Past Due Aging as of | 30-59 | 60-89 | 90 Days or | 90Days Past Due | ||||||||||||||||||||||||||||||||||||||
Days Past | Days Past | More Past | Total Past | Total | and Still | |||||||||||||||||||||||||||||||||||||
Due | Due | Due | Due | Current | Loans | Accruing | ||||||||||||||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial - organic | $ | - | $ | - | $ | - | $ | - | $ | 42,230 | $ | 42,230 | $ | - | ||||||||||||||||||||||||||||
Commercial and industrial - government guaranteed | - | - | - | - | 22,722 | 22,722 | - | |||||||||||||||||||||||||||||||||||
Commercial and industrial - syndicated | - | - | - | - | 17,262 | 17,262 | - | |||||||||||||||||||||||||||||||||||
Real estate construction and land | ||||||||||||||||||||||||||||||||||||||||||
Residential construction | - | - | - | - | 2,310 | 2,310 | - | |||||||||||||||||||||||||||||||||||
Commercial construction | - | - | - | - | 12,788 | 12,788 | - | |||||||||||||||||||||||||||||||||||
Land and land development | 18 | - | - | 18 | 10,031 | 10,049 | - | |||||||||||||||||||||||||||||||||||
Real estate mortgages | ||||||||||||||||||||||||||||||||||||||||||
1-4 family residential, first lien, investment | - | - | - | - | 39,251 | 39,251 | - | |||||||||||||||||||||||||||||||||||
1-4 family residential, first lien, owner occupied | - | - | 18 | 18 | 16,791 | 16,809 | 18 | |||||||||||||||||||||||||||||||||||
1-4 family residential, junior lien | 249 | - | - | 249 | 3,144 | 3,393 | - | |||||||||||||||||||||||||||||||||||
Home equity lines of credit, first lien | - | - | - | - | 8,968 | 8,968 | - | |||||||||||||||||||||||||||||||||||
Home equity lines of credit, junior lien | - | - | - | - | 13,498 | 13,498 | - | |||||||||||||||||||||||||||||||||||
Farm | - | - | - | - | 10,551 | 10,551 | - | |||||||||||||||||||||||||||||||||||
Multifamily | - | - | - | - | 31,948 | 31,948 | - | |||||||||||||||||||||||||||||||||||
Commercial owner occupied | - | - | - | - | 77,823 | 77,823 | - | |||||||||||||||||||||||||||||||||||
Commercial non-owner occupied | - | - | - | - | 107,828 | 107,828 | - | |||||||||||||||||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||||||||||||||||||||
Consumer revolving credit | - | - | - | - | 22,459 | 22,459 | - | |||||||||||||||||||||||||||||||||||
Consumer all other credit | - | 1 | - | 1 | 9,704 | 9,705 | - | |||||||||||||||||||||||||||||||||||
Student loans purchased | 500 | 162 | 324 | 986 | 50,444 | 51,430 | 324 | |||||||||||||||||||||||||||||||||||
Total Loans | $ | 767 | $ | 163 | $ | 342 | $ | 1,272 | $ | 499,752 | $ | 501,024 | $ | 342 | ||||||||||||||||||||||||||||
Past Due Aging as of | 30-59 | 60-89 | 90 Days or | 90Days Past Due | ||||||||||||||||||||||||||||||||||||||
Past Due Aging as of | 90Days | |||||||||||||||||||||||||||||||||||||||||
June 30, 2019 | 30-59 | 60-89 | 90 Days or | Past Due | ||||||||||||||||||||||||||||||||||||||
Days Past | Days Past | More Past | Total Past | Total | and Still | Days Past | Days Past | More Past | Total Past | Total | and Still | |||||||||||||||||||||||||||||||
Due | Due | Due | Due | Current | Loans | Accruing | Due | Due | Due | Due | Current | Loans | Accruing | |||||||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial - organic | $ | 65 | $ | 61 | $ | - | $ | 126 | $ | 41,434 | $ | 41,560 | $ | - | $ | 172 | $ | - | $ | - | $ | 172 | $ | 39,204 | $ | 39,376 | $ | - | ||||||||||||||
Commercial and industrial - government guaranteed | - | - | - | - | 5,550 | 5,550 | - | - | - | 548 | 548 | 34,595 | 35,143 | 548 | ||||||||||||||||||||||||||||
Commercial and industrial - syndicated | - | - | - | - | 19,107 | 19,107 | - | - | - | - | - | 12,091 | 12,091 | - | ||||||||||||||||||||||||||||
Real estate construction and land | ||||||||||||||||||||||||||||||||||||||||||
Residential construction | - | - | - | - | 395 | 395 | - | - | - | - | - | 1,021 | 1,021 | - | ||||||||||||||||||||||||||||
Commercial construction | - | - | - | - | 4,422 | 4,422 | - | - | - | - | - | 3,663 | 3,663 | - | ||||||||||||||||||||||||||||
Land and land development | - | - | 22 | 22 | 10,843 | 10,865 | - | - | 15 | - | 15 | 9,621 | 9,636 | - | ||||||||||||||||||||||||||||
Real estate mortgages | ||||||||||||||||||||||||||||||||||||||||||
1-4 family residential, first lien, investment | 125 | - | - | 125 | 37,413 | 37,538 | - | - | - | - | - | 40,807 | 40,807 | - | ||||||||||||||||||||||||||||
1-4 family residential, first lien, owner occupied | - | - | 20 | 20 | 16,609 | 16,629 | 20 | - | - | - | - | 16,304 | 16,304 | - | ||||||||||||||||||||||||||||
1-4 family residential, junior lien | - | - | - | - | 2,871 | 2,871 | - | - | - | - | - | 2,894 | 2,894 | - | ||||||||||||||||||||||||||||
1-4 family residential - purchased | . | - | - | - | 18,451 | 18,451 | - | |||||||||||||||||||||||||||||||||||
Home equity lines of credit, first lien | - | - | - | - | 7,912 | 7,912 | - | - | - | - | - | 8,544 | 8,544 | - | ||||||||||||||||||||||||||||
Home equity lines of credit, junior lien | 36 | - | - | 36 | 13,986 | 14,022 | - | - | - | - | - | 9,472 | 9,472 | - | ||||||||||||||||||||||||||||
Farm | - | - | - | - | 11,253 | 11,253 | - | - | - | - | - | 9,298 | 9,298 | - | ||||||||||||||||||||||||||||
Multifamily | - | - | - | - | 31,052 | 31,052 | - | - | - | - | - | 24,432 | 24,432 | - | ||||||||||||||||||||||||||||
Commercial owner occupied | - | - | - | - | 83,296 | 83,296 | - | - | - | - | - | 95,286 | 95,286 | - | ||||||||||||||||||||||||||||
Commercial non-owner occupied | - | - | - | - | 107,062 | 107,062 | - | 3,750 | - | - | 3,750 | 113,140 | 116,890 | - | ||||||||||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||||||||||||||||||||
Consumer revolving credit | - | - | - | - | 20,373 | 20,373 | - | - | - | - | - | 24,341 | 24,341 | - | ||||||||||||||||||||||||||||
Consumer all other credit | 1 | 48 | - | 49 | 11,279 | 11,328 | - | - | 24 | - | 24 | 4,172 | 4,196 | - | ||||||||||||||||||||||||||||
Student loans purchased | 1,316 | 139 | 188 | 1,643 | 55,257 | 56,900 | 188 | 538 | 407 | 432 | 1,377 | 48,541 | 49,918 | 69 | ||||||||||||||||||||||||||||
Total Loans | $ | 1,543 | $ | 248 | $ | 230 | $ | 2,021 | $ | 480,114 | $ | 482,135 | $ | 208 | $ | 4,460 | $ | 446 | $ | 980 | $ | 5,886 | $ | 515,877 | $ | 521,763 | $ | 617 | ||||||||||||||
Past Due Aging as of | 90Days | |||||||||||||||||||||||||||||||||||||||||
December 31, 2018 | 30-59 | 60-89 | 90 Days or | Past Due | ||||||||||||||||||||||||||||||||||||||
Days Past | Days Past | More Past | Total Past | Total | and Still | |||||||||||||||||||||||||||||||||||||
Due | Due | Due | Due | Current | Loans | Accruing | ||||||||||||||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial - organic | $ | 50 | $ | 172 | $ | - | $ | 222 | $ | 41,304 | $ | 41,526 | $ | - | ||||||||||||||||||||||||||||
Commercial and industrial - government guaranteed | - | - | 548 | 548 | 30,819 | 31,367 | 548 | |||||||||||||||||||||||||||||||||||
Commercial and industrial - syndicated | - | - | - | - | 12,134 | 12,134 | - | |||||||||||||||||||||||||||||||||||
Real estate construction and land | ||||||||||||||||||||||||||||||||||||||||||
Residential construction | - | - | - | - | 1,552 | 1,552 | - | |||||||||||||||||||||||||||||||||||
Commercial construction | - | - | - | - | 5,078 | 5,078 | - | |||||||||||||||||||||||||||||||||||
Land and land development | 1 | - | 15 | 16 | 10,878 | 10,894 | 15 | |||||||||||||||||||||||||||||||||||
Real estate mortgages | ||||||||||||||||||||||||||||||||||||||||||
1-4 family residential, first lien, investment | - | - | - | - | 40,311 | 40,311 | - | |||||||||||||||||||||||||||||||||||
1-4 family residential, first lien, owner occupied | - | - | - | - | 16,775 | 16,775 | - | |||||||||||||||||||||||||||||||||||
1-4 family residential, junior lien | - | - | - | - | 3,169 | 3,169 | - | |||||||||||||||||||||||||||||||||||
1-4 family residential - purchased | 954 | - | - | 954 | 17,693 | 18,647 | - | |||||||||||||||||||||||||||||||||||
Home equity lines of credit, first lien | - | - | - | - | 8,325 | 8,325 | - | |||||||||||||||||||||||||||||||||||
Home equity lines of credit, junior lien | - | - | - | - | 10,912 | 10,912 | - | |||||||||||||||||||||||||||||||||||
Farm | - | - | - | - | 10,397 | 10,397 | - | |||||||||||||||||||||||||||||||||||
Multifamily | - | - | - | - | 27,328 | 27,328 | - | |||||||||||||||||||||||||||||||||||
Commercial owner occupied | - | - | - | - | 93,800 | 93,800 | - | |||||||||||||||||||||||||||||||||||
Commercial non-owner occupied | 75 | - | - | 75 | 123,139 | 123,214 | - | |||||||||||||||||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||||||||||||||||||||
Consumer revolving credit | - | - | - | - | 21,540 | 21,540 | - | |||||||||||||||||||||||||||||||||||
Consumer all other credit | 4 | 599 | - | 603 | 4,927 | 5,530 | - | |||||||||||||||||||||||||||||||||||
Student loans purchased | 850 | 463 | 754 | 2,067 | 52,624 | 54,691 | 332 | |||||||||||||||||||||||||||||||||||
Total Loans | $ | 1,934 | $ | 1,234 | $ | 1,317 | $ | 4,485 | $ | 532,705 | $ | 537,190 | $ | 895 |
Note 5. Intangible Assets
On February 1, 2016 (the “Effective Date”), VNB Wealth purchased the book of business, including interest in the client relationships (“Purchased Relationships”), from a current officer (the “Seller”) of VNB Wealth pursuant to an employment and asset purchase agreement (the “Purchase Agreement”). Prior to becoming an employee of VNB Wealth and until the Effective Date of the sale, the Seller provided services to these Purchased Relationships as a sole proprietor. As of January 15, 2016, the fair value of the assets under management associated with the Purchased Relationships totaled $31.5 million. Under the terms of the Purchase Agreement, the Company will receive all future revenue for investment management, advisory, brokerage, insurance, consulting, trust and related services performed for the Purchased Relationships.
The purchase price of $1.2 million is payable over a five year period. During the first quarter of 2016, the Company recognized goodwill and other intangible assets arising from this purchase. As required under ASC Topic 805, “Business Combinations,” using the acquisition method of accounting, below is a summary of the net asset values, as determined by an independent third party, based on the fair value measurements and the purchase price. The intangible assets identified below will be amortized using a straight line method over the estimated useful life, and the amortized cost will be shown as noninterest expense. In accordance with ASC 350, “Intangibles-Goodwill and Other,” the Company will review the carrying value of indefinite lived goodwill at least annually or more frequently if certain impairment indicators exist. (Dollars below reported in thousands.)
Estimated | |||||||
% of Total | Economic Useful | ||||||
Fair Value | Intangible Assets | Life | |||||
Identified Intangible Assets | |||||||
Non-Compete Agreement | $ | 103 | 9.0% | 3 years | |||
Customer Relationships Intangible | 670 | 58.5% | 10 years | ||||
Total Identified Intangible Assets | $ | 773 | 67.5% | ||||
Goodwill | $ | 372 | 32.5% | Indefinite | |||
Total Intangible Assets | $ | 1,145 | 100.0% |
Through the nine months ended September 2017 and 2016, the Company recognized $87 thousand and $68 thousand, respectively, in amortization expense from these identified intangible assets with a finite life. The net carrying value of $604 thousand will be recognized as amortization expense in future reporting periods through 2026. The following shows the gross and net balance of these intangible assets as of September 30, 2017. (Dollars below reported in thousands.)
Gross Carrying | Accumulated | Net Carrying | |||||||
Value | Amortization | Value | |||||||
Identified Intangible Assets | |||||||||
Non-Compete Agreement | $ | 103 | $ | 57 | $ | 46 | |||
Customer Relationships Intangible | 670 | 112 | $ | 558 | |||||
Total Identified Intangible Assets | $ | 773 | $ | 169 | $ | 604 |
As of September 30, 2017, the Company carried a contingent liability of $156 thousand, representing the net of the fair value of the purchase price, less the initial two annual payments made to the Seller. The remaining three annual payments as delineated in the Purchase Agreement will be paid from this liability.
Note 6. Net Income Per Share and Stock Repurchase Program
On September 22, 2014,June 13, 2019, the Company announced the approval by its Board of Directors ofapproved a stock repurchase program authorizing repurchasedividend of up to 400,000five percent (5%) on the outstanding shares of common stock of the Company's commonCompany (or .05 share for each share outstanding) which was issued on July 5, 2019 to all shareholders of record as of the close of business on June 26, 2019, referred to as the “5% Stock Dividend”. Shareholders received cash in lieu of any fractional shares through September 18, 2015.that they otherwise would have been entitled to receive in connection with the stock dividend. The Company announcedprice paid for fractional shares was based on September 21, 2015 that its Board of Directors extended the program for another year. A total of 343,559 shares at a weightedvolume-weighted average price of $22.89a share of common stock for the most recent three (3) days prior to the record date during which a trade of the Company’s stock occurred.
For the following table, share and per share were repurchased throughdata have been adjusted to reflect the program.5% Stock Dividend. The program expired on September 18, 2016.
The followingtable shows the weighted average number of shares used in computing net income per common share and the effect on the weighted average number of shares of diluted potential common stock for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016.2018. Potential dilutive common stock equivalents have no effect on net income available to common shareholders. (Dollars below reported in thousands except per share data.)
Three Months Ended | September 30, 2017 | September 30, 2016 | June 30, 2019 | June 30, 2018 | |||||||||||||||||||||||||||||
Weighted | Per | Weighted | Per | Weighted | Per | Weighted | Per | ||||||||||||||||||||||||||
Average | Share | Average | Share | Average | Share | Average | Share | ||||||||||||||||||||||||||
Net Income | Shares | Amount | Net Income | Shares | Amount | Net Income | Shares | Amount | Net Income | Shares | Amount | ||||||||||||||||||||||
Basic net income per share | $ | 1,745 | 2,401,083 | $ | 0.73 | $ | 1,396 | 2,366,530 | $ | 0.59 | $ | 2,115 | 2,688,005 | $ | 0.79 | $ | 1,832 | 2,666,120 | $ | 0.69 | |||||||||||||
Effect of dilutive stock options | - | 20,965 | - | - | 13,863 | - | - | 960 | - | - | 22,225 | (0.01 | ) | ||||||||||||||||||||
Diluted net income per share | $ | 1,745 | 2,422,048 | $ | 0.72 | $ | 1,396 | 2,380,393 | $ | 0.59 | $ | 2,115 | 2,688,965 | $ | 0.79 | $ | 1,832 | 2,688,345 | $ | 0.68 | |||||||||||||
Nine Months Ended | September 30, 2017 | September 30, 2016 | |||||||||||||||||||||||||||||||
Six Months Ended | June 30, 2019 | June 30, 2018 | |||||||||||||||||||||||||||||||
Weighted | Per | Weighted | Per | Weighted | Per | Weighted | Per | ||||||||||||||||||||||||||
Average | Share | Average | Share | Average | Share | Average | Share | ||||||||||||||||||||||||||
Net Income | Shares | Amount | Net Income | Shares | Amount | Net Income | Shares | Amount | Net Income | Shares | Amount | ||||||||||||||||||||||
Basic net income per share | $ | 5,400 | 2,387,960 | $ | 2.26 | $ | 4,261 | 2,369,517 | $ | 1.80 | $ | 3,361 | 2,683,122 | $ | 1.25 | $ | 4,628 | 2,663,842 | $ | 1.74 | |||||||||||||
Effect of dilutive stock options | - | 21,521 | - | - | 14,393 | - | - | 4,269 | - | - | 21,862 | (0.02 | ) | ||||||||||||||||||||
Diluted net income per share | $ | 5,400 | 2,409,481 | $ | 2.24 | $ | 4,261 | 2,383,910 | $ | 1.79 | $ | 3,361 | 2,687,391 | $ | 1.25 | $ | 4,628 | 2,685,704 | $ | 1.72 |
For the nine-monthsix-month period ended SeptemberJune 30, 2017,2019, there were no66,308 option shares, as adjusted, considered anti-dilutive and excluded from this calculation. For the nine-monthsix-month period ended SeptemberJune 30, 2016, option2018, there were 65,888 options shares, totaling 59,110 wereas adjusted, considered anti-dilutive and were excluded from this calculation.
Note 7.6. Stock Incentive Plans
At the Annual Shareholders Meeting on May 21, 2014, shareholders approved the Virginia National Bankshares Corporation 2014 Stock Incentive Plan (“2014 Plan”). The 2014 Plan makes available up to 250,000275,625 shares of the Company’s common stock, as adjusted by the 5% Stock Dividend and prior stock dividends, to be issued to plan participants. Similar to the Company’s 2003 Stock Incentive Plan (“2003 Plan”) and 2005 Stock Incentive Plan (“2005 Plan”), theThe 2014 Plan provides for granting of both incentive and nonqualified stock options, as well as restricted stock and other stock based awards. No new grants will be issued under the 2003 Plan or the 2005 Plan as these plans havethis plan has expired.
For all of the Company’s stock incentive plans (the “Plans”), the option price of incentive stock options will not be less than the fair value of the stock at the time an option is granted. Nonqualified stock options may be granted at prices established by the Board of Directors, including prices less than the fair value on the date of grant. Outstanding stock options generally expire in ten years from the grant date. Stock options generally vest by the fourth or fifth anniversary of the date of the grant.
A summary of the shares issued and available under each of the Plans is shown below as of SeptemberJune 30, 2017.2019. Share data and exercise price range per share have been adjusted to reflect the 5% Stock Dividend. Although the 2003 Plan and 2005 Plan havehas expired and no new grants will be issued under these plans,this plan, there were options issued before the plansplan expired which are still outstanding as shown below.
2003 Plan | 2005 Plan | 2014 Plan | 2005 Plan | 2014 Plan | ||||||||||||||||
Aggregate shares issuable | 128,369 | 230,000 | 250,000 | 253,575 | 275,625 | |||||||||||||||
Options issued, net of forfeited and expired options | (108,054 | ) | (67,507 | ) | (2,000 | ) | ||||||||||||||
Options or shares issued, net of forfeited and expired options | (59,870 | ) | (80,055 | ) | ||||||||||||||||
Cancelled due to Plan expiration | (20,315 | ) | (162,493 | ) | - | (193,705 | ) | - | ||||||||||||
Remaining available for grant | - | - | 248,000 | - | 195,570 | |||||||||||||||
Grants issued and outstanding: | ||||||||||||||||||||
Total vested and unvested shares | 1,379 | 67,415 | ||||||||||||||||||
Fully vested shares | 1,379 | 13,182 | ||||||||||||||||||
Exercise price range | $ | 13.69 to | $ | 27.39 to | ||||||||||||||||
$ | 13.69 | $ | 42.62 | |||||||||||||||||
Total vested and unvested shares | 15,568 | 26,357 | 2,000 | |||||||||||||||||
Fully vested shares | 15,568 | 25,107 | - | |||||||||||||||||
Exercise price range | $ $ | 18.26 to 18.26 | $ $ | 11.74 to 23.26 | $ $ | 30.20 to 30.20 |
The Company accounts for all of its stock incentive plans under recognition and measurement accounting principles which require that the compensation cost relating to stock-based payment transactions be recognized in the financial statements. Stock-based compensation arrangements include stock options and restricted stock. All stock-based payments to employees are required to be valued at a fair value on the date of grant and expensed based on that fair value over the applicable vesting period. For the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, the Company recognized $8$47 thousand and $20$17 thousand, respectively, in compensation expense for stock options. As of SeptemberJune 30, 2017,2019, there was $10$359 thousand in unamortizedunrecognized compensation expense remaining to be recognized in future reporting periods through 2021.2024.
Stock Options
Changes in the stock options outstanding related to all of the Plans are summarized as follows (dollarsbelow. Share and per share data have been adjusted to reflect the 5% Stock Dividend. (Dollars in thousands except per share data):
September 30, 2017 | |||||||||
Weighted Average | Aggregate | ||||||||
Number of Options | Exercise Price | Intrinsic Value | |||||||
Outstanding at January 1, 2017 | 98,893 | $ | 22.83 | $ | 592 | ||||
Issued | 2,000 | 30.20 | |||||||
Exercised | (41,903 | ) | 22.70 | ||||||
Forfeited | (4,600 | ) | 26.96 | ||||||
Expired | (10,465 | ) | 30.86 | ||||||
Outstanding at September 30, 2017 | 43,925 | $ | 20.96 | $ | 656 | ||||
Options exercisable at September 30, 2017 | 40,675 | $ | 20.59 | $ | 623 |
June 30, 2019 | ||||||||||
Weighted Average | Aggregate | |||||||||
Number of Options | Exercise Price | Intrinsic Value | ||||||||
Outstanding at January 1, 2019 | 86,611 | $ | 36.21 | |||||||
Issued | 420 | 36.19 | ||||||||
Exercised | (5,975 | ) | (17.04 | ) | $ | 120 | ||||
Expired | (12,262 | ) | 16.56 | |||||||
Outstanding at June 30, 2019 | 68,794 | $ | 41.37 | $ | 43 | |||||
Options exercisable at June 30, 2019 | 14,561 | $ | 39.49 | $ | 33 |
The fair value of any stock option grant is estimated at the grant date using the Black-Scholes pricing model. There were no stockStock option grants for 420 and 65,888 shares, as adjusted for the 5% Stock Dividend, were issued during the twelve months ended December 31, 2016. During the first ninesix months of 2017, a stock option grant of 2,000 shares was issued,2019 and the2018, respectively. The fair value on the grant issuedof each option granted in 2019 was estimated based on the assumptions noted in the following table:
For the | |||
Expected volatility1 | % | ||
Expected dividends2 | % | ||
Expected term (in years)3 | |||
Risk-free rate4 | % |
1 | ||||
2 | Calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant. | |||
3 | Based on the average of the contractual life and vesting period for the respective option. | |||
4 | Based upon an interpolated US Treasury yield curve interest rate that corresponds to the contractual life of the option, in effect at the time of the grant. |
Summary information pertaining to options outstanding at SeptemberJune 30, 20172019 is as follows:shown below. Share and per share data have been adjusted to reflect the 5% Stock Dividend.
Options Outstanding | Options Exercisable | |||||||||||
Weighted- | Weighted- | Weighted- | ||||||||||
Number of | Average | Average | Number of | Average | ||||||||
Options | Remaining | Exercise | Options | Exercise | ||||||||
Exercise Price | Outstanding | Contractual Life | Price | Exercisable | Price | |||||||
$ 11.74 to 20.00 | 19,118 | 2.1 Years | $ | 17.84 | 17,868 | $ | 17.82 | |||||
$ 20.01 to 30.00 | 22,807 | 0.9 Years | 22.76 | 22,807 | 22.76 | |||||||
$ 30.01 to 36.74 | 2,000 | 9.5 Years | 30.20 | 0 | - | |||||||
Total | 43,925 | 1.8 Years | $ | 20.96 | 40,675 | $ | 20.59 |
Options Outstanding | Options Exercisable | |||||||||||
Weighted- | Weighted- | Weighted- | ||||||||||
Number of | Average | Average | Number of | Average | ||||||||
Options | Remaining | Exercise | Options | Exercise | ||||||||
Exercise Price | Outstanding | Contractual Life | Price | Exercisable | Price | |||||||
$10.65 to $20.00 | 1,386 | 3.6 Years | $ | 13.70 | 1,386 | $ | 13.70 | |||||
$20.01 to $30.00 | 1,107 | 7.7 Years | 27.39 | 4 | 26.18 | |||||||
$30.01 to $40.00 | 8,820 | 8.9 Years | 39.36 | 1,680 | 39.52 | |||||||
$40.01 to $42.62 | 57,481 | 8.9 Years | 42.62 | 11,491 | 42.62 | |||||||
Total | 68,794 | 8.8 Years | $ | 41.37 | 14,561 | $ | 39.49 |
Restricted Stock Grants
On February 20, 2019, a total of 11,535 shares of stock, as adjusted for the 5% Stock Dividend, were granted to non-employee directors and certain members of executive management for services to be provided during the year ending December 31, 2019. Based on the market price on February 20, 2019 of $36.72, as adjusted for the 5% Stock Dividend, the total expense for these shares will be $424 thousand which will be expensed over the twelve months of 2019 as those services are provided. For the six months ended June 30, 2019, $212 thousand of this total has been realized in stock grant expense. There were no restricted stock grants outstanding throughout 2016 or as of September 30, 2017. No restricted stock grants were awardedissued during 2016 or the first nine months of 2017.year ended December 31, 2018.
Note 8.7. Fair Value Measurements
Determination of Fair Value
The Company follows ASC 820, “Fair Value Measurements and Disclosures,” to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. This codification clarifies that the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
Fair Value Hierarchy
In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 – | Valuation is based on quoted prices in active markets for identical assets and liabilities. | |
Level 2 – | Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market. | |
Level 3 – | Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market |
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:
Securities available for sale
Securities 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).
The following tables present the balances measured at fair value on a recurring basis as of SeptemberJune 30, 20172019 and December 31, 20162018 (dollars in thousands):
Fair Value Measurements at September 30, 2017 Using: | ||||||||||||||||||||||||
Fair Value Measurements at June 30, 2019 Using: | ||||||||||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||||||||||
Quoted Prices in | Significant Other | Significant | Active Markets | Other | Significant | |||||||||||||||||||
Active Markets for | Observable | Unobservable | for Identical | Observable | Unobservable | |||||||||||||||||||
Identical Assets | Inputs | Inputs | Assets | Inputs | Inputs | |||||||||||||||||||
Description | Balance | (Level 1) | (Level 2) | (Level 3) | Balance | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
Assets: | ||||||||||||||||||||||||
U.S. Government agencies | $ | 19,166 | $ | - | $ | 19,166 | $ | - | $ | 19,461 | $ | - | $ | 19,461 | $ | - | ||||||||
Mortgage-backed securities/CMOs | 31,624 | - | 31,624 | - | 26,465 | - | 26,465 | - | ||||||||||||||||
Municipal bonds | 20,259 | - | 20,259 | - | 10,922 | - | 10,922 | - | ||||||||||||||||
Total securities available for sale | $ | 71,049 | $ | - | $ | 71,049 | $ | - | $ | 56,848 | $ | - | $ | 56,848 | $ | - | ||||||||
Fair Value Measurements at December 31, 2016 Using: | ||||||||||||||||||||||||
Fair Value Measurements at December 31, 2018 Using: | ||||||||||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||||||||||
Quoted Prices in | Significant Other | Significant | Active Markets | Other | Significant | |||||||||||||||||||
Active Markets for | Observable | Unobservable | for Identical | Observable | Unobservable | |||||||||||||||||||
Identical Assets | Inputs | Inputs | Assets | Inputs | Inputs | |||||||||||||||||||
Description | Balance | (Level 1) | (Level 2) | (Level 3) | Balance | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
Assets: | ||||||||||||||||||||||||
U.S. Government agencies | $ | 14,501 | $ | - | $ | 14,501 | $ | - | $ | 18,974 | $ | - | $ | 18,974 | $ | - | ||||||||
Corporate bonds | 2,010 | - | 2,010 | - | ||||||||||||||||||||
Mortgage-backed securities/CMOs | 24,982 | - | 24,982 | - | 25,063 | - | 25,063 | - | ||||||||||||||||
Municipal bonds | 15,169 | - | 15,169 | - | 17,355 | - | 17,355 | - | ||||||||||||||||
Total securities available for sale | $ | 56,662 | $ | - | $ | 56,662 | $ | - | $ | 61,392 | $ | - | $ | 61,392 | $ | - |
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 consolidated financial statements:
Impaired Loans
Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3.
The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).
Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The Company had impaired loans of $2.5 million as of September 30, 2017 and $2.4 million as of December 31, 2016. None of these impaired loans required a valuation allowance after consideration was given for each borrowing as to the fair value of the collateral on the loan or the present value of expected future cash flows from the customer.
Other Real Estate Owned
Other real estate owned (“OREO”) is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the Allowance for Loan Losses. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Consolidated Statements of Income. As of SeptemberJune 30, 20172019 and December 31, 2016,2018, the Company had no OREO property.
Impaired Loans
Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral, or using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3.
Impaired loans that are measured based on expected future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest are not recorded at fair value, and are therefore excluded from fair value disclosure requirements.
The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).
Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The Company had impaired loans of $2.6 million as of June 30, 2019 and $2.8 million as of December 31, 2018. All impaired loans were measured based on expected future cash flows discounted at the loan’s effective interest rate.
ASC 825, “Financial Instruments,” requires disclosures about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
Cash and cash equivalents
For those short-termThe company uses the exit price notion in calculating the fair values of financial instruments including cash, due from banks, federal funds sold and interest-bearing deposits maturing within ninety days, the carrying amount is a reasonable estimate of fair value.
Securities
Fair values for securities, excluding restricted securities, are based on third party vendor pricing models. The carrying value of restricted securities consists of stock in FRB, FHLB, and CBBFC and is based on the redemption provisions of each entity and therefore excluded from the following table.
Loans
Thenot measured at fair value of performing loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar remaining maturities. This calculation ignores loan fees and certain factors affecting the interest rates charged on various loans, such as the borrower’s creditworthiness and compensating balances and dissimilar types of real estate held as collateral. The fair value of impaired loans is measured as described within the Impaired Loans section of this note.
Bank owned life insurance
The carrying amounts of bank owned life insurance approximate fair value.
Accrued interest
The carrying amounts of accrued interest approximate fair value.
Deposit liabilities
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.
Repurchase agreements and other borrowings
The carrying amounts of repurchase agreements and other borrowings, including federal funds purchased and FHLB advances, approximate fair value.
Off-balance sheet financial instruments
Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. For the reporting period, the fair value of unfunded loan commitments and standby letters of credit were deemed to be immaterial and therefore, they have not been included in the following tables.a recurring basis.
The carrying values and estimated fair values of the Company's financial instruments as of SeptemberJune 30, 20172019 and December 31, 20162018 are as follows (dollars in thousands):
Fair Value Measurement at September 30, 2017 using: | Fair Value Measurement at June 30, 2019 using: | |||||||||||||||||||||||||||||
Quoted Prices | Significant | Quoted Prices | Significant | |||||||||||||||||||||||||||
in Active | Other | Significant | in Active | Other | Significant | |||||||||||||||||||||||||
Markets for | Observable | Unobservable | Markets for | Observable | Unobservable | |||||||||||||||||||||||||
Identical Assets | Inputs | Inputs | Identical Assets | Inputs | Inputs | |||||||||||||||||||||||||
Carrying value | Level 1 | Level 2 | Level 3 | Fair Value | Carrying value | Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||
Cash and cash equivalent | $ | 10,298 | $ | 10,298 | $ | - | $ | - | $ | 10,298 | $ | 24,794 | $ | 24,794 | $ | - | $ | - | $ | 24,794 | ||||||||||
Available for sale securities | 71,049 | - | 71,049 | - | 71,049 | 56,848 | - | 56,848 | - | 56,848 | ||||||||||||||||||||
Loans, net | 497,200 | - | - | 490,081 | 490,081 | 516,946 | - | - | 501,483 | 501,483 | ||||||||||||||||||||
Bank owned life insurance | 14,229 | - | 14,229 | - | 14,229 | 16,190 | - | 16,190 | - | 16,190 | ||||||||||||||||||||
Accrued interest receivable | 1,850 | - | 395 | 1,455 | 1,850 | 2,264 | - | 278 | 1,986 | 2,264 | ||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||
Demand deposits and interest-bearing transaction and money market accounts | $ | 393,221 | $ | - | $ | 393,221 | $ | - | $ | 393,221 | ||||||||||||||||||||
Demand deposits and interest-bearing transaction, money market, and savings accounts | $ | 431,526 | $ | - | $ | 431,526 | $ | - | $ | 431,526 | ||||||||||||||||||||
Certificates of deposit | 114,049 | - | 113,992 | - | 113,992 | 121,993 | - | 122,730 | - | 122,730 | ||||||||||||||||||||
Repurchase agreements and other borrowings | 37,001 | - | 37,001 | - | 37,001 | |||||||||||||||||||||||||
Accrued interest payable | 123 | - | 123 | - | 123 | 317 | - | 317 | - | 317 | ||||||||||||||||||||
Fair Value Measurement at December 31, 2016 using: | Fair Value Measurement at December 31, 2018 using: | |||||||||||||||||||||||||||||
Quoted Prices | Significant | Quoted Prices | Significant | |||||||||||||||||||||||||||
in Active | Other | Significant | in Active | Other | Significant | |||||||||||||||||||||||||
Markets for | Observable | Unobservable | Markets for | Observable | Unobservable | |||||||||||||||||||||||||
Identical Assets | Inputs | Inputs | Identical Assets | Inputs | Inputs | |||||||||||||||||||||||||
Carrying value | Level 1 | Level 2 | Level 3 | Fair Value | Carrying value | Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||
Cash and cash equivalent | $ | 38,500 | $ | 38,500 | $ | - | $ | - | $ | 38,500 | $ | 18,874 | $ | 18,874 | $ | - | $ | - | $ | 18,874 | ||||||||||
Available for sale securities | 56,662 | - | 56,662 | - | 56,662 | 61,392 | - | 61,392 | - | 61,392 | ||||||||||||||||||||
Loans, net | 478,447 | - | - | 476,438 | 476,438 | 532,299 | - | - | 514,917 | 514,917 | ||||||||||||||||||||
Bank owned life insurance | 13,917 | - | 13,917 | - | 13,917 | 16,790 | - | 16,790 | - | 16,790 | ||||||||||||||||||||
Accrued interest receivable | 1,662 | - | 272 | 1,390 | 1,662 | 2,100 | - | 342 | 1,758 | 2,100 | ||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||
Demand deposits and interest-bearing transaction and money market accounts | $ | 409,625 | $ | - | $ | 409,625 | $ | - | $ | 409,625 | $ | 464,002 | $ | - | $ | 464,002 | $ | - | $ | 464,002 | ||||||||||
Certificates of deposit | 115,026 | - | 114,979 | - | 114,979 | 108,531 | - | 108,323 | - | 108,323 | ||||||||||||||||||||
Repurchase agreements and other borrowings | 19,700 | - | 19,700 | - | 19,700 | |||||||||||||||||||||||||
Accrued interest payable | 107 | - | 107 | - | 107 | 243 | - | 243 | - | 243 |
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. Consequently, the fair values of the Company’s financial instruments will fluctuate when interest rate levels change, and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk; however, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
Note 9.8. Other Comprehensive Income
A component of the Company’s other comprehensive income, in addition to net income from operations, is the recognition of the unrealized gains and losses on available for sale securities, net of income taxes. Reclassifications of realized gains and losses on available for sale securities are reported in the income statement as “Gains (losses) on sales and calls of securities” with the corresponding income tax effect reflected as a component of income tax expense. Amounts reclassified out of accumulated other comprehensive income are presented below for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 (dollars in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | |||||||||||||
Available for sale securities: | ||||||||||||||||
Realized gains (losses) on sales and calls of securities | $ | (78 | ) | $ | 181 | $ | (74 | ) | $ | 189 | ||||||
Tax effect | 27 | (62 | ) | 25 | (64 | ) | ||||||||||
Realized gains (losses), net of tax | $ | (51 | ) | $ | 119 | $ | (49 | ) | $ | 125 |
Three Months Ended | Six Months Ended | |||||||||||||
June 30, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | |||||||||||
Available for sale securities | ||||||||||||||
Realized gains on sales of securities | $ | 64 | $ | - | $ | 64 | $ | - | ||||||
Tax effect | (13 | ) | - | (13 | ) | - | ||||||||
Realized gains, net of tax | $ | 51 | $ | - | $ | 51 | $ | - |
Note 10.9. Segment Reporting
Virginia National Bankshares CorporationBeginning in 2019, the Company has twofour reportable segments, the Bank and VNB Wealth.
The Company’s commercial banking segment involves making loans and generating deposits from individuals, businesses and charitable organizations. Loan fee income, service charges from deposit accounts, and other non-interest-related fees, such as fees for debit cards and ATM usage and fees for treasury management services, generate additional income for this segment.
The VNB Wealth segment includes (a) trust income from the investment management, wealth advisory and trust and estate services offered by VNBTrust, comprised of both management fees and performance fees, (b) advisory and brokerage income from investment advisory, retail brokerage, annuity and insurance services offered under the name of VNB Investment Services and (c) royalty income from the sale of Swift Run Capital Management, LLC in 2013. More information on royalty income and the related sale can be found under Summary of Significant Accounting Policies in Note 1 of the notes to consolidated financial statements, which is found in Item 8. Financial Statements and Supplementary Data, in the Company’s Form 10-K Report for December 31, 2016 (the “Company’s 2016 Form 10-K”).
A management fee for administrative and technology support services provided by the Bank is charged to VNB Wealth. For both the nine months ended September 30, 2017 and 2016, management fees of $75 thousand were charged to VNB Wealth and eliminated in consolidated totals.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies provided earlier in this report.segments. Each reportable segment is a strategic business unit that offers different products and services. They are managed separately, because each segment appeals to different markets and, accordingly, require different technology and marketing strategies. The accounting policies of the segments are the same as those described in the summary of significant accounting policies provided earlier in this report.
The four reportable segments are:
● | Bank -The commercial banking segment involves making loans and generating deposits from individuals, businesses and charitable organizations. Loan fee income, service charges from deposit accounts, and other non- interest-related fees, such as fees for debit cards and ATM usage and fees for treasury management services, generate additional income for the Bank segment. |
● | VNB Investment Services- VNB Investment Services offers wealth management and investment advisory services. Revenue for this segment is generated primarily from investment advisory and financial planning fees, with a small and decreasing portion attributable to brokerage commissions. |
● | VNB Trust & Estate Services– VNB Trust & Estate Services offers corporate trustee services, trust and estate administration, IRA administration and custody services. Revenue for this segment is generated from administration, service and custody fees, as well as management fees which are derived from Assets Under Management and incentive income which is based on the investment returns generated on performance-based Assets Under Management. Investment management services currently are offered through in-house and third-party managers. In addition, royalty income, in the form of fixed and incentive fees, from the sale of Swift Run Capital Management, LLC in 2013 is reported as income of VNB Trust & Estate Services. More information on royalty income and the related sale can be found under Summary of Significant Accounting Policies in Note 1 of the notes to consolidated financial statements, which is found in Item 8. Financial Statements and Supplementary Data, in the Company’s Form 10-K Report for December 31, 2018. |
● | Masonry Capital- Masonry Capital offers investment management services for separately managed accounts and a private investment fund employing a value-based, catalyst-driven investment strategy. Revenue for this segment is generated from management fees which are derived from Assets Under Management and incentive income which is based on the investment returns generated on performance-based Assets Under Management. |
A management fee for administrative and technology support services provided by the Bank is allocated to the other three lines of business previously combined under VNB Wealth. For both the six months ended June 30, 2019 and 2018, management fees totaling $50 thousand were charged by the Bank and eliminated in consolidated totals.
Segment information for the three months and ninesix months ended SeptemberJune 30, 20172019 and 20162018 is shown in the following tables (dollars in thousands). The
VNB | VNB Trust & | |||||||||||||||||
Investment | Estate | Masonry | ||||||||||||||||
Three months ended June 30, 2019 | Bank | Services | Services | Capital | Consolidated | |||||||||||||
Net interest income | $ | 5,461 | $ | - | $ | - | $ | - | $ | 5,461 | ||||||||
Provision for (recovery of) loan losses | (64 | ) | - | - | - | (64 | ) | |||||||||||
Noninterest income | 1,137 | 156 | 348 | 59 | 1,700 | |||||||||||||
Noninterest expense | 4,073 | 147 | 303 | 162 | 4,685 | |||||||||||||
Income before income taxes | 2,589 | 9 | 45 | (103 | ) | 2,540 | ||||||||||||
Provision for income taxes | 435 | 2 | 10 | (22 | ) | 425 | ||||||||||||
Net income | $ | 2,154 | $ | 7 | $ | 35 | $ | (81 | ) | $ | 2,115 | |||||||
Total assets | $ | 633,573 | NR* | NR* | $ | 200 | $ | 633,773 | ||||||||||
VNB | VNB Trust & | |||||||||||||||||
Investment | Estate | Masonry | ||||||||||||||||
Six months ended June 30, 2019 | Bank | Services | Services | Capital | Consolidated | |||||||||||||
Net interest income | $ | 11,029 | $ | - | $ | - | $ | - | $ | 11,029 | ||||||||
Provision for loan losses | 620 | - | - | - | 620 | |||||||||||||
Noninterest income | 1,710 | 292 | 694 | 63 | 2,759 | |||||||||||||
Noninterest expense | 7,872 | 283 | 610 | 331 | 9,096 | |||||||||||||
Income before income taxes | 4,247 | 9 | 84 | (268 | ) | 4,072 | ||||||||||||
Provision for income taxes | 747 | 2 | 18 | (56 | ) | 711 | ||||||||||||
Net income | $ | 3,500 | $ | 7 | $ | 66 | $ | (212 | ) | $ | 3,361 |
* Not reportable. Asset information is not reported for these segments, as the assets previously allocated to VNB Wealth totalare reported at the Bank level subsequent to the merger of VNBTrust into the Bank effective July 1, 2018; also, assets specifically allocated to these VNB Wealth lines of business are insignificant and are no longer provided to the chief operating decision maker.
Prior to January 1, 2019, Virginia National Bankshares Corporation had two reportable segments, the Bank andVNB Wealth.
Three months ended June 30, 2018 | Bank | VNB Wealth | Consolidated | ||||||
Net interest income | $ | 5,653 | $ | 39 | $ | 5,692 | |||
Provision for loan losses | 701 | - | 701 | ||||||
Noninterest income | 703 | 604 | 1,307 | ||||||
Noninterest expense | 3,513 | 514 | 4,027 | ||||||
Income before income taxes | 2,142 | 129 | 2,271 | ||||||
Provision for income taxes | 412 | 27 | 439 | ||||||
Net income | $ | 1,730 | $ | 102 | $ | 1,832 | |||
Total assets | $ | 644,221 | $ | 10,436 | $ | 654,657 | |||
Six months ended June 30, 2018 | Bank | VNB Wealth | Consolidated | ||||||
Net interest income | $ | 11,315 | $ | 73 | $ | 11,388 | |||
Provision for loan losses | 605 | - | 605 | ||||||
Noninterest income | 1,346 | 1,675 | 3,021 | ||||||
Noninterest expense | 7,005 | 1,039 | 8,044 | ||||||
Income before income taxes | 5,051 | 709 | 5,760 | ||||||
Provision for income taxes | 983 | 149 | 1,132 | ||||||
Net income | $ | 4,068 | $ | 560 | $ | 4,628 |
Note 10. Leases
On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. Lease payments for short-term leases are recognized as shownlease expense on a straight-line basis over the lease term. Payments for leases with terms longer than twelve months are included in the determination of the lease liability.
The implementation of the new standard resulted in recognition of a right-of-use asset and lease liability of $4.3 million at the date of adoption, which is related to the Company’s lease of premises used in operations. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.
Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease for a term similar to the length of the lease, including any probable renewal options available. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.
Each of the Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.
The following tables representpresent information about the assetsCompany’s leases (dollars in thousands):
June 30, 2019 | ||||
Lease liability | $ | 3,945 | ||
Right-of-use asset | $ | 3,930 | ||
Weighted average remaining lease term | 5.50 years | |||
Weighted average discount rate | 2.82 | % |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
Lease Expense | 2019 | 2018 | 2019 | 2018 | ||||||||
Operating lease expense | $ | 204 | NR* | $ | 408 | NR* | ||||||
Short-term lease expense | 37 | NR* | 73 | NR* | ||||||||
Total lease expense | $ | 241 | $ | 226 | $ | 481 | $ | 451 | ||||
Cash paid for amounts included in lease liabilities | $ | 197 | NR* | $ | 393 | NR* | ||||||
* Not reportable |
A maturity analysis of VNB Wealthoperating lease liabilities and shouldreconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):
Undiscounted Cash Flow | June 30, 2019 | |||
Six months ending December 31, 2019 | $ | 395 | ||
Twelve months ending December 31, 2020 | 799 | |||
Twelve months ending December 31, 2021 | 807 | |||
Twelve months ending December 31, 2022 | 767 | |||
Twelve months ending December 31, 2023 | 680 | |||
Twelve months ending December 31, 2024 | 469 | |||
Thereafter | 354 | |||
Total undiscounted cash flows | $ | 4,271 | ||
Less: Discount | (326 | ) | ||
Lease liability | $ | 3,945 |
Note 11. Commitments and Contingent Liabilities
The Company is currently involved in pending and threatened legal proceedings, both relating to the same matter. While management does not be confusedbelieve that the claims against the Company have merit and is prepared to vigorously defend such claims, the Company accrued a contingent liability of $300 thousand in accordance with client assets under management.
Three months ended September 30, 2017 | Bank | VNB Wealth | Consolidated | |||||||||
Net interest income | $ | 5,457 | $ | 26 | $ | 5,483 | ||||||
Provision for loan losses | 168 | - | 168 | |||||||||
Noninterest income | 610 | 548 | 1,158 | |||||||||
Noninterest expense | 3,380 | 537 | 3,917 | |||||||||
Income before income taxes | 2,519 | 37 | 2,556 | |||||||||
Provision for income taxes | 798 | 13 | 811 | |||||||||
Net income | $ | 1,721 | $ | 24 | $ | 1,745 | ||||||
Total assets | $ | 600,690 | $ | 9,638 | $ | 610,328 | ||||||
Three months ended September 30, 2016 | Bank | VNB Wealth | Consolidated | |||||||||
Net interest income | $ | 4,526 | $ | 11 | $ | 4,537 | ||||||
Provision for loan losses | 104 | - | 104 | |||||||||
Noninterest income | 909 | 504 | 1,413 | |||||||||
Noninterest expense | 3,291 | 530 | 3,821 | |||||||||
Income (loss) before income taxes | 2,040 | (15 | ) | 2,025 | ||||||||
Provision for (benefit of) income taxes | 634 | (5 | ) | 629 | ||||||||
Net income (loss) | $ | 1,406 | $ | (10 | ) | $ | 1,396 | |||||
Total assets | $ | 559,933 | $ | 9,606 | $ | 569,539 | ||||||
Nine months ended September 30, 2017 | Bank | VNB Wealth | Consolidated | |||||||||
Net interest income | $ | 15,798 | $ | 66 | $ | 15,864 | ||||||
Provision for loan losses | 213 | - | 213 | |||||||||
Noninterest income | 1,977 | 1,757 | 3,734 | |||||||||
Noninterest expense | 9,858 | 1,597 | 11,455 | |||||||||
Income before income taxes | 7,704 | 226 | 7,930 | |||||||||
Provision for income taxes | 2,452 | 78 | 2,530 | |||||||||
Net income | $ | 5,252 | $ | 148 | $ | 5,400 | ||||||
Nine months ended September 30, 2016 | Bank | VNB Wealth | Consolidated | |||||||||
Net interest income | $ | 13,447 | $ | 34 | $ | 13,481 | ||||||
Provision for (recovery of) loan losses | (291 | ) | - | (291 | ) | |||||||
Noninterest income | 2,332 | 1,455 | 3,787 | |||||||||
Noninterest expense | 9,645 | 1,732 | 11,377 | |||||||||
Income (loss) before income taxes | 6,425 | (243 | ) | 6,182 | ||||||||
Provision for (benefit of) income taxes | 2,003 | (82 | ) | 1,921 | ||||||||
Net income (loss) | $ | 4,422 | $ | (161 | ) | $ | 4,261 |
applicable accounting guidance and based on the Company’s estimate of a range of possible loss. This amount (a) has been recognized as a loss and appears within other noninterest expense in the Consolidated Statements of Income for the three and six months ended June 30, 2019 and (b) appears as a contingent liability within accrued interest payable and other liabilities in the Consolidated Balance Sheet as of June 30, 2019.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Virginia National Bankshares Corporation’s consolidated financial statements, and notes thereto, for the year ended December 31, 2016,2018, included in the Company’s 20162018 Form 10-K. Per share data for June 30, 2019 and all preceding periods disclosed have been adjusted to reflect the 5% stock dividend effective July 5, 2019 (the “5% Stock Dividend”). Operating results for the three and ninesix months ended SeptemberJune 30, 20172019 are not necessarily indicative of the results for the year ending December 31, 20172019 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, including but not limited to, statements concerning future results of operations or financial position, borrowing capacity and future liquidity, future investment results, future credit exposure, future loan losses and plans and objectives for future operations, change in laws and regulations applicable to the Company and its subsidiaries, adequacy of funding sources, actuarial expected benefit payment, valuation of foreclosed assets, regulatory requirements, economic environment and other statements contained herein regarding matters that are not historical facts, are “forward-looking statements” as defined in the Securities Exchange Act of 1934. Such statements are often characterized by use of qualified words such as “expect,” “believe,” “estimate,” “project,” “anticipate,” “intend,” “will,” “should” or words of similar meaning or other statements concerning the opinions or judgment of the Company and its management about future events. These statements are not historical facts but instead are subject to numerous assumptions, risks and uncertainties, and represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. Any forward-looking statements made by the Company speak only as of the date on which such statements are made. Our actual results and financial position may differ materially from the anticipated results and financial condition indicated in or implied by these forward-looking statements. The Company makes no commitment to update or revise forward-looking statements in order to reflect new information or subsequent events or changes in expectations.
Factors that could cause our actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following: inflation, interest rates, market and monetary fluctuations; geopolitical developments including acts of war and terrorism and their impact on economic conditions; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; changes, particularly declines, in economic and business conditions, both generally and in the local markets in which the Company operates; the financial condition of the Company’s borrowers; competitive pressures on loan and deposit pricing and demand; changes in technology and their impact on the marketing of new products and services and the acceptance of these products and services by new and existing customers; the willingness of customers to substitute competitors’ products and services for the Company’s products and services; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); changes in accounting principles, policies and guidelines; the ability to retain key personnel; incorrect assumptions regarding the allowance for loan losses; risks and assumptions associated with mergers and acquisitions and other expansion activities; other risks and uncertainties described from time to time in press releases and other public filings; and the Company’s performance in managing the risks involved in any of the foregoing. The foregoing list of important factors is not exclusive, and the Company will not update any forward-looking statement, whether written or oral, that may be made from time to time.
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 20162018 Form 10-K. There have been no significant changes in the Company’s application of critical accounting policies since December 31, 2016.2018.
FINANCIAL CONDITION
Total assets
The total assets of the Company as of SeptemberJune 30, 20172019 were $610.3$633.8 million. This is a $5.3an $11.0 million increasedecrease from the $605.0$644.8 million total assets reported at December 31, 20162018 and a $40.8$20.9 million increasedecrease from the $569.5$654.7 million reported at SeptemberJune 30, 2016. The year-over-year net growth2018. A $15.4 million decrease in loans since December 31, 2018 was the major reason for the decrease in assets was funded largely by a $23.5 million expansion in short-term borrowings and a $12.1 million expansion in deposits.since year-end.
Federal funds sold
The Company had overnight federal funds sold of $3.2$12.3 million at Septemberas of June 30, 2017,2019, compared to $28.5 million and $32.9$7.1 million as of December 31, 20162018 and September$18.3 million as of June 30, 2016, respectively.2018. 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 Federal Reserve Bank of Richmond’s Excess Balance Account (“EBA”). The EBA is a limited-purpose account at the Federal Reserve Bank for the maintenance of excess cash balances held by financial institutions. The EBA eliminates the potential of concentration risk that comes with depositing excess balances with one or multiple correspondent banks.
Securities
The Company’s investment securities portfolio as of SeptemberJune 30, 20172019 totaled $73.8$58.5 million, an increasea decrease of $15.4$4.5 million fromcompared with the $58.4$63.0 million reported at December 31, 20162018 and an increasea decrease of $1.6$8.2 million from the $72.2$66.7 million reported at SeptemberJune 30, 2016.2018. Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company. ThroughoutDuring June of 2019, management sold approximately $10.4 million of securities, realizing a gain of $64 thousand, to reposition the third quarter of 2017, lower earning securities were sold and the proceeds were either used to purchaseportfolio for higher yield. Approximately $6.9 million had been reinvested into higher yielding securities or fund higher earning loans as of June 30, 2019, and the loan funding needs arose.remaining $3.5 million in purchases settle in July and August. At SeptemberJune 30, 2017,2019 and June 30, 2018, the investment securities holdings represented 12.1%9.2% and 10.2% of the Company’s total assets, compared to 9.7% and 12.7% of total assets at December 31, 2016 and September 30, 2016, respectively.
The Company’s investment securities portfolio included restricted securities totaling $2.7 million as of September 30, 2017 and $1.7 million as of June 30, 2019 and December 31, 2016 and September2018, compared to $3.2 million as of June 30, 2016.2018. These securities represent stock in the Federal Reserve Bank of Richmond (“FRB-R”), the Federal Home Loan Bank of Atlanta (“FHLB-A”), and CBB Financial Corporation (“CBBFC”), the holding company for Community Bankers Bank. The level of FRB-R and FHLB-A stock that the Company is required to hold is determined in accordance with membership guidelines provided by the Federal Reserve Bank Board of Governors or the Federal Home Loan Bank of Atlanta. The $1.0 million increase from year-enddecrease compared to June 30, 2018 was required by FHLB-A as a result ofdue to the decrease in the Company’s short-term borrowing initiated duringwith the thirdFHLB-A from the second quarter of 2017.2018 to the second quarter of 2019. Stock ownership in the bank holding company for Community Bankers’ Bank provides the Bank with several benefits that are not available to non-shareholder correspondent banks. None of these restricted securities are traded on the open market and can only be redeemed by the respective issuer.
At SeptemberJune 30, 2017,2019, the unrestricted securities portfolio totaled $71.0$56.8 million. The following table summarizes the Company's available for sale securities by type as of SeptemberJune 30, 2017,2019, December 31, 2016,2018, and SeptemberJune 30, 20162018 (dollars in thousands):
September 30, 2017 | December 31, 2016 | September 30, 2016 | ||||||||||||||||
Percent | Percent | Percent | ||||||||||||||||
Balance | of Total | Balance | of Total | Balance | of Total | |||||||||||||
U.S.Government agencies | $ | 19,166 | 27.0 | % | $ | 14,501 | 25.6 | % | $ | 14,955 | 21.2 | % | ||||||
Corporate bonds | - | 0.0 | % | 2,010 | 3.5 | % | 6,126 | 8.7 | % | |||||||||
Mortgage-backed securities/CMOs | 31,624 | 44.5 | % | 24,982 | 44.1 | % | 31,497 | 44.7 | % | |||||||||
Municipal bonds | 20,259 | 28.5 | % | 15,169 | 26.8 | % | 17,869 | 25.4 | % | |||||||||
Total available for sale securities | $ | 71,049 | 100.0 | % | $ | 56,662 | 100.0 | % | $ | 70,447 | 100.0 | % |
June 30, 2019 | December 31, 2018 | June 30, 2018 | ||||||||||||||||
Percent | Percent | Percent | ||||||||||||||||
Balance | of Total | Balance | of Total | Balance | of Total | |||||||||||||
U.S. Government agencies | $ | 19,461 | 34.2 | % | $ | 18,974 | 30.9 | % | $ | 18,746 | 29.5 | % | ||||||
Mortgage-backed securities/CMOs | 26,465 | 46.6 | % | 25,063 | 40.8 | % | 27,117 | 42.6 | % | |||||||||
Municipal bonds | 10,922 | 19.2 | % | 17,355 | 28.3 | % | 17,718 | 27.9 | % | |||||||||
Total available for sale securities | $ | 56,848 | 100.0 | % | $ | 61,392 | 100.0 | % | $ | 63,581 | 100.0 | % |
The securities are held primarily for earnings, liquidity, and asset/liability management purposes and 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.
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 borrower. The portfolio strategies include seeking industry, loan size, and loan type diversification in order to minimize credit exposure and originating loans in markets with which the Company is familiar. The predominant market area for loans includes Charlottesville, Albemarle County, Orange County, Harrisonburg, Winchester, Frederick County, Richmond and areas in the Commonwealth of Virginia that are within a 75 mile radius of any Virginia National Bank office.
As of SeptemberJune 30, 2017,2019, total loans were $501.0$521.8 million, compared to the balance of $482.1$537.2 million as of December 31, 20162018 and $430.9$535.0 million at SeptemberJune 30, 2016.2018. Loans as a percentage of total assets at SeptemberJune 30, 20172019 were 82.1%82.3%, compared to 75.7%81.7% as of SeptemberJune 30, 2016.2018. Loans as a percentage of deposits at SeptemberJune 30, 20172019 were 98.8%94.3%, compared to 87.0%99.7% as of SeptemberJune 30, 2016.2018. This loan-to-deposit ratio is in line with our strategy to achieve an effective mix of earning assets and liabilities on our balance sheet.
The following table summarizes the Company's loan portfolio by type of loan as of SeptemberJune 30, 2017,2019, December 31, 2016,2018, and SeptemberJune 30, 20162018 (dollars in thousands):
September 30, 2017 | December 31, 2016 | September 30, 2016 | June 30, 2019 | December 31, 2018 | June 30, 2018 | |||||||||||||||||||||||||||||||
Percent | Percent | Percent | Percent | Percent | Percent | |||||||||||||||||||||||||||||||
Balance | of Total | Balance | of Total | Balance | of Total | Balance | of Total | Balance | of Total | Balance | of Total | |||||||||||||||||||||||||
Commercial and industrial | $ | 82,214 | 16.4 | % | $ | 66,217 | 13.7 | % | $ | 60,884 | 14.1 | % | $ | 86,610 | 16.6 | % | $ | 85,027 | 15.8 | % | $ | 85,146 | 15.9 | % | ||||||||||||
Real estate - commercial | 217,599 | 43.4 | % | 221,410 | 45.9 | % | 203,670 | 47.3 | % | 245,906 | 47.1 | % | 254,739 | 47.4 | % | 255,223 | 47.7 | % | ||||||||||||||||||
Real estate - residential mortgage | 92,470 | 18.5 | % | 90,225 | 18.7 | % | 87,330 | 20.3 | % | 96,472 | 18.5 | % | 98,139 | 18.3 | % | 84,839 | 15.8 | % | ||||||||||||||||||
Real estate - construction | 25,147 | 5.0 | % | 15,682 | 3.3 | % | 19,628 | 4.5 | % | 14,320 | 2.8 | % | 17,524 | 3.3 | % | 19,627 | 3.7 | % | ||||||||||||||||||
Consumer loans | 83,594 | 16.7 | % | 88,601 | 18.4 | % | 59,377 | 13.8 | % | 78,455 | 15.0 | % | 81,761 | 15.2 | % | 90,170 | 16.9 | % | ||||||||||||||||||
Total loans | $ | 501,024 | 100.0 | % | $ | 482,135 | 100.0 | % | $ | 430,889 | 100.0 | % | $ | 521,763 | 100.0 | % | $ | 537,190 | 100.0 | % | $ | 535,005 | 100.0 | % |
From the $430.9 million outstanding at September 30, 2016, gross loans have increased $70.1Loan balances declined $15.4 million, or 16.3%.2.9%, since December 31, 2018 and declined $13.2 million, or 2.5%, from June 30, 2018. Over the one-year period, the significantloan fluctuation consisted of $36.6 million in new funding from organic loan growth was attributable to approximately $30.6and $28.0 million in net organic loan growth supplementedin purchased loans, offset by purchases of loans.$55.4 million in regular payoffs and normal amortization, $14.9 million in payoffs from businesses sold or properties sold by borrowers, and $7.5 million in a participation purchased being recalled by the primary lender. The purchase of loans is considered a secondary strategy, which allows the Company to supplement organic loan growth and enhance earnings.growth. Purchased loans with balances outstanding of $91.4$115.6 million as of SeptemberJune 30, 20172019 were comprised of:
● | Student loanstotaling |
● | Loans guaranteed by a U.S. government agency |
● | Syndicated loanstotaling |
● | Mortgage loanstotaling $18.5 million. In the fourth quarter of 2018, the Company purchased a package of 1-to-4 family residential mortgages. Each of the 42 adjustable rate loans purchased were individually underwritten by the Company prior to the closing of the purchase. The collateral on these loans is located primarily on the East Coast of the United States. |
Management will continue to evaluate loan purchase transactions as needed to supplement organic loan growth, as part of its strategy to strengthen earnings and attain an effective mix of earning assets.
While the increase in loan balances slowed to a modest $18.9 million during the first three quarters of 2017, compared to December 31, 2016, the Company experienced significant loan growth in the fourth quarter of 2016 and each of the five quarters ending December 31, 2015. The positive impact to earnings from that significant loan growth has been realized in the first nine months of 2017 and should continue throughout the remainder of the year.
Loan quality
Non-accrual loans remained low and totaled $186$390 thousand at SeptemberJune 30, 2017,2019, compared to the $167$615 thousand and $173$447 thousand reported at December 31, 20162018 and SeptemberJune 30, 2016,2018, respectively. At September 30, 2017, theThe Company had loans in its portfolio totaling $342$617 thousand, $895 thousand and $143 thousand, as of June 30, 2019, December 31, 2018 and June 30, 2018, respectively, that were ninety or more days past due which were all still accruing interest as the Company deems them to be collectible.
At SeptemberJune 30, 2017,2019 and December 31, 2018, the Company had loans classified as impaired loans in the amount of $2.5$2.6 million, classified as impaired loans, of which $2.3compared to $2.9 million were Troubled Debt Restructurings (TDRs) that are still accruing interest. At December 31, 2016 and Septemberat June 30, 2016, the Company had loans in the amount of $2.4 million classified as impaired loans, of which $2.3 million were Troubled Debt Restructurings (TDRs) that are still accruing interest.2018. Based on regulatory guidance on Student Lending, issued in May, 2016, the Company has classified 6168 of its purchased student loans as TDRs for a total of $937 thousand$1.2 million as of SeptemberJune 30, 2017.2019. 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 restructurings. 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. As all student loans purchased are fully insured, the Company does not expect to experience a loss onManagement has evaluated these loans individually for impairment and included any potential 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 allowance for loan losses 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 allowance for loan losses. The Company applies historical loss rates to various pools of loans based on risk rating classifications. In addition, the adequacy of the allowance is further evaluated by applying estimates of loss that could be attributable to any one of the following eight qualitative factors:
Changes in national and local economic | |
| |
2) | Changes in the value of underlying collateral; |
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 |
|
As discussed earlier, the Company utilizes a loss migration model. Migration analysis 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.
The relationship of the allowance for loan losses to total loans at SeptemberJune 30, 2017,2019, December 31, 2016,2018, and SeptemberJune 30, 20162018 appears below (dollars in thousands):
September 30, | December 31, | September 30, | June 30, | December 31, | June 30, | |||||||||||||||||||
2017 | 2016 | 2016 | 2019 | 2018 | 2018 | |||||||||||||||||||
Loans held for investment at period-end | $ | 501,024 | $ | 482,135 | $ | 430,889 | $ | 521,763 | $ | 537,190 | $ | 535,005 | ||||||||||||
Allowance for loan losses | $ | 3,824 | $ | 3,688 | $ | 3,278 | $ | 4,817 | $ | 4,891 | $ | 4,698 | ||||||||||||
Allowance as a percent of period-end loans | 0.76 | % | 0.77 | % | 0.76 | % | 0.92 | % | 0.91 | % | 0.88 | % |
A provisionProvisions for loan losses totaling $213$620 thousand wasand $605 thousand were recorded in the first ninesix months of 2017, while a recovery of $291 thousand was recognized for the first nine months of 2016.2019 and 2018, respectively. The following is a summary of the changes in the allowance for loan losses for the ninesix months ended SeptemberJune 30, 20172019 and SeptemberJune 30, 20162018 (dollars in thousands):
2017 | 2016 | 2019 | 2018 | |||||||||||||
Allowance for loan losses, January 1 | $ | 3,688 | $ | 3,567 | $ | 4,891 | $ | 4,043 | ||||||||
Charge-offs | (111 | ) | (36 | ) | (823 | ) | (1 | ) | ||||||||
Recoveries | 34 | 38 | 129 | 51 | ||||||||||||
Provision for (recovery of) loan losses | 213 | (291 | ) | |||||||||||||
Allowance for loan losses, September 30 | $ | 3,824 | $ | 3,278 | ||||||||||||
Provision for loan losses | 620 | 605 | ||||||||||||||
Allowance for loan losses, June 30 | $ | 4,817 | $ | 4,698 |
For additional insight into management’s approach and methodology in estimating the allowance for loan losses, please refer to the earlier discussion of “Allowance for Loan Losses” in Note 4 of the Notes to Consolidated Financial Statements. In addition, Note 4 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 Allowance for Loan Losses on a quarterly basis to ensure it is adequate based upon the calculated potential losses inherent in the portfolio. Management believes the allowance for loan losses was adequately provided for as of SeptemberJune 30, 2017.2019.
Premises and equipment
The Company’s premises and equipment, net of depreciation, as of SeptemberJune 30, 20172019 totaled $7.4$6.6 million compared to the $8.0 million and $8.2$7.0 million as of December 31, 20162018 and September$7.1 million as of June 30, 2016, respectively.2018. 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 SeptemberJune 30, 2017,2019, the Company and its subsidiaries occupied sixfive full-service banking facilities in the cities of Charlottesville and Winchester, as well as the countiescounty of Albemarle and Orange in Virginia. The Company’s lease for the Loudoun Mall bankingCompany also operates a drive-through location at 301 East Water Street, Charlottesville, Virginia. The Bank closed its Orange, Virginia office located at 186 North Loudoun Street, Winchester, Virginia expired, and the Company permanently closed that office on October 28, 2016. The Company is continuing to search for at least one new branch office location in Winchester. Any new offices that the Company decides to add are expectedeffective April 13, 2018; expanded messenger service continues to be small commercial spaces.available to the customers within and surrounding Orange, Virginia.
The multi-story office building at 404 People Place, Charlottesville, Virginia, located in Albemarle County, also serves as the Company’s corporate headquarters and operations center, as well as the principal offices of VNB Wealth.Investment Services and Masonry Capital. VNB Trust & Estate Services’ main office is located at 112 Third Street, SE, Charlottesville, Virginia.
Both the Arlington Boulevard facility in Charlottesville and the People Place facility also contain office space that is currently under lease to tenants.
Leases
$3.9 million of the increase in each of Other Assets and Other Liabilities resulted from the Company’s implementation of ASU 2016-02 “Leases” (Topic 842). This implementation required the Company to recognize right-of-use assets, which 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
Depository accounts represent the Company’s primary source of funds and are comprised of demand deposits, interest-bearing checking, accounts, money market, depositand savings accounts andas well as time deposits. These deposits have been provided predominantly by individuals, businesses and charitable organizations in the Charlottesville/Albemarle area, the Orange County area, and the Winchester area.areas.
Total deposits as of SeptemberJune 30, 20172019 were $507.3$553.5 million, down $17.4$19.0 million compared to the balances of $524.7$572.5 million at December 31, 2016 and2018, yet up $12.1$16.8 million compared to the $495.2$536.7 million total as of SeptemberJune 30, 2016. The year-over-year increase was realized predominately in money market accounts.2018.
Deposit accounts | ||||||||||||||||||||||||||||||||||||
(dollars in thousands) | June 30, 2019 | December 31, 2018 | June 30, 2018 | |||||||||||||||||||||||||||||||||
% of Total | % of Total | % of Total | ||||||||||||||||||||||||||||||||||
(dollars in thousands) | September 30, 2017 | December 31, 2016 | September 30, 2016 | |||||||||||||||||||||||||||||||||
Balance | % of Total Deposits | Balance | % of Total Deposits | Balance | % of Total Deposits | Balance | Deposits | Balance | Deposits | Balance | Deposits | |||||||||||||||||||||||||
No cost and low cost deposits: | ||||||||||||||||||||||||||||||||||||
Noninterest demand deposits | $ | 166,544 | 32.8 | % | $ | 176,098 | 33.5 | % | $ | 176,063 | 35.6 | % | $ | 158,166 | 28.6 | % | $ | 185,819 | 32.4 | % | $ | 172,744 | 32.2 | % | ||||||||||||
Interest checking accounts | 98,528 | 19.4 | % | 96,869 | 18.5 | % | 91,808 | 18.5 | % | 97,620 | 17.6 | % | 106,884 | 18.7 | % | 86,008 | 16.0 | % | ||||||||||||||||||
Money market deposit accounts | 128,149 | 25.3 | % | 136,658 | 26.0 | % | 114,903 | 23.2 | % | |||||||||||||||||||||||||||
Money market and savings deposit accounts | 175,740 | 31.8 | % | 171,299 | 29.9 | % | 146,505 | 27.3 | % | |||||||||||||||||||||||||||
Total noninterest and low cost deposit accounts | 393,221 | 77.5 | % | 409,625 | 78.0 | % | 382,774 | 77.3 | % | 431,526 | 78.0 | % | 464,002 | 81.0 | % | 405,257 | 75.5 | % | ||||||||||||||||||
Time deposit accounts: | ||||||||||||||||||||||||||||||||||||
Certificates of deposit | 97,273 | 19.2 | % | 90,084 | 17.2 | % | 94,469 | 19.1 | % | 96,925 | 17.5 | % | 81,265 | 14.2 | % | 79,084 | 14.7 | % | ||||||||||||||||||
CDARS deposits | 16,776 | 3.3 | % | 24,942 | 4.8 | % | 17,936 | 3.6 | % | 25,068 | 4.5 | % | 27,266 | 4.8 | % | 52,405 | 9.8 | % | ||||||||||||||||||
Total certificates of deposit and other time deposits | 114,049 | 22.5 | % | 115,026 | 22.0 | % | 112,405 | 22.7 | % | 121,993 | 22.0 | % | 108,531 | 19.0 | % | 131,489 | 24.5 | % | ||||||||||||||||||
Total deposit account balances | $ | 507,270 | 100.0 | % | $ | 524,651 | 100.0 | % | $ | 495,179 | 100.0 | % | $ | 553,519 | 100.0 | % | $ | 572,533 | 100.0 | % | $ | 536,746 | 100.0 | % |
Noninterest-bearing demand deposits on SeptemberJune 30, 20172019 were $166.5$158.2 million, representing 32.8%28.6% of total deposits. Interest-bearing transaction, and money market, and savings accounts totaled $226.7$273.4 million, and represented 44.7%49.4% of total deposits at SeptemberJune 30, 2017.2019. Collectively, noninterest-bearing and interest-bearing transaction and money market accounts represented 77.5%78.0% of total deposit accounts at SeptemberJune 30, 2017.2019. These account types are an excellent source of low-cost funding for the Company.
The Company implemented insured cash sweep (“ICS®”) deposit products during the third quarter of 2018. ICS®deposit balances of $16.0 million and $24.4 million are included in the interest checking accounts and the money market and savings deposit accounts balances, respectively, in the table above, as of June 30, 2019. As of December 31, 2018, ICS®deposit balances of $15.8 million and $21.0 million are included in the interest checking accounts and the money market and savings deposit account balances, respectively.
The remaining 22.5%22.0% of total deposits consisted of certificates of deposit and other time deposit accounts totaling $114.0$122.0 million at SeptemberJune 30, 2017.2019. Included in this deposit total are Certificate of Deposit Account Registry Service CDs, known as CDARSTM, whereby depositors can obtain FDIC deposit insurance on account balances of up to $50 million. CDARSTMdeposits totaled $16.8$25.1 million as of SeptemberJune 30, 2017.2019, all of which were reciprocal balances for the Bank’s customers.
Repurchase agreements and other borrowingsBorrowings
Short-term borrowings, consisting primarily of FHLB Advances, repurchase agreements,Federal Home Loan Bank (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.
During the third quarter of 2017, the Company borrowed $25 million from the FHLB, which remained outstanding as of September 30, 2017. The Company had no outstanding borrowings from the FHLB as of December 31, 2016 or September 30, 2016. Average borrowings from the FHLB were $8.2 million during the third quarter of 2017.
Repurchase agreements, also referred to as securities sold under agreement to repurchase, arewere available to non-individual accountholders on an overnight term through the Company’s investment sweep product. Under the agreements to repurchase, invested funds arewere fully collateralized by security instruments that arewere pledged on behalf of customers utilizing this product. The repurchase agreement product was discontinued by the Company effective December 31, 2018, in connection with the roll-out of ICS®to customers, and therefore, there were no balances in repurchase agreements as of June 30, 2019 or December 31, 2018. Total balances in repurchase agreements as of SeptemberJune 30, 20172018 were $12.0 million, compared to $19.7 million$13.4 million.
The Company has a collateral dependent line of credit with the FHLB of Atlanta. As of June 30, 2019 and $13.5 million as of December 31, 2016 and September2018, the Company had no outstanding balances from FHLB advances. As of June 30, 2016.2018, the Company had outstanding FHLB advances of $35.0 million.
Additional borrowing arrangements maintained by the Bank include formal federal funds lines with four major regional correspondent banks. The Company had no outstanding balances in borrowed overnight federal funds as of SeptemberJune 30, 2017, yet averaged $702 thousand for the third quarter of the year. The Company had no balances in federal funds purchased as of2019, December 31, 20162018 or SeptemberJune 30, 2016.2018.
Shareholders' equity and regulatory capital ratios
The following table displays the changes in shareholders' equity for the Company from December 31, 20162018 to SeptemberJune 30, 20172019 (dollars in thousands):
Equity, December 31, 2016 | $ | 59,054 | |||||
Equity, December 31, 2018 | $ | 70,742 | |||||
Net income | 5,400 | 3,361 | |||||
Other comprehensive income | 483 | 1,240 | |||||
Cash dividends declared | (1,077 | ) | (1,573 | ) | |||
Stock granted | 424 | ||||||
Stock options exercised | 981 | 102 | |||||
Equity increase due to expensing of stock options | 8 | 47 | |||||
Equity, September 30, 2017 | $ | 64,849 | |||||
Equity, June 30, 2019 | $ | 74,343 |
The Basel III regulatory capital rules effective January 1, 2015 required the Company and its subsidiaries to comply with the following new minimum capital ratios: (i) a new common equity Tier 1 capital ratio of 4.50% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6% of risk-weighted assets (increased from the prior requirement of 4.00%); (iii) a total capital ratio of 8.00% of risk-weighted assets (unchanged from the prior requirement); and (iv) a leverage ratio of 4.00% of total assets (unchanged from the prior requirement). These were the initial capital requirements.
Beginning January 1, 2016 a capital conservation buffer requirement began to be phased in over a four-year period, beginning at 0.625% of risk-weighted assets and increasing annually to 2.50% at January 1, 2019. Therefore, for the calendar year 2017,2019, this 1.25%2.5% buffer effectively results in the minimum (i) common equity Tier 1 capital ratio of 5.75%7.00% of risk-weighted assets; (ii) Tier 1 capital ratio of 7.25%8.50% of risk-weighted assets; and (iii) total capital ratio of 9.25%10.50% of risk-weighted assets. The minimum leverage ratio remains at 4.00%. For additional information regarding the new capital requirements, refer to the Supervision and Regulation section, under Item 1. Business, found in the Company’s Form 10-K Report for December 31, 2016.2018.
Using the new capital requirements, the Company’s capital ratios remain well above the levels designated by bank regulators as "well capitalized" at SeptemberJune 30, 2017.2019. Under the current risk-based capital guidelines of federal regulatory authorities, the Company’s common equity Tier 1 capital ratio and Tier 1 capital ratio are both at 12.75%14.71% of its risk-weighted assets and are well in excess of the well-capitalized minimum capital requirements of 6.50% and 8.00%, respectively. Additionally, the Company has a total capital ratio of 13.51%15.68% of its risk-weighted assets and leverage ratio of 10.30%11.51% of total assets, which are both well in excess of the well-capitalized minimum 10.00% and 5.00% level designated by bank regulators under “well capitalized” capital guidelines.
RESULTS OF OPERATIONS
Non-GAAP presentations
The Company, in referring to its net income and net interest income, is referring to income computed in accordance with GAAP, unless otherwise noted. Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations also refer to various calculations that are non-GAAP presentations. They include:
● | Fully taxable-equivalent (“FTE”) adjustments –Net interest margin and efficiency ratios are presented on an FTE basis, consistent with SEC guidance in Industry Guide 3 which states that tax exempt income may be calculated on a tax equivalent basis. This is a non-GAAP presentation. The FTE basis adjusts for the |
● | Net interest margin –Net interest margin (FTE) is calculated as net interest income, computed on an FTE basis, expressed as a percentage of average earning assets. The Company believes this measure to be the preferred industry measurement of net interest margin and that it enhances comparability of net interest margin among peers in the industry. |
● | Efficiency ratio –One of the ratios the Company monitors in its evaluation of operations is the efficiency ratio, which measures the cost to produce one dollar of revenue. The Company computes its efficiency ratio (FTE) by dividing noninterest expense by the sum of net interest income (FTE) and noninterest income. A lower ratio is an indicator of increased operational efficiency. This non-GAAP metric is used to assist investors in understanding how management assesses its ability to generate revenues from its non-funding-related expense base, as well as to align presentation of this financial measure with peers in the industry. The Company believes this measure to be the preferred industry measurement of operational efficiency, which is consistent with Federal Deposit Insurance Corporation (“FDIC”) studies. |
Net interest income is discussed in Management’s Discussion and Analysis on a GAAP basis, unless noted as “FTE”; and the reconcilement below shows the fully taxable-equivalent adjustment to net interest income to aid the reader in understanding the computations of net interest margin and the efficiency ratio on a non-GAAP basis (dollars in thousands):
Reconcilement of Non-GAAP Measures | For the three months ended | For the nine months ended | ||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | |||||||||||||
Net interest income | $ | 5,483 | $ | 4,537 | $ | 15,864 | $ | 13,481 | ||||||||
Fully taxable-equivalent adjustment | 40 | 40 | 104 | 124 | ||||||||||||
Net interest income (FTE) | $ | 5,523 | $ | 4,577 | $ | 15,968 | $ | 13,605 | ||||||||
Efficiency ratio | 59.0 | % | 64.2 | % | 58.4 | % | 65.9 | % | ||||||||
Impact of FTE adjustment | -0.4 | % | -0.4 | % | -0.3 | % | -0.5 | % | ||||||||
Efficiency ratio (FTE) | 58.6 | % | 63.8 | % | 58.1 | % | 65.4 | % | ||||||||
Net interest margin | 3.67 | % | 3.38 | % | 3.56 | % | 3.46 | % | ||||||||
Fully tax-equivalent adjustment | 0.03 | % | 0.03 | % | 0.02 | % | 0.03 | % | ||||||||
Net interest margin (FTE) | 3.70 | % | 3.41 | % | 3.58 | % | 3.49 | % |
Reconcilement of Non-GAAP | ||||||||||||||||
Measures: | For the three months ended | For the six months ended | ||||||||||||||
June 30, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | |||||||||||||
Net interest income | $ | 5,461 | $ | 5,692 | $ | 11,029 | $ | 11,388 | ||||||||
Fully taxable-equivalent adjustment | 20 | 24 | 42 | 45 | ||||||||||||
Net interest income (FTE) | $ | 5,481 | $ | 5,716 | $ | 11,071 | $ | 11,433 | ||||||||
Efficiency ratio | 65.4 | % | 57.5 | % | 66.0 | % | 55.8 | % | ||||||||
Impact of FTE adjustment | -0.2 | % | -0.2 | % | -0.2 | % | -0.2 | % | ||||||||
Efficiency ratio (FTE) | 65.2 | % | 57.3 | % | 65.8 | % | 55.7 | % | ||||||||
Net interest margin | 3.65 | % | 3.76 | % | 3.71 | % | 3.79 | % | ||||||||
Fully tax-equivalent adjustment | 0.02 | % | 0.02 | % | 0.01 | % | 0.02 | % | ||||||||
Net interest margin (FTE) | 3.67 | % | 3.78 | % | 3.72 | % | 3.81 | % |
Net income
Net income for the three months ended SeptemberJune 30, 20172019 was $1.7$2.1 million, a 25.0%15.5% increase compared to the $1.4$1.8 million reported for the three months ended SeptemberJune 30, 2016.2018. Net income per diluted share was $0.72$0.79 for the quarter ended SeptemberJune 30, 20172019 compared to $0.59$.68 per diluted share for the same quarter in the prior year.year, each adjusted to reflect the 5% Stock Dividend. The $349 thousand increase in net income for the thirdsecond quarter of 2017,2019, when compared to the same period of 2016,2018, was driven by an increase in net interest income of $946 thousand. Partially offsetting this improvement was a decrease in noninterest income of $255$765 thousand and increases of $182 thousandfluctuation in the provision for (recovery of) loan losses and a $355 thousand increase in earnings from the proceeds of bank owned life insurance, offset by a $339 thousand increase in salaries and employee benefits and a $300 thousand loss accrual, included in other noninterest expense, related to pending and threatened legal proceedings. This loss accrual had the impact of reducing net income taxes, $96by $237 thousand in noninterest expenses, and $64 thousandearnings per share, diluted and adjusted for the 5% Stock Dividend, by $0.09, in the provision for loan losses.second quarter of 2019. For more information regarding this accrual, please refer to the earlier discussion of Commitments and Contingent Liabilities in Note 11 of the Notes to Consolidated Financial Statements.
Net income for the first ninesix months of 20172019 was $5.4$3.4 million, or 26.7% higher thana 27.4% decrease compared to the $4.6 million reported net income of $4.3 million duringfor the same period in 2016.six months ended June 30, 2018. Net income per diluted share was $1.25 for the six months ended June 30, 2019 compared to $1.72 per diluted share for the same quarter in the prior year, as adjusted to reflect the 5% Stock Dividend. The decrease in net income for the first three quarterssix months of 20172019, when compared to the same period of 2018, was $2.24, or $0.45 higher than the $1.79 per diluted share reporteddriven by a $544 thousand decrease in the first three quarters of 2016. The $1.1 millionroyalty income, a $694 thousand increase in net income during the first nine months of 2017salaries and employee benefits and a $300 thousand loss accrual included in other noninterest expense, as noted above, offset by a $355 thousand increase in earnings from the first nine monthsproceeds of 2016 was attributable to an increase of $2.4 million in net interest income. Net income was negatively impacted by an increase of $609 thousand in provision for income taxes, an increase of $504 thousand in the provision for loan losses, an increase of $78 thousand in noninterest expense, and a decrease of $53 thousand in noninterest income.bank owned life insurance.
Net interest income
Net interest income (FTE) for the three months ended SeptemberJune 30, 20172019 was $5.5 million, a $946 thousand increase4.1% decrease compared to net interest income of $4.5$5.7 million for the three months ended SeptemberJune 30, 2016.2018. Net interest income was positivelynegatively impacted by an increase in average earning assetsthe effect of $58.1 million. Mosthigher rates paid on deposit balances, increasing interest expense by $482 thousand, compared to the effect of this growth was in higher yieldingrates earned on loans, and resulted in average loans for the third quarter of 2017 being $74.4 million higher than the average loans for the third quarter of 2016. For the nine months ended September 30, 2017, the Company recorded $15.9 million inwhich positively impacted net interest income or 17.7% more than the $13.5 million recordedby $242 thousand. The lower volume of borrowing positively impacted net interest income by $180 thousand for the same ninesecond quarter of 2019 as compared to the second quarter of 2018.
Net interest income (FTE) for the first six months of 2019 was $11.1 million, a year ago.3.2% decrease compared to net interest income of $11.4 million for the first six months of 2018. Net interest income was negatively impacted by the effect of higher rates paid on deposit balances, increasing interest expense by $929 thousand, compared to the effect of higher rates earned on loans, which positively impacted net interest income by $532 thousand. The lower volume of borrowing positively impacted net interest income by $267 thousand for the second quarter of 2019 as compared to the second quarter of 2018.
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 3.70% for the three months ended September 30, 2017 was 29 basis points higher than the 3.41%3.67% for the quarter ended SeptemberJune 30, 2016.2019 was eleven basis points lower than the 3.78% for the quarter ended June 30, 2018. The net interest margin (FTE) of 3.72% for the firstsix months ended June 30, 2019 was nine months of 2017 was 3.58% or 12 basis points higherlower than the 3.46% reported3.81% for the same period in 2016.quarter ended June 30, 2018. 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.
Total interest income (FTE) for the ninethree months ended SeptemberJune 30, 20172019 was $2.6 million$165 thousand higher than the same period in the prior year, accounting for the year-to-date increase in net interest income (FTE).year. The increased loan volumeyield on loans was the major contributor to the increased interest income. This shift resulted in an earning asset yield, as computed on a tax-equivalent basis, of 3.79%4.38% on average earning asset balances of $596.2$599.8 million for the ninethree months ended SeptemberJune 30, 2017.2019. The earning asset yield, as computed on a tax-equivalent basis, was 3.64%4.22% on average earning asset balances of $524.9$607.1 million for the ninethree months ended SeptemberJune 30, 20162018.
The Company’s netTotal interest income continues to benefit from having one of(FTE) for the lowest cost of funds among community bankssix months ended June 30, 2019 was $500 thousand higher than the same period in the country.prior year. The increased yield on loans was the major contributor to the increased interest income. This shift resulted in an earning asset yield, as computed on a tax-equivalent basis, of 4.39% on average earning asset balances of $599.8 million for the six months ended June 30, 2019. The earning asset yield, as computed on a tax-equivalent basis, was 4.18% on average earning asset balances of $604.8 million for the six months ended June 30, 2018.
Offsetting the increased interest income was an increase in interest expense of $400 thousand for the three months ended June 30, 2019 compared to the same period in the prior year. Interest expense increased $862 thousand for the six months ended June 30, 2019 compared to the same period in the prior year. The primary reason for the increase in interest expense is the increased rates paid on deposits to be competitive in the market. The rate paid on interest-bearing deposits averaged 106 basis points in the second quarter of 2019, compared to 58 basis points for the second quarter of 2018. The rate paid on interest-bearing deposits averaged 98 basis points for the first six months of 2019, compared to 50 basis points for the first six months of 2018. Average balances of interest-bearing deposits also increased, from $366.4 million in the second quarter of 2018 to $397.1 million in the second quarter of 2019 and from $362.8 million for the first six months of 2018 to $388.6 million for the first six months of 2019. Average balances of borrowed funds decreased from $40.8 million in the second quarter of 2018 to $3.8 million in the second quarter of 2019, and decreased from $38.0 million for the first six months of 2018 to $6.9 million for the first six months of 2019, causing a decrease in interest expense on borrowed funds over both periods. A table showing the mix of no cost and low cost deposit accounts is shown under “Financial Condition - Deposits” earlier in this report. Interest expense as a percentage of average earning assets was 0.21% for the nine months ended September 30, 2017 and 0.18% for the nine months ended September 30, 2016.
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 ninesix months ended SeptemberJune 30, 20172019 and 2016.2018. These tables also include a rate/volume analysis for these same periods (dollars in thousands).
Consolidated Average Balance Sheet And Analysis of Net Interest Income
For the three months ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | Change in Interest Income/Expense | For the three months ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average | Interest | Average | Average | Interest | Average | Change Due to:4 | Total | June 30, 2019 | June 30, 2018 | Change in Interest Income/Expense | |||||||||||||||||||||||||||||||||||||||||||||||
Balance | Income | Yield/ | Balance | Income | Yield/ | Increase/ | Average | Interest | Average | Average | Interest | Average | Change Due to: 4 | Total | |||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Expense | Cost | Expense | Cost | Volume | Rate | (Decrease) | Balance | Income Expense | Yield/ Cost | Balance | Income Expense | Yield/ Cost | Volume | Rate | Increase/ (Decrease) | |||||||||||||||||||||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Earning Assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Taxable Securities | $ | 71,208 | $ | 351 | 1.97% | $ | 59,087 | $ | 260 | 1.76% | $ | 57 | $ | 34 | $ | 91 | $ | 49,814 | $ | 277 | 2.22 | % | $ | 53,847 | $ | 303 | 2.25 | % | $ | (22 | ) | $ | (4 | ) | $ | (26 | ) | ||||||||||||||||||||
Tax Exempt Securities1 | 13,557 | 118 | 3.48% | 13,835 | 118 | 3.41% | (2) | 2 | - | 12,715 | 96 | 3.02 | % | 13,170 | 109 | 3.31 | % | (4 | ) | (9 | ) | (13 | ) | ||||||||||||||||||||||||||||||||||
Total Securities1 | 84,765 | 469 | 2.21% | 72,922 | 378 | 2.07% | 55 | 36 | 91 | 62,529 | 373 | 2.39 | % | 67,017 | 412 | 2.46 | % | (26 | ) | (13 | ) | (39 | ) | ||||||||||||||||||||||||||||||||||
Total Loans | 496,983 | 5,348 | 4.27% | 422,567 | 4,385 | 4.13% | 796 | 167 | 963 | 524,424 | 6,105 | 4.67 | % | 530,885 | 5,936 | 4.48 | % | (73 | ) | 242 | 169 | ||||||||||||||||||||||||||||||||||||
Fed Funds Sold | 9,698 | 30 | 1.23% | 37,310 | 45 | 0.48% | (50) | 35 | (15) | 12,885 | 74 | 2.30 | % | 9,206 | 39 | 1.70 | % | 19 | 16 | 35 | |||||||||||||||||||||||||||||||||||||
Other Interest Bearing Deposits | 462 | 1 | 0.86% | 1,000 | 3 | 1.19% | (1) | (1) | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||
Total Earning Assets | 591,908 | 5,848 | 3.92% | 533,799 | 4,811 | 3.59% | 800 | 237 | 1,037 | 599,838 | 6,552 | 4.38 | % | 607,108 | 6,387 | 4.22 | % | (80 | ) | 245 | 165 | ||||||||||||||||||||||||||||||||||||
Less: Allowance for Loan Losses | (3,721) | (3,186) | (4,951 | ) | (3,986 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Total Non-Earning Assets | 36,502 | 37,321 | 44,452 | 37,814 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Assets | $ | 624,689 | $ | 567,934 | $ | 639,339 | $ | 640,936 | |||||||||||||||||||||||||||||||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Bearing Liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Bearing Deposits: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Checking | $ | 95,542 | $ | 12 | 0.05% | $ | 93,390 | $ | 11 | 0.05% | $ | - | $ | 1 | $ | 1 | $ | 100,983 | $ | 47 | 0.19 | % | $ | 91,061 | $ | 11 | 0.05 | % | $ | 1 | $ | 35 | $ | 36 | |||||||||||||||||||||||
Money Market Deposits | 135,113 | 96 | 0.28% | 109,535 | 57 | 0.21% | 15 | 24 | 39 | ||||||||||||||||||||||||||||||||||||||||||||||||
Money Market and Savings Deposits | 169,128 | 416 | 0.99 | % | 155,432 | 253 | 0.65 | % | 24 | 139 | 163 | ||||||||||||||||||||||||||||||||||||||||||||||
Time Deposits | 122,586 | 179 | 0.58% | 113,261 | 157 | 0.55% | 13 | 9 | 22 | 126,993 | 586 | 1.85 | % | 119,933 | 262 | 0.88 | % | 16 | 308 | 324 | |||||||||||||||||||||||||||||||||||||
Total Interest-Bearing Deposits | 353,241 | 287 | 0.32% | 316,186 | 225 | 0.28% | 28 | 34 | 62 | 397,104 | 1,049 | 1.06 | % | 366,426 | 526 | 0.58 | % | 41 | 482 | 523 | |||||||||||||||||||||||||||||||||||||
Short Term Borrowings | 26,013 | 38 | 0.58% | 16,992 | 9 | 0.21% | 7 | 22 | 29 | ||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase agreements and other borrowed funds | 3,800 | 22 | 2.32 | % | 40,792 | 145 | 1.43 | % | (180 | ) | 57 | (123 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Total Interest-Bearing Liabilities | 379,254 | 325 | 0.34% | 333,178 | 234 | 0.28% | 35 | 56 | 91 | 400,904 | 1,071 | 1.07 | % | 407,218 | 671 | 0.66 | % | (139 | ) | 539 | 400 | ||||||||||||||||||||||||||||||||||||
Non-Interest-Bearing Liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Demand deposits | 179,964 | 173,745 | 159,425 | 164,388 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 1,062 | 1,827 | 5,421 | 1,333 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Liabilities | 560,280 | 508,750 | 565,750 | 572,939 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Shareholders' Equity | 64,409 | 59,184 | 73,589 | 67,997 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Liabilities & Shareholders' Equity | $ | 624,689 | $ | 567,934 | $ | 639,339 | $ | 640,936 | |||||||||||||||||||||||||||||||||||||||||||||||||
Net Interest Income (FTE) | $ | 5,523 | $ | 4,577 | $ | 765 | $ | 181 | $ | 946 | $ | 5,481 | $ | 5,716 | $ | 59 | $ | (294 | ) | $ | (235 | ) | |||||||||||||||||||||||||||||||||||
Interest Rate Spread2 | 3.58% | 3.31% | 3.31 | % | 3.56 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Expense as a Percentage of Average Earning Assets | 0.22% | 0.17% | 0.72 | % | 0.44 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net Interest Margin (FTE)3 | 3.70% | 3.41% | 3.67 | % | 3.78 | % |
(1) | Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of | |
(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. |
Consolidated Average Balance Sheet And Analysis of Net Interest Income
For the nine months ended | For the six months ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | Change in Interest Income/Expense | June 30, 2019 | June 30, 2018 | Change in Interest Income/Expense | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average | Interest | Average | Average | Interest | Average | Change Due to:4 | Total | Average | Interest | Average | Average | Interest | Average | Change Due to: 4 | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance | Income | Yield/ | Balance | Income | Yield/ | Increase/ | Balance | Income | Yield/ | Balance | Income | Yield/ | Increase/ | |||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Expense | Cost | Expense | Cost | Volume | Rate | (Decrease) | Expense | Cost | Expense | Cost | Volume | Rate | (Decrease) | ||||||||||||||||||||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Earning Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Taxable Securities | $ | 63,884 | $ | 907 | 1.89 | % | $ | 59,949 | $ | 829 | 1.84 | % | $ | 55 | $ | 23 | $ | 78 | $ | 50,046 | $ | 555 | 2.22 | % | $ | 54,072 | $ | 610 | 2.26 | % | $ | (45 | ) | $ | (10 | ) | $ | (55 | ) | |||||||||||||||||||||||||
Tax Exempt Securities(1) | 12,167 | 307 | 3.36 | % | 14,371 | 366 | 3.40 | % | (56 | ) | (3 | ) | (59 | ) | 12,824 | 199 | 3.10 | % | 13,607 | 216 | 3.17 | % | (12 | ) | (5 | ) | (17 | ) | ||||||||||||||||||||||||||||||||||||
Total Securities(1) | 76,051 | 1,214 | 2.13 | % | 74,320 | 1,195 | 2.14 | % | (1 | ) | 20 | 19 | 62,870 | 754 | 2.40 | % | 67,679 | 826 | 2.44 | % | (57 | ) | (15 | ) | (72 | ) | ||||||||||||||||||||||||||||||||||||||
Total Loans | 489,375 | 15,454 | 4.22 | % | 421,156 | 13,012 | 4.13 | % | 2,149 | 293 | 2,442 | 528,854 | 12,202 | 4.65 | % | 527,882 | 11,649 | 4.45 | % | 21 | 532 | 553 | ||||||||||||||||||||||||||||||||||||||||||
Fed Funds Sold | 29,951 | 208 | 0.93 | % | 28,246 | 101 | 0.48 | % | 6 | 101 | 107 | 8,077 | 93 | 2.32 | % | 9,262 | 74 | 1.61 | % | (10 | ) | 29 | 19 | |||||||||||||||||||||||||||||||||||||||||
Other Interest Bearing Deposits | 819 | 7 | 1.14 | % | 1,132 | 7 | 0.83 | % | (2 | ) | 2 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Earning Assets | 596,196 | 16,883 | 3.79 | % | 524,854 | 14,315 | 3.64 | % | 2,152 | 416 | 2,568 | 599,801 | 13,049 | 4.39 | % | 604,823 | 12,549 | 4.18 | % | (46 | ) | 546 | 500 | |||||||||||||||||||||||||||||||||||||||||
Less: Allowance for Loan Losses | (3,691 | ) | (3,387 | ) | (4,928 | ) | (4,016 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Non-Earning Assets | 36,964 | 37,471 | 42,074 | 37,930 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Assets | $ | 629,469 | $ | 558,938 | $ | 636,947 | $ | 638,737 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Bearing Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Bearing Deposits: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Checking | $ | 98,854 | $ | 37 | 0.05 | % | $ | 90,634 | $ | 34 | 0.05 | % | $ | 3 | $ | - | $ | 3 | $ | 101,944 | $ | 96 | 0.19 | % | $ | 93,336 | $ | 23 | 0.05 | % | $ | 2 | $ | 71 | $ | 73 | ||||||||||||||||||||||||||||
Money Market Deposits | 142,724 | 304 | 0.28 | % | 108,152 | 169 | 0.21 | % | 63 | 72 | 135 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Money Market and Savings Deposits | 165,339 | 748 | 0.91 | % | 156,217 | 473 | 0.61 | % | 29 | 246 | 275 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Time Deposits | 126,895 | 516 | 0.54 | % | 114,161 | 474 | 0.55 | % | 52 | (10 | ) | 42 | 121,327 | 1,045 | 1.74 | % | 113,198 | 402 | 0.72 | % | 31 | 612 | 643 | |||||||||||||||||||||||||||||||||||||||||
Total Interest-Bearing Deposits | 368,473 | 857 | 0.31 | % | 312,947 | 677 | 0.29 | % | 118 | 62 | 180 | 388,610 | 1,889 | 0.98 | % | 362,751 | 898 | 0.50 | % | 62 | 929 | 991 | ||||||||||||||||||||||||||||||||||||||||||
Short Term Borrowings | 20,140 | 58 | 0.39 | % | 19,235 | 33 | 0.23 | % | 2 | 23 | 25 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase agreements and other borrowed funds | 6,908 | 89 | 2.60 | % | 38,021 | 218 | 1.16 | % | (267 | ) | 138 | (129 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Total Interest-Bearing Liabilities | 388,613 | 915 | 0.31 | % | 332,182 | 710 | 0.29 | % | 120 | 85 | 205 | 395,518 | 1,978 | 1.01 | % | 400,772 | 1,116 | 0.56 | % | (205 | ) | 1,067 | 862 | |||||||||||||||||||||||||||||||||||||||||
Non-Interest-Bearing Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Demand deposits | 177,142 | 167,387 | 165,322 | 169,245 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 1,310 | 1,583 | 3,337 | 1,600 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Liabilities | 567,065 | 501,152 | 564,177 | 571,617 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shareholders' Equity | 62,404 | 57,786 | 72,770 | 67,120 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Liabilities & Shareholders' Equity | $ | 629,469 | $ | 558,938 | $ | 636,947 | $ | 638,737 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Interest Income (FTE) | $ | 15,968 | $ | 13,605 | $ | 2,032 | $ | 331 | $ | 2,363 | $ | 11,071 | $ | 11,433 | $ | 159 | $ | (521 | ) | $ | (362 | ) | ||||||||||||||||||||||||||||||||||||||||||
Interest Rate Spread(2) | 3.48 | % | 3.35 | % | 3.37 | % | 3.62 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Expense as a Percentage of Average Earning Assets | 0.21 | % | 0.18 | % | 0.67 | % | 0.37 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Interest Margin (FTE)3 | 3.58 | % | 3.46 | % | 3.72 | % | 3.81 | % |
(1) | Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of | |
(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. |
Provision for loan losses
A recovery of loan losses of $64 thousand was recognized in the second quarter of 2019 due primarily to the lower level of delinquencies within the student loan portfolio, along with the decreased balances in the organic loan portfolio. A provision of $701 thousand was recognized in the second quarter of 2018 when we were notified of the loss of surety bonds which previously covered the student loan portfolio. A provision for loan losses of $168$620 thousand was recorded in the third quarterfirst six months of 2017,2019, compared to a provision for loan losses of $104$605 thousand for the same quarter in 2016. On a year-to-date basis, a provision for loan losses of $213 thousand was recorded in 2017, while a recovery of $291 thousand was recognized for the first three quarters of 2016. This resulted in a negative impact to income of $504 thousand when comparing year-over-year. The 2017 provision for loan losses was recorded due to loan growth during the first ninesix months of the year and to replenish the allowance for losses due to net charge-offs of $77 thousand during the period.2018. The allowance for loan losses as a percentage of total loans at SeptemberJune 30, 20172019 was 0.92%, compared to 0.91% as of 0.76% was level with SeptemberDecember 31, 2018 and 0.88% as of June 30, 2016. As discussed earlier, the Company utilizes a loss migration model.2018. Further discussion of management’s assessment of the allowance for loan losses is provided earlier in the report and in Note 4 – Allowance for Loan Losses, found in the Notes to the Consolidated Financial Statements. In management’s opinion, the allowance was adequately provided for at SeptemberJune 30, 2017.2019.
Noninterest income
The components of noninterest income for the three months ended SeptemberJune 30, 20172019 and 20162018 are shown below (dollars in thousands):
For the three months ended | Variance | |||||||||||||
September 30, 2017 | September 30, 2016 | $ | % | |||||||||||
Noninterest income: | ||||||||||||||
Trust income | $ | 394 | $ | 388 | $ | 6 | 1.5 | % | ||||||
Advisory and brokerage income | 132 | 106 | 26 | 24.5 | % | |||||||||
Royalty income | 22 | 11 | 11 | 100.0 | % | |||||||||
Customer service fees | 225 | 240 | (15 | ) | -6.3 | % | ||||||||
Debit/credit card and ATM fees | 206 | 223 | (17 | ) | -7.6 | % | ||||||||
Earnings/increase in value of bank owned life insurance | 103 | 111 | (8 | ) | -7.2 | % | ||||||||
Fees on mortgage sales | 55 | 41 | 14 | 34.1 | % | |||||||||
Gains (losses) on sales & calls of securities | (78 | ) | 181 | (259 | ) | N/A | ||||||||
Gains (losses) on sales of other assets | - | 6 | (6 | ) | -100.0 | % | ||||||||
Other | 99 | 106 | (7 | ) | -6.6 | % | ||||||||
Total noninterest income | $ | 1,158 | $ | 1,413 | $ | (255 | ) | -18.0 | % |
For the three months ended | Variance | ||||||||||||
June 30, 2019 | June 30, 2018 | $ | % | ||||||||||
Noninterest income: | |||||||||||||
Trust income | $ | 402 | $ | 427 | $ | (25 | ) | -5.9 | % | ||||
Advisory and brokerage income | 156 | 142 | 14 | 9.9 | % | ||||||||
Royalty income | 4 | 34 | (30 | ) | -88.2 | % | |||||||
Deposit account fees | 192 | 236 | (44 | ) | -18.6 | % | |||||||
Debit/credit card and ATM fees | 189 | 204 | (15 | ) | -7.4 | % | |||||||
Earnings/increase in value of bank owned life insurance | 466 | 111 | 355 | N/A | |||||||||
Fees on mortgage sales | 56 | 46 | 10 | 21.7 | % | ||||||||
Gains on sales of securities | 64 | - | 64 | N/A | |||||||||
Other | 171 | 107 | 64 | 59.8 | % | ||||||||
Total noninterest income | $ | 1,700 | $ | 1,307 | $ | 393 | 30.1 | % |
Noninterest income for the quarter ended SeptemberJune 30, 20172019 of $1.2$1.7 million was $255$393 thousand lower compared withor 30.1% higher than the $1.4 millionamount recorded for the quarter ended SeptemberJune 30, 2016. Losses on sales of securities of $78 thousand2018. This increase was largely due to the increase in the third quarter of 2017 comparedearnings from bank owned life insurance, due to a gain of $181 thousand for sale of securities in the same quarter of 2016 accounted fordeath benefit received as a $259 thousand reduction. As discussed earlier in this Management Discussion and Analysis section under “Securities,” the Company restructured a portionresult of the investment portfolio to achieve higher yields, resulting in the realized losses during the quarter ended September 30, 2017.death of a former employee.
The components of noninterest income for the ninesix months ended SeptemberJune 30, 20172019 and 20162018 are shown below (dollars in thousands):
For the nine months ended | Variance | ||||||||||||||
September 30, 2017 | September 30, 2016 | $ | % | ||||||||||||
Noninterest income: | |||||||||||||||
Trust income | $ | 1,171 | $ | 1,174 | $ | (3 | ) | -0.3 | % | ||||||
Advisory and brokerage income | 387 | 287 | 100 | 34.8 | % | ||||||||||
Royalty income | 198 | 20 | 178 | N/A | |||||||||||
Customer service fees | 678 | 686 | (8 | ) | -1.2 | % | |||||||||
Debit/credit card and ATM fees | 650 | 653 | (3 | ) | -0.5 | % | |||||||||
Earnings/increase in value of bank owned life insurance | 312 | 331 | (19 | ) | -5.7 | % | |||||||||
Fees on mortgage sales | 104 | 156 | (52 | ) | -33.3 | % | |||||||||
Gains (losses) on sales and calls of securities | (74 | ) | 189 | (263 | ) | N/A | |||||||||
Gains (losses) on sales of other assets | - | (21 | ) | 21 | 100.0 | % | |||||||||
Other | 308 | 312 | (4 | ) | -1.3 | % | |||||||||
Total noninterest income | $ | 3,734 | $ | 3,787 | $ | (53 | ) | -1.4 | % |
For the six months ended | Variance | |||||||||||||
June 30, 2019 | June 30, 2018 | $ | % | |||||||||||
Noninterest income: | ||||||||||||||
Trust income | $ | 749 | $ | 841 | $ | (92 | ) | -10.9 | % | |||||
Advisory and brokerage income | 292 | 282 | 10 | 3.5 | % | |||||||||
Royalty income | 8 | 552 | (544 | ) | -98.6 | % | ||||||||
Deposit account fees | 373 | 483 | (110 | ) | -22.8 | % | ||||||||
Debit/credit card and ATM fees | 346 | 391 | (45 | ) | -11.5 | % | ||||||||
Earnings/increase in value of bank owned life insurance | 576 | 220 | 356 | N/A | ||||||||||
Fees on mortgage sales | 86 | 82 | 4 | 4.9 | % | |||||||||
Gains on sales of securities | 64 | - | 64 | N/A | ||||||||||
Losses on sales of assets | - | (33 | ) | 33 | 100.0 | % | ||||||||
Other | 265 | 203 | 62 | 30.5 | % | |||||||||
Total noninterest income | $ | 2,759 | $ | 3,021 | $ | (262 | ) | -8.7 | % |
On a year-to-date basis, noninterestNoninterest income for the six months ended June 30, 2019 of $3.7$2.8 million was recognized$262 thousand or 8.7% lower than the amount recorded for the six months ended June 30, 2018. This decrease was due to the lack of performance fee royalty income in the first nine monthsquarter of 2017, a slight decrease2019, compared to $518 thousand in the first quarter of $53 thousand2018. Royalty income is collected periodically from SRCM Holdings, LLC, as described in Note 1 – Summary of Significant Accounting Policies, found in the same period in 2016. The restructuring of a portion ofNotes to the investment portfolio duringConsolidated Financial Statements within the quarter ended September 30, 2017, as discussed above, resulted in realized losses on sales of securities of $74 thousandCompany’s Form 10-K for the first three quarters of 2017, compared to gains on sales and calls of $189 thousand recognized inyear ended December 31, 2018.
The decrease was offset by the same period of 2016. This $263 thousand variance was the major cause for the contraction in noninterest income.
Wealth Management contributed positively to income in two areas. Royalty income was $178 thousand higher in the nine months ended September 30, 2017, partially as a result of a one-time payment received inincreased earnings from bank owned life insurance during the second quarter in connection with a revision to our agreement with Swift Run Capital Management, LLC (“SRCM”). Advisory and brokerage income of $387 thousand for the 2017 period was $100 thousand higher than the $287 thousand recognized for the same period in 2016. As a point of reference, for the full year of 2015, Wealth Management recognized $29 thousand in advisory and brokerage income. The purchase of the wealth management book of business early in 2016,2019, as discussed earlier under Note 5 – Intangible Assets, accounts for the increased advisory and brokerage income during both periods.noted previously.
Noninterest expense
The components of noninterest expense for the three months ended SeptemberJune 30, 20172019 and 20162018 are shown below (dollars in thousands):
For the three months ended | Variance | ||||||||||||
September 30, 2017 | September 30, 2016 | $ | % | ||||||||||
Noninterest expense: | |||||||||||||
Salaries and employee benefits | $ | 1,998 | $ | 1,939 | $ | 59 | 3.0 | % | |||||
Net occupancy | 461 | 465 | (4 | ) | -0.9 | % | |||||||
Equipment | 124 | 134 | (10 | ) | -7.5 | % | |||||||
ATM, debit and credit card | 90 | 86 | 4 | 4.7 | % | ||||||||
Bank franchise tax | 119 | 109 | 10 | 9.2 | % | ||||||||
Computer software | 91 | 100 | (9 | ) | -9.0 | % | |||||||
Data processing | 236 | 297 | (61 | ) | -20.5 | % | |||||||
FDIC deposit insurance assessment | 87 | 52 | 35 | 67.3 | % | ||||||||
Marketing, advertising and promotion | 126 | 137 | (11 | ) | -8.0 | % | |||||||
Professional fees | 153 | 115 | 38 | 33.0 | % | ||||||||
Other | 432 | 387 | 45 | 11.6 | % | ||||||||
Total noninterest expense | $ | 3,917 | $ | 3,821 | $ | 96 | 2.5 | % |
Noninterest expense for the third quarter of 2017 of $3.9 million was $96 thousand higher than the quarter ended September 30, 2016. The $59 thousand increase in salaries and employee benefits was partially due to the expenses associated with hiring experienced loan officers. A reduction in data processing expenses of $61 thousand was mainly due to a renegotiated contract with the Company’s core data processing provider.
The components of noninterest expense for the nine months ended September 30, 2017 and 2016 are shown below (dollars in thousands):
For the nine months ended | Variance | For the three months ended | Variance | |||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | $ | % | June 30, 2019 | June 30, 2018 | $ | % | |||||||||||||||||||
Noninterest expense: | ||||||||||||||||||||||||||
Salaries and employee benefits | $ | 5,770 | $ | 5,704 | $ | 66 | 1.2 | % | $ | 2,321 | $ | 1,982 | $ | 339 | 17.1 | % | ||||||||||
Net occupancy | 1,390 | 1,413 | (23 | ) | -1.6 | % | 444 | 449 | (5 | ) | -1.1 | % | ||||||||||||||
Equipment | 398 | 401 | (3 | ) | -0.7 | % | 114 | 118 | (4 | ) | -3.4 | % | ||||||||||||||
ATM, debit and credit card | 247 | 235 | 12 | 5.1 | % | 45 | 53 | (8 | ) | -15.1 | % | |||||||||||||||
Bank franchise tax | 357 | 324 | 33 | 10.2 | % | 152 | 126 | 26 | 20.6 | % | ||||||||||||||||
Computer software | 283 | 281 | 2 | 0.7 | % | 139 | 106 | 33 | 31.1 | % | ||||||||||||||||
Data processing | 763 | 884 | (121 | ) | -13.7 | % | 330 | 295 | 35 | 11.9 | % | |||||||||||||||
FDIC deposit insurance assessment | 206 | 208 | (2 | ) | -1.0 | % | 15 | 60 | (45 | ) | -75.0 | % | ||||||||||||||
Loan expenses | 80 | 81 | (1 | ) | -1.2 | % | ||||||||||||||||||||
Marketing, advertising and promotion | 359 | 412 | (53 | ) | -12.9 | % | 195 | 158 | 37 | 23.4 | % | |||||||||||||||
Professional fees | 408 | 345 | 63 | 18.3 | % | 204 | 230 | (26 | ) | -11.3 | % | |||||||||||||||
Other | 1,274 | 1,170 | 104 | 8.9 | % | 646 | 369 | 277 | 75.1 | % | ||||||||||||||||
Total noninterest expense | $ | 11,455 | $ | 11,377 | $ | 78 | 0.7 | % | $ | 4,685 | $ | 4,027 | $ | 658 | 16.3 | % |
Noninterest expense for the first nine monthssecond quarter of 20172019 of $11.5$4.7 million was fairly level with$658 thousand higher than the nine months ended September 30, 2016.second quarter of 2018. Salaries and employee benefits increased $339 thousand due to increased staffing for our new Richmond market and cyber and network security professionals, as well as the quarterly expense of stock grants issued in February 2019. Other expenses increased $277 thousand, due to a loss accrual of $300 thousand related to pending and threatened legal proceedings. For more information regarding this accrual, please refer to the earlier discussion of Commitments and Contingent Liabilities in Note 11 of the Notes to Consolidated Financial Statements. Management continues to evaluate expenses for potential containments and reductions that would have a positive impact on net income on an ongoing basis.
The components of noninterest expense for the six months ended June 30, 2019 and 2018 are shown below (dollars in thousands):
For the six months ended | Variance | ||||||||||||
June 30, 2019 | June 30, 2018 | $ | % | ||||||||||
Noninterest expense: | |||||||||||||
Salaries and employee benefits | $ | 4,667 | $ | 3,973 | $ | 694 | 17.5 | % | |||||
Net occupancy | 923 | 929 | (6 | ) | -0.6 | % | |||||||
Equipment | 231 | 246 | (15 | ) | -6.1 | % | |||||||
ATM, debit and credit card | 91 | 116 | (25 | ) | -21.6 | % | |||||||
Bank franchise tax | 303 | 249 | 54 | 21.7 | % | ||||||||
Computer software | 247 | 199 | 48 | 24.1 | % | ||||||||
Data processing | 646 | 547 | 99 | 18.1 | % | ||||||||
FDIC deposit insurance assessment | 30 | 110 | (80 | ) | -72.7 | % | |||||||
Loan expenses | 142 | 156 | (14 | ) | -9.0 | % | |||||||
Marketing, advertising and promotion | 389 | 350 | 39 | 11.1 | % | ||||||||
Professional fees | 407 | 427 | (20 | ) | -4.7 | % | |||||||
Other | 1,020 | 742 | 278 | 37.5 | % | ||||||||
Total noninterest expense | $ | 9,096 | $ | 8,044 | $ | 1,052 | 13.1 | % |
Noninterest expense for the first six months of 2019 of $9.1 million was $1.1 million higher than the first six months of 2018. Salaries and employee benefits increased $694 thousand due to increased staffing for our new Richmond market and cyber and network security professionals, as well as the expense of stock grants issued in February 2019. Other expenses increased $278 thousand, due to a loss accrual of $300 thousand as noted above.
The efficiency ratio (FTE) fellincreased to 58.6%65.2% for the thirdsecond quarter of 2017, an improvement of 5.2 percentage points compared to the efficiency ratio (FTE) of 63.8%2019 from 57.3% for the same quarter of 2016. The efficiency ratio (FTE) of 58.1% for2018, due to the first nine months of 2017 reflected an improvement of 7.3 percentage points compared to 65.4% for the same nine months of 2016.increase in noninterest expense. The improved asset mix from the loan growth experienced the last three years, together with the restructuring of the securities portfolio during the past quarter,and higher yields on earning assets should continue to enhance net interest income. Further, additionalincome; however, noninterest income prospects should add to the revenue stream, while cost containment and reduction strategies should control expenses. This combination is expected toexpense will continue to support a low efficiency ratio.increase as the Company positions itself for growth and enters into new markets. 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
The Company benefited from the Tax Cuts and Jobs Act (“Tax Act”) enacted on December 22, 2017, which permanently lowered the corporate income tax rate to 21% effective January 1, 2018, amongst other significant changes to the U.S. tax law. For the three months ended SeptemberJune 30, 20172019 and SeptemberJune 30, 2016,2018, the Company provided $811$425 thousand and $629$439 thousand for Federal income taxes, respectively, resulting in an effective income tax rate of 31.7%16.7% and 31.1%19.3%, respectively. For the ninesix months of 2017ended June 30, 2019 and 2016,June 30, 2018, the Company provided $2.5$711 thousand and $1.1 million and $1.9 million,for Federal income taxes, respectively, resulting in an effective income tax rate of 31.9%17.5% and 31.1%19.7%, respectively. The effective income tax rates differed from the U.S. statutory rate of 34% during the comparable periods21% primarily due to the effect of tax-exempt income from life insurance policies and municipal bonds.
OTHER SIGNIFICANT EVENTS
None
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective at the reasonable assurance level. There was no change in the internal control over financial reporting that occurred during the quarter ended SeptemberJune 30, 20172019 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 1A. RISK FACTORS.
Not required
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable
ITEM 5. OTHER INFORMATION.
(a) Required 8-K disclosures.
None
(b) Changes in procedures for director nominations by security holders.
None
ITEM 6. EXHIBITS.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VIRGINIA NATIONAL BANKSHARES CORPORATION | ||
(Registrant) |
By: | /s/ Glenn W. Rust | ||
Glenn W. Rust | |||
President and Chief Executive Officer | |||
Date: | August 8, 2019 | ||
By: | /s/ Tara Y. Harrison | ||
Tara Y. Harrison | |||
Executive Vice President and Chief Financial Officer | |||
Date: |
46