UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A10-Q
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20222023
or
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to _____________
Commission file number: 000-33411
NEW PEOPLES BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Virginia (State or other jurisdiction of incorporation or organization)
| 31-1804543 (I.R.S. Employer Identification No.) | |||
67 Commerce Drive, Honaker, Virginia (Address of principal executive offices) | 24260 (Zip Code) | |||
(276(276)) 873-7000
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
None |
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 | [X] | No | [ ] |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T ((§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes | [X] | 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 [X] | Smaller reporting company [X] | |
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 | [X] |
The number of shares outstanding of the registrant’s common stock was November 10, 2022.August 7, 2023. as of
NEW PEOPLES BANKSHARES, INC.
INDEX
Part I Financial Information
Item 1 | Financial Statements |
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBERJUNE 30, 20222023 AND DECEMBER 31, 20212022
(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)
(UNAUDITED)
September 30, | December 31, | |||||||
2022 | 2021 | |||||||
ASSETS | ||||||||
Cash and due from banks | 17,134 | $ | 14,952 | |||||
Interest-bearing deposits with banks | 97,406 | 45,766 | ||||||
Federal funds sold | 378 | 228 | ||||||
Total Cash and Cash Equivalents | 114,918 | 60,946 | ||||||
Investment securities available-for-sale | 98,845 | 107,358 | ||||||
Loans receivable | 579,874 | 593,744 | ||||||
Allowance for loan losses | (6,593 | ) | (6,735 | ) | ||||
Net loans | 573,281 | 587,009 | ||||||
Bank premises and equipment, net | 19,675 | 20,735 | ||||||
Other real estate owned | 321 | 1,361 | ||||||
Accrued interest receivable | 2,174 | 2,112 | ||||||
Deferred taxes, net | 4,570 | 1,673 | ||||||
Bank owned life insurance | 4,602 | 4,685 | ||||||
Right-of-use assets – operating leases | 3,816 | 4,062 | ||||||
Other assets | 6,363 | 4,706 | ||||||
Total Assets | 828,565 | $ | 794,647 | |||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Noninterest bearing | 269,052 | $ | 251,257 | |||||
Interest-bearing | 454,862 | 456,256 | ||||||
Total Deposits | 723,914 | 707,513 | ||||||
Borrowed funds | 41,496 | 16,496 | ||||||
Lease liabilities – operating leases | 3,816 | 4,062 | ||||||
Accrued interest payable | 355 | 272 | ||||||
Accrued expenses and other liabilities | 3,754 | 2,673 | ||||||
Total Liabilities | 773,335 | 731,016 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock - $ par value; shares authorized; | ||||||||
and shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 47,755 | 47,844 | ||||||
Additional paid-in-capital | 14,556 | 14,570 | ||||||
Retained earnings | 6,665 | 2,031 | ||||||
Accumulated other comprehensive loss | (13,746 | ) | (814 | ) | ||||
Total Shareholders’ Equity | 55,230 | 63,631 | ||||||
Total Liabilities and Shareholders’ Equity | 828,565 | $ | 794,647 |
The accompanying notes are an integral part of these consolidated financial statements.
3
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
INTEREST AND DIVIDEND INCOME | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Loans including fees | $ | 7,010 | 7,602 | $ | 20,476 | $ | 21,483 | |||||||||
Federal funds sold | 2 | — | 3 | — | ||||||||||||
Interest-earning deposits with banks | 559 | 28 | 738 | 69 | ||||||||||||
Investments | 505 | 388 | 1,422 | 969 | ||||||||||||
Dividends on equity securities (restricted) | 34 | 26 | 88 | 90 | ||||||||||||
Total Interest and Dividend Income | 8,110 | 8,044 | 22,727 | 22,611 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Deposits | 418 | 522 | 1,252 | 1,780 | ||||||||||||
Borrowed funds | 492 | 104 | 810 | 349 | ||||||||||||
Total Interest Expense | 910 | 626 | 2,062 | 2,129 | ||||||||||||
NET INTEREST INCOME | 7,200 | 7,418 | 20,665 | 20,482 | ||||||||||||
PROVISION FOR LOAN LOSSES | 225 | — | 400 | 372 | ||||||||||||
NET INTEREST INCOME AFTER | ||||||||||||||||
PROVISION FOR LOAN LOSSES | 6,975 | 7,418 | 20,265 | 20,110 | ||||||||||||
NONINTEREST INCOME | ||||||||||||||||
Service charges and fees | 1,069 | 1,001 | 2,973 | 2,674 | ||||||||||||
Card processing and interchange | 915 | 982 | 2,858 | 2,918 | ||||||||||||
Insurance and investment fees | 167 | 222 | 650 | 723 | ||||||||||||
Net gain on sales of available-for-sale securities | — | 322 | — | 322 | ||||||||||||
Other noninterest income | 38 | 443 | 425 | 840 | ||||||||||||
Total Noninterest Income | 2,189 | 2,970 | 6,906 | 7,477 | ||||||||||||
NONINTEREST EXPENSES | ||||||||||||||||
Salaries and employee benefits | 3,290 | 3,239 | 9,947 | 9,417 | ||||||||||||
Occupancy and equipment expense | 1,177 | 2,215 | 3,200 | 4,575 | ||||||||||||
Data processing and telecommunications | 607 | 609 | 1,762 | 1,835 | ||||||||||||
Other operating expenses | 1,525 | 2,004 | 4,787 | 5,313 | ||||||||||||
Total Noninterest Expenses | 6,599 | 8,067 | 19,696 | 21,140 | ||||||||||||
INCOME BEFORE INCOME TAXES | 2,565 | 2,321 | 7,475 | 6,447 | ||||||||||||
INCOME TAX EXPENSE | 579 | 476 | 1,645 | 1,354 | ||||||||||||
NET INCOME | $ | 1,986 | 1,845 | $ | 5,830 | $ | 5,093 | |||||||||
Earnings per share | ||||||||||||||||
Basic and diluted | $ | 0.08 | 0.08 | $ | 0.24 | $ | 0.21 | |||||||||
Average Weighted Shares of Common Stock | ||||||||||||||||
Basic and diluted | 23,893,224 | 23,922,086 | 23,910,287 | 23,922,086 |
June 30, | December 31, | |||||||
2023 | 2022 | |||||||
ASSETS | ||||||||
Cash and due from banks | 15,238 | $ | 13,979 | |||||
Interest-bearing deposits with banks | 52,382 | 46,747 | ||||||
Federal funds sold | 63 | 960 | ||||||
Total cash and cash equivalents | 67,683 | 61,686 | ||||||
Investment securities available-for-sale | 93,106 | 96,076 | ||||||
Loans receivable | 609,038 | 584,613 | ||||||
Allowance for credit losses | (6,814 | ) | (6,727 | ) | ||||
Net loans | 602,224 | 577,886 | ||||||
Bank premises and equipment, net | 18,635 | 19,290 | ||||||
Other real estate owned | 261 | 261 | ||||||
Accrued interest receivable | 2,483 | 2,555 | ||||||
Deferred taxes, net | 4,430 | 4,623 | ||||||
Bank owned life insurance | 4,577 | 4,549 | ||||||
Right-of-use assets – operating leases | 3,557 | 3,725 | ||||||
Other assets | 6,036 | 4,707 | ||||||
Total assets | 802,992 | $ | 775,358 | |||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Noninterest bearing | 247,135 | $ | 249,924 | |||||
Interest-bearing | 460,941 | 442,783 | ||||||
Total deposits | 708,076 | 692,707 | ||||||
Borrowed funds | 26,496 | 16,496 | ||||||
Lease liabilities – operating leases | 3,557 | 3,725 | ||||||
Accrued interest payable | 930 | 526 | ||||||
Accrued expenses and other liabilities | 3,776 | 4,685 | ||||||
Total liabilities | 742,835 | 718,139 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock - $ par value; shares authorized; | ||||||||
June 30, 2023 and December 31, 2022, respectively and shares issued and outstanding at | 47,606 | 47,697 | ||||||
Additional paid-in-capital | 14,536 | 14,546 | ||||||
Retained earnings | 11,019 | 8,917 | ||||||
Accumulated other comprehensive loss | (13,004 | ) | (13,941 | ) | ||||
Total shareholders’ equity | 60,157 | 57,219 | ||||||
Total liabilities and shareholders’ equity | 802,992 | $ | 775,358 |
The accompanying notes are an integral part of these consolidated financial statements.
43
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20222023 AND 20212022
(IN THOUSANDS)THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
NET INCOME | $ | 1,986 | $ | 1,845 | $ | 5,830 | $ | 5,093 | ||||||||
Other comprehensive (loss) income: | ||||||||||||||||
Investment securities activity | ||||||||||||||||
Unrealized losses arising during the period | (3,614 | ) | (45 | ) | (16,369 | ) | (629 | ) | ||||||||
Reclassification adjustment for net gains included | ||||||||||||||||
in net income | — | (322 | ) | — | (322 | ) | ||||||||||
Other comprehensive loss on investment securities | (3,614 | ) | (367 | ) | (16,369 | ) | (951 | ) | ||||||||
Related tax benefit | 759 | 76 | 3,437 | 199 | ||||||||||||
TOTAL OTHER COMPREHENSIVE LOSS | (2,855 | ) | (291 | ) | (12,932 | ) | (752 | ) | ||||||||
TOTAL COMPREHENSIVE (LOSS) INCOME | $ | (869 | ) | $ | 1,554 | $ | (7,102 | ) | $ | 4,341 |
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
INTEREST AND DIVIDEND INCOME | ||||||||||||||||
Loans including fees | $ | 7,876 | 6,792 | $ | 15,258 | $ | 13,466 | |||||||||
Federal funds sold | 8 | 1 | 16 | 1 | ||||||||||||
Interest-earning deposits with banks | 551 | 158 | 1,083 | 179 | ||||||||||||
Investments | 547 | 482 | 1,107 | 917 | ||||||||||||
Dividends on equity securities (restricted) | 36 | 27 | 76 | 54 | ||||||||||||
Total interest and dividend income | 9,018 | 7,460 | 17,540 | 14,617 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Deposits | 1,645 | 404 | 2,791 | 834 | ||||||||||||
Borrowed funds | 373 | 212 | 682 | 318 | ||||||||||||
Total interest expense | 2,018 | 616 | 3,473 | 1,152 | ||||||||||||
NET INTEREST INCOME | 7,000 | 6,844 | 14,067 | 13,465 | ||||||||||||
PROVISION FOR CREDIT LOSSES | 149 | 75 | 149 | 175 | ||||||||||||
NET INTEREST INCOME AFTER | ||||||||||||||||
PROVISION FOR CREDIT LOSSES | 6,851 | 6,769 | 13,918 | 13,290 | ||||||||||||
NONINTEREST INCOME | �� | |||||||||||||||
Service charges and fees | 961 | 897 | 1,877 | 1,904 | ||||||||||||
Card processing and interchange | 943 | 1,027 | 1,842 | 1,943 | ||||||||||||
Insurance and investment fees | 306 | 242 | 563 | 483 | ||||||||||||
Other noninterest income | 194 | 182 | 520 | 387 | ||||||||||||
Total noninterest income | 2,404 | 2,348 | 4,802 | 4,717 | ||||||||||||
NONINTEREST EXPENSES | ||||||||||||||||
Salaries and employee benefits | 3,652 | 3,382 | 7,202 | 6,657 | ||||||||||||
Occupancy and equipment expense | 975 | 1,017 | 1,935 | 2,023 | ||||||||||||
Data processing and telecommunications | 619 | 601 | 1,261 | 1,155 | ||||||||||||
Other operating expenses | 1,789 | 1,658 | 3,505 | 3,262 | ||||||||||||
Total noninterest expenses | 7,035 | 6,658 | 13,903 | 13,097 | ||||||||||||
INCOME BEFORE INCOME TAXES | 2,220 | 2,459 | 4,817 | 4,910 | ||||||||||||
INCOME TAX EXPENSE | 497 | 536 | 1,073 | 1,066 | ||||||||||||
NET INCOME | $ | 1,723 | 1,923 | $ | 3,744 | $ | 3,844 | |||||||||
Earnings per share | ||||||||||||||||
Basic and diluted | $ | $ | $ | |||||||||||||
Average Weighted Shares of Common Stock | ||||||||||||||||
Basic and diluted |
The accompanying notes are an integral part of these consolidated financial statements.
54
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYCOMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20222023 AND 20212022
(IN THOUSANDS INCLUDING SHARE DATA)
(UNAUDITED)
Shares of Common Stock | Common Stock | Additional Paid-in- Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||
Balance, December 31, 2020 | 23,922 | $ | 47,844 | $ | 14,570 | $ | (4,979 | ) | $ | 742 | $ | 58,177 | ||||||||||||
Net income | — | — | — | 1,585 | — | 1,585 | ||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | (415 | ) | (415 | ) | ||||||||||||||||
Balance, March 31, 2021 | 23,922 | $ | 47,844 | $ | 14,570 | $ | (3,394 | ) | $ | 327 | $ | 59,347 | ||||||||||||
Net income | — | — | — | 1,663 | — | 1,663 | ||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | (46 | ) | (46 | ) | ||||||||||||||||
Balance, June 30, 2021 | 23,922 | $ | 47,844 | $ | 14,570 | $ | (1,731 | ) | $ | 281 | $ | 60,964 | ||||||||||||
Net income | — | — | — | 1,845 | — | 1,845 | ||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | (291 | ) | (291 | ) | ||||||||||||||||
Balance, September 30, 2021 | 23,922 | $ | 47,844 | $ | 14,570 | $ | 114 | $ | (10 | ) | $ | 62,518 | ||||||||||||
| ||||||||||||||||||||||||
Balance, December 31, 2021 | 23,922 | $ | 47,844 | $ | 14,570 | $ | 2,031 | $ | (814 | ) | $ | 63,631 | ||||||||||||
Net income | — | — | — | 1,921 | — | 1,921 | ||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | (5,444 | ) | (5,444 | ) | ||||||||||||||||
Cash dividend declared ($0.05 per share) | — | — | — | (1,196 | ) | — | (1,196 | ) | ||||||||||||||||
Balance, March 31, 2022 | 23,922 | $ | 47,844 | $ | 14,570 | $ | 2,756 | $ | (6,258 | ) | $ | 58,912 | ||||||||||||
Net income | — | — | — | 1,923 | — | 1,923 | ||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | (4,633 | ) | (4,633 | ) | ||||||||||||||||
Repurchase of common stock | (16 | ) | (33 | ) | (5 | ) | — | — | (38 | ) | ||||||||||||||
Balance, June 30, 2022 | 23,906 | $ | 47,811 | $ | 14,565 | $ | 4,679 | $ | (10,891 | ) | $ | 56,164 | ||||||||||||
Net income | — | — | — | 1,986 | — | 1,986 | ||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | (2,855 | ) | (2,855 | ) | ||||||||||||||||
Repurchase of common stock | (28 | ) | (56 | ) | (9 | ) | — | — | (65 | ) | ||||||||||||||
Balance, September 30, 2022 | 23,878 | $ | 47,755 | $ | 14,556 | $ | 6,665 | $ | (13,746 | ) | $ | 55,230 |
The accompanying notes are an integral part of these consolidated financial statements.
6
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(IN THOUSANDS)
(UNAUDITED)
2022 | 2021 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 5,830 | $ | 5,093 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 1,337 | 1,609 | ||||||
Provision for loan losses | 400 | 372 | ||||||
Loss (income) on bank owned life insurance | 83 | (25 | ) | |||||
Net gain on sale of securities available-for-sale | — | (322 | ) | |||||
Net gain on sale of mortgage loans | (27 | ) | (95 | ) | ||||
Loss (gain) on sale or disposal of premises and equipment | 195 | (149 | ) | |||||
Gain on sale of other real estate owned | (70 | ) | (122 | ) | ||||
Loans originated for sale | (1,503 | ) | (5,494 | ) | ||||
Proceeds from sales of loans originated for sale | 1,530 | 5,869 | ||||||
Adjustment to carrying value of premises transferred to other real estate owned | — | 1,067 | ||||||
Adjustment of carrying value of other real estate owned | 137 | 423 | ||||||
Net amortization/accretion of bond premiums/discounts | 392 | 336 | ||||||
Deferred tax expense | 540 | 1,351 | ||||||
Net change in: | ||||||||
Accrued interest receivable | (62 | ) | 250 | |||||
Other assets | (693 | ) | (491 | ) | ||||
Accrued interest payable | 83 | (146 | ) | |||||
Accrued expenses and other liabilities | 1,136 | 212 | ||||||
Net Cash Provided by Operating Activities | 9,308 | 9,738 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Net decrease in loans | 14,039 | 41 | ||||||
Purchase of securities available-for-sale | (19,790 | ) | (77,168 | ) | ||||
Proceeds from sale of investment securities available-for-sale | — | 7,686 | ||||||
Proceeds from repayments and maturities of securities available-for-sale | 11,542 | 11,695 | ||||||
Net (purchase) redemption of equity securities (restricted) | (964 | ) | 555 | |||||
Payments for the purchase of premises and equipment | (478 | ) | (2,217 | ) | ||||
Proceeds from sale of premises and equipment | — | 1,203 | ||||||
Proceeds from insurance claims on other real estate owned or premises | 6 | 54 | ||||||
Proceeds from sales of other real estate owned | 207 | 2,128 | ||||||
Net Cash Provided by (Used) in Investing Activities | 4,562 | (56,023 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Net change in short term borrowings | 25,000 | (5,000 | ) | |||||
Net change in noninterest bearing deposits | 17,795 | 31,718 | ||||||
Net change in interest bearing deposits | (1,394 | ) | 13,759 | |||||
Dividends paid | (1,196 | ) | — | |||||
Repurchase of common stock | (103 | ) | — | |||||
Net Cash Provided by Financing Activities | 40,102 | 40,477 | ||||||
Net increase (decrease) in cash and cash equivalents | 53,972 | (5,808 | ) | |||||
Cash and Cash Equivalents, Beginning of the Period | 60,946 | 92,350 | ||||||
Cash and Cash Equivalents, End of the Period | $ | 114,918 | $ | 86,542 | ||||
Supplemental Disclosure of Cash Paid During the Period for: | ||||||||
Interest | $ | 1,979 | $ | 2,275 | ||||
Taxes | $ | 325 | $ | — | ||||
Supplemental Disclosure of Non-cash Transactions: | ||||||||
Other real estate acquired in settlement of foreclosed loans | $ | — | $ | 566 | ||||
Loans made to finance sale of other real estate owned | $ | 711 | $ | — | ||||
Transfer of premises and equipment to other real estate | $ | — | $ | 950 | ||||
Change in unrealized losses on securities available for sale | $ | (16,369 | ) | $ | (951 | ) |
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
NET INCOME | $ | 1,723 | $ | 1,923 | $ | 3,744 | $ | 3,844 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Investment securities activity | ||||||||||||||||
Unrealized (losses) gains arising during the period | (1,518 | ) | (5,865 | ) | 1,187 | (12,756 | ) | |||||||||
Related tax benefit (expense) | 319 | 1,232 | (250 | ) | 2,679 | |||||||||||
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) | (1,199 | ) | (4,633 | ) | 937 | (10,077 | ) | |||||||||
TOTAL COMPREHENSIVE INCOME (LOSS) | $ | 524 | $ | (2,710 | ) | $ | 4,681 | $ | (6,233 | ) | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(IN THOUSANDS INCLUDING SHARE DATA)
(UNAUDITED)
Shares of Common Stock | Common Stock | Additional Paid-in- Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||
Balance, December 31, 2021 | 23,922 | $ | 47,844 | $ | 14,570 | $ | 2,031 | $ | (814 | ) | $ | 63,631 | ||||||||||||
Net income | — | — | — | 1,921 | — | 1,921 | ||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | (5,444 | ) | (5,444 | ) | ||||||||||||||||
Cash dividend declared ($0.05 per share) | — | — | — | (1,196 | ) | — | (1,196 | ) | ||||||||||||||||
Balance, March 31, 2022 | 23,922 | $ | 47,844 | $ | 14,570 | $ | 2,756 | $ | (6,258 | ) | $ | 58,912 | ||||||||||||
Net income | — | — | — | 1,923 | — | 1,923 | ||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | (4,633 | ) | (4,633 | ) | ||||||||||||||||
Repurchase of common stock | (16 | ) | (33 | ) | (5 | ) | — | — | (38 | ) | ||||||||||||||
Balance, June 30, 2022 | 23,906 | $ | 47,811 | $ | 14,565 | $ | 4,679 | $ | (10,891 | ) | $ | 56,164 | ||||||||||||
Balance, December 31, 2022 | 23,848 | $ | 47,697 | $ | 14,546 | $ | 8,917 | $ | (13,941 | ) | $ | 57,219 | ||||||||||||
Net income | — | — | — | 2,021 | — | 2,021 | ||||||||||||||||||
Adoption of ASU 2016-13 | — | — | — | (212 | ) | — | (212 | ) | ||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | 2,136 | 2,136 | ||||||||||||||||||
Repurchase of common stock | (20 | ) | (40 | ) | (6 | ) | — | — | (46 | ) | ||||||||||||||
Cash dividend declared ($0.06 per share) | — | — | — | (1,430 | ) | — | (1,430 | ) | ||||||||||||||||
Balance, March 31, 2023 | 23,828 | $ | 47,657 | $ | 14,540 | $ | 9,296 | $ | (11,805 | ) | $ | 59,688 | ||||||||||||
Net income | — | — | — | 1,723 | — | 1,723 | ||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | (1,199 | ) | (1,199 | ) | ||||||||||||||||
Repurchase of common stock | (25 | ) | (51 | ) | (4 | ) | — | — | (55 | ) | ||||||||||||||
Balance, June 30, 2023 | 23,803 | $ | 47,606 | $ | 14,536 | $ | 11,019 | $ | (13,004 | ) | $ | 60,157 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(IN THOUSANDS)
(UNAUDITED)
2023 | 2022 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 3,744 | $ | 3,844 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 793 | 916 | ||||||
Provision for credit losses | 149 | 175 | ||||||
Income on bank owned life insurance | (28 | ) | (12 | ) | ||||
Gain on sale of mortgage loans | (4 | ) | (20 | ) | ||||
Gain on sale or disposal of premises and equipment | (134 | ) | — | |||||
Gain on sale of other real estate owned | — | (25 | ) | |||||
Loans originated for sale | (81 | ) | (1,134 | ) | ||||
Proceeds from sales of loans originated for sale | 85 | 1,092 | ||||||
Adjustment of carrying value of other real estate owned | — | 137 | ||||||
Net amortization/accretion of bond premiums/discounts | 151 | 276 | ||||||
Deferred tax (benefit) expense | (1 | ) | 644 | |||||
Net change in: | ||||||||
Accrued interest receivable | 72 | (127 | ) | |||||
Other assets | (909 | ) | (1,426 | ) | ||||
Accrued interest payable | 404 | 61 | ||||||
Accrued expenses and other liabilities | (1,191 | ) | 409 | |||||
Net cash provided by operating activities | 3,050 | 4,810 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Net (increase) decrease in loans | (24,473 | ) | 8,730 | |||||
Purchase of securities available-for-sale | — | (14,861 | ) | |||||
Proceeds from repayments and maturities of securities available-for-sale | 4,006 | 8,571 | ||||||
Net purchase of equity securities (restricted) | (420 | ) | (2,277 | ) | ||||
Payments for the purchase of premises and equipment | (813 | ) | (392 | ) | ||||
Proceeds from sales of premises and equipment | 809 | — | ||||||
Proceeds from sales of other real estate owned | — | 207 | ||||||
Net cash used in investing activities | (20,891 | ) | (22 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Net change in short term borrowings | — | 60,000 | ||||||
Issuance of long-term debt | 10,000 | — | ||||||
Net change in noninterest bearing deposits | (2,789 | ) | 8,734 | |||||
Net change in interest bearing deposits | 18,158 | (9,183 | ) | |||||
Dividends paid | (1,430 | ) | (1,196 | ) | ||||
Repurchase of common stock | (101 | ) | (38 | ) | ||||
Net cash provided by financing activities | 23,838 | 58,317 | ||||||
Net increase in cash and cash equivalents | 5,997 | 63,105 | ||||||
Cash and cash equivalents, beginning of the period | 61,686 | 60,946 | ||||||
Cash and cash equivalents, end of the period | $ | 67,683 | $ | 124,051 | ||||
Supplemental disclosure of cash paid during the period for: | ||||||||
Interest | $ | 3,069 | $ | 1,091 | ||||
Taxes | 1,925 | 325 | ||||||
Supplemental disclosure of non-cash transactions: | ||||||||
Loans made to finance sale of other real estate owned | — | 711 | ||||||
Change in unrealized losses on securities available-for-sale | 1,187 | (12,756 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
7
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 NATURE OF OPERATIONS
Nature of Operations – New Peoples Bankshares, Inc. (New Peoples or the Company) is a financial holding company whose principal activity is the ownership and management of a community bank, New Peoples Bank, Inc. (the Bank). New Peoples and the Bank are organized and incorporated under the laws of the Commonwealth of Virginia. As a state-chartered member bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System (the Federal Reserve). The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwest Virginia, southern West Virginia, western North Carolina and northeastern Tennessee. These services include commercial and consumer loans along with traditional deposit products such as checking and savings accounts.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements conform to U. S. generally accepted accounting principles (GAAP) and to general industry practices. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position at Septemberas of June 30, 20222023 and December 31, 2021,2022, and the results of operations for the three- and nine-monthsix-month periods ended SeptemberJune 30, 20222023 and 2021.2022. The Notes included herein should be read in conjunction with the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022. The results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.
The consolidated financial statements include New Peoples, the Bank, NPB Insurance Services, Inc., and NPB Web Services, Inc. (hereinafter, collectively referred to as the Company, we, us or our). All significant intercompany balances and transactions have been eliminated. In accordance with Accounting Standards Codification (ASC) 942, Financial Services – Depository and Lending, NPB Capital Trust I and 2 are not included in the consolidated financial statements.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. The determination of the adequacy of the allowance for loancredit losses and the determination of the deferred tax asset areis based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.
Certain reclassifications have been made to prior period amounts to conform to current period presentation. None of these reclassifications are considered material and have no impact on net income.
The Company’s significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in the Company’s Annual report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2022 except for the following:
Accounting Standards Adopted in 2023
On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses.
8
In addition, CECL made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell.
The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included a decrease in the allowance for credit losses on loans of $80,000, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $348,000, which is recorded within other liabilities. The Company recorded a net decrease to retained earnings of $212,000 as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”).
The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available-for-sale securities was not deemed material.
The following table illustrates the impact on the allowance for credit losses from the adoption of ASC 326:
Schedule of allowance for credit losses on available for sale securities | ||||||||||||
January 1, 2023 As Reported Under ASC 326 | December 31, 2022 Pre-ASC 326 Adoption | Impact of ASC 326 Adoption | ||||||||||
(Dollars are in thousands) | ||||||||||||
Assets: | ||||||||||||
Loans, at amortized cost | 584,613 | 584,613 | $ | — | ||||||||
Allowance for credit losses on loans: | ||||||||||||
Real estate secured: | ||||||||||||
Commercial | 2,065 | 2,364 | (299 | ) | ||||||||
Construction and land development | 509 | 345 | 164 | |||||||||
Residential 1-4 family | 2,639 | 2,364 | 275 | |||||||||
Multifamily | 274 | 262 | 12 | |||||||||
Farmland | 228 | 153 | 75 | |||||||||
Total real estate loans | 5,715 | 5,488 | 227 | |||||||||
Commercial | 622 | 381 | 241 | |||||||||
Agriculture | 27 | 32 | (5 | ) | ||||||||
Consumer and other loans | 283 | 386 | (103 | ) | ||||||||
Unallocated | — | 440 | (440 | ) | ||||||||
Total allowance for credit losses for loans | 6,647 | 6,727 | (80 | ) | ||||||||
Deferred tax asset | 4,679 | 4,623 | 56 | |||||||||
Liabilities: | ||||||||||||
Allowance for credit losses for unfunded commitments | 348 | — | 348 |
The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.
9
Allowance for Credit Losses – Available-for-sale Securities
For available-for-sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.
If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income (loss).
Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available-for-sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. As of June 30, 2023, there was no allowance for credit loss related to the available-for-sale portfolio.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $2.0 million as of June 30, 2023 and was reported in accrued interest receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments.
The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days after the contractual due date.
All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured.
Allowance for Credit Losses – Loans
The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses.
The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
The Company primarily utilizes the cohort and the probability of default/loss given default methodologies for its reasonable and supportable forecasting of current expected credit losses. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider the following qualitative adjustment factors: changes to: lending policies and procedures, national and local economic conditions, the experience and ability of management and staff; the volume and severity of past due, rated and nonaccrual assets, loan review system, collateral value, concentrations of credit, and legal or regulatory requirements and competition.
The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following portfolio segments and calculates the allowance for credit losses for each using a discounted cash flow methodology:
10
· | Commercial Loans. We make commercial loans to qualified businesses in our market area. Our commercial lending consists primarily of commercial and industrial loans to finance accounts receivable, inventory, property, plant and equipment. Commercial business loans generally have a higher degree of risk than residential mortgage loans, but have commensurately higher yields. Residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be easily ascertainable. In contrast, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral for commercial business loans may depreciate over time and cannot be appraised with as much precision as residential real estate. To manage these risks, our underwriting guidelines generally require us to secure commercial loans with both the assets of the borrowing business and other additional collateral and guarantees that may be available. In addition, we actively monitor certain measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors. |
· | Residential Mortgage Loans. Our residential mortgage loans consist of residential first and second mortgage loans, residential construction loans, home equity lines of credit and term loans secured by first and second mortgages on the residences of borrowers for home improvements, education and other personal expenditures. We make mortgage loans with a variety of terms, including fixed and floating or variable rates and a variety of maturities. Under our underwriting guidelines, residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be easily ascertainable. These loans are made consistent with our appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities. |
· | Construction Loans. Construction lending entails significant additional risks compared to residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers. Construction loans also involve additional risks attributable to the fact that loan funds are advanced upon the security of property under construction, which is of uncertain value prior to the completion of construction. Thus, it is more difficult to evaluate the total loan funds required to complete a project and related loan-to-value ratios accurately. To minimize the risks associated with construction lending, loan-to-value limitations for residential, multi-family and non-residential construction loans are in place. These are in addition to the usual credit analyses of borrowers. Management feels that the loan-to-value ratios help to minimize the risk of loss and to compensate for normal fluctuations in the real estate market. Maturities for construction loans generally range from 4 to 12 months for residential property and from 6 to 18 months for non-residential and multi-family properties. |
· | Consumer Loans. Our consumer loans consist primarily of installment loans to individuals for personal, family and household purposes. The specific types of consumer loans that we make include home improvement loans, debt consolidation loans and general consumer lending. Consumer loans entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured, such as lines of credit, or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance due to the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. A borrower may also be able to assert against the Bank as an assignee any claims and defenses that it has against the seller of the underlying collateral. |
Loans that do not share risk characteristics are evaluated on an individual basis. The Company designates loan relationships of $250,000 or more that have been determined to meet the regulatory definitions of “special mention” or “classified” (together known as “criticized”) as individually evaluated. The fair value of individually evaluated loans is measured using the fair value of collateral (“collateral method”) or the DCF method.
11
· | The collateral method is applied to individually evaluated loans for which foreclosure is probable. The collateral method is also applied to individually evaluated loans when borrowers are experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral (“collateral dependent”). The allowance for credit loss is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. When repayment is expected to be from the operation of the collateral, the allowance for credit loss is calculated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, the allowance for credit loss is calculated as the amount by which the loan's amortized cost basis exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance for credit loss may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the loan. |
· | The DCF method is applied to individually evaluated loans that do not meet the criteria for collateral method measurement. Cash flows are projected and discounted using the same method as for collectively evaluated loans, and the Company considers default and prepayment assumptions. |
Allowance for Credit Losses – Unfunded Commitments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for unfunded commitments, which is included in the provision for credit losses, in the Company’s income statements. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.
On January 1, 2023, concurrent with its adoption of ASU No. 2016-13, the Company adopted ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” The amendments eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. Disclosures about periods prior to adoption will be presented under GAAP applicable for that period.
Similar to its policy under previous GAAP, the Company continues to identify modifications to loans and to determine whether the borrower is experiencing financial difficulty. If the Company determines that the borrower is experiencing financial difficulty, the loan's risk rating is evaluated to determine whether it falls within the regulatory definition of “criticized” and requires individual evaluation. Under previous GAAP, modifications to loans when the borrower was experiencing financial difficulty were designated as TDR and were individually evaluated for the duration of the loan. Under CECL, if a previously modified loan with financial difficulty is subsequently upgraded to a pass rating, it will no longer be individually evaluated.
Basic Earningsearnings per share computations are based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. For the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20222023 and 2021,2022, there were no potential common shares. Basic and diluted net income per common share calculations follows:
Schedule of basic and diluted net loss per common share calculations | ||||||||||||||||||||||||||||||||
(Dollars in Thousands, Except Share and Per Share Data) | For the three months ended September 30, | For the Nine months ended September 30, | ||||||||||||||||||||||||||||||
(Dollars are in thousands, except share and per share data) | For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
Net income | $ | 1,986 | $ | 1,845 | $ | 5,830 | $ | 5,093 | $ | 1,723 | $ | 1,923 | $ | 3,744 | $ | 3,844 | ||||||||||||||||
Weighted average shares outstanding | 23,893,224 | 23,922,086 | 23,910,287 | 23,922,086 | 23,817,903 | 23,915,869 | 23,829,468 | 23,918,960 | ||||||||||||||||||||||||
Weighted average dilutive shares outstanding | 23,893,224 | 23,922,086 | 23,910,287 | 23,922,086 | 23,817,903 | 23,915,869 | 23,829,468 | 23,918,960 | ||||||||||||||||||||||||
Basic and diluted Earnings per share | $ | 0.08 | $ | 0.08 | $ | 0.24 | $ | 0.21 | ||||||||||||||||||||||||
Basic and diluted earnings per share | $ | $ | $ | $ |
812
NOTE 4 CAPITAL
Capital Requirements and Ratios
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
To qualify as a "Small Bank Holding Company" under federal regulations, a bank must have consolidated assets of $3 billion or less. The primary benefit of being deemed a "Small Bank Holding Company" is the exemption from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level.
The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (BASEL III rules) became fully phased in on January 1, 2019. Under the BASEL III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer required is 2.502.50%%. At SeptemberAs of June 30, 2022,2023, the Bank had a capital conservation buffer of 8.35%8.59%. Amounts recorded to accumulated other comprehensive income (loss) are not included in computing regulatory capital. Management believes as of SeptemberJune 30, 2022,2023, the Bank met all capital adequacy requirements to which it was subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At SeptemberAs of June 30, 2022,2023, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.
In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase-in over a three-year period the Day 1 adverse regulatory capital effects of the CECL accounting standard. Additionally, in March 2020, the U.S. Federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years. The final rule was adopted and became effective in September 2020. The Company implemented the CECL model commencing January 1, 2023, and elected not to phase in the effect of CECL on regulatory capital.
13
The Bank’s actual capital amounts and ratios are presented in the following table as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively.
Schedule of capital requirements | ||||||||||||||||||||||||
Actual | Minimum Capital Requirement | Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
(Dollars are in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
September 30, 2022: | ||||||||||||||||||||||||
Total Capital to Risk Weighted Assets | 90,849 | 16.35 | % | $ | 44,465 | 8.0 | % | $ | 55,582 | 10.0 | % | |||||||||||||
Tier 1 Capital to Risk Weighted Assets | 84,256 | 15.16 | % | 33,349 | 6.0 | % | 44,465 | 8.0 | % | |||||||||||||||
Tier 1 Capital to Average Assets | 84,256 | 9.86 | % | 34,166 | 4.0 | % | 42,707 | 5.0 | % | |||||||||||||||
Common Equity Tier 1 Capital | ||||||||||||||||||||||||
to Risk Weighted Assets | 84,256 | 15.16 | % | 25,012 | 4.5 | % | 36,128 | 6.5 | % | |||||||||||||||
December 31, 2021: | ||||||||||||||||||||||||
Total Capital to Risk Weighted Assets | 85,890 | 16.23 | % | $ | 42,332 | 8.0 | % | $ | 52,915 | 10.0 | % | |||||||||||||
Tier 1 Capital to Risk Weighted Assets | 79,274 | 14.98 | % | 31,749 | 6.0 | % | 42,332 | 8.0 | % | |||||||||||||||
Tier 1 Capital to Average Assets | 79,274 | 9.86 | % | 32,145 | 4.0 | % | 40,181 | 5.0 | % | |||||||||||||||
Common Equity Tier 1 Capital | ||||||||||||||||||||||||
to Risk Weighted Assets | 79,274 | 14.98 | % | 23,812 | 4.5 | % | 34,395 | 6.5 | % |
Schedule of capital requirements | ||||||||||||||||||||||||
Actual | Minimum Capital Requirement | Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
(Dollars are in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
June 30, 2023: | ||||||||||||||||||||||||
Total capital to risk weighted assets | 95,814 | 16.59 | % | $ | 46,196 | 8.00 | % | $ | 55,745 | 10.00 | % | |||||||||||||
Tier 1 capital to risk weighted assets | 88,718 | 15.35 | % | 34,647 | 6.00 | % | 46,196 | 8.00 | % | |||||||||||||||
Tier 1 capital to average assets | 88,718 | 11.05 | % | 32,111 | 4.00 | % | 40,139 | 5.00 | % | |||||||||||||||
Common equity Tier 1 capital | ||||||||||||||||||||||||
to risk weighted assets | 88,718 | 15.35 | % | 25,985 | 4.50 | % | 37,534 | 6.50 | % | |||||||||||||||
December 31, 2022: | ||||||||||||||||||||||||
Total capital to risk weighted assets | 93,028 | 16.50 | % | $ | 45,106 | 8.00 | % | $ | 56,382 | 10.00 | % | |||||||||||||
Tier 1 capital to risk weighted assets | 86,301 | 15.31 | % | 33,829 | 6.00 | % | 45,106 | 8.00 | % | |||||||||||||||
Tier 1 capital to average assets | 86,301 | 10.40 | % | 33,206 | 4.00 | % | 41,508 | 5.00 | % | |||||||||||||||
Common equity Tier 1 capital | ||||||||||||||||||||||||
to risk weighted assets | 86,301 | 15.31 | % | 25,372 | 4.50 | % | 36,648 | 6.50 | % |
9
NOTE 5 INVESTMENT SECURITIES
The amortized cost and estimated fair value of available-for-sale (AFS)(“AFS”) securities as of SeptemberJune 30, 20222023 and December 31, 20212022 is as follows:
Schedule of securities amortized cost and estimated fair value | ||||||||||||||||||||||||
Gross | Gross | Approximate | Gross | Gross | Amortized | |||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||
(Dollars are in thousands) | (Dollars are in thousands) | Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | |||||||||||||||
September 30, 2022 | ||||||||||||||||||||||||
June 30, 2023 | ||||||||||||||||||||||||
U.S. Treasuries | $ | 12,639 | $ | - | $ | 993 | $ | 11,646 | $ | 12,648 | $ | — | $ | 892 | $ | 11,756 | ||||||||
U.S. Government Agencies | 10,451 | 4 | 695 | 9,760 | 9,407 | 4 | 744 | 8,667 | ||||||||||||||||
Taxable municipals | Taxable municipals | 23,338 | - | 5,560 | 17,778 | 23,000 | — | 5,468 | 17,532 | |||||||||||||||
Corporate bonds | Corporate bonds | 3,515 | - | 340 | 3,175 | 3,505 | — | 407 | 3,098 | |||||||||||||||
Mortgage backed securities | Mortgage backed securities | 66,301 | - | 9,815 | 56,486 | 61,007 | — | 8,954 | 52,053 | |||||||||||||||
Total Securities available for sale | $ | 116,244 | $ | 4 | $ | 17,403 | $ | 98,845 | ||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||
Total securities available-for-sale | $ | 109,567 | $ | 4 | $ | 16,465 | $ | 93,106 | ||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||
U.S. Treasuries | $ | 7,791 | $ | 2 | $ | 122 | $ | 7,671 | $ | 12,642 | $ | — | $ | 957 | $ | 11,685 | ||||||||
U.S. Government Agencies | 9,098 | 77 | 86 | 9,089 | 10,129 | 4 | 734 | 9,399 | ||||||||||||||||
Taxable municipals | 23,075 | 159 | 254 | 22,980 | 23,022 | — | 6,207 | 16,815 | ||||||||||||||||
Corporate bonds | 2,014 | 23 | 18 | 2,019 | 3,512 | — | 376 | 3,136 | ||||||||||||||||
Mortgage backed securities | 66,410 | 143 | 954 | 65,599 | 64,419 | — | 9,378 | 55,041 | ||||||||||||||||
Total Securities available for sale | $ | 108,388 | $ | 404 | $ | 1,434 | $ | 107,358 | ||||||||||||||||
Total securities available-for-sale | $ | 113,724 | $ | 4 | $ | 17,652 | $ | 96,076 |
14
The following table details unrealized losses and related fair values in the AFS portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of SeptemberJune 30, 20222023 and December 31, 2021.2022.
Schedule of fair value and gross unrealized losses on investment securities | ||||||||||||||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||||||||||||
(Dollars are in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||||||||
September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
June 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||
U. S. Treasuries | $ | 1,446 | $ | 16 | $ | 10,308 | $ | 876 | $ | 11,754 | $ | 892 | ||||||||||||||||||||||||||||||||||||
U.S. Government Agencies | 1,778 | 50 | 6,732 | 694 | 8,510 | 744 | ||||||||||||||||||||||||||||||||||||||||||
Taxable municipals | 475 | 25 | 17,057 | 5,443 | 17,532 | 5,468 | ||||||||||||||||||||||||||||||||||||||||||
Corporate bonds | 985 | 15 | 2,113 | 392 | 3,098 | 407 | ||||||||||||||||||||||||||||||||||||||||||
Mortgage backed securities | 2,287 | 71 | 49,766 | 8,883 | 52,053 | 8,954 | ||||||||||||||||||||||||||||||||||||||||||
Total securities available-for-sale | $ | 6,971 | $ | 177 | $ | 85,976 | $ | 16,288 | $ | 92,947 | $ | 16,465 | ||||||||||||||||||||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasuries | $ | 5,115 | $ | 283 | $ | 5,564 | $ | 710 | $ | 10,679 | $ | 993 | $ | 4,761 | $ | 145 | $ | 6,922 | $ | 812 | $ | 11,683 | $ | 957 | ||||||||||||||||||||||||
U.S. Government Agencies | 5,450 | 362 | 3,120 | 333 | 8,570 | 695 | 5,925 | 348 | 3,295 | 386 | 9,220 | 734 | ||||||||||||||||||||||||||||||||||||
Taxable municipals | 7,009 | 2,131 | 9,969 | 3,429 | 16,978 | 5,560 | 3,689 | 1,113 | 13,127 | 5,094 | 16,816 | 6,207 | ||||||||||||||||||||||||||||||||||||
Corporate bonds | 2,288 | 228 | 388 | 112 | 2,676 | 340 | 2,375 | 136 | 761 | 240 | 3,136 | 376 | ||||||||||||||||||||||||||||||||||||
Mortgage backed securities | 14,463 | 1,759 | 39,512 | 8,056 | 53,975 | 9,815 | 11,338 | 861 | 43,612 | 8,517 | 54,950 | 9,378 | ||||||||||||||||||||||||||||||||||||
Total Securities available for sale | $ | 34,325 | $ | 4,763 | $ | 58,553 | $ | 12,640 | $ | 92,878 | $ | 17,403 | ||||||||||||||||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasuries | $ | 6,200 | $ | 122 | $ | — | $ | — | $ | 6,200 | $ | 122 | ||||||||||||||||||||||||||||||||||||
U.S. Government Agencies | 977 | 10 | 3,434 | 76 | 4,411 | 86 | ||||||||||||||||||||||||||||||||||||||||||
Taxable municipals | 13,040 | 237 | 387 | 17 | 13,427 | 254 | ||||||||||||||||||||||||||||||||||||||||||
Corporate bonds | 1,482 | 18 | — | — | 1,482 | 18 | ||||||||||||||||||||||||||||||||||||||||||
Mortgage backed securities | 52,180 | 758 | 6,282 | 196 | 58,462 | 954 | ||||||||||||||||||||||||||||||||||||||||||
Total Securities available for sale | $ | 73,879 | $ | 1,145 | $ | 10,103 | $ | 289 | $ | 83,982 | $ | 1,434 | ||||||||||||||||||||||||||||||||||||
Total securities available-for-sale | $ | 28,088 | $ | 2,603 | $ | 67,717 | $ | 15,049 | $ | 95,805 | $ | 17,652 |
At SeptemberAs of June 30, 2022,2023, there were 216219 securities in a loss position, of which 100202 have been in a loss position for twelve months or more. Management believes that all unrealized losses have resulted from temporary changes in the interest rates and current market conditions and are not a result of credit deterioration. Management does not intend to sell, and it is not likely that the Bank will be required to sell, any of the securities referenced in the table above before recovery of their amortized cost. None of the individual securities are past due as to principal or interest payments and a number of these securities have explicit or implicit payment guarantees. The remaining securities have credit ratings at or above that necessary to be considered “bank qualified”.
Investment securities with a carrying value of $28.336.9 million and $12.127.3 million at Septemberas of June 30, 20222023 and December 31, 2021,2022, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.
10
The following table summarizesThere were no sales of AFS debtavailable-for-sale investment securities forduring the nine months-ended Septemberthree and six months ended June 30,
Schedule of summarizes sales of AFS debt securities | ||||||||
(Dollars are in thousands) | 2022 | 2021 | ||||||
Proceeds | $ | — | $ | 7,686 | ||||
Gains | — | 322 | ||||||
Losses | — | — | ||||||
Tax provision (benefit) | — | 68 |
2023 and 2022.
The amortized cost and fair value of investment securities at Septemberas of June 30, 2022,2023, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Schedule of amortized cost and fair value of investment securities contractual maturity | ||||||||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||||||
(Dollars are in thousands) | Amortized | Fair | Average | Amortized | Fair | Average | ||||||||||||||||||
Securities Available-for-Sale | Cost | Value | Yield | Cost | Value | Yield | ||||||||||||||||||
Due in one year or less | $ | 1,777 | $ | 1,776 | 4.30 | % | $ | 2,998 | $ | 2,951 | 3.22 | % | ||||||||||||
Due after one year through five years | 16,829 | 15,805 | 2.09 | % | 15,295 | 14,351 | 2.15 | % | ||||||||||||||||
Due after five years through ten years | 14,663 | 12,832 | 1.98 | % | 17,145 | 14,891 | 2.09 | % | ||||||||||||||||
Due after ten years | 82,975 | 68,432 | 1.82 | % | 74,129 | 60,913 | 1.90 | % | ||||||||||||||||
Total | $ | 116,244 | $ | 98,845 | 1.92 | % | $ | 109,567 | $ | 93,106 | 2.00 | % |
The Bank, as a member bank of the Federal Reserve Bank of Richmond (Federal Reserve Bank) and the Federal Home Loan Bank of Atlanta (FHLB), is required to hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities, which are included in Other Assetsother assets on the consolidated balance sheet, are restricted from trading and are recorded at a cost of $3.02.4 million and $2.02.1 million at Septemberas of June 30, 20222023 and December 31, 2021,2022, respectively. The stock has no quoted market value and no ready market exists. When evaluating these securities for impairment, their value is determined based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Equity securities are viewed as long-term investments and management believes the Company has the ability and the intent to hold these securities until their value is recovered
15
NOTE 6 LOANS
Loans receivable outstanding as of SeptemberJune 30, 2022,2023, and December 31, 2021,2022, are summarized as follows:
Schedule of Loans receivable outstanding | ||||||||
(Dollars are in thousands) | September 30, 2022 | December 31, 2021 | ||||||
Real estate secured: | ||||||||
Commercial | $ | 198,101 | $ | 206,162 | ||||
Construction and land development | 38,598 | 32,325 | ||||||
Residential 1-4 family | 226,706 | 224,530 | ||||||
Multifamily | 29,062 | 33,048 | ||||||
Farmland | 17,467 | 18,735 | ||||||
Total real estate loans | 509,934 | 514,800 | ||||||
Commercial | 45,126 | 54,325 | ||||||
Agriculture | 3,799 | 4,021 | ||||||
Consumer installment loans | 19,602 | 18,756 | ||||||
All other loans | 1,413 | 1,842 | ||||||
Total loans | $ | 579,874 | $ | 593,744 |
Included in commercial loans at September 30, 2022 and December 31, 2021 were $298 thousand and $6.4 million of Paycheck Protection Program (PPP) loans, respectively, that are guaranteed by the Small Business Administration (SBA).
Schedule of Loans receivable outstanding | ||||||||
(Dollars are in thousands) | June 30, 2023 | December 31, 2022 | ||||||
Real estate secured: | ||||||||
Commercial | $ | 209,780 | $ | 197,069 | ||||
Construction and land development | 43,279 | 42,470 | ||||||
Residential 1-4 family | 231,626 | 227,232 | ||||||
Multifamily | 34,140 | 29,710 | ||||||
Farmland | 17,628 | 17,744 | ||||||
Total real estate loans | 536,453 | 514,225 | ||||||
Commercial | 47,720 | 46,697 | ||||||
Agriculture | 3,607 | 3,756 | ||||||
Consumer installment loans | 20,651 | 19,309 | ||||||
All other loans | 607 | 626 | ||||||
Total loans | $ | 609,038 | $ | 584,613 |
Also included in total loans above are deferred loan fees of $1.7 million and $1.81.6 million at Septemberas of June 30, 20222023 and December 31, 2021,2022, respectively. Deferred loan costs were $2.11.9 million and $2.01.9 million, at Septemberas of June 30, 20222023 and December 31, 2021,2022, respectively. Income from net deferred fees and costs is recognized over the lives of the respective loans as a yield adjustment. If loans repay prior to scheduled maturities, any unamortized fee or costs is recognized at that time.
��11
Loans receivable on nonaccrual status as of SeptemberJune 30, 2022,2023, and December 31, 2021,2022, are summarized as follows:
Summary of loans receivable on nonaccrual status | ||||||||
(Dollars are in thousands) | September 30, 2022 | December 31, 2021 | ||||||
Real estate secured: | ||||||||
Commercial | $ | 273 | $ | 415 | ||||
Construction and land development | 735 | 37 | ||||||
Residential 1-4 family | 2,636 | 2,314 | ||||||
Multifamily | — | 111 | ||||||
Farmland | 43 | 48 | ||||||
Total real estate loans | 3,687 | 2,925 | ||||||
Commercial | 15 | 9 | ||||||
Consumer installment loans and other loans | 4 | 7 | ||||||
Total loans receivable on nonaccrual status | $ | 3,706 | $ | 2,941 |
Summary of loans receivable on nonaccrual status | ||||||||||
CECL | Incurred Loss | |||||||||
June 30, 2023 | December 31, 2022 | |||||||||
(Dollars are in thousands) | With No Allowance | With an Allowance | Total | |||||||
Real estate secured: | ||||||||||
Commercial | $ | - | $ | 268 | $ | 268 | $ | - | ||
Construction and land development | - | - | - | 471 | ||||||
Residential 1-4 family | 2,097 | - | 2,097 | 2,597 | ||||||
Multifamily | 199 | - | 199 | 268 | ||||||
Farmland | - | - | - | 41 | ||||||
Total real estate loans | 2,296 | 268 | 2,564 | 3,377 | ||||||
Commercial | - | - | - | - | ||||||
Consumer installment loans and other loans | 23 | - | 23 | 36 | ||||||
Total loans receivable on nonaccrual status | $ | 2,319 | $ | 268 | $ | 2,587 | $ | 3,413 | ||
Total interest income not recognized on nonaccrual loans for the ninesix months ended SeptemberJune 30, 2023, and June 30, 2022, was $28,000 and September 30, 2021, was $22 thousand and $445 thousand,$11,000, respectively.
The following tables presents information concerningPrior to the Company’s investment inadoption of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans include loans on nonaccrual status and accruing troubled debt restructurings. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of September 30, 2022,global cash flow sufficient to pay all debt obligations and December 31, 2021:
Schedule of summary of impaired loans | ||||||||||||
As of September 30, 2022 (Dollars are in thousands) |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance | |||||||||
With no related allowance recorded: | ||||||||||||
Real estate secured: | ||||||||||||
Commercial | $ | 92 | $ | 133 | $ | — | ||||||
Construction and land development | 6 | 279 | — | |||||||||
Residential 1-4 family | 1,662 | 2,008 | — | |||||||||
Multifamily | — | — | — | |||||||||
Farmland | 268 | 437 | — | |||||||||
Commercial | 24 | 32 | — | |||||||||
Agriculture | — | — | — | |||||||||
Consumer installment loans | — | — | — | |||||||||
All other loans | — | — | — | |||||||||
With an allowance recorded: | ||||||||||||
Real estate secured: | ||||||||||||
Commercial | 291 | 361 | 69 | |||||||||
Construction and land development | 710 | 710 | 174 | |||||||||
Residential 1-4 family | 34 | 49 | 26 | |||||||||
Multifamily | — | — | — | |||||||||
Farmland | — | — | — | |||||||||
Commercial | — | — | — | |||||||||
Agriculture | — | — | — | |||||||||
Consumer installment loans | — | — | — | |||||||||
All other loans | — | — | — | |||||||||
Total | $ | 3,087 | $ | 4,009 | $ | 269 |
an evaluation of secondary sources of repayment, such as guarantor support and collateral value. The Company individually assessed for impairment all nonaccrual loans greater than $250,000 and all troubled debt restructurings, whether or not currently classified as such. The tables below include all loans deemed impaired, whether or not individually assessed for impairment. If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis.
1216
As of December 31, 2021 (Dollars are in thousands) |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance | |||||||||
With no related allowance recorded: | ||||||||||||
Real estate secured: | ||||||||||||
Commercial | $ | 99 | $ | 140 | $ | — | ||||||
Construction and land development | 24 | 298 | — | |||||||||
Residential 1-4 family | 1,508 | 1,791 | — | |||||||||
Multifamily | — | — | — | |||||||||
Farmland | 320 | 490 | — | |||||||||
Commercial | — | — | — | |||||||||
Agriculture | — | — | — | |||||||||
Consumer installment loans | 2 | 2 | — | |||||||||
All other loans | — | — | — | |||||||||
With an allowance recorded: | ||||||||||||
Real estate secured: | ||||||||||||
Commercial | 315 | 372 | 94 | |||||||||
Construction and land development | — | — | — | |||||||||
Residential 1-4 family | 340 | 372 | 53 | |||||||||
Multifamily | — | — | — | |||||||||
Farmland | 197 | 209 | 17 | |||||||||
Commercial | 28 | 35 | 2 | |||||||||
Agriculture | — | — | — | |||||||||
Consumer installment loans | — | — | — | |||||||||
All other loans | — | — | — | |||||||||
Total | $ | 2,833 | $ | 3,709 | $ | 166 |
The following tables present information concerning the Company’s average impairedtable presents loans and interest recognized on those impairedindividually evaluated for impairment by class of loans for the periods indicated:as of December 31, 2022:
Nine Months Ended | ||||||||||||||||||||||||||||||||
September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||||||||||
(Dollars are in thousands) |
Average Recorded Investment |
Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized | ||||||||||||||||||||||||||||
Schedule of summary of impaired loans | ||||||||||||||||||||||||||||||||
As of December 31, 2022 (Dollars are in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | ||||||||||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||||||||||
Real estate secured: | ||||||||||||||||||||||||||||||||
Commercial | $ | 132 | $ | 4 | $ | 281 | $ | — | $ | 90 | $ | 131 | $ | — | $ | 124 | ||||||||||||||||
Construction and land development | 25 | 13 | 75 | 9 | 471 | 491 | — | 114 | ||||||||||||||||||||||||
Residential 1-4 family | 1,578 | 37 | 1,773 | 24 | 1,617 | 1,972 | — | 1,585 | ||||||||||||||||||||||||
Multifamily | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Farmland | 322 | 18 | 467 | 14 | 248 | 417 | — | 307 | ||||||||||||||||||||||||
Commercial | 12 | 1 | — | — | 23 | 31 | — | 14 | ||||||||||||||||||||||||
Agriculture | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Consumer installment loans | 1 | — | 3 | — | — | — | — | 1 | ||||||||||||||||||||||||
All other loans | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||||||||||
Real estate secured: | ||||||||||||||||||||||||||||||||
Commercial | 442 | 3 | 1,010 | 3 | 268 | 338 | 63 | 407 | ||||||||||||||||||||||||
Construction and land development | 364 | 17 | — | — | — | — | — | 291 | ||||||||||||||||||||||||
Residential 1-4 family | 243 | 6 | 338 | 6 | 32 | 48 | 23 | 201 | ||||||||||||||||||||||||
Multifamily | 25 | — | — | — | — | — | — | 20 | ||||||||||||||||||||||||
Farmland | 79 | — | 102 | 4 | — | — | — | 63 | ||||||||||||||||||||||||
Commercial | 34 | 1 | 129 | 1 | — | — | — | 27 | ||||||||||||||||||||||||
Agriculture | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Consumer installment loans | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
All other loans | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total | $ | 3,257 | $ | 100 | $ | 4,178 | $ | 61 | $ | 2,749 | $ | 3,428 | $ | 86 | $ | 3,154 |
Upon adoption of ASU 2016-13 the Company began evaluating loans that do not share risk characteristics on an individual basis utilizing the collateral or discounted cash flow methods as described in Note 2 Summary of Significant Accounting Policies. The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated to those loans as June 30, 2023:
13
Three Months Ended | ||||||||||||||||||||||||
September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||
(Dollars are in thousands) |
Average Recorded Investment |
Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized | ||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
As of June 30, 2023 (Dollars are in thousands) | Unpaid Principal Balance | Related Allowance | ||||||||||||||||||||||
Real estate secured: | ||||||||||||||||||||||||
Commercial | $ | 94 | $ | 4 | $ | 122 | $ | — | $ | 268 | $ | 64 | ||||||||||||
Construction and land development | 9 | 9 | 56 | 5 | — | — | ||||||||||||||||||
Residential 1-4 family | 1,553 | 23 | 1,764 | 10 | 262 | — | ||||||||||||||||||
Multifamily | — | — | — | — | — | — | ||||||||||||||||||
Farmland | 275 | 9 | 452 | 5 | — | — | ||||||||||||||||||
Total real estate secured | 530 | 64 | ||||||||||||||||||||||
Commercial | 25 | 1 | — | — | — | — | ||||||||||||||||||
Agriculture | — | — | — | — | 109 | 57 | ||||||||||||||||||
Consumer installment loans | — | — | 3 | — | — | — | ||||||||||||||||||
All other loans | — | — | — | — | ||||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||
Real estate secured: | ||||||||||||||||||||||||
Commercial | 295 | — | 519 | — | ||||||||||||||||||||
Construction and land development | 727 | 17 | — | — | ||||||||||||||||||||
Residential 1-4 family | 167 | 6 | 357 | 6 | ||||||||||||||||||||
Multifamily | 25 | — | — | — | ||||||||||||||||||||
Farmland | — | — | 100 | 4 | ||||||||||||||||||||
Commercial | — | — | 29 | — | ||||||||||||||||||||
Agriculture | — | — | — | — | ||||||||||||||||||||
Consumer installment loans | — | — | — | — | ||||||||||||||||||||
All other loans | — | — | — | — | ||||||||||||||||||||
Total | $ | 3,170 | $ | 69 | $ | 3,402 | $ | 30 | $ | 639 | $ | 121 |
AnThe following table is an age analysis of past due loans receivable as of SeptemberJune 30, 2022, and2023, segregated by class:
Summary age analysis of past due loans receivable | ||||||||||||||||||||||||
As of June 30, 2023 (Dollars are in thousands) | Loans 30-59 Days Past Due | Loans 60-89 Days Past Due | Loans 90 or More Days Past Due | Total Past Due Loans | Current Loans | Total Loans | ||||||||||||||||||
Real estate secured: | ||||||||||||||||||||||||
Commercial | $ | 99 | $ | — | $ | 268 | $ | 367 | $ | 209,413 | $ | 209,780 | ||||||||||||
Construction and land development | — | — | — | — | 43,279 | 43,279 | ||||||||||||||||||
Residential 1-4 family | 1,450 | 877 | 751 | 3,078 | 228,548 | 231,626 | ||||||||||||||||||
Multifamily | — | — | — | — | 34,140 | 34,140 | ||||||||||||||||||
Farmland | — | — | — | — | 17,628 | 17,628 | ||||||||||||||||||
Total real estate loans | 1,549 | 877 | 1,019 | 3,445 | 533,008 | 536,453 | ||||||||||||||||||
Commercial | 17 | — | — | 17 | 47,703 | 47,720 | ||||||||||||||||||
Agriculture | 109 | — | — | 109 | 3,498 | 3,607 | ||||||||||||||||||
Consumer installment loans | 50 | 17 | 23 | 90 | 20,561 | 20,651 | ||||||||||||||||||
All other loans | — | — | — | — | 607 | 607 | ||||||||||||||||||
Total loans | $ | 1,725 | $ | 894 | $ | 1,042 | $ | 3,661 | $ | 605,377 | $ | 609,038 |
17
The following table is an age analysis of past due loans receivable as of December 31, 2021, is below. At September 30, 2022, and December 31, 2021, no loans over 90 days past due were accruing.segregated by class:
Summary age analysis of past due loans receivable | ||||||||||||||||||||||||
As of September 30, 2022 (Dollars are in thousands) |
Loans 30-59 Days Past Due |
Loans 60-89 Days Past Due | Loans 90 or More Days Past Due |
Total Past Due Loans |
Current Loans |
Total Loans | ||||||||||||||||||
Real estate secured: | ||||||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | $ | 198,101 | $ | 198,101 | ||||||||||||
Construction and land development | 50 | — | 710 | 760 | 37,838 | 38,598 | ||||||||||||||||||
Residential 1-4 family | 1,879 | 361 | 551 | 2,791 | 223,915 | 226,706 | ||||||||||||||||||
Multifamily | — | — | — | — | 29,062 | 29,062 | ||||||||||||||||||
Farmland | 43 | — | — | 43 | 17,424 | 17,467 | ||||||||||||||||||
Total real estate loans | 1,972 | 361 | 1,261 | 3,594 | 506,340 | 509,934 | ||||||||||||||||||
Commercial | 65 | — | 15 | 80 | 45,046 | 45,126 | ||||||||||||||||||
Agriculture | — | — | — | — | 3,799 | 3,799 | ||||||||||||||||||
Consumer installment loans | 28 | 32 | 4 | 64 | 19,538 | 19,602 | ||||||||||||||||||
All other loans | 28 | — | — | 28 | 1,385 | 1,413 | ||||||||||||||||||
Total loans | $ | 2,093 | $ | 393 | $ | 1,280 | $ | 3,766 | $ | 576,108 | $ | 579,874 |
14
As of December 31, 2022 (Dollars are in thousands) | Loans 30-59 Days Past Due | Loans 60-89 Days Past Due | Loans 90 or More Days Past Due | Total Past Due Loans | Current Loans | Total Loans | ||||||||||||||||||
Real estate secured: | ||||||||||||||||||||||||
Commercial | $ | 268 | $ | — | $ | — | $ | 268 | $ | 196,801 | $ | 197,069 | ||||||||||||
Construction and land development | 89 | — | — | 89 | 42,381 | 42,470 | ||||||||||||||||||
Residential 1-4 family | 3,521 | 543 | 341 | 4,405 | 222,827 | 227,232 | ||||||||||||||||||
Multifamily | 229 | — | — | 229 | 29,481 | 29,710 | ||||||||||||||||||
Farmland | 285 | — | — | 285 | 17,459 | 17,744 | ||||||||||||||||||
Total real estate loans | 4,392 | 543 | 341 | 5,276 | 508,949 | 514,225 | ||||||||||||||||||
Commercial | 56 | — | — | 56 | 46,641 | 46,697 | ||||||||||||||||||
Agriculture | — | — | — | — | 3,756 | 3,756 | ||||||||||||||||||
Consumer installment Loans | 73 | 17 | 17 | 107 | 19,202 | 19,309 | ||||||||||||||||||
All other loans | 59 | — | — | 59 | 567 | 626 | ||||||||||||||||||
Total loans | $ | 4,580 | $ | 560 | $ | 358 | $ | 5,498 | $ | 579,115 | $ | 584,613 |
As of December 31, 2021 (Dollars are in thousands) |
Loans 30-59 Days Past Due |
Loans 60-89 Days Past Due | Loans 90 or More Days Past Due |
Total Past Due Loans |
Current Loans |
Total Loans | ||||||||||||||||||
Real estate secured: | ||||||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | $ | 206,162 | $ | 206,162 | ||||||||||||
Construction and land development | 7 | — | 7 | 14 | 32,311 | 32,325 | ||||||||||||||||||
Residential 1-4 family | 2,473 | 240 | 486 | 3,199 | 221,331 | 224,530 | ||||||||||||||||||
Multifamily | — | — | 111 | 111 | 32,937 | 33,048 | ||||||||||||||||||
Farmland | — | — | — | — | 18,735 | 18,735 | ||||||||||||||||||
Total real estate loans | 2,480 | 240 | 604 | 3,324 | 511,476 | 514,800 | ||||||||||||||||||
Commercial | 5 | — | — | 5 | 54,320 | 54,325 | ||||||||||||||||||
Agriculture | — | — | — | — | 4,021 | 4,021 | ||||||||||||||||||
Consumer installment Loans | 56 | 5 | — | 61 | 18,695 | 18,756 | ||||||||||||||||||
All other loans | — | — | — | — | 1,842 | 1,842 | ||||||||||||||||||
Total loans | $ | 2,541 | $ | 245 | $ | 604 | $ | 3,390 | $ | 590,354 | $ | 593,744 |
The Company categorizes loans receivable into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans receivable as to credit risk. The Company uses the following definitions for risk ratings:
Pass- Loans in this category are considered to have a low likelihood of loss based on relevant information analyzed about the ability of the borrowers to service their debt and other factors.
Special Mention- Loans in this category are currently protected but are potentially weak, including adverse trends in borrower’s operations, credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances. Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s credit position at some future date.
Substandard- A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified doubtful have all the weaknesses inherent in loans classified as substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.
1518
The following table present the credit risk grade of loans by origination year as of June 30, 2023:
Based on
Summary of risk category of loans receivable | ||||||||||||||||||||||||||||||||
As of June 30, 2023 | ||||||||||||||||||||||||||||||||
Dollars are in thousands | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Total | ||||||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||||||||||
Pass | $ | 17,674 | $ | 43,891 | $ | 47,305 | $ | 30,822 | $ | 21,812 | $ | 46,866 | $ | 1,042 | $ | 209,412 | ||||||||||||||||
Special mention | — | — | — | — | — | 99 | — | 99 | ||||||||||||||||||||||||
Substandard | — | — | — | — | — | 269 | — | 269 | ||||||||||||||||||||||||
Total commercial real estate | $ | 17,674 | $ | 43,891 | $ | 47,305 | $ | 30,822 | $ | 21,812 | $ | 47,234 | $ | 1,042 | $ | 209,780 | ||||||||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Construction and Land Development | ||||||||||||||||||||||||||||||||
Pass | $ | 4,944 | $ | 19,547 | $ | 9,988 | $ | 4,603 | $ | 1,453 | $ | 2,127 | $ | 71 | $ | 42,733 | ||||||||||||||||
Special mention | — | — | — | — | 436 | 110 | — | 546 | ||||||||||||||||||||||||
Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total construction and land development | $ | 4,944 | $ | 19,547 | $ | 9,988 | $ | 4,603 | $ | 1,889 | $ | 2,237 | $ | 71 | $ | 43,279 | ||||||||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Residential 1-4 family | ||||||||||||||||||||||||||||||||
Pass | $ | 13,532 | $ | 33,923 | $ | 44,183 | $ | 14,297 | $ | 14,548 | $ | 88,856 | $ | 19,901 | $ | 229,240 | ||||||||||||||||
Special mention | — | — | — | — | — | 313 | — | 313 | ||||||||||||||||||||||||
Substandard | — | — | 202 | — | 40 | 1,762 | 69 | 2,073 | ||||||||||||||||||||||||
Total residential 1-4 family | $ | 13,532 | $ | 33,923 | $ | 44,385 | $ | 14,297 | $ | 14,588 | $ | 90,931 | $ | 19,970 | $ | 231,626 | ||||||||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Multifamily | ||||||||||||||||||||||||||||||||
Pass | $ | 4,178 | $ | 12,021 | $ | 8,273 | $ | 2,689 | $ | 1,106 | $ | 5,674 | $ | — | $ | 33,941 | ||||||||||||||||
Special mention | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Substandard | — | — | — | — | — | 199 | — | 199 | ||||||||||||||||||||||||
Total multifamily | $ | 4,178 | $ | 12,021 | $ | 8,273 | $ | 2,689 | $ | 1,106 | $ | 5,873 | $ | — | $ | 34,140 | ||||||||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Farmland | ||||||||||||||||||||||||||||||||
Pass | $ | 1,311 | $ | 2,270 | $ | 3,602 | $ | 806 | $ | 1,233 | $ | 8,209 | $ | — | $ | 17,431 | ||||||||||||||||
Special mention | — | — | — | — | 1 | 196 | — | 197 | ||||||||||||||||||||||||
Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total farmland | $ | 1,311 | $ | 2,270 | $ | 3,602 | $ | 806 | $ | 1,234 | $ | 8,405 | $ | — | $ | 17,628 | ||||||||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Commercial | ||||||||||||||||||||||||||||||||
Pass | $ | 8,684 | $ | 12,819 | $ | 6,736 | $ | 1,972 | $ | 2,621 | $ | 7,218 | $ | 7,667 | $ | 47,717 | ||||||||||||||||
Special mention | — | — | — | — | — | 3 | — | 3 | ||||||||||||||||||||||||
Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total commercial | $ | 8,684 | $ | 12,819 | $ | 6,736 | $ | 1,972 | $ | 2,621 | $ | 7,221 | $ | 7,667 | $ | 47,720 | ||||||||||||||||
Current period gross charge-offs | $ | — | $ | (5 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (5 | ) | ||||||||||||||
Agriculture | ||||||||||||||||||||||||||||||||
Pass | $ | 274 | $ | 639 | $ | 425 | $ | 209 | $ | 112 | $ | 814 | $ | 1,134 | $ | 3,607 | ||||||||||||||||
Special mention | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total agriculture | $ | 274 | $ | 639 | $ | 425 | $ | 209 | $ | 112 | $ | 814 | $ | 1,134 | $ | 3,607 | ||||||||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Consumer and All Other | ||||||||||||||||||||||||||||||||
Pass | $ | 5,555 | $ | 6,869 | $ | 3,293 | $ | 1,242 | $ | 857 | $ | 1,359 | $ | 2,058 | $ | 21,233 | ||||||||||||||||
Special mention | — | 2 | — | — | — | — | — | 2 | ||||||||||||||||||||||||
Substandard | — | 4 | — | — | — | 19 | — | 23 | ||||||||||||||||||||||||
Total consumer and all other | $ | 5,555 | $ | 6,875 | $ | 3,293 | $ | 1,242 | $ | 857 | $ | 1,378 | $ | 2,058 | $ | 21,258 | ||||||||||||||||
Current period gross charge-offs | $ | (97 | ) | $ | (34 | ) | $ | (5 | ) | $ | — | $ | — | $ | (37 | ) | $ | — | $ | (173 | ) | |||||||||||
Total | $ | 56,152 | $ | 131,985 | $ | 124,007 | $ | 56,640 | $ | 44,219 | $ | 164,093 | $ | 31,942 | $ | 609,038 | ||||||||||||||||
Total current period gross charge-offs | $ | (97 | ) | $ | (39 | ) | $ | (5 | ) | $ | — | $ | — | $ | (37 | ) | $ | — | $ | (178 | ) |
19
The following table presents the most recent analysis performed, thecredit risk categoriesgrade of loans receivable as of September 30, 2022, and December 31, 2021, was as follows:2022, prior to the adoption of ASU 2016-13, under the incurred loss model:
Summary of risk category of loans receivable | ||||||||||||||||||||||||||||||||||||||||
As of September 30, 2022 (Dollars are in thousands) |
Pass | Special Mention |
Substandard | Doubtful |
Total | |||||||||||||||||||||||||||||||||||
As of December 31, 2022 (Dollars are in thousands) | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||||||||||||||||||||||
Real estate secured: | ||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 193,557 | $ | 4,271 | $ | 273 | $ | — | $ | 198,101 | $ | 195,376 | $ | 1,425 | $ | 268 | $ | — | $ | 197,069 | ||||||||||||||||||||
Construction and land development | 37,738 | 126 | 734 | — | 38,598 | 41,882 | 117 | 471 | — | 42,470 | ||||||||||||||||||||||||||||||
Residential 1-4 family | 223,593 | 493 | 2,620 | — | 226,706 | 224,228 | 406 | 2,598 | — | 227,232 | ||||||||||||||||||||||||||||||
Multifamily | 28,852 | 210 | — | — | 29,062 | 29,503 | 207 | — | — | 29,710 | ||||||||||||||||||||||||||||||
Farmland | 16,538 | 886 | 43 | — | 17,467 | 16,848 | 855 | 41 | — | 17,744 | ||||||||||||||||||||||||||||||
Total real estate loans | 500,278 | 5,986 | 3,670 | — | 509,934 | 507,837 | 3,010 | 3,378 | — | 514,225 | ||||||||||||||||||||||||||||||
Commercial | 44,208 | 903 | 15 | — | 45,126 | 46,471 | 226 | — | — | 46,697 | ||||||||||||||||||||||||||||||
Agriculture | 3,799 | — | — | — | 3,799 | 3,756 | — | — | — | 3,756 | ||||||||||||||||||||||||||||||
Consumer installment loans | 19,595 | 3 | 4 | — | 19,602 | 19,272 | 2 | 35 | — | 19,309 | ||||||||||||||||||||||||||||||
All other loans | 1,413 | — | — | — | 1,413 | 626 | — | — | — | 626 | ||||||||||||||||||||||||||||||
Total | $ | 569,293 | $ | 6,892 | $ | 3,689 | $ | — | $ | 579,874 | $ | 577,962 | $ | 3,238 | $ | 3,413 | $ | — | $ | 584,613 | ||||||||||||||||||||
As of December 31, 2021 (Dollars are in thousands) |
Pass |
Special Mention |
Substandard | Doubtful |
Total | |||||||||||||||||||||||||||||||||||
Real estate secured: | ||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 198,022 | $ | 7,725 | $ | 415 | $ | — | $ | 206,162 | ||||||||||||||||||||||||||||||
Construction and land development | 31,366 | 922 | 37 | — | 32,325 | |||||||||||||||||||||||||||||||||||
Residential 1-4 family | 221,342 | 915 | 2,273 | — | 224,530 | |||||||||||||||||||||||||||||||||||
Multifamily | 32,499 | 438 | 111 | — | 33,048 | |||||||||||||||||||||||||||||||||||
Farmland | 18,137 | 550 | 48 | — | 18,735 | |||||||||||||||||||||||||||||||||||
Total real estate loans | 501,366 | 10,550 | 2,884 | — | 514,800 | |||||||||||||||||||||||||||||||||||
Commercial | 53,162 | 1,154 | 9 | — | 54,325 | |||||||||||||||||||||||||||||||||||
Agriculture | 4,021 | — | — | — | 4,021 | |||||||||||||||||||||||||||||||||||
Consumer installment loans | 18,746 | 2 | 8 | — | 18,756 | |||||||||||||||||||||||||||||||||||
All other loans | 1,842 | — | — | — | 1,842 | |||||||||||||||||||||||||||||||||||
Total | $ | 579,137 | $ | 11,706 | $ | 2,901 | $ | — | $ | 593,744 |
NOTE 7 ALLOWANCE FOR LOANCREDIT LOSSES FOR LOANS (“ACLL”)
In determining the amount of our allowance for loancredit losses, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision. Due to the underlying SBA guarantee provided for PPP loans, these accounts were not included in either the portfolio segment or impairment calculations at September 30, 2022 and December 31, 2021. Additionally, due to uncertainties presented by the ongoing pandemic and the resulting economic uncertainty, internal and external qualitative factors were revised accordingly. This revision included reviewing our internal scoring related to loan modifications and extensions, and external factors, specifically, unemployment and other economic factors.
The following table presents a disaggregated analysis of activity in the allowance for credit losses as of June 30, 2023:
Schedule of allocation of portion of allowance | ||||||||||||||||||||||||||||||||||||||||
Real estate secured | ||||||||||||||||||||||||||||||||||||||||
(Dollars are in thousands) | Commercial | Construction and Land Development | Residential 1-4 family | Multifamily | Farmland | Commercial | Agriculture | Consumer and All Other | Unallocated | Total | ||||||||||||||||||||||||||||||
Six months ended June 30, 2023 | ||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 2,364 | $ | 345 | $ | 2,364 | $ | 262 | $ | 153 | $ | 381 | $ | 32 | $ | 386 | $ | 440 | $ | 6,727 | ||||||||||||||||||||
Adjustment to allowance for adoption of ASU 2016-13 | (299 | ) | 164 | 275 | 12 | 75 | 241 | (5 | ) | (103 | ) | (440 | ) | (80 | ) | |||||||||||||||||||||||||
Charge-offs | — | — | — | — | — | (5 | ) | — | (173 | ) | — | (178 | ) | |||||||||||||||||||||||||||
Recoveries | — | 16 | 15 | — | — | 1 | — | 97 | — | 129 | ||||||||||||||||||||||||||||||
Provision for credit losses | 212 | (27 | ) | (71 | ) | 16 | (36 | ) | (42 | ) | 58 | 106 | — | 216 | ||||||||||||||||||||||||||
Ending balance | $ | 2,277 | $ | 498 | $ | 2,583 | $ | 290 | $ | 192 | $ | 576 | $ | 85 | $ | 313 | $ | — | $ | 6,814 | ||||||||||||||||||||
Three months ended June 30, 2023 | ||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 2,157 | $ | 472 | $ | 2,619 | $ | 302 | $ | 192 | $ | 588 | $ | 31 | $ | 300 | $ | — | $ | 6,661 | ||||||||||||||||||||
Charge-offs | — | — | — | — | — | — | — | (95 | ) | — | (95 | ) | ||||||||||||||||||||||||||||
Recoveries | — | 11 | 6 | — | — | — | — | 39 | — | 56 | ||||||||||||||||||||||||||||||
Provision for credit losses | 120 | 15 | (42 | ) | (12 | ) | — | (12 | ) | 54 | 69 | — | 192 | |||||||||||||||||||||||||||
Ending balance | $ | 2,277 | $ | 498 | $ | 2,583 | $ | 290 | $ | 192 | $ | 576 | $ | 85 | $ | 313 | $ | — | $ | 6,814 |
20
The following tables present a disaggregated analysis of activity in the allowance for loan losses, for comparative periods, prior to the nine- and three-month periods ended September 30, 2022 and 2021, respectively. Additionally, the allocationadoption of the allowance by recorded portfolio segment and impairment method is presented as of September 30, 2022, and December 31, 2021, respectively.
ASU 2016-13:
Real estate secured | ||||||||||||||||||||||||||||||||||||||||
(Dollars are in thousands) | Commercial | Construction and Land Development | Residential 1-4 family | Multifamily | Farmland | Commercial | Agriculture | Consumer and All Other | Unallocated | Total | ||||||||||||||||||||||||||||||
Year ended December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 2,134 | $ | 189 | $ | 2,237 | $ | 254 | $ | 149 | $ | 1,099 | $ | 28 | $ | 108 | $ | 537 | $ | 6,735 | ||||||||||||||||||||
Charge-offs | (5 | ) | (149 | ) | (64 | ) | (111 | ) | (1 | ) | (45 | ) | (1 | ) | (559 | ) | — | (935 | ) | |||||||||||||||||||||
Recoveries | 33 | 6 | 100 | 2 | 14 | 31 | 1 | 115 | — | 302 | ||||||||||||||||||||||||||||||
Provision | 202 | 299 | 91 | 117 | (9 | ) | (704 | ) | 4 | 722 | (97 | ) | 625 | |||||||||||||||||||||||||||
Ending balance | $ | 2,364 | $ | 345 | $ | 2,364 | $ | 262 | $ | 153 | $ | 381 | $ | 32 | $ | 386 | $ | 440 | $ | 6,727 | ||||||||||||||||||||
Allowance for loan losses at December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 63 | $ | — | $ | 23 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 86 | ||||||||||||||||||||
Collectively evaluated for impairment | 2,301 | 345 | 2,341 | 262 | 153 | 381 | 32 | 386 | 440 | 6,641 | ||||||||||||||||||||||||||||||
$ | 2,364 | $ | 345 | $ | 2,364 | $ | 262 | $ | 153 | $ | 381 | $ | 32 | $ | 386 | $ | 440 | $ | 6,727 | |||||||||||||||||||||
Loans at December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 358 | $ | 471 | $ | 1,649 | $ | — | $ | 248 | $ | 23 | $ | — | $ | — | $ | — | $ | 2,749 | ||||||||||||||||||||
Collectively evaluated for impairment | 196,711 | 41,999 | 225,583 | 29,710 | 17,496 | 46,965 | 3,756 | 19,644 | — | 581,864 | ||||||||||||||||||||||||||||||
$ | 197,069 | $ | 42,470 | $ | 227,232 | $ | 29,710 | $ | 17,744 | $ | 46,988 | $ | 3,756 | $ | 19,644 | $ | — | $ | 584,613 | |||||||||||||||||||||
Real estate secured | ||||||||||||||||||||||||||||||||||||||||
(Dollars are in thousands) | Commercial | Construction and Land Development | Residential 1-4 family | Multifamily | Farmland | Commercial | Agriculture | Consumer and All Other | Unallocated | Total | ||||||||||||||||||||||||||||||
For the six months ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 2,134 | $ | 189 | $ | 2,237 | $ | 254 | $ | 149 | $ | 1,099 | $ | 28 | $ | 108 | $ | 537 | $ | 6,735 | ||||||||||||||||||||
Charge-offs | — | — | (24 | ) | (61 | ) | — | (28 | ) | — | (45 | ) | — | (158 | ) | |||||||||||||||||||||||||
Recoveries | — | — | 22 | — | — | 14 | — | 28 | — | 64 | ||||||||||||||||||||||||||||||
Provision | 28 | 261 | 4 | 215 | (8 | ) | (232 | ) | 1 | 79 | (173 | ) | 175 | |||||||||||||||||||||||||||
Ending balance | $ | 2,162 | $ | 450 | $ | 2,239 | $ | 408 | $ | 141 | $ | 853 | $ | 29 | $ | 170 | $ | 364 | $ | 6,816 | ||||||||||||||||||||
For the three months ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 2,132 | $ | 229 | $ | 2,198 | $ | 313 | $ | 143 | $ | 1,005 | $ | 28 | $ | 112 | $ | 599 | $ | 6,759 | ||||||||||||||||||||
Charge-offs | — | — | (24 | ) | — | — | — | — | (31 | ) | — | (55 | ) | |||||||||||||||||||||||||||
Recoveries | — | — | 8 | — | — | 3 | — | 26 | — | 37 | ||||||||||||||||||||||||||||||
Provision | 30 | 221 | 57 | 95 | (2 | ) | (155 | ) | 1 | 63 | (235 | ) | 75 | |||||||||||||||||||||||||||
Ending balance | $ | 2,162 | $ | 450 | $ | 2,239 | $ | 408 | $ | 141 | $ | 853 | $ | 29 | $ | 170 | $ | 364 | $ | 6,816 | ||||||||||||||||||||
Allowance for loan losses as of June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 77 | $ | 207 | $ | 47 | $ | 50 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 381 | ||||||||||||||||||||
Collectively evaluated for impairment | 2,085 | 243 | 2,192 | 358 | 141 | 853 | 29 | 170 | 364 | 6,435 | ||||||||||||||||||||||||||||||
$ | 2,162 | $ | 450 | $ | 2,239 | $ | 408 | $ | 141 | $ | 853 | $ | 29 | $ | 170 | $ | 364 | $ | 6,816 | |||||||||||||||||||||
Loans as of June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 394 | $ | 755 | $ | 1,743 | $ | 50 | $ | 281 | $ | 25 | $ | — | $ | — | $ | — | $ | 3,248 | ||||||||||||||||||||
Collectively evaluated for impairment | 196,216 | 36,935 | 221,979 | 37,561 | 17,774 | 46,672 | 3,623 | 21,623 | — | 582,383 | ||||||||||||||||||||||||||||||
$ | 196,610 | $ | 37,690 | $ | 223,722 | $ | 37,611 | $ | 18,055 | $ | 46,697 | $ | 3,623 | $ | 21,623 | $ | — | $ | 585,631 |
1621
Schedule of allocation of portion of allowance | ||||||||||||||||||||||||||||||||||||||||
Real estate secured | ||||||||||||||||||||||||||||||||||||||||
(Dollars are in thousands) | Commercial | Construction and Land Development | Residential 1-4 family | Multifamily | Farmland | Commercial | Agriculture | Consumer and All Other | Unallocated | Total | ||||||||||||||||||||||||||||||
Nine months ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 2,134 | $ | 189 | $ | 2,237 | $ | 254 | $ | 149 | $ | 1,099 | $ | 28 | $ | 108 | $ | 537 | $ | 6,735 | ||||||||||||||||||||
Charge-offs | (5 | ) | (149 | ) | (52 | ) | (111 | ) | (2 | ) | (29 | ) | — | (454 | ) | — | (802 | ) | ||||||||||||||||||||||
Recoveries | 33 | 3 | 87 | 2 | 14 | 29 | — | 92 | — | 260 | ||||||||||||||||||||||||||||||
Provision | 42 | 394 | (107 | ) | 97 | (24 | ) | (429 | ) | 1 | 565 | (139 | ) | 400 | ||||||||||||||||||||||||||
Ending balance | $ | 2,204 | $ | 437 | $ | 2,165 | $ | 242 | $ | 137 | $ | 670 | $ | 29 | $ | 311 | $ | 398 | $ | 6,593 | ||||||||||||||||||||
Three months ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 2,162 | $ | 450 | $ | 2,239 | $ | 408 | $ | 141 | $ | 853 | $ | 29 | $ | 170 | $ | 364 | $ | 6,816 | ||||||||||||||||||||
Charge-offs | (5 | ) | (149 | ) | (28 | ) | (50 | ) | (2 | ) | (1 | ) | — | (409 | ) | — | (644 | ) | ||||||||||||||||||||||
Recoveries | 33 | 3 | 65 | 2 | 14 | 15 | — | 64 | — | 196 | ||||||||||||||||||||||||||||||
Provision | 14 | 133 | (111 | ) | (118 | ) | (16 | ) | (197 | ) | — | 486 | 34 | 225 | ||||||||||||||||||||||||||
Ending balance | $ | 2,204 | $ | 437 | $ | 2,165 | $ | 242 | $ | 137 | $ | 670 | $ | 29 | $ | 311 | $ | 398 | $ | 6,593 | ||||||||||||||||||||
Allowance for loan losses at September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 69 | $ | 174 | $ | 26 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 269 | ||||||||||||||||||||
Collectively evaluated for impairment | 2,135 | 263 | 2,139 | 242 | 137 | 670 | 29 | 311 | 398 | 6,324 | ||||||||||||||||||||||||||||||
$ | 2,204 | $ | 437 | $ | 2,165 | $ | 242 | $ | 137 | $ | 670 | $ | 29 | $ | 311 | $ | 398 | $ | 6,593 | |||||||||||||||||||||
Loans at September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 383 | $ | 716 | $ | 1,696 | $ | — | $ | 268 | $ | 24 | $ | — | $ | — | $ | — | $ | 3,087 | ||||||||||||||||||||
Collectively evaluated for impairment | 197,718 | 37,882 | 225,010 | 29,062 | 17,199 | 45,102 | 3,799 | 21,015 | — | 576,787 | ||||||||||||||||||||||||||||||
$ | 198,101 | $ | 38,598 | $ | 226,706 | $ | 29,062 | $ | 17,467 | $ | 45,126 | $ | 3,799 | $ | 21,015 | $ | — | $ | 579,874 |
Real estate secured | ||||||||||||||||||||||||||||||||||||||||
(Dollars are in thousands) | Commercial | Construction and Land Development | Residential 1-4 family | Multifamily | Farmland | Commercial | Agriculture | Consumer and All Other | Unallocated | Total | ||||||||||||||||||||||||||||||
Allowance for loan losses at December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 94 | $ | — | $ | 53 | $ | — | $ | 17 | $ | 2 | $ | — | $ | — | $ | — | $ | 166 | ||||||||||||||||||||
Collectively evaluated for impairment | 2,040 | 189 | 2,184 | 254 | 132 | 1,097 | 28 | 108 | 537 | 6,569 | ||||||||||||||||||||||||||||||
$ | 2,134 | $ | 189 | $ | 2,237 | $ | 254 | $ | 149 | $ | 1,099 | $ | 28 | $ | 108 | $ | 537 | $ | 6,735 | |||||||||||||||||||||
Loans at December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 414 | $ | 24 | $ | 1,848 | $ | — | $ | 517 | $ | 28 | $ | — | $ | 2 | $ | — | $ | 2,833 | ||||||||||||||||||||
Collectively evaluated for impairment | 205,748 | 32,301 | 222,682 | 33,048 | 18,218 | 54,297 | 4,021 | 20,596 | — | 590,911 | ||||||||||||||||||||||||||||||
$ | 179,381 | $ | 25,031 | $ | 222,980 | $ | 16,569 | $ | 18,368 | $ | 86,010 | $ | 4,450 | $ | 22,777 | $ | — | $ | 593,744 |
17
Real estate secured | ||||||||||||||||||||||||||||||||||||||||
(Dollars are in thousands) | Commercial | Construction and Land Development | Residential 1-4 family | Multifamily | Farmland | Commercial | Agriculture | Consumer and All Other | Unallocated | Total | ||||||||||||||||||||||||||||||
Nine months ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 2,281 | $ | 233 | $ | 1,951 | $ | 151 | $ | 97 | $ | 2,275 | $ | 40 | $ | 163 | $ | — | $ | 7,191 | ||||||||||||||||||||
Charge-offs | (915 | ) | — | (48 | ) | — | — | (92 | ) | — | (55 | ) | — | (1,110 | ) | |||||||||||||||||||||||||
Recoveries | 2 | 6 | 25 | — | — | 134 | 1 | 36 | — | 204 | ||||||||||||||||||||||||||||||
Provision | 700 | (69 | ) | 180 | 6 | 59 | (842 | ) | (14 | ) | (42 | ) | 394 | 372 | ||||||||||||||||||||||||||
Ending balance | $ | 2,068 | $ | 170 | $ | 2,108 | $ | 157 | $ | 156 | $ | 1,475 | $ | 27 | $ | 102 | $ | 394 | $ | 6,657 | ||||||||||||||||||||
Three months ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 2,151 | $ | 155 | $ | 2,046 | $ | 160 | $ | 137 | $ | 1,916 | $ | 28 | $ | 103 | $ | — | $ | 6,696 | ||||||||||||||||||||
Charge-offs | — | — | (38 | ) | — | — | — | — | (27 | ) | — | (65 | ) | |||||||||||||||||||||||||||
Recoveries | — | 6 | 8 | — | — | 3 | — | 9 | — | 26 | ||||||||||||||||||||||||||||||
Provision | (83 | ) | 9 | 92 | (3 | ) | 19 | (444 | ) | (1 | ) | 17 | 394 | — | ||||||||||||||||||||||||||
Ending balance | $ | 2,068 | $ | 170 | $ | 2,108 | $ | 157 | $ | 156 | $ | 1,475 | $ | 27 | $ | 102 | $ | 394 | $ | 6,657 |
Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
NOTE 8 TROUBLED DEBT RESTRUCTURINGSMODIFICATIONS MADE TO BORROWERS EXPERIENCING FINANCIAL DIFFICULTY
The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a discounted cash flow methodology to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.
In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.
There were $no loans modified to borrowers experiencing financial difficulty in the three or six months ended June 30, 2023. Additionally, there were no loans that had a payment default during the quarter that were modified in the previous 12 months.
2.1 million and $
2.5Prior to adoption of ASC 2022-02, there were $2.0 million in loans classified as troubled debt restructurings at September 30, 2022 andas of December 31, 2021, respectively.2022. All loans considered to be troubled debt restructurings are individually evaluated for impairment as part of the allowance for loan losses calculation. No loans modified during the three and ninesix months ended SeptemberJune 30, 2022 or September 30, 2021, were considered to be troubled debt restructurings.
One loan totaling $6 thousand, secured by residential real estate, previously modified as a troubled debt restructuring, was in default duringFor the three and six months ended SeptemberJune 30, 2022. Two2022, there were no loans totaling $73 thousand, previously modified as a troubled debt restructuring that subsequently defaulted during the first ninewithin twelve months of 2022, were in compliance with the terms of the restructuring at September 30, 2022. During the nine months ended September 30, 2021, two loans to the same borrower, previously modified as troubled debt restructurings, totaling $1.1 million defaulted, resulting in charge-offs totaling $835 thousand.loan modification. Generally, a restructured troubled debt is considered to be in default once it becomes 90 days or more past due following a modification.
In determining theNOTE 9 CREDIT ALLOWANCE FOR UNFUNDED COMMITMENTS
The Company maintains a separate allowance for credit losses on off-balance-sheet credit exposures, including unfunded loan commitments, which is included in other liabilities on the consolidated balance sheet. The allowance for credit losses management considers troubled debt restructuringsfor off-balance-sheet credit exposures is adjusted through a provision for credit losses in the income statement. The estimate includes consideration of the likelihood that funding will occur and subsequent defaults inan estimate of expected credit losses on commitments expected to be funded over its estimated life, utilizing the same models and approaches for the Company's other loan portfolio segments described above, as these restructurings inunfunded commitments share similar risk characteristics as its estimate.loan portfolio segments. The Company evaluates all troubled debt restructuringshas identified the unfunded portion of certain lines of credit as unconditionally cancellable credit exposures, meaning the Company can cancel the unfunded commitment at any time. No credit loss estimate is reported for possible further impairment. As a result,off-balance-sheet credit exposures that are unconditionally cancellable by the allowanceCompany or for undrawn amounts under such arrangements that may be increased, adjustments may be made indrawn prior to the allocationcancellation of the arrangement.
On January 1, 2023, the Company recorded an adjustment to initiate an allowance or charge-offs may be takenfor credit losses for unfunded commitments of $348,000 for the adoption of ASC Topic 326. For the three and six months ended June 30, 2023, the Company recorded a reversal to further write down the carrying valueprovision for credit losses for unfunded commitments of $43,000, and $66,000, respectively. As of June 30, 2023, the loan.liability for credit losses on off-balance-sheet credit exposures included in other liabilities was $282,000.
22
NOTE 910 OTHER REAL ESTATE OWNED
The following table summarizes the activity in other real estate owned for the Ninesix months ended SeptemberJune 30, 2022,2023, and the year ended December 31, 2021:2022:
Schedule of other real estate owned | ||||||||||||||||
(Dollars are in thousands) | September 30, 2022 | December 31, 2021 | June 30, 2023 | December 31, 2022 | ||||||||||||
Balance, beginning of period | $ | 1,361 | $ | 3,334 | $ | 261 | $ | 1,361 | ||||||||
Additions | — | 566 | — | — | ||||||||||||
Transfers from premises and equipment | — | 950 | — | — | ||||||||||||
Proceeds from sales | (207 | ) | (2,645 | ) | — | (207 | ) | |||||||||
Proceeds from insurance claims | — | (54 | ) | |||||||||||||
Loans made to finance sales | (711 | ) | (400 | ) | — | (711 | ) | |||||||||
Adjustment of carrying value | (137 | ) | (466 | ) | — | (197 | ) | |||||||||
Net gains from sales | 15 | 76 | — | 15 | ||||||||||||
Balance, end of period | $ | 321 | $ | 1,361 | $ | 261 | $ | 261 |
18As of June 30, 2023, four loans totaling $383,000 were in the process of foreclosure.
NOTE 1011 FAIR VALUES
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of Financial Accounting Standards Board (the FASB) ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market and 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 and 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.
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: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level 2: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are valued using other financial instruments, the parameters of which can be directly observed.
Level 3: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
23
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy are as follows:
Investment Securities Available for SaleAvailable-for-sale - Investment securities available for saleavailable-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices. The Company’s available for saleavailable-for-sale securities, totaling $98.893.1 million and $107.496.1 million at Septemberas of June 30, 20222023 and December 31, 2021,2022, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service.
Collateral Dependent Loans with an ACL - The Company does not recordIn accordance with ASC 326, we may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans at fair valuewithin our loan pools. In such cases, the loans are evaluated for expected credit losses on a recurring basis. Real estate serves as collateral on a substantial majorityan individual basis and excluded from the collective evaluation. Specific allocations of the Company’s loans. When aallowance for credit losses are determined by analyzing the borrower's ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower's industry, among other things. A loan is considered impaired, a specific reserve may be established. Loans, which are deemed to be impairedcollateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and require a reserve are primarily valued on a non-recurring basis atrepayment is expected to be provided substantially through the fair valueoperation or sale of the underlying real estate collateral. Where there is no observable market price,In such fair valuescases, expected credit losses are obtained using independent appraisals, which management evaluates to determine whether or notbased on the fair value of the collateral is further impaired belowat the appraised value and adjustsmeasurement date, adjusted for estimated selling costs if satisfaction of disposition.the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The Company records impairedfair value of real estate collateral supporting collateral dependent loans as nonrecurring Level 3 assets.is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice.
Other Real Estate Owned –Other real estate owned is adjusted to fair value upon transfer of the loans, or former bank premises, to other real estate owned. These assets are carried at the lower of their carrying value or fair value. Fair value is based upon observable market prices, when available, reduced by estimated disposition costs, which the Company considers to be nonrecurring Level 2 inputs. When observable market prices are not available, management determines the fair value of the foreclosed asset using independent third-party appraisals, evaluated to determine whether or not the property is further impaired below the appraised value, and adjusts for estimated costs of disposition. The Company records foreclosed assets as nonrecurring Level 3.
Assets and liabilities measured at fair value are as follows as of June 30, 2023:
Schedule of summary of assets and liabilities measured at fair value | ||||||||||||
June 30, 2023 (Dollars are in thousands) | Quoted market price in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||
(On a recurring basis) Available-for-sale investments | ||||||||||||
U.S. Treasuries | $ | — | $ | 11,756 | $ | — | ||||||
U.S. Government Agencies | — | 8,667 | — | |||||||||
Taxable municipals | — | 17,532 | — | |||||||||
Corporate bonds | — | 3,098 | — | |||||||||
Mortgage-backed securities | — | 52,053 | — | |||||||||
(On a non-recurring basis) Other real estate owned | — | — | 261 | |||||||||
Collateral dependent loans with ACL: | ||||||||||||
Commercial real estate | — | — | 204 | |||||||||
Agriculture | — | — | 52 | |||||||||
Total | $ | — | $ | 93,106 | $ | 517 |
1924
Assets and liabilities measured at fair value are as follows as of September 30,December 31, 2022 (for purpose of this table the impaired loans are shown net of the related allowance):
Schedule of summary of assets and liabilities measured at fair value | ||||||||||||
September 30, 2022 (Dollars are in thousands) | Quoted market price in active markets (Level 1) |
Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||
(On a recurring basis) Available for sale investments | ||||||||||||
U.S. Treasuries | $ | — | $ | 11,646 | $ | — | ||||||
U.S. Government Agencies | — | 9,760 | — | |||||||||
Taxable municipals | — | 17,778 | — | |||||||||
Corporate bonds | — | 3,175 | — | |||||||||
Mortgage-backed securities | — | 56,486 | — | |||||||||
(On a non-recurring basis) Other real estate owned | — | — | 321 | |||||||||
Impaired loans | — | — | 2,818 | |||||||||
Total | $ | — | $ | 98,845 | $ | 3,139 |
Assets and liabilities measured at fair value are as follows as of December 31, 2021 (for purpose of this table the impaired loans are shown net of the related allowance):
December 31, 2021 (Dollars are in thousands) | Quoted market price in active markets (Level 1) |
Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||
(On a recurring basis) Available for sale investments | ||||||||||||
U.S. Treasuries | $ | 7,671 | — | - | ||||||||
U.S. Government Agencies | — | 9,089 | $ | — | ||||||||
Taxable municipals | — | 22,980 | — | |||||||||
Corporate bonds | — | 2,019 | — | |||||||||
Mortgage-backed securities | — | 65,599 | — | |||||||||
— | ||||||||||||
(On a non-recurring basis) Other real estate owned | — | — | 1,361 | |||||||||
Impaired loans | — | — | 2,667 | |||||||||
Total | $ | — | $ | 107,358 | $ | 4,028 |
December 31, 2022 (Dollars are in thousands) | Quoted market price in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||
(On a recurring basis) Available-for-sale investments | ||||||||||||
U.S. Treasuries | $ | — | $ | 11,685 | — | |||||||
U.S. Government Agencies | — | 9,399 | $ | — | ||||||||
Taxable municipals | — | 16,815 | — | |||||||||
Corporate bonds | — | 3,136 | — | |||||||||
Mortgage-backed securities | — | 55,041 | — | |||||||||
(On a non-recurring basis) Other real estate owned | — | — | 261 | |||||||||
Impaired loans | — | — | 213 | |||||||||
Total | $ | — | $ | 96,076 | $ | 474 |
For Level 3 assets measured at fair value on a recurring or non-recurring basis as of SeptemberJune 30, 20222023 and December 31, 2021,2022, the significant unobservable inputs used in the fair value measurements were as follows:
Schedule of significant unobservable inputs In level 3 assets | ||||||||||||||||||||||||
(Dollars in thousands) |
Fair Value at September 30, 2022 |
Fair Value at December 31, 2021 |
Valuation Technique |
Significant Unobservable Inputs | General Range of Significant Unobservable Input Values | |||||||||||||||||||
(Dollars are in thousands) | Fair Value at June 30, 2023 | Fair Value at December 31, 2022 | Valuation Technique | Significant Unobservable Inputs | General Range of Significant Unobservable Input Values | |||||||||||||||||||
Impaired Loans | $ | 2,818 | $ | 2,667 | Appraised Value | Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell | 0 – 18% | |||||||||||||||||
Collateral dependent loans with ACL: | Appraised Value | Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell | 0 – 18% | |||||||||||||||||||||
Commercial real estate | $ | 204 | $ | 213 | ||||||||||||||||||||
Agriculture | 52 | — | ||||||||||||||||||||||
Other Real Estate Owned | $ | 321 | $ | 1,361 | Appraised Value/Comparable Sales/Other Estimates from Independent Sources | Discounts to reflect current market conditions and estimated costs to sell | 0 – 18% | $ | 261 | $ | 261 | Appraised Value/Comparable Sales/Other Estimates from Independent Sources | Discounts to reflect current market conditions and estimated costs to sell | 0 – 18% |
20
Fair Value of Financial Instruments
Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument.
The following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.
25
The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a recurring basis as of SeptemberJune 30, 2022,2023, and December 31, 2021,2022, are as follows:
Schedule of estimated fair value of financial instruments | ||||||||||||||||||||
Fair Value Measurements | ||||||||||||||||||||
(Dollars are in thousands) |
Carrying Amount |
Fair Value | Quoted market price in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) | |||||||||||||||
September 30, 2022 | ||||||||||||||||||||
Financial Instruments – Assets | ||||||||||||||||||||
Net Loans | $ | 573,281 | $ | 554,800 | $ | — | $ | — | $ | 554,800 | ||||||||||
Financial Instruments – Liabilities | ||||||||||||||||||||
Time Deposits | 179,709 | 178,702 | — | 178,702 | — | |||||||||||||||
Borrowed funds | 41,496 | 40,266 | — | 40,266 | — | |||||||||||||||
December 31, 2021 | ||||||||||||||||||||
Financial Instruments – Assets | ||||||||||||||||||||
Net Loans | $ | 587,009 | $ | 580,024 | $ | — | $ | — | $ | 580,024 | ||||||||||
Financial Instruments – Liabilities | ||||||||||||||||||||
Time Deposits | 196,285 | 198,353 | — | 198,353 | — | |||||||||||||||
Borrowed funds | 16,496 | 15,649 | — | 15,649 | — |
Schedule of estimated fair value of financial instruments | ||||||||||||||||||||
Fair Value Measurements | ||||||||||||||||||||
(Dollars are in thousands) | Carrying Amount | Fair Value | Quoted market price in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||||
June 30, 2023 | ||||||||||||||||||||
Financial instruments – assets | ||||||||||||||||||||
Net loans | $ | 602,224 | $ | 572,741 | $ | — | $ | — | $ | 572,741 | ||||||||||
Financial instruments – liabilities | ||||||||||||||||||||
Time deposits | 220,197 | 219,049 | — | 219,049 | — | |||||||||||||||
Borrowed funds | 26,496 | 23,785 | — | 23,785 | — | |||||||||||||||
December 31, 2022 | ||||||||||||||||||||
Financial instruments – assets | ||||||||||||||||||||
Net loans | $ | 577,886 | $ | 552,675 | $ | — | $ | 552,462 | $ | 213 | ||||||||||
Financial instruments – liabilities | ||||||||||||||||||||
Time deposits | 188,233 | 187,179 | — | 187,179 | — | |||||||||||||||
Borrowed funds | 16,496 | 14,825 | — | 14,825 | — |
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates.
Estimated fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Company’s fair value estimates, methods and assumptions are set forth below for the Company’s other financial instruments.
The carrying values of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities, trust preferred securities and accrued interest approximates fair value and are excluded from the table above.
In accordance with our adoption of Accounting Standards Update (ASU) 2016-01 in 2018, the methods utilized to measure the fair value of financial instruments at Septemberas of June 30, 20222023 and December 31, 2021,2022, represent an approximation of exit price; however, an actual exit price may differ.
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NOTE 1112 LEASING ACTIVITIES
As of SeptemberJune 30, 2022,2023, the Bank leases four branch office sites resulting from sale leaseback transactions entered into in 2017offices and a sublet ofsublets a lot adjacent to another branch office. The lease agreements have maturity dates ranging from May 2032 to December 2041. It is assumed that there are currently no circumstances in which the leases would be terminated prior to expiration. The weighted average remaining life of the lease terms at Septemberas of June 30, 20222023 was 9.879.11 years.
The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded to the lease term for each transaction. This methodology is expected to be used for any other subsequent lease agreements. The weighted average discount rate for the leases at Septemberas of June 30, 20222023 was 3.243.29%%.
For the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, operating lease expenses were $342224,000 thousand and $421228,000 thousand,, respectively.
The Company’s other operating leases were evaluated and determined to be immaterial to the financial statements. At SeptemberAs of June 30, 2022,2023, future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands):
Schedule of future minimum rental commitments under the non-cancellable operating leases | ||
2022 | $ | 114 |
2023 | 455 | |
2024 | 455 | |
2025 | 455 | |
2026 | 455 | |
Thereafter | 2,698 | |
Total lease payments | 4,632 | |
Less imputed interest | 844 | |
Total | $ | 3,788 |
Schedule of future minimum rental commitments under the non-cancellable operating leases | ||||||
2023 | $ | 228 | ||||
2024 | 456 | |||||
2025 | 456 | |||||
2026 | 456 | |||||
2027 | 477 | |||||
Thereafter | 2,226 | |||||
Total lease payments | 4,299 | |||||
Less: imputed interest | (742 | ) | ||||
Total | $ | 3,557 |
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NOTE 1213 BORROWED FUNDS
Included in Borrowed Funds is a short-terman FHLB Advance totalingof $2510.0 million at Septemberas of June 30, 2022. 2023, bearing an interest rate of 3.51% maturing on May 4, 2028. No short-term borrowings FHLB Advances were outstanding at December 31, 2021. The outstanding advance at September 30, 2022,2022. For additional information on borrowed funds, refer to Note 18 in Item 8 of $25 million, has a fixed rate of 2.60%, and maturesForm 10-K for the year ended December 19,31, 2022.
NOTE 1314 REVENUE FROM CONTRACTS WITH CUSTOMERS
All our revenue from contracts with customers as defined in ASC 606 is recognized within Noninterestnoninterest income. Refer to Note 23 in our Annual Report on Form 10-K for the year ended December 31, 20212022 for a description of how each revenue stream is accounted for under ASC 606. The following table presents Noninterestnoninterest income by revenue stream for the three and ninesix months ended SeptemberJune 30, 20222023 and 2021:2022:
Schedule of revenue from contracts with customers | ||||||||||||||
For the three months ended | For the nine months ended | |||||||||||||
September 30, | September 30, | |||||||||||||
(Dollars in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||
Service charges and fees | $ | 1,069 | $ | 1,001 | $ | 2,973 | $ | 2,674 | ||||||
Card Processing and interchange income | 915 | 982 | 2,858 | 2,918 | ||||||||||
Gain on sale of securities available-for-sale (1) | - | 322 | - | 322 | ||||||||||
Insurance and investment fees | 167 | 222 | 650 | 723 | ||||||||||
Other noninterest income | 38 | 159 | 425 | 840 | ||||||||||
Total Noninterest Income | $ | 2,189 | $ | 2,970 | $ | 6,906 | $ | 7,477 | ||||||
Schedule of revenue from contracts with customers | ||||||||||||||
For the three months ended | For the six months ended | |||||||||||||
June 30, | June 30, | |||||||||||||
(Dollars are in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||
Service charges and fees | $ | 961 | $ | 897 | $ | 1,877 | $ | 1,904 | ||||||
Card processing and interchange income | 943 | 1,027 | 1,842 | 1,943 | ||||||||||
Insurance and investment fees | 306 | 242 | 563 | 483 | ||||||||||
Other noninterest income | 194 | 182 | 520 | 387 | ||||||||||
Total noninterest income | $ | 2,404 | $ | 2,348 | $ | 4,802 | $ | 4,717 |
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NOTE 1415 NONINTEREST EXPENSES
Other operating expenses, included as part of noninterest expenses, consisted of the following for the periods presented:
Schedule of noninterest expenses | ||||||||||||||||
For the three months ended September 30, | For the Nine months ended September 30, | |||||||||||||||
(Dollars are in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Advertising | $ | 23 | $ | 85 | $ | 115 | $ | 193 | ||||||||
ATM network expense | 806 | 368 | 1,553 | 1,113 | ||||||||||||
Legal, accounting and professional fees | 258 | 254 | 746 | 842 | ||||||||||||
Consulting fees | 98 | 58 | 227 | 206 | ||||||||||||
Loan related expenses | 65 | 198 | 265 | 448 | ||||||||||||
Printing and supplies | 35 | 29 | 107 | 89 | ||||||||||||
FDIC insurance premiums | 56 | 81 | 159 | 218 | ||||||||||||
Other real estate owned expenses, net | (35 | ) | 301 | 110 | 439 | |||||||||||
Other operating expenses | 219 | 630 | 1,505 | 1,765 | ||||||||||||
Total other operating expenses | $ | 1,525 | $ | 2,004 | $ | 4,787 | $ | 5,313 |
NOTE 15 SUBSEQUENT EVENTS
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. There were no subsequent events requiring recognition or disclosure.
Schedule of noninterest expenses | ||||||||||||||||
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
(Dollars are in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Advertising | $ | 70 | $ | 64 | $ | 107 | $ | 92 | ||||||||
ATM network expense | 370 | 380 | 730 | 747 | ||||||||||||
Legal, accounting and professional fees | 325 | 257 | 660 | 488 | ||||||||||||
Consulting fees | 41 | 62 | 132 | 129 | ||||||||||||
Loan related expenses | 127 | 103 | 216 | 200 | ||||||||||||
Printing and supplies | 48 | 39 | 90 | 72 | ||||||||||||
FDIC insurance premiums | 88 | 54 | 176 | 103 | ||||||||||||
Other real estate owned expenses, net | 10 | 15 | 16 | 145 | ||||||||||||
Other operating expenses | 710 | 684 | 1,378 | 1,286 | ||||||||||||
Total other operating expenses | $ | 1,789 | $ | 1,658 | $ | 3,505 | $ | 3,262 |
NOTE 16 RECENT ACCOUNTING DEVELOPMENTS
The following is a summary of recent authoritative announcements:
In June 2016, per ASU No. 2016-13, ‘Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,’ the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. Subsequently, per ASU No. 2019-10, implementation for the Company is delayed until reporting periods beginning after December 15, 2022. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will haveadopted this guidance on its financial position, results of operations, and cash flows.January 1, 2023. The Company has contracted with a software vendorrecognized an adjustment to retained earnings in the amount of $212,000, and is currently working through the implementation process. The new model has been constructed, initial assumptions have been input and historical loan and loss activity has been input and validated. The Company is running the new methodology parallelrecorded an adjustment to the current allowance methodology,for credit losses in loans and will be assessingunfunded commitments on loans in the comparative results for the first three quarterly calculations during the fourth quarteramount of 2022.$80,000 and $348,000, respectively.
In March 2020,June 2022, the FASB releasedissued ASU 2020-04, ‘Reference Rate Reform2022-03, “Fair Value Measurement (Topic 848), Facilitation820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the Effectsunit of Reference Rate Reform on Financial Reporting,’ which provides optional guidance for a limited periodaccount of time to ease the potential burdenequity security and, therefore, is not considered in accounting for (or recognizing the effects of) reference rate reform.measuring fair value. The amendments in this Update are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference the London Interbank Offering Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The amendments in the Update areASU is effective for the Company as of March 12, 2020 throughfiscal years, including interim periods within those fiscal years, beginning after December 31, 2022.15, 2023. Early adoption is permitted. The Company is working through implementationdoes not expect the adoption of this guidance, andASU 2022-03 to date this amendment has not hadhave a material impact on its consolidated financial statements.
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In January 2021, the FASB released ASU 2021-01, ‘Reference Rate Reform (Topic 848),’ which clarifies that certain optional expedients and exceptions in topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition related to reference rate reform. The amendments in this Update are effective immediately for all entities. An entity may elect to apply the amendments in the Update on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. The Company does not expect this amendment to have a material effect on its financial statements.
In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company adopted this guidance on January 1, 2023 and it did not have a material impact on the consolidated financial statements.
In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”. ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is currentlyto provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.
To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective for all entities upon issuance. The Company is assessing ASU 2022-06 and its impact on the impactCompany’s transition away from LIBOR for its loan and other financial instruments that have not already been transitioned to an alternative reference rate.
In July 2023, the Financial Accounting Standards Board (FASB) issued ASU 2022-02 will2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)”. This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Caution About Forward-Looking Statements
We make forward-looking statements in this quarterly report on Form 10-Q that are subject to risks and uncertainties. These forward-looking statements include statements regarding expectations, intentions, projections and beliefs concerning our profitability, liquidity, and allowance for loancredit losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Important factors that may cause actual results to differ from projections include:
29
Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
25
Critical Accounting Policies
For discussion of our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2021 (the 20212022, and Note 2 Summary of Significant Accounting Policies, in Item 1 of this Form 10-K).10-Q. Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting policies relate to our provisionallowance for loan losses and the calculation of our deferred tax asset.credit losses.
The allowance for credit losses represents an amount that, in the Company's judgment, will be adequate to absorb probableexpected and estimable losses inherent in the loan portfolio. The judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio, current, reasonable and supportable forecasts of economic conditions that may affect a borrower's ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available.
Deferred tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. In the past, the Company provided a valuation allowance on its net deferred tax assets where it was deemed more likely than not such assets would not be realized. At September 30, 2022 and December 31, 2021, the Company had no valuation allowance on its net deferred tax assets.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.
For further discussion of the deferred tax asset and valuation allowance, we refer you to the section on “Deferred Tax Asset and Income Taxes” below.
Overview and Highlights
ForNet income for the three months ended SeptemberJune 30, 2022, net income2023 was $1.7 million, a decrease of $2.0 million was recorded; an increase of $141,000,$200,000, or 7.6%10.40%, from the same period in 2021. The primary driver for the improved earnings was a decrease in total noninterest expense of $1.5 million due largely to the $1.0 million decline in occupancy expenses. This year-over-year decrease in occupancy expenses offset decreases in net interest income and noninterest income of $218,000 and $781,000, respectively.2022. Net interest income decreased $218,000, a result of deferred loan fees earnedimproved 2.28%, or $156,000, from $6.8 million for the quarter ended June 30, 2022 to $7.0 million for the quarter ended June 30, 2023. While non-interest income also increased $56,000, or 2.39%, from the forgiveness of Paycheck Protection Program (PPP) loans of $1.1 million during the thirdsecond quarter of 2021 not being replicated in 2022, resulting in a netthe decrease in interest and fees on loans of $592,000, or 7.8%. The decrease in loan fees was largely offset by increased earnings on interest bearing deposits in banks and investments, which increased $531,000 and $117,000, respectively. For the comparative three-month periods of 2022 and 2021, interest expense increased $284,000, as interest on borrowed funds increased $388,000, offset by a decrease in interest expense on deposits of $104,000.
For the nine months ended September 30, 2022, net income totaled $5.8 million or $0.24 per share comparedis related to $5.1 million or $0.21 per shareincreases in non-interest expense of $337,000 and the provision for the same nine-month period in 2021. Interest income was slightly higher and interest expense was slightly lower, resulting in an improvementcredit losses of $183,000 in net interest income. Other drivers of the improvement were reduced noninterest expense, which declined $1.4 million, due largely to charges foe the write down of closed and former branch office sites during the third quarters of 2022 and 2021. Updated valuations of the two branch offices closed in 2022, resulted in a charge of $195,000 that is included in noninterest expense. During the same period in 2021, three former branch office sites were sold, resulting in gains of $190,000, and three more former branch office sites were transferred to other real estate owned, resulting in a combined loss of $1.1 million.
On June 15, 2022, we experienced a cybersecurity incident that temporarily interrupted the operability of our computer systems. Limited operations were restored June 17, 2022, and full operations were restored June 21, 2022. On June 29, 2022, we issued a press release outlining the timeline, restoration efforts and communications, services and safeguards being offered to our customers in response to this incident, and filed a Current Report on Form 8-K relating to the incident. Since that date, restoration efforts have been completed and normal operations have resumed. Reference to the cybersecurity event is made throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations.$74,000.
The balance sheet grew to $828.6$803.0 million in total assets as of SeptemberJune 30, 2022,2023, from $794.6$775.4 million as of December 31, 2021, due to Federal Home Loan Bank advances taken, in the second quarter of 2022, as a precautionary measure in response to the cybersecurity incident. Total deposits2022. Gross loans increased $16.4$24.4 million to $723.9$609.0 million at Septemberas of June 30, 2022 from $707.5 million at December 31, 2021. Loans decreased $13.92023. Additionally, interest-bearing deposits in other banks increased $5.6 million to $579.9$52.4 million during the first nine monthsas of 2022, due to repayments of several large commercial real estate loans combined with PPP loan repayments of approximately $6.1 million.
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In August of 2022, branch offices in Big Stone Gap and Chilhowie, Virginia were closed and the loan and deposit accounts were transferred to nearby office locations. Affected personnel were reassigned to other branches or departments.June 30, 2023.
During the second quarter of 2022, we initiated a previously announced stock repurchase program.program, which continues through March 31, 2024. Through SeptemberJune 30, 2022, 44,4852023, the Company has repurchased 119,229 shares have been repurchased at an average price of $2.30$2.29 per share.
Comparison of the Three Months ended SeptemberJune 30, 20222023 and 20212022
Quarter-to-date highlights include:
· | Returns on average assets and equity, annualized, of 0.88% and 11.62% for the second quarter of 2023, compared to 0.94% and |
· | Net interest income was |
· | Provision for |
· | Noninterest income was |
· | Noninterest expense was |
30
The Company’s primary source of income is net interest income, which decreasedincreased by $218 thousand,$156,000, or 2.9%2.28%, to $7.2$7.0 million for the thirdsecond quarter of 2023 compared to $6.8 million for the second quarter of 2022. The increase was primarily due to improvement in the net interest margin to 3.71% for the second quarter of 2023 compared to 3.50% for the second quarter of 2022 compared to $7.4 million for the third quarter of 2021. Interest income increased $66 thousand due to a $56 millionthe increase in asset yields outpacing increases in funding costs in the rising interest rate environment throughout 2022 and 2023. The loan portfolio was the primary contributor to the improvement in the net interest margin due to the 70 bp increase in the average balance of earning assets, a shift ofquarterly yield on loans to 5.26%. The yield on overnight funds improved 406 bps to higher-yielding investment securities;4.99% for the quarter ended June 30, 2023 and increased interest earning deposits with banks funded from FHLB advances as we maintained additional liquidity as we monitored customer reactionalso contributed to the cybersecurity incident. Additionally, the 2022 increasesincrease in the fednet interest margin. The loan portfolio and overnight funds rate partiallycontributions offset the decline in accelerated fee recognition when PPP loans are forgiven. Total interest expense increased $284 thousand driven primarily by a $388 thousand increase in interest on borrowed funds due to the FHLB advances combined with increased interest rates paid on trust preferred securities. Increased borrowing expenses were partially offset by a decrease in interest on deposits which decreased $104 thousand, or 19.9%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The lower deposit interest expense resulted largely from reduced time deposit interest expense due to a decrease in both volume and interest rates. Overall there was a 12 basis-point79 bp increase in the cost of funds which rose to 461.12% for the quarter ended June 30, 2023. Total interest expense increased $1.4 million driven primarily by the increase in the cost of interest-bearing liabilities, which rose 119 bps whileto 1.70% from 0.51% for the comparative three months ended June 30, 2023 and 2022. The net interest margin decreased 38increased 21 bps to 3.55%. During3.71% from 3.50% as of June 30, 2023 and 2022, respectively. There was one increase in the third quarter of 2022,federal funds interest rate by the Federal Reserve’s Open Market Committee (FOMC) increased the discount rate two times for a total of 150 bps, bringing the number of rate increases for the first nine months of 2022 to five, totaling 300 bps. The Company experienced benefits of the rate increases(“FOMC”) during the third quarter butended June 30, 2023. Through June 30, 2023, the full impact will be somewhat lagging as certain loans, investments, and trust preferred securities will not reprice untilFOMC has increased this rate seven times since the individual instruments next interest rate repricing date. Deposit rates have not yet been significantly impacted by the rate increases, but thequarter ended June 30, 2022. The Company continues to evaluate rate adjustments for factors, including competitive pressure within the local markets, funding needs to support growth, and other needs. During the third quarter of 2022, in response to rising interest rates, we initiated some promotional time deposit products.
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The following table shows the rates paid on earning assets and interest-bearing liabilities for the periods indicated:
Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates
| |||||||||||||||||
(Dollars in thousands) | |||||||||||||||||
Three Months Ended September 30, | |||||||||||||||||
2022 | 2021 | ||||||||||||||||
Average | Income/ | Yields/ | Average | Income/ | Yields/ | ||||||||||||
Balance | Expense | Rates | Balance | Expense | Rates | ||||||||||||
ASSETS | |||||||||||||||||
Loans (1) (2) (3) | $ | 590,090 | $ | 7,010 | 4.72% | $ | 581,517 | $ | 7,602 | 5.19% | |||||||
Federal funds sold | 353 | 2 | 2.34% | 209 | - | 0.12% | |||||||||||
Interest bearing deposits in other banks | 98,657 | 559 | 2.25% | 72,549 | 28 | 0.15% | |||||||||||
Taxable investment securities | 117,628 | 539 | 1.83% | 96,136 | 414 | 1.72% | |||||||||||
Total earning assets | 806,728 | 8,110 | 3.99% | 750,411 | 8,044 | 4.26% | |||||||||||
Less: Allowance for loans losses | (6,738) | (6,778) | |||||||||||||||
Non-earning assets | 41,134 | 58,972 | |||||||||||||||
Total Assets | $ | 841,124 | $ | 802,605 | |||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||
Interest-bearing demand deposits | $ | 75,151 | $ | 23 | 0.12% | $ | 60,289 | $ | 15 | 0.10% | |||||||
Savings and money market deposits | 192,550 | 52 | 0.11% | 184,155 | 36 | 0.08% | |||||||||||
Time deposits | 181,480 | 343 | 0.75% | 212,712 | 471 | 0.88% | |||||||||||
Total interest-bearing deposits | 449,181 | 418 | 0.37% | 457,156 | 522 | 0.45% | |||||||||||
Short-term borrowings | 46,793 | 287 | 2.40% | - | - | -% | |||||||||||
Trust preferred securities | 16,496 | 205 | 4.85% | 16,496 | 104 | 2.47% | |||||||||||
Total interest-bearing liabilities | 512,470 | 910 | 0.70% | 473,652 | 626 | 0.52% | |||||||||||
Non-interest-bearing deposits | 262,244 | - | -% | 258,251 | - | - % | |||||||||||
Total deposit liabilities and cost of funds | 774,714 | 910 | 0.46% | 731,903 | 626 | 0.34% | |||||||||||
Other liabilities | 8,904 | 8,399 | |||||||||||||||
Total Liabilities | 783,618 | 740,302 | |||||||||||||||
Shareholders’ Equity | 57,506 | 62,303 | |||||||||||||||
Total Liabilities and Shareholders’ Equity | $ | 841,124 | $ | 802,605 | |||||||||||||
Net Interest Income | $ | 7,200 | $ | 7,418 | |||||||||||||
Net Interest Margin | 3.55% | 3.93% | |||||||||||||||
Net Interest Spread | 3.29% | 3.74% | |||||||||||||||
(1) Nonaccrual loans and loans held for sale have been included in average loan balances | |||||||||||||||||
(2) Tax exempt income is not significant and has been treated as fully taxable (3) Includes mortgage loans held for sale | |||||||||||||||||
Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates
| |||||||||||||||||
Three Months Ended June 30, | |||||||||||||||||
2023 | 2022 | ||||||||||||||||
Average | Income/ | Yields/ | Average | Income/ | Yields/ | ||||||||||||
(Dollars are in thousands) | Balance | Expense | Rates | Balance | Expense | Rates | |||||||||||
ASSETS | |||||||||||||||||
Loans (1) (2) | $ | 600,712 | $ | 7,876 | 5.26% | $ | 597,570 | $ | 6,791 | 4.56% | |||||||
Mortgage loans held for sale | - | - | -% | 124 | 1 | 4.17% | |||||||||||
Federal funds sold | 673 | 8 | 4.77% | 189 | 1 | 0.87% | |||||||||||
Interest bearing deposits in other banks | 44,325 | 551 | 4.99% | 68,298 | 158 | 0.93% | |||||||||||
Taxable investment securities | 110,698 | 583 | 2.11% | 117,905 | 509 | 1.73% | |||||||||||
Total earning assets | 756,408 | 9,018 | 4.78% | 784,086 | 7,460 | 3.82% | |||||||||||
Less: Allowance for loans losses | (6,816) | (6,887) | |||||||||||||||
Non-earning assets | 37,914 | 43,371 | |||||||||||||||
Total assets | $ | 787,506 | $ | 820,570 | |||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||
Interest-bearing demand deposits | $ | 75,847 | $ | 112 | 0.59% | $ | 71,805 | $ | 19 | 0.10% | |||||||
Savings and money market deposits | 162,652 | 293 | 0.72% | 197,346 | 40 | 0.08% | |||||||||||
Time deposits | 214,029 | 1,240 | 2.32% | 187,891 | 345 | 0.74% | |||||||||||
Total interest-bearing deposits | 452,528 | 1,645 | 1.46% | 457,042 | 404 | 0.35% | |||||||||||
FHLB advances | 6,374 | 56 | 3.52% | 12,692 | 71 | 2.21% | |||||||||||
Trust preferred securities | 16,496 | 317 | 7.71% | 16,496 | 141 | 3.38% | |||||||||||
Total interest-bearing liabilities | 475,398 | 2,018 | 1.70% | 486,230 | 616 | 0.51% | |||||||||||
Non-interest-bearing deposits | 243,974 | - | -% | 268,802 | - | -% | |||||||||||
Total deposit liabilities and cost of funds | 719,372 | 2,018 | 1.13% | 755,032 | 616 | 0.33% | |||||||||||
Other liabilities | 8,675 | 8,213 | |||||||||||||||
Total liabilities | 728,047 | 763,245 | |||||||||||||||
Shareholders’ equity | 59,459 | 57,325 | |||||||||||||||
Total liabilities and shareholders’ equity | $ | 787,506 | $ | 820,570 | |||||||||||||
Net interest income | $ | 7,000 | $ | 6,844 | |||||||||||||
Net interest margin | 3.71% | 3.50% | |||||||||||||||
Net interest spread | 3.08% | 3.31% | |||||||||||||||
(1) Nonaccrual loans and loans held for sale have been included in average loan balances. | |||||||||||||||||
(2) Tax exempt income is not significant and has been treated as fully taxable. | |||||||||||||||||
31
Net interest income is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing liabilities. The following table sets forth the amounts of the total changes in interest income and interest expense which can be attributed to rates and volume for the three months ended SeptemberJune 30, 2022,2023, as compared to the three months ended SeptemberJune 30, 2021.2022.
28
Volume and Rate Analysis
Increase (decrease)
Three Months Ended September 30, 2022 versus 2021 | Three Months Ended June 30, 2023 versus 2022 | |||||||||||||||||||||||
(Dollars in thousands) | Volume Effect | Rate Effect | Change in Interest Income/ Expense | |||||||||||||||||||||
Interest Income: | ||||||||||||||||||||||||
(Dollars are in thousands) | Volume Effect | Rate Effect | Change in Interest Income/ Expense | |||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Loans | $ | (972 | ) | $ | 380 | $ | (592 | ) | $ | (18 | ) | $ | 1,103 | $ | 1,085 | |||||||||
Mortgage loans held for sale | (1 | ) | — | (1 | ) | |||||||||||||||||||
Federal funds sold | — | 2 | 2 | 3 | 4 | 7 | ||||||||||||||||||
Interest bearing deposits in other banks | 13 | 518 | 531 | (74 | ) | 467 | 393 | |||||||||||||||||
Taxable investment securities | 92 | 33 | 125 | (10 | ) | 84 | 74 | |||||||||||||||||
Total Earning Assets | (867 | ) | 933 | 66 | ||||||||||||||||||||
Interest Expense: | ||||||||||||||||||||||||
Total earning assets | (100 | ) | 1,658 | 1,558 | ||||||||||||||||||||
Interest expense: | ||||||||||||||||||||||||
Interest-bearing demand deposits | 5 | 3 | 8 | 1 | 92 | 93 | ||||||||||||||||||
Savings and money market deposits | 3 | 13 | 16 | (8 | ) | 261 | 253 | |||||||||||||||||
Time deposits | (65 | ) | (63 | ) | (128 | ) | 69 | 826 | 895 | |||||||||||||||
Short-term borrowings | 287 | — | 287 | |||||||||||||||||||||
FHLB advances | (47 | ) | 32 | (15 | ) | |||||||||||||||||||
Trust preferred securities | — | 101 | 101 | — | 176 | 176 | ||||||||||||||||||
Total Interest-bearing Liabilities | 230 | 54 | 284 | |||||||||||||||||||||
Change in Net Interest Income | $ | (1,097 | ) | $ | 879 | $ | (218 | ) | ||||||||||||||||
Total interest-bearing liabilities | 15 | 1,387 | 1,402 | |||||||||||||||||||||
Change in net interest income | $ | (115 | ) | $ | 271 | $ | 156 |
Based on our current assessment of the loan portfolio and related unfunded commitments, a provision of $225 thousand$149,000 was made in the thirdsecond quarter of 2022, compared to zero for the third quarter of 2021, due to a combination of factors, including the rising interest rate environment, overdraft charge-offs related to the cybersecurity incident realized during the third quarter of 2022, and uncertain economic trends.2023. The allowance for loancredit losses as a percentage of loans increaseddecreased from 1.13%1.15% at December 31, 20212022 to 1.14%1.12% as of SeptemberJune 30, 2022.2023. For a discussion of the factors affecting the allowance for loancredit losses, including provision expense, refer to Note 2, Summary of Significant Accounting Polices and Note 7, Allowance for LoanCredit Losses, in Item 1 of this Form 10-Q.
Total noninterestNon-interest income decreased $781,000increased $56,000 to $2.4 million for the quarter ended June 30, 2023 from $2.3 million for the comparable quarter in 2022. This increase is due largely to the thirdreduction in certain fee and other income during the second quarter of 2022, compared toresulting from the third quarterimpact of 2021. The primary drivers of the quarter-over-quarter decline were $322,000 of gains on sales of investment securities and $190,000 of gains on sale of bank premises in 2021 that were not repeated in 2022. In addition, the Company recorded a $100,000 write-down of bank owned life insurance (BOLI) and a period-over-period decrease in gains and commissions on mortgage loan originations of $82,000, during the third quarter of 2022. The BOLI charge resulted from a decrease in the market value of the underlying investments supporting the policy due to increased interest rates. Service charge revenue increased $68 thousand, or 6.8%, to $1.1 million for the comparative three-month periods ended September 30, 2022 and 2021 as operations returned to normal operations after the cybersecurity incident. Card processing and interchange revenue decreased $67 thousand for the three months ended September 30, 2022, as compared to the same period in 2021, due to a decline in transaction volume. The increased interest rate environment also contributed to the reduced mortgage revenue as mortgage originations and refinancings have slowed.
Total noninterest expense decreased $1.5 million in the third quarter of 2022 compared to the same period of 2021, due primarily to charges recorded in 2021 of $1.1 million related to the transfer of three former branch office locations to other real estate owned, which is reflected in occupancy and equipment expense, and $395,000 of write-downs on OREO, which is reflected in other operating expense. These charges more than exceeded the $195,000 charge related to the closure of two branch offices during the third quarter of 2022, which is included in occupancy expenses. Salaries and benefits remained virtually flat for the comparative three-month period in 2022 versus 2021. This was due in part to an adjustment to reduce the liability for our self-insured insurance plan of $100,000 during the third quarter of 2022, based on a rolling assessment of claims made against the plan. This liability adjustment offset employee appreciation bonus payments, totaling $89,000, during the third quarter in recognition of employee response to the cybersecurity incident in June 2022. During the period immediately after the cybersecurity incident, we temporarily stopped assessing overdraft and certain other service charges. Additionally, financial services revenue was impacted as we were limited in executing client transactions, especially new account activity during the disruption. For the three-months ended June 30, 2023, increases to service charges and fee income of $64,000 and insurance and investment revenue of $64,000 were offset by decreases in card processing fees of $84,000 and mortgage income of $34,000, as compared to the three-months ended June 30, 2022.
Non-interest expense was $7.0 million for the quarter ended June 30, 2023 compared to $6.7 million for the quarter ended June 30, 2022. The $377,000 increase was impacted by increases in salaries and employee benefits, which increased $270,000, as well as other operating expenses, which increased $131,000. The increase in salaries and employee benefits related to performance raises and benefits enhancements initiated in the first quarter of 2023. The quarter-over-quarter increase in other operating expenses was due to increases in deposit insurance premium, professional fees, marketing and business development costs, and data processing and telecommunication costs. These quarter-over-quarter increases were due to a combination of adjustments due to contractual or inflationary factors, along with decisions to increase or incur certain costs as part of our overall strategic plan.
The efficiency ratio, a non-GAAP measure, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, improvedincreased to 70.3%74.81% for thirdthe second quarter of 20222023 from 77.6%72.43% for the thirdsecond quarter of 2021.2022. We continue to assess our operational procedures and structure to improve efficiencies and contain costs. A review of deposit operations was performed during the third quarter of 2022, and based on this assessment, several processes will be modified or reassigned to improve operational efficiencies.
29
In August 2022, the Bank closed branch offices in Big Stone Gap and Chilhowie, Virginia. Accounts serviced at these offices were transferred to nearby branches, and employees were reassigned to other positions or offices, as available. Interactive teller machines at these locations will remain in service for the foreseeable future. This restructuring of the branch network should improve the efficiency of services to the customers of these communities.
Income tax expense for the thirdsecond quarter of 20222023 totaled $579 thousand, an increase$497,000, a decrease of $103 thousand,$39,000, or 21.6%7.28% from the $476 thousand$536,000 recorded during the same period in 2021.2022. The effective tax rate for the three months ended SeptemberJune 30, 2022,2023, was 22.6%22.39%, compared to 20.5%21.80% for the same period in 2021. The year-over-year, quarterly increase generally approximates the percentage increase of pre-tax earnings.2022.
32
Comparison of the NineSix Months ended SeptemberJune 30, 20222023 and 20212022
Year-to-date highlights include:
· | Net interest income improved to |
· | Net interest margin was |
· | Provision for |
· | Noninterest income was |
· | Salaries and employee benefits expense was |
· | Total noninterest expense was |
Overall, duringDuring the ninesix months ended SeptemberJune 30, 2022,2023, compared to the same period in 2021,2022, net income improved 14.5%decreased 2.60% to $5.8$3.7 million from $5.1$3.8 million. Although net interest income was virtually unchanged, increasing $116 thousand, reduced interestand non-interest income increased, total non-interest expense of $67 thousand contributed to an improvement of $183 thousand in net interest income.increased at a greater percentage. The following table presents the rates earned on earning assets and paid on interest-bearing liabilities for the periods indicated.
Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates
| |||||||||||||||||
Six Months Ended June 30, | |||||||||||||||||
2023 | 2022 | ||||||||||||||||
Average | Income/ | Yields/ | Average | Income/ | Yields/ | ||||||||||||
(Dollars are in thousands) | Balance | Expense | Rates | Balance | Expense | Rates | |||||||||||
ASSETS | |||||||||||||||||
Loans (1) (2) | $ | 593,455 | $ | 15,258 | 5.18% | $ | 596,813 | $ | 13,465 | 4.55% | |||||||
Mortgage loans held for sale | 2 | - | -% | 69 | 1 | 4.33% | |||||||||||
Federal funds sold | 652 | 16 | 4.95% | 203 | 1 | 0.49% | |||||||||||
Interest bearing deposits in other banks | 46,125 | 1,083 | 4.73% | 61,094 | 179 | 0.59% | |||||||||||
Taxable investment securities | 111,713 | 1,183 | 2.14% | 114,190 | 971 | 1.70% | |||||||||||
Total earning assets | 751,947 | 17,540 | 4.70% | 772,369 | 14,617 | 3.82% | |||||||||||
Less: Allowance for loans losses | (6,864) | (6,867) | |||||||||||||||
Non-earning assets | 37,388 | �� | 46,335 | ||||||||||||||
Total assets | $ | 782,471 | $ | 811,837 | |||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||
Interest-bearing demand deposits | $ | 78,077 | $ | 208 | 0.54% | $ | 69,523 | $ | 35 | 0.10% | |||||||
Savings and money market deposits | 164,590 | 515 | 0.63% | 195,780 | 78 | 0.08% | |||||||||||
Time deposits | 206,983 | 2,068 | 2.01% | 192,064 | 720 | 0.76% | |||||||||||
Total interest-bearing deposits | 449,650 | 2,791 | 1.25% | 457,367 | 833 | 0.37% | |||||||||||
FHLB advances | 3,978 | 76 | 3.85% | 6,381 | 71 | 2.21% | |||||||||||
Trust preferred securities | 16,496 | 606 | 7.41% | 16,496 | 248 | 2.98% | |||||||||||
Total interest-bearing liabilities | 470,124 | 3,473 | 1.49% | 480,244 | 1,152 | 0.48% | |||||||||||
Non-interest-bearing deposits | 244,489 | - | -% | 263,509 | - | -% | |||||||||||
Total deposit liabilities and cost of funds | 714,613 | 3,473 | 0.97% | 743,753 | 1,152 | 0.31% | |||||||||||
Other liabilities | 8,632 | 7,773 | |||||||||||||||
Total liabilities | 723,245 | 751,526 | |||||||||||||||
Shareholders’ equity | 59,226 | 60,188 | |||||||||||||||
Total liabilities and shareholders’ equity | $ | 782,471 | $ | 811,714 | |||||||||||||
Net interest income | $ | 14,067 | $ | 13,465 | |||||||||||||
Net interest margin | 3.77% | 3.52% | |||||||||||||||
Net interest spread | 3.21% | 3.33% | |||||||||||||||
(1) Nonaccrual loans and loans held for sale have been included in average loan balances. | |||||||||||||||||
(2) Tax exempt income is not significant and has been treated as fully taxable. | |||||||||||||||||
3033
Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates
| |||||||||||||||||
(Dollars in thousands) | |||||||||||||||||
Nine Months Ended September 30, | |||||||||||||||||
2022 | 2021 | ||||||||||||||||
Average | Income/ | Yields/ | Average | Income/ | Yields/ | ||||||||||||
Balance | Expense | Rates | Balance | Expense | Rates | ||||||||||||
ASSETS | |||||||||||||||||
Loans (1) (2) (3) | $ | 594,593 | $ | 20,476 | 4.61% | $ | 588,083 | $ | 21,483 | 4.89% | |||||||
Federal funds sold | 254 | 3 | 1.36% | 208 | - | 0.09% | |||||||||||
Interest bearing deposits in other banks | 73,752 | 738 | 1.34% | 83,153 | 69 | 0.11% | |||||||||||
Taxable investment securities | 115,349 | 1,510 | 1.74% | 72,958 | 1,059 | 1.94% | |||||||||||
Total earning assets | 783,948 | 22,727 | 3.88% | 744,402 | 22,611 | 4.06% | |||||||||||
Less: Allowance for loans losses | (6,824) | (7,143) | |||||||||||||||
Non-earning assets | 44,582 | 59,984 | |||||||||||||||
Total Assets | $ | 821,706 | $ | 797,243 | |||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||
Interest-bearing demand deposits | $ | 71,420 | $ | 58 | 0.11% | $ | 57,606 | $ | 45 | 0.10% | |||||||
Savings and money market deposits | 194,691 | 130 | 0.09% | 175,668 | 109 | 0.08% | |||||||||||
Time deposits | 188,497 | 1,064 | 0.75% | 222,186 | 1,626 | 0.98% | |||||||||||
Total interest-bearing liabilities | 454,608 | 1,252 | 0.37% | 455,460 | 1,780 | 0.52% | |||||||||||
Short-term borrowings | 20,000 | 358 | 2.36% | 3,308 | 33 | 1.35% | |||||||||||
Trust preferred securities | 16,496 | 452 | 3.61% | 16,496 | 316 | 2.52% | |||||||||||
Total interest-bearing liabilities | 491,104 | 2,062 | 0.56% | 475,264 | 2,129 | 0.60% | |||||||||||
Non-interest-bearing deposits | 263,083 | - | -% | 252,985 | - | - % | |||||||||||
Total deposit liabilities and cost of funds | 754,187 | 2,062 | 0.36% | 728,249 | 2,129 | 0.39% | |||||||||||
Other liabilities | 8,235 | 8,726 | |||||||||||||||
Total Liabilities | 762,422 | 736,975 | |||||||||||||||
Shareholders’ Equity | 59,284 | 60,268 | |||||||||||||||
Total Liabilities and Shareholders’ Equity | $ | 821,706 | $ | 794,243 | |||||||||||||
Net Interest Income | $ | 20,665 | $ | 20,482 | |||||||||||||
Net Interest Margin | 3.53% | 3.68% | |||||||||||||||
Net Interest Spread | 3.32% | 3.46% | |||||||||||||||
(1) Nonaccrual loans and loans held for sale have been included in average loan balances | |||||||||||||||||
(2) Tax exempt income is not significant and has been treated as fully taxable | |||||||||||||||||
(3) Includes mortgage loans held for sale
Net interest income is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing liabilities. The following table sets forth the amounts of the total changes in interest income and interest expense which can be attributed to rates and volume for the ninesix months ended SeptemberJune 30, 2022,2023, as compared to the ninesix months ended SeptemberJune 30, 2021.2022.
31
Volume and Rate Analysis
Increase (decrease)
Nine Months Ended September 30, 2022 versus 2021 | Six Months Ended June 30, 2023 versus 2022 | |||||||||||||||||||||||
(Dollars in thousands) | Volume Effect | Rate Effect | Change in Interest Income/ Expense | |||||||||||||||||||||
Interest Income: | ||||||||||||||||||||||||
(Dollars are in thousands) | Volume Effect | Rate Effect | Change in Interest Income/ Expense | |||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Loans | $ | (1,382 | ) | $ | 375 | $ | (1,007 | ) | $ | (254 | ) | $ | 2,047 | $ | 1,793 | |||||||||
Mortgage loans held for sale | (1 | ) | — | (1 | ) | |||||||||||||||||||
Federal funds sold | — | 3 | 3 | 3 | 12 | 15 | ||||||||||||||||||
Interest bearing deposits in other banks | (9 | ) | 678 | 669 | (54 | ) | 958 | 904 | ||||||||||||||||
Taxable investment securities | 484 | (33 | ) | 451 | 23 | 189 | 212 | |||||||||||||||||
Total Earning Assets | (907 | ) | 1,023 | 116 | ||||||||||||||||||||
Interest Expense: | ||||||||||||||||||||||||
Total earning assets | (283 | ) | 3,206 | 2,923 | ||||||||||||||||||||
Interest expense: | ||||||||||||||||||||||||
Interest-bearing demand deposits | 13 | — | 13 | 7 | 166 | 173 | ||||||||||||||||||
Savings and money market deposits | 15 | 6 | 21 | (16 | ) | 453 | 437 | |||||||||||||||||
Time deposits | (226 | ) | (336 | ) | (562 | ) | 76 | 1,272 | 1,348 | |||||||||||||||
Short-term borrowings | 284 | 41 | 325 | |||||||||||||||||||||
FHLB advances | (14 | ) | 19 | 5 | ||||||||||||||||||||
Trust preferred securities | — | 136 | 136 | — | 358 | 358 | ||||||||||||||||||
Total Interest-bearing Liabilities | 86 | (153 | ) | (67 | ) | |||||||||||||||||||
Change in Net Interest Income | $ | (993 | ) | $ | 1,176 | $ | 183 | |||||||||||||||||
Total interest-bearing liabilities | 53 | 2,268 | 2,321 | |||||||||||||||||||||
Change in net interest income | $ | (336 | ) | $ | 938 | $ | 602 |
During the first nine months of 2022 compared to the same period of 2021, net interest income increased $183 thousand primarily due to a reduction in interest expense on deposits of $528 thousand, largely offset by increases to the cost of borrowed funds of $461 thousand. The increase in expense for borrowed funds was due to $95 million of FHLB advances taken during the second quarter, combined with rate increases on trust preferred securities. The reduction in interest expense on deposits was driven mainly by a reduction in the average cost of retail time deposits, which declined 23 basis points, to 0.75% from 0.98%, plus a decrease in average balances of $33.7 million. There was a modest increase in interest income of $116 thousand due to increases to the investment portfolio and increased rates paid on deposits with other banks. These improvements offset reductions in loan interest and fees due principally to the reduction in fees from PPP loan repayments as these fees fell $1.6 million during the comparative nine-month periods. As a result, the net interest margin for the first nine months of 2022 was 3.53%, a reduction of 15 bps compared to 3.68% for the first nine months of 2021.
During the first nine months of 2022, the FOMC increased the discount rate five times for a total of 300 bps. This increased interest rate environment has improved returns on certain assets that immediately adjust as these changes are made, such as interest-bearing deposits in other banks, credit cards, home equity lines of credit and certain commercial and commercial real estate loans. It is anticipated that yields on these assets will improve moving forward. Conversely, it is expected that there will be a need to adjust, upward, rates paid on deposit accounts, which will increase our overall cost of funds. Additionally, in response to the June 2022 cybersecurity incident, during the third quarter of 2022, we began offering a customer appreciation time deposit product to recognize the patience and loyalty of our customers. This promotional product pays a higher rate than is currently offered on similar non-promotional products and is expected to contribute to an increased cost of funds going forward.
Based on our current assessment of the loan portfolio $400 thousandand related unfunded commitments, a provision of $149,000 was provided tomade for the six months ended June 30, 2023. The allowance for loancredit losses during the first nine monthsas a percentage of loans decreased from 1.15% at December 31, 2022 compared to $372 thousand provided during the same period in 2021.1.12% as of June 30, 2023. For more information ona discussion of the factors affecting the allowance for loancredit losses, including provision expense, refer to Note 2, Summary of Significant Accounting Polices and Note 7, Allowance for loanCredit Losses, in Item 1 of this Form 10-Q. Depending on changes to economic conditions and the impact those changes may have on individual borrowers, it is possible that additional provisions may be needed beyond those necessary to support organic growth of the loan portfolio.
Total noninterestNon-interest income increased $85,000 to $4.8 million for the six months ended June 30, 2023 from $4.7 million for the comparable period in 2022. The primary drivers of the increase were the sales of the former call center building in Bristol, Virginia and a former branch office in Big Stone Gap, Virginia, which resulted in a combined gain of $130,000, and an increase in brokerage revenue of $84,000. This was offset by decreases in service charge income and card processing fees totaling a combined $128,000 during the period. Service charge income decreased $571,000 for the first nine months of 2022, compareddue to the same period in 2021, to $6.9 million. Net gains on the sale of investment securities and a gain on the sale of bank premises in 2021 account for $322,000 and $190,000, respectively, of the decrease, as those earnings were not replicated in 2022. Additionally, a BOLI adjustment of $100,000 was recordedchanges made in 2022 in assessing certain charges that reduced the number of transactions subject to such fees. Fees from debit card activity declined as customer discretionary funds have begun to decline and customer spending habits have begun to normalize. In addition, as discussed previously, discussed. Aside from these individual events, financial servicescertain service fees and secondary market mortgage lending activities wereother revenues, adversely impacted by the cybersecurity event and the rising interest rate environment, showing year-over-year revenue declines of $74,000 and $116,000, respectively. These declines were offset by increased service charge revenue which increased $299,000, despite a period during the cybersecurity event where service charges were waived for all accounts.
32
For the nine months ended September 30, 2022, compared to the same periodincident in 2021, total noninterest expense decreased $1.4 million to $19.7 million, primarily due to a $1.4 million decrease in occupancy and equipment expense that was driven nearly entirely by the $1.1 million in losses on three former branch office locations discussed above, which were transferred into other real estate owned in 2021, partially offset by a similar $195,000 charge recorded in 2022. Due to the reduction in the number of branch office locations, year-over-year depreciation expense decreased $286,000. Salaries and benefits increased $530,000, or 5.6%, to $9.9 million for the comparative nine-month periodJune of 2022, versus 2021, as salary adjustments, accruals for performance bonus and profit sharing programs, along with costs for new or amended benefits, accounted for approximately $485,000 of the increase, along with approximately $89,000 of employee appreciation bonus payments, made to all employees, as a result of their effortsrecovered in addressing the cybersecurity incident.2023.
Income taxes increased $291,000, or 21.5%,Non-interest expense was $13.9 million for the six months ended June 30, 2023 compared to $1.6$13.1 million for the six months ended June 30, 2022. The $806,000 increase was impacted by increases in salaries and employee benefits of $545,000 as well as data processing and telecommunications expenses of $106,000, professional fees of $203,000, and deposit insurance of $73,000. These increases were partially offset by decreases in occupancy expenses of $88,000, and costs associated with other real estate owned, which generally correlates todecreased $129,000 over the increase in pretax earnings.comparative six-month period.
The efficiency ratio, a non-GAAP measure, improvedincreased to 71.4%73.68% for the first ninesix months ended June 30, 2023 from 72.03% for the six months ended June 30, 2022.
Income tax expense for the six months ended June 30, 2023 totaled $1.1 million, an increase of 2022$7,000, or 0.66% from 77.6.%$1.1 million recorded during the same period in 2022. The effective tax rate for the six months ended June 30, 2023, was 22.28%, compared to 21.71% for the same period of 2021.in 2022.
34
Balance Sheet
Total assets increased $33.9as of June 30, 2023 were $803.0 million, an increase of $27.6 million, or 4.3%3.6%, to $828.6from $775.4 million at September 30, 2022 from $794.6 million atas of December 31, 2021. This growth was2022. Gross loans increased $24.4 million, or 4.2%, during 2023, due to continued loan demand with less incentives for prepayments by borrowers due to the higher interest rate environment. Investment securities decreased $3.0 million during 2023 primarily driven by the FHLB advances, now totaling $25.0 million, and total deposits which increased $16.4 million, as noninterest-bearing deposits increased $17.8 million while interest-bearing deposits decreased $1.4 million. The year-to-date deposit activity is due to a combinationdecrease of factors including customer reaction to$1.2 million in the cybersecurity incident, time deposit customers seeking higher interest ratesunrealized loss position, offset by principal repayments of amortizing investments of $3.4 million and actions taken by customers at the two branch locations closed in August 2022. The FHLB advance funds were transferred to interest bearing deposits with other banks which increased $51.6 million year-to-date.maturity of U.S. government agency securities of $732,000. All of the Company’s investments are designated as available-for-sale.
Total investments decreased $8.5Gross loans receivable increased $24.4 million or 7.9%, to $98.8$609.0 million at Septemberas of June 30, 2022 due primarily to an increase2023 from $584.6 million as of $16.4 million in net unrealized losses and $11.5 million of repayments and maturities, which more than offset purchases of $19.8 million. Future purchases of investment securities will depend on a number of factors, including changes in loans and deposits, liquidity needs and the results of the Company’s interest rate risk modeling.
Loans decreased $13.9 million, or 2.3% during the first nine months ofDecember 31, 2022. Commercial real estate loans increased $12.7 million, or 6.50%, from December 31, 2022 to June 30, 2023. Residential 1-4 family and multifamily loans, decreased $8.1each, increased $4.4 million or 3.9% and $4.0 million or 12.1%individually from December 31, 2022 to $198.1 million and $29.1 million, respectively at SeptemberJune 30, 2022, as several large commercial2023. These increases were a result of continuing loan borrowers liquidated their holdings in projects we financed and repaid the corresponding loans. These repayments were partially offset by increases in construction and development loans, and residential real estate which increased $6.3 million, or 19.4%, and $2.2 million, or 1.0%, respectively. Commercial loans decreased $9.2 million or 16.9% to $45.1 million at September 30, 2022, due largely to repayments and forgiveness of PPP loans which declined $6.1 million during the first nine months of 2022. At September 30, 2022, PPP loans totaled $298 thousand and no longer represent a significant component of our loan portfolio. Loan originations, specifically commercial real estate and multi-family loans, continue to be positively impacted by our Boone, NC, loan production office, as well as originations in the Kingsport and Johnson City, Tennessee markets.demand.
Total deposits increased $16.4$15.4 million or 2.3%, to $723.9from $692.7 million at September 30, 2022 from $707.5 million atas of December 31, 2021, as noninterest bearing deposits increased $17.82022 to $708.1 million or 7.1%. The increase in noninterest bearing deposits more than offset a decrease in interest bearing deposits which declined $1.4 million, or 0.3% during the first nine months of 2022. Despite the net increase in deposits, we experienced some deposit runoff in response to the cybersecurity incident. Additionally, other factors also influenced customers’ deposit activities, including interest rates available for time deposits and the closure of two branch offices in August 2022. Since the closure of the two branch offices, runoff of accounts from those offices has been minimal, totaling approximately $555 thousand through September 30, 2022. Additionally, some of this deposit activity is due to normal churn of deposit accounts and depositors. Specifically, time deposit runoff totaled $16.6 million, or 8.4%, during the first nine months of 2022. The decrease in time deposits was offset by increases in non-interest bearing and interest-bearing transaction accounts which increased $17.8 million, or 7.1%, and $15.3 million, or 5.9%, during the nine months ended September 30, 2022. Another factor influencing deposit retention is the dissipation of liquidity experienced by depositors, as stimulus and other economic support funds distributed during the height of the COVID-19 pandemic are spent or otherwise distributed. While it is likely that recent and expected increases to the federal funds rate will, at some point, impact liquidity, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our customer base and communities.
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At September 30, 2022, FHLB advances totaling $25 million were outstanding. As previously discussed, overnight and term advances totaling $95 million were taken in June 2022, as a precautionary measure related to the cybersecurity incident with $60 million outstanding as of June 30, 2022. During2023. The increase related primarily to interest-bearing deposits which increased $18.2 million. The increase was due to efforts to attract and retain time deposits, combined with cyclical funds inflows. As a result of these efforts, total time deposits increased $31.9 million during the third quarterfirst six months of 2022,2023. The increase in time deposits contributed to the increase in our cost of funds, as previously discussed, due to the rising interest rate environment experienced over the past 18 months.
In May 2023, an advance totaling $20.0from the Federal Home Loan Bank (“FHLB”) in the amount of $10.0 million matured and was repaid,drawn with an interest rate of 3.51% and a $15.0 million partial prepayment was made on the remaining $40.0 million advance which matures inmaturity date of May 4, 2028 to support pending loan closings. There were no FHLB advances outstanding as of December 31, 2022. We anticipate repaying the $25.0 million outstanding advance at maturity.
Trust preferred securities of $16.5 million at Septemberas of June 30, 2022 were2023 remained unchanged comparedin comparison to December 31, 2021.2022.
TotalDuring the first six months of 2023 total shareholders’ equity at Septemberincreased $2.9 million to $60.2 million as of June 30, 2022 was $55.2 million, a decrease of $8.4 million, or 13.2%, compared to $63.6 million at December 31, 2021. As discussed previously and in2023, as the Capital Resources section below, the primary driver of the decline was the $12.9 million net increase in the accumulated other comprehensive loss, related to the unrealized loss on available for saleavailable-for-sale investment securities alongdecreased $1.2 million, which when combined with year-to-date earnings of $3.7 million, more than offset a cash dividend payment of $1.4 million and repurchasesthe repurchase of common shares.stock totaling $101,000. Additionally, the implementation of the current expected credit loss (“CECL”) methodology, resulted in a one-time net of tax, direct charge to retained earnings of $212,000. Consequently, book value per share has increased to $2.53 as of June 30, 2023 compared to $2.40 at December 31, 2022. The increase in other accumulated comprehensive loss is related to the recent increase in interest rates and is not related to any deterioration in the credit quality of any investment securities held.Bank remains well capitalized per regulatory guidance.
Asset Quality
Nonperforming assets include nonaccrual loans, other real estate owned (OREO)(“OREO”) and loans past due more than 90 days which are still accruing interest. Our policy is to place loans on nonaccrual status once they reach 90 days past due. The makeup of the nonaccrual loans is primarily those secured by residential mortgages and commercial real estate. OREO is primarily made upcomprised of farmlandresidential and residentialcommercial lots.
Nonperforming assets decreased $275 thousand,totaled $2.8 million as of June 30, 2023, a decline of $826,000, or 6.4%22.48%, during the first nine months ofsince year-end 2022, driven by a decrease in OREO of $1.0 million, which offset an increase$826,000 in nonaccrual loans of $765 thousand.loans. The increasedecrease in nonaccrual loans is attributed to a single credit for a commercial construction loan. This account has been assessed as partgeneral improvement in the performance of our determination of the adequacy of the allowance for loan losses, and collection efforts are ongoing.nonaccrual loans, resulting in several accounts being returned to accruing status. No loans 90 days or more past due are accruing interest. AsNonperforming assets as a result, the ratiopercentage of nonperforming assets to total assets decreased to 0.49% at Septemberwere 0.35% as of June 30, 2022 compared to 0.54%2023, and 0.47% at December 31, 2021.2022.
At SeptemberAs of June 30, 2022,2023, OREO is primarily made up of farmlandresidential and landcommercial lots acquired through foreclosure. DuringAs of June 30, 2023, OREO totaled $261,000, unchanged from December 31, 2022. Expenses associated with OREO were $10,000 for the quarter ended June 30, 2023 compared to $15,000 for the quarter ended June 30, 2022, two former branch sites that had been transferreddue to costs associated with the sale of OREO in 2021, were sold bringing our OREO balance down to $321 thousand. We continue extensive and aggressive measures to work through problem credits and liquidate foreclosed properties in an effort to reduce nonperforming assets. We remain mindfulowned during the second quarter of the impact on earnings and capital as we work to achieve our goal to reduce nonperforming assets. However, we may recognize some losses and reductions in the allowance for loan loss as we expedite the resolution of these problem assets.2022.
For detailed information foron nonaccrual loans and other real estate owned as of SeptemberJune 30, 2022,2023 and December 31, 2021,2022, refer to Note 6 Loans and Note 910 Other Real Estate Owned in Item 1 of this Form 10-Q.
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Loans rated substandard or below totaled $3.7$2.6 million at Septemberas of June 30, 2022, an increase2023, a decrease of $788 thousand from $2.9 million at December 31, 2021. Total past due loans increased slightly to $3.8 million at September 30, 2022$849,000 from $3.4 million at December 31, 2021. The2022. Total past due loans at September 30, 2022, represent a decreasedecreased to $3.7 million as of $6.3 million, or 62.4%, from the $10.0 million reported at June 30, 2022, as delays in loan billing and notice presentation related to the cybersecurity incident, during the second quarter of 2022, were addressed during the third quarter.2023 from $5.5 million at December 31, 2022.
Our allowance for loancredit losses at Septemberas of June 30, 20222023 was $6.6$6.8 million or 1.14%1.12% of total loans as compared to $6.7 million, or 1.13%1.15% of total loans at December 31, 2021. Impaired2022. Individually evaluated loans totaled $3.1 million$639,000 with an estimated related specific allowance of $269 thousand at September$121,000 as of June 30, 2022,2023, as compared to $2.8$2.7 million as of impaired loansDecember 31, 2022 with an estimated related specific allowance of $166 thousand$86,000 of impaired loans at the end of 2021.2022. A provision of $400 thousand$149,000 was recorded for the first ninesix months of 20222023 compared to $372 thousand$175,000 during the first ninesix months of 2021.2022.
In the first ninesix months of 2022,2023, net charge-offs totaled $542 thousand,$49,000, or 0.12%0.02% of average loans, annualized, as compared to $906 thousand,$94,000, or 0.21%0.03%, of average loans, annualized, for the same period in 2021. Of the net charge-offs recorded in 2022, approximately $320 thousand represents overdraft charge-offs resulting from customer activity during the several days of the cybersecurity event when we increased daily transaction limits for debit card and ATM activity to meet customer needs while core services were restored.2022. The allowance for loancredit losses is maintained at a level that management deems appropriate to absorb any potential future losses and known impairments within the loan portfolio, whether or not the losses are actually ever realized. Through our quarterly assessment, we continue to adjust the allowance for loan lossCECL model to best reflect the risks in the portfolio and the improvements made in our internal policies and procedures; however,portfolio. However, future provisions may be deemed necessary. During the first ninesix months of 2022,2023, we adjustedmade modest adjustments to our external qualitative factors, to reflect positive employmentconsider risk factors associated with commercial real estate and home sales statistics, along with adjusting for the impactresidential mortgage loans, as part of historically high inflation.our CECL implementation. Those changes, along with the assessment of the inherenthistorical and specific risks associated with the loan portfolio, resulted in a net provision tofor credit losses of $149,000, of which $216,000 was provided for the loan portfolio; offset by a reduction of the allowance for unfunded commitments of $400 thousand for the first nine months 2022.$67,000. The following table summarizes components of the allowance for loancredit losses and related loans as of SeptemberJune 30, 20222023 and December 31, 2021:
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2022:
1 - Annualized Deferred Tax Asset and Income Taxes Due to timing differences between book and tax treatment of several income and expense items, a net deferred tax asset, excluding the deferred tax asset on the unrealized loss on securities available-for-sale, of $4.4 million and $4.6 million existed as of June 30, 2023 and December 31, 2022, respectively. Our income tax expense was computed at the corporate income tax rate of 21% of taxable income. We have no significant nontaxable income or nondeductible expenses. The implementation of the CECL methodology resulted in a one-time deferred tax charge of $56,000. Refer to Note 2 Summary of Significant Accounting Policies in Part 1 of this Form 10-Q 36 Capital Resources Total shareholders’ equity as of June 30, 2023 was $60.2 million compared to $57.2 million at December 31, 2022, an increase of $2.9 million, or 5.1%. The increase was driven by a decrease in net unrealized loss on available-for-sale securities of $937,000, which, when combined with year-to-date earnings of $3.7 million, more than offset a cash dividend payment of $1.4 million and the repurchase of common stock totaling $101,000. Additionally, the implementation of the CECL methodology resulted in a onetime net of tax direct charge to retained earnings of $212,000. The Company meets the eligibility criteria to be classified as a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February 2015 and is therefore not obligated to report consolidated regulatory capital. The Bank continues to be subject to various capital requirements administered by banking agencies. The Bank’s capital ratios along with the minimum regulatory thresholds to be considered well-capitalized are presented in Note 4 in Item 1 of this Form 10-Q. As of June 30, 2023, the Bank remains well capitalized under the regulatory framework for prompt corrective action. The ratios mentioned above for the Bank comply with the Federal Reserve rules to align with the Basel III Capital requirements. Book value per common share was $2.53 and $2.40 as of June 30, 2023 and December 31, 2022, respectively. Other key performance indicators are as follows: 1 - Annualized Under current economic conditions, we believe it is prudent to continue to retain capital sufficient to support planned asset growth while being able to absorb potential losses that may occur if asset quality deteriorates, and based upon projections, we believe our current capital levels will be sufficient. During the first On April 28, 2022, the board of directors of 37 Liquidity We closely monitor our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold, and unpledged available-for-sale securities. As of June 30, 2023, all of our investment securities were classified as available-for-sale. These investments provide a source of liquidity in the amount of $56.2 million, which is net of the $36.9 million of securities pledged as collateral. Investment securities available-for-sale serve as a source of liquidity while yielding a higher return versus other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank. Due to the unrealized loss on securities available-for-sale, the sale of investments would not be considered a primary source of liquidity due to the immediate impact on regulatory capital; however, the majority of the portfolio is considered high credit quality investments and would be available to pledge against borrowings. Our loan to deposit ratio was 86.01% and 84.40% as of June 30, 2023 and December 31, 2022, respectively. Generally, our policy has been to manage this ratio at or below 90.00%. Available third-party sources of liquidity as of June 30, 2023 include the following: a line of credit with the FHLB, access to brokered certificates of deposit markets and the discount window at the Federal Reserve Bank. Additionally, in March 2023, the Federal Reserve Bank initiated a supplemental term funding program offering borrowings, of up to one year, secured by securities valued at par rather than market value. This program offers an additional source of liquidity against high quality securities, rather than liquidating securities should a need for additional funds arise. We also have the ability to borrow $30.0 million in unsecured federal funds through credit facilities extended by correspondent banks. We have used our line of credit with the FHLB to issue a letter of credit totaling $12.0 million to the Treasury Board of Virginia for collateral on public funds. No draws on the letter of credit have been issued. This letter of credit is considered to be a draw on our FHLB line of credit. In May 2023, we borrowed $10 million from FHLB, through a fixed rate 5-year advance, to support loan fundings and other general liquidity needs. An additional $176.5 million was available as of June 30, 2023 on the $198.5 million line of credit, of which $106.7 million is secured by a blanket lien on our residential real estate loans. We held no brokered deposits as of June 30, 2023 and December 31, 2022. Internet accounts are limited to customers located in our primary market area and the surrounding geographical area. The average balance of and the rate paid on deposits is shown in the net interest margin analysis tables. Total Certificate of Deposit Registry Services (“CDARS”) time deposits were $2.6 million and $1.4 million as of June 30, 2023 and December 31, 2022, respectively. Aside from the availability of CDARS time deposits, we also offer a similar deposit product for transaction account customers Intrafi Cash Service (“ICS”). As of June 30, 2023 approximately $27.3 million were placed in this product as compared to $23.9 million at December 31, 2022. Both the CDARS and ICS offerings assist us in maintaining deposit relationships, while assuring the depositors’ funds retain federal deposit insurance coverage. Additional liquidity is available through the Federal Reserve Bank discount window for overnight funding needs. We may collateralize this line with investment securities and loans at our discretion; however, while we do not anticipate using this as a primary funding source, securities with an estimated market value of $36.9 million were pledged as of June 30, 2023. In March and May of 2023, three regional banks, each with assets in excess of $100.0 billion, were taken into receivership through FDIC and were sold in-whole, or in part to other financial institutions. Two of these banks, Silicon Valley Bank (“SVB”) headquartered in Santa Clara, California, and First Republic Bank headquartered in San Francisco, California, experienced significant outflows of deposit funds fueled by concerns of large commercial and retail deposit customers holding funds far in excess of the FDIC insured limits at both institutions. These concerns, in SVB’s case, related to unrealized losses in SVB’s investment portfolio combined with the long-term maturities of the investments and other earning assets held by SVB. The concerns for First Republic Bank related to exposure to long-term jumbo mortgages made to preferred deposit customers and the impact to net interest income and the value of those mortgages in the rising rate environment. While we, or any other financial institution, can be impacted by sudden changes in market conditions or customer sentiment, we believe that our funding and liquidity management strategies and procedures are sound. In addition, our deposit customer base is diverse without significant exposure to uninsured deposit relationships. Prior to receivership of these financial institutions our deposit fluctuations were largely tied to cyclical events and inflows and outflows related to customers seeking higher interest rates. Since the date of these receiverships, we have not experienced any significant or unusual deposit outflows and we took steps to successfully test certain liquidity facilities in the event of any future deposit outflows. 38 With the on-balance sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources to meet our requirements and needs for the foreseeable future. However, liquidity can be further affected by a number of factors such as counterparty willingness or ability to extend credit, regulatory actions and customer preferences, etc., some of which are beyond our control. The bank holding company has approximately $449,000 in cash on deposit at the Bank as of June 30, 2023. The holding company receives periodic dividend payments from the Bank which are used to pay operating expenses, to pay trust preferred interest payments and discretionary principal payments, and to fund dividend payments to shareholders and repurchase shares. The Company makes quarterly interest payments on the trust preferred securities. As discussed in the Capital Resources section, the Company is authorized to repurchase up to 500,000 shares of the Company’s outstanding common stock through March 31, 2024. Payments for any repurchases will be distributed from available funds, or from dividend payments from the Bank, and are not expected to have a material impact on available liquidity. Off Balance Sheet Items and Contractual Obligations There have been no material changes during the Not Applicable. We have carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer (our CEO) and our Executive Vice President and Chief Financial Officer (our CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were operating effectively in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended Part II Other Information In the course of operations, we may become a party to legal proceedings in the normal course of business. Not Applicable. Stock Repurchase Program The Company has an approved one-year stock repurchase program that authorizes the repurchase of up to 500,000 of the Company’s common shares that was extended through March 31, Shares of the Company’s common stock were repurchased during the three months ended 40 None. Not Applicable. None The following exhibits are filed as part of this report or are incorporated by reference: 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. Selected Credit Ratios September 30, December 31, (Dollars in thousands) 2022 2021 Allowance for loan losses $ 6,593 $ 6,735 Total loans 579,874 593,744 Allowance for loan losses to total loans 1.14 % 1.13 % Nonaccrual loans $ 3,706 $ 2,941 Nonaccrual loans to total loans 0.64 % 0.50 % Ratio of allowance for loan losses to nonaccrual loans 1.78 X 2.29 X Charge-offs net of recoveries $ 542 $ 828 Average loans $ 594,534 $ 586,963 Net charge-offs to average loans 0.12 % 0.14 % WeJune 30,December 31, (Dollars are in the processthousands)2023 2022 Allowance for loan losses $ 6,814 $ 6,727 Total loans 609,038 584,613 Allowance for credit losses to total loans 1.12% 1.15% Nonaccrual loans $ 2,587 $ 3,413 Nonaccrual loans to total loans 0.42% 0.58% Ratio of implementing the Current Expected Credit Loss (CECL) modelallowance for credit losses to replace our legacy loan loss model. While we had estimated we would be running concurrent models by June 30, 2022, duenonaccrual loans2.63X 1.97X Charge-offs net of recoveries1 $ 98 $ 633 Average loans $ 593,457 $ 591,179 Net charge-offs to the cybersecurity incident, we delayed the start of parallel runs, which began late in the third quarter of 2022. Initial CECL model runs have occurred using only historical loss information. Initial assumptions have been input and are being layered onto the initial runs of historical loan and loss activity. The Company will run the new methodology parallel to the current allowance methodology for the first three quarters of 2022 before full implementation. In addition, we have retained a third-party vendor to perform a validation of the CECL model implementation.average loans1 Deferred Tax Asset and Income Taxes0.02%Due to timing differences between book and tax treatment of several income and expense items, a net deferred tax asset, excluding the deferred tax asset on the unrealized loss on securities available for sale, of $916 thousand and $1.5 million existed at September 30, 2022 and December 31, 2021, respectively. Our income tax expense was computed at the corporate income tax rate of 21% of taxable income. We have no significant nontaxable income or nondeductible expenses. Capital Resources0.11%Total shareholders’ equity at September 30, 2022 was $55.2 million compared to $63.6 million at December 31, 2021, a decrease of $8.4 million, or 13.2%. As previously discussed, this decline was driven by the $12.9 million net increase in the accumulated other comprehensive loss related to the unrealized loss on investment securities available-for-sale. Excluding the impact of the unrealized loss, equity increased $4.5 million, due to net income of $5.8 million less the cash dividend payment of $1.2 million and $103 thousand used for share repurchases.The Company meets the eligibility criteria to be classified as a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February 2015 and is therefore not obligated to report consolidated regulatory capital. The Bank continues to be subject to various capital requirements administered by banking agencies.The Bank’s capital ratios along with the minimum regulatory thresholds to be considered well-capitalized are presented at Note 4 in Item 1 of this Form 10-Q.At September 30, 2022, the Bank remains well capitalized under the regulatory framework for prompt corrective action. The ratios mentioned above for the Bank comply with the Federal Reserve rules to align with the Basel III Capital requirements.Book value per common share was $2.31 at September 30, 2022, and $2.66 at December 31, 2021. Excluding the impact of the accumulated other comprehensive loss, book value per share was $2.89 and $2.69 at September 30, 2022 and December 31, 2021, respectively. Other key performance indicators are as follows: 35 Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Return on average assets1 0.94% 0.91% 0.95% 0.85% Return on average equity1 13.70% 11.75% 13.15% 11.30% Average equity to average assets 6.84% 7.76% 7.21% 7.56% Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Return on average assets1 0.88 % 0.94 % 0.96 % 0.95 % Return on average shareholders’ equity1 11.62 % 13.45 % 12.75 % 12.88 % Average equity to average assets 7.55 % 6.99 % 7.57 % 7.41 % quarter of 2022, the Company paid its first cash dividend of $0.05 per common share to our shareholders. Earnings will continue to be retained to provide capital to support the planned growth and operations of the Company and to continue to pay any future dividends to shareholders.During the second quarter of 2023, the Company paid a cash dividend of $0.06 per common share to our shareholders. Future payments of cash dividends will depend on a number of factors including but not limited to maintaining positive retained earnings, compliance with regulatory rules governing the payment of dividends, strategic plans, and sufficient capital at the Bank to allow payment of dividends to the parent company. the Company authorized the repurchase of up to 500,000 shares of the Company’s outstanding common stock through March 31, 2023. The actual means and timing of any purchases, number of shares and prices or range of prices will be determined by the Company in its discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. During the third quarter of 2022, 26,831 shares were purchased at an average price of $2.32 per share; bringing the total shares repurchased through September 30, 2022 to 44,485 at an average price of $2.30 per share. There is no assurance that the Company will purchase any additional shares under this program.LiquidityAs discussed previously, in response to the cybersecurity incident, during the second quarter of 2022, we took efforts to increase on balance sheet liquidity through a series of FHLB advances transferred to our account at Federal Reserve Bank and pledging additional investment securities as collateral against unused funding sources for emergency needs. The deposit runoff since the cybersecurity incident has not been significant. Based on the customer response and an assessment of our overall liquidity, during the third quarter of 2022, we repaid a maturing FHLB advance totaling $20.0 million, and partially prepaid $15.0 million on the remaining $40.0 million advance. We closely monitor our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold, and unpledged available for sale investments. Collectively, those balances were $185.5 million at September 30, 2022, an increase of $26.2 million from $159.3 million at December 31, 2021. A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs during 2022.At September 30, 2022, all of our investment securities were classified as available-for-sale. These investments provide a source of liquidity in the amount of $70.5 million, which is net of the $28.3 million of securities pledged as collateral. Investment securities available for sale serve as a source of liquidity while yielding a higher return versus other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank. Due to the increase in the unrealized loss on securities available for sale, the sale of investments would not be considered a primary source of liquidity due to the immediate impact on regulatory capital; however, the majority of the portfolio is considered high credit quality investments and would be available to pledge against borrowings.Our loan to deposit ratio was 80.1% at September 30, 2022 and 83.9% at December 31, 2021. We anticipate this ratio to remain at or below 90% for the foreseeable future.Available third-party sources of liquidity at September 30, 2022 include the following: a line of credit with the FHLB, access to brokered certificates of deposit markets and the discount window at the Federal Reserve Bank. We also have the ability to borrow $30.0 million in unsecured federal funds through credit facilities extended by correspondent banks.The Bank’s line of credit with the FHLB is $211.7 million, with unused availability at September 30, 2022 of $179.7 million. FHLB advances totaling $25 million were outstanding at September 30, 2022, but the credit line also secures a letter of credit totaling $7.0 million. The available line and the outstanding letters of credit are secured by a blanket lien on our residential real estate loans which amounted to $123.2 million at September 30, 2022. 36The Bank also has access to the brokered deposits market and the Certificate of Deposit Registry Service (CDARS). At September 30, 2022, we held no brokered deposits while $2.8 million in CDARS reciprocal time deposits and $23.1 million in ICS reciprocal interest-bearing demand deposits are outstanding.Additional liquidity is available through the Federal Reserve Bank discount window for overnight funding needs. We may collateralize this line with investment securities and loans at our discretion; however, while we do not anticipate using this as a primary funding source, securities with an estimated market value of $24.4 million were pledged at September 30, 2022.With the on-balance sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources to meet our requirements and needs for the foreseeable future. However, liquidity can be further affected by a number of factors such as counterparty willingness or ability to extend credit, regulatory actions and customer preferences, etc., some of which are beyond our control.The bank holding company has approximately $371 thousand in cash on deposit at the Bank at September 30, 2022. The holding company receives periodic dividend payments from the Bank which are used to pay operating expenses, to pay trust preferred interest payments, and to fund dividend payments to shareholders and repurchase shares. The Company makes quarterly interest payments on the trust preferred securities.As discussed in the Capital Resources section, the Company authorized the repurchase of up to 500,000 shares of the Company’s outstanding common stock through March 31, 2023. As previously reported, this plan was extended by the Board of Directors through March 31, 2024. The actual means and timing of any purchases, number of shares and prices or range of prices will be determined by the Company in its discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. As of June 30, 2023, the Company has repurchased 119,229 shares at an average price of $2.29 per share. During the quarter ended June 30, 2023, the Company repurchased 25,702 shares at an average price of $2.18 per share. There is no assurance that the Company will purchase any additional shares under this program.ninesix months ended SeptemberJune 30, 2022,2023, to the off-balance sheet items and the contractual obligations disclosed in our 20212022 Form 10-K.Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures SeptemberJune 30, 2022,2023, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting. 3739Item 1. Legal Proceedings At SeptemberAs of June 30, 2022,2023, we do not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or any of its subsidiaries or to which the property of the Company or any of its subsidiaries is subject, in the opinion of management, will materially impact the financial condition or liquidity of the Company.Item 1A. Risk Factors Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a) Sales of Unregistered Securities – None (b) Use of Proceeds – Not Applicable (c) Issuer Purchases of Securities 2023.2024. Repurchases may be made through open market purchases or in privately negotiated transactions. Shares repurchased will be returned to the status of authorized and unissued shares of common stock. The actual means and timing of any purchases, number of shares and prices or range of prices will be determined by the Company.SeptemberJune 30, 2022,2023, as detailed below. Under the terms of the stock repurchase program, the Company has the remaining authority to repurchase up to 455,515380,771 shares of common stock.Period Beginning on First Day of Month Ended Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares That May Yet Be Purchased Under Plans or Programs July 31, 2022 5,720 $ 2.31 5,720 477,770 August 31, 2022 11,127 $ 2.35 11,127 466,643 September 30, 2022 11,128 $ 2.29 11,128 455,515 Total 27,975 $ 2.32 27,975 Period Beginning on First Day of Month Ended Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares That May Yet Be Purchased Under Plans or Programs April 30, 2023 2,911 $ 2.20 2,911 403,562 May 31, 2023 7,029 $ 2.09 7,029 396,533 June 30, 2023 15,762 $ 2.21 15,762 380,771 Total 25,702 $ 2.18 25,702 Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information 38Item 6. Exhibits 3941NEW PEOPLES BANKSHARES, INC. (Registrant) By: /s/ C. TODD ASBURY C. Todd Asbury President and Chief Executive Officer Date: November 15, 2022August 14, 2023By: /s/ CHRISTOPHER G. SPEAKS Christopher G. Speaks Executive Vice President and Chief Financial Officer and TreasurerDate: November 15, 2022August 14, 2023 40