10-Q 1 fxnc20230930_10q.htm FORM 10-Q fxnc20230930_10q.htm
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S

Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2023

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission File Number: 1-38874

 


first1nationalcorporationa09.jpg

 

 (Exact name of registrant as specified in its charter)

 


 

Virginia

54-1232965

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

112 West King Street, Strasburg, Virginia

22657

(Address of principal executive offices)

(Zip Code)

 

(540) 465-9121

(Registrant’s telephone number, including area code)

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, par value $1.25 per share

FXNC

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

  

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 3, 2023, 6,260,934 shares of common stock, par value $1.25 per share, of the registrant were outstanding.

 



 

  

 

TABLE OF CONTENTS

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022

3

 

 

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022 (unaudited)

4

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2023 and 2022 (unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (unaudited)

7

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2023 and 2022 (unaudited)

9

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

10

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

 

 

 

Item 4.

Controls and Procedures

42

 

PART II – OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

43

 

 

 

Item 1A.

Risk Factors

43

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

 

 

 

Item 3.

Defaults Upon Senior Securities

43

 

 

 

Item 4.

Mine Safety Disclosures

43

 

 

 

Item 5.

Other Information

43

 

 

 

Item 6.

Exhibits

44

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Balance Sheets

(in thousands, except share and per share data)


 

  

(unaudited)

     
  September 30,  December 31, 
  2023  2022* 

Assets

        

Cash and due from banks

 $17,168  $20,784 

Interest-bearing deposits in banks

  32,931   46,130 

Securities available for sale, at fair value

  148,175   162,907 

Securities held to maturity, at amortized cost (net of allowance for credit losses of $131 at September 30, 2023)

  149,948   153,158 

Restricted securities, at cost

  2,077   1,908 

Loans, net of allowance for credit losses, 2023, $8,896; 2022, $7,446

  943,603   913,077 

Other real estate owned, net of valuation allowance

     184 

Premises and equipment, net

  21,363   21,876 

Accrued interest receivable

  4,502   4,543 

Bank owned life insurance

  24,734   24,531 

Goodwill

  3,030   3,030 

Core deposit intangibles, net

  122   136 

Other assets

  18,567   17,119 

Total assets

 $1,366,220  $1,369,383 
         

Liabilities and Shareholders’ Equity

        
         

Liabilities

        

Deposits:

        

Noninterest-bearing demand deposits

 $403,774  $427,344 

Savings and interest-bearing demand deposits

  646,980   677,139 

Time deposits

  184,419   136,849 

Total deposits

 $1,235,173  $1,241,332 

Subordinated debt, net of issuance cost

  4,997   4,995 

Junior subordinated debt

  9,279   9,279 

Accrued interest payable and other liabilities

  4,792   5,417 

Total liabilities

 $1,254,241  $1,261,023 
         

Commitments and contingencies

          
         

Shareholders’ Equity

        

Preferred stock, par value $1.25 per share; authorized 1,000,000 shares; none issued and outstanding

 $  $ 

Common stock, par value $1.25 per share; authorized 8,000,000 shares; issued and outstanding, 2023, 6,260,934 shares; 2022, 6,264,912 shares

  7,826   7,831 

Surplus

  32,840   32,716 

Retained earnings

  95,988   90,284 

Accumulated other comprehensive loss, net

  (24,675)  (22,471)

Total shareholders’ equity

 $111,979  $108,360 

Total liabilities and shareholders’ equity

 $1,366,220  $1,369,383 

 

*Derived from audited consolidated financial statements.

 

See Notes to Consolidated Financial Statements

 

 

 

FIRST NATIONAL CORPORATION

Consolidated Statements of Income (Unaudited)

(in thousands, except per share data)


 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

   

September 30,

   

September 30,

 
   

2023

   

2022

   

2023

   

2022

 

Interest and Dividend Income

                               

Interest and fees on loans

  $ 12,640     $ 10,759     $ 36,038     $ 30,218  

Interest on deposits in banks

    338       380       1,441       701  

Interest and dividends on securities:

                               

Taxable interest

    1,323       1,323       3,968       3,750  

Tax-exempt interest

    304       307       917       921  

Dividends

    26       23       81       65  

Total interest and dividend income

  $ 14,631     $ 12,792     $ 42,445     $ 35,655  

Interest Expense

                               

Interest on deposits

  $ 3,810     $ 927     $ 9,428     $ 1,680  

Interest on subordinated debt

    69       70       207       208  

Interest on junior subordinated debt

    69       68       203       202  

Interest on other borrowings

                3        

Total interest expense

  $ 3,948     $ 1,065     $ 9,841     $ 2,090  

Net interest income

  $ 10,683     $ 11,727     $ 32,604     $ 33,565  

Provision for credit losses

    100       200       200       600  

Net interest income after provision for credit losses

  $ 10,583     $ 11,527     $ 32,404     $ 32,965  

Noninterest Income

                               

Service charges on deposit accounts

  $ 733     $ 708     $ 2,062     $ 2,015  

ATM and check card fees

    976       915       2,624       2,462  

Wealth management fees

    811       739       2,336       2,302  

Fees for other customer services

    122       180       538       601  

Brokered mortgage fees

    38       72       73       224  

Income from bank owned life insurance

    175       166       459       441  

Other operating income

    198       247       623       473  

Total noninterest income

  $ 3,053     $ 3,027     $ 8,715     $ 8,518  

Noninterest Expense

                               

Salaries and employee benefits

  $ 5,505     $ 5,174     $ 16,040     $ 15,384  

Occupancy

    534       539       1,586       1,656  

Equipment

    598       546       1,756       1,725  

Marketing

    204       211       720       585  

Supplies

    128       117       423       384  

Legal and professional fees

    439       361       1,204       1,075  

ATM and check card expense

    440       332       1,265       982  

FDIC assessment

    161       109       479       393  

Bank franchise tax

    262       238       778       692  

Data processing expense

    266       243       720       700  

Amortization expense

    5       6       14       15  

Other real estate owned (income) expense, net

    15       14       (201 )     83  

Other operating expense

    1,227       1,193       3,358       2,971  

Total noninterest expense

  $ 9,784     $ 9,083     $ 28,142     $ 26,645  

 

See Notes to Consolidated Financial Statements

 

 

FIRST NATIONAL CORPORATION

Consolidated Statements of Income (Unaudited)

(Continued)

(in thousands, except per share data)


 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

   

September 30,

   

September 30,

 
   

2023

   

2022

   

2023

   

2022

 

Income before income taxes

  $ 3,852     $ 5,471     $ 12,977     $ 14,838  

Income tax expense

    731       1,017       2,502       2,820  

Net income

  $ 3,121     $ 4,454     $ 10,475     $ 12,018  

Earnings per common share

                               

Basic

  $ 0.50     $ 0.71     $ 1.67     $ 1.92  

Diluted

  $ 0.50     $ 0.71     $ 1.67     $ 1.92  

 

See Notes to Consolidated Financial Statements

 

 

 

FIRST NATIONAL CORPORATION

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(in thousands)


 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

  

September 30,

  

September 30,

 
  

2023

  

2022

  

2023

  

2022

 

Net income

 $3,121  $4,454  $10,475  $12,018 

Other comprehensive income (loss), net of tax,

                

Unrealized holding (losses) gains on available for sale securities, net of tax ($1,080) and $155 for the three months and ($925) and ($6,225) for the nine months ended September 30, 2023 and 2022, respectively

  (4,063)  581   (3,480)  (23,424)

Unrealized holding losses on securities transferred from available for sale to held to maturity, net of tax ($1,605) for the three months and nine months ended September 31, 2022

     (6,036)     (6,036)

Amortization of unrealized holding losses on available-for-sale securities transferred to held to maturity, net of tax of $86 and $0 for the three months and $258 and $0 for the nine months ended September 30, 2023 and 2022, respectively

  323      972    

Change in fair value of cash flow hedges, net of tax $113 and $106 for the three months and $82 and $373 for the nine months ended September 30, 2023 and 2022, respectively

  424   404   304   1,409 

Total other comprehensive (loss)

  (3,316)  (5,051)  (2,204)  (28,051)

Total comprehensive (loss) income

 $(195) $(597) $8,271  $(16,033)

 

See Notes to Consolidated Financial Statements

 

 

 

FIRST NATIONAL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


 

   

Nine Months Ended

 
    September 30,     September 30,  
    2023     2022  

Cash Flows from Operating Activities

               

Net income

  $ 10,475     $ 12,018  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization of premises and equipment

    1,195       1,118  

Amortization of core deposit intangibles

    14       14  

Amortization of debt issuance costs

    2       2  

Provision for credit losses on loans

    166       600  

(Recovery of) credit losses on securities held to maturity

    (2 )      

Provision for credit losses on unfunded commitments

    36        

Net (gain) loss on sale of other real estate owned

    (233 )     33  

Increase in cash value of bank owned life insurance

    (459 )     (441 )

Accretion of discounts and amortization of premiums on securities, net

    746       891  

Accretion of premium on time deposits

    (68 )     (159 )

Accretion of certain acquisition-related loan discounts, net

    (510 )     (1,013 )

Stock-based compensation

    681       728  

Excess tax benefits on stock-based compensation

    4       3  

(Gain) loss on disposal of premises and equipment, net

    (3 )     4  

Deferred income tax expense

    323       46  

Changes in assets and liabilities:

               

Decrease (increase) in interest receivable

    41       (344 )

(Increase) decrease in other assets

    (284 )     3,513  

(Decrease) in accrued interest payable and other liabilities

    (814 )     (176 )

Net cash provided by operating activities

  $ 11,310     $ 16,837  

Cash Flows from Investing Activities

               

Proceeds from maturities, calls, and principal payments of securities available for sale

  $ 9,623     $ 21,556  

Proceeds from maturities, calls, and principal payments of securities held to maturity

    6,359       7,086  

Purchases of securities available for sale

          (21,147 )

Purchases of restricted securities

    (274 )      

Purchases of securities held to maturity

    (2,092 )     (54,038 )

Net redemption (purchase) of restricted securities

    105       (95 )

Purchase of premises and equipment

    (682 )     (596 )

Proceeds from sale of premises and equipment

    3        

Proceeds from sale of other real estate owned

    417       421  

Proceeds from cash value of bank owned life insurance

    256       360  

Net (increase) in loans

    (32,368 )     (80,401 )

Net cash (used in) investing activities

  $ (18,653 )   $ (126,854 )

 

See Notes to Consolidated Financial Statements

 

 

FIRST NATIONAL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)

(Continued)

(in thousands)


 

   

Nine Months Ended

 
    September 30,     September 30,  
    2023     2022  

Cash Flows from Financing Activities

               

Net (decrease) increase in demand deposits and savings accounts

  $ (53,729 )   $ 29,090  

Net increase (decrease) in time deposits

    47,638       (11,637 )

Repayment of subordinated debt

          (5,000 )

Cash dividends paid on common stock, net of reinvestment

    (2,699 )     (2,474 )

Repurchase of common stock, stock incentive plan

    (114 )     (183 )

Repurchase of common stock, stock repurchase plan

    (568 )      

Net cash (used in) provided by financing activities

  $ (9,472 )   $ 9,796  

Decrease in cash and cash equivalents

  $ (16,815 )   $ (100,221 )

Cash and Cash Equivalents

               

Beginning

  $ 66,914     $ 176,006  

Ending

  $ 50,099     $ 75,785  

Supplemental Disclosures of Cash Flow Information

               

Cash payments for:

               

Interest

  $ 9,405     $ 2,285  

Income taxes

  $ 2,726     $ 2,265  

Supplemental Disclosures of Noncash Investing and Financing Activities

               

Unrealized losses on securities available for sale

  $ (4,405 )   $ (29,649 )

Unrealized losses on securities transferred from available for sale to held to maturity

  $     $ (7,641 )

Fair value of securities transferred from available for sale to held to maturity

  $     $ 74,416  

Change in fair value of cash flow hedges

  $ 386     $ 1,782  

Transfer from premises and equipment to other real estate owned, net

  $     $ (184 )

Issuance of common stock, dividend reinvestment plan

  $ 120     $ 152  

 

See Notes to Consolidated Financial Statements

 

 

 

FIRST NATIONAL CORPORATION

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(in thousands, except share and per share data)


 

  

Common Stock

  

Surplus

  

Retained Earnings

  Accumulated Other Comprehensive (Loss)  

Total

 

Balance, June 30, 2022

 $7,815  $32,398  $82,804  $(22,702) $100,315 

Net income

        4,454      4,454 

Other comprehensive loss

           (5,051)  (5,051)

Cash dividends on common stock ($0.14 per share)

        (876)     (876)

Stock-based compensation

     187         187 

Issuance of 2,733 shares common stock, dividend reinvestment plan

  4   44         48 

Issuance of 7,500 shares common stock, stock incentive plan

  9   (9)         

Balance, September 30, 2022

 $7,828  $32,620  $86,382  $(27,753) $99,077 

 

  

Common Stock

  

Surplus

  

Retained Earnings

  

Accumulated Other Comprehensive (Loss)

  

Total

 

Balance, June 30, 2023

 $7,813  $32,601  $93,805  $(21,359) $112,860 

Net income

        3,121      3,121 

Other comprehensive loss

           (3,316)  (3,316)

Cash dividends on common stock ($0.15 per share)

        (938)     (938)

Stock-based compensation

     274         274 

Issuance of 2,295 shares of common stock, dividend reinvestment plan

  3   37         40 

Repurchase of 6,495 shares of common stock, stock incentive plan

  15   (15)         

Repurchase of 3,674 shares of common stock, stock repurchase plan

  (5)  (57)        (62)

Balance, September 30, 2023

 $7,826  $32,840  $95,988  $(24,675) $111,979 

 

  

Common Stock

  

Surplus

  

Retained Earnings

  

Accumulated Other Comprehensive Income (Loss)

  

Total

 

Balance, December 31, 2021

 $7,785  $31,966  $76,990  $298  $117,039 

Net income

        12,018      12,018 

Other comprehensive loss

           (28,051)  (28,051)

Cash dividends on common stock ($0.42 per share)

        (2,626)     (2,626)

Stock-based compensation

     728         728 

Issuance of 7,853 shares common stock, dividend reinvestment plan

  10   142         152 

Issuance of 34,634 shares common stock, stock incentive plan

  43   (43)         

Repurchase of 8,283 shares common stock, stock incentive plan

  (10)  (173)        (183)

Balance, September 30, 2022

 $7,828  $32,620  $86,382  $(27,753) $99,077 

 

  

Common Stock

  

Surplus

  

Retained Earnings

  

Accumulated Other Comprehensive (Loss)

  

Total

 

Balance, December 31, 2022

 $7,831  $32,716  $90,284  $(22,471) $108,360 

Adoption of new accounting standard (ASU 2016-13)

        (1,952)     (1,952)

Net income

        10,475      10,475 

Other comprehensive (loss)

           (2,204)  (2,204)

Cash dividends on common stock ($0.45 per share)

        (2,819)     (2,819)

Stock-based compensation

     681         681 

Issuance of 7,047 shares common stock, dividend reinvestment plan

  9   111         120 

Issuance of 33,002 shares common stock, stock incentive plan

  41   (41)         

Repurchase of 6,495 shares common stock, stock incentive plan

  (8)  (106)        (114)

Repurchase of 37,532 shares common stock, stock repurchase plan

  (47)  (521)        (568)

Balance, September 30, 2023

 $7,826  $32,840  $95,988  $(24,675) $111,979 

 

See Notes to Consolidated Financial Statements

 

 

FIRST NATIONAL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)


 

 

Note 1. General

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of First National Corporation (the Company) and its subsidiary, First Bank (the Bank), have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in accordance with guidance provided by the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by GAAP for annual year-end financial statements. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial positions at September 30, 2023 and December 31, 2022, the statements of income and comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022, the cash flows for the nine months ended September 30, 2023 and 2022, and the changes in shareholders’ equity for the three and nine months ended September 30, 2023 and 2022. The statements should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 2022. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.  Certain items in the prior period financial statements have been reclassified to conform to the current presentation. These reclassifications had no effect on prior year net income or shareholders' equity.

 

Significant Accounting Policies and Estimates
 
Application of the principles of GAAP and practices within the banking industry requires management to make estimates, assumptions, and judgements that affect the amounts reported in the financial statements and accompanying notes.  These estimates, assumptions, and judgements are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions and judgements.  Certain policies inherently rely more extensively on the use of estimates, assumptions, and judgements and as such may have a greater possibility of producing results that could be materially different than originally reported.    Material estimates that are particularly susceptible to significant changes in the near term include estimates related to the determination of the allowance for credit losses.
 
The Company’s significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in Note 1 of the audited financial statements and notes for the year ended December 31, 2022 and are contained in the Company’s 2022 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:
 

Adoption of New Accounting Pronouncements

 

ASU 2016-13:  On January 1, 2023, the Company adopted Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (Accounting Standards Codification (ASC) 326).  This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology.  CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit.  Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses.  

 

In addition, CECL made changes to the accounting for available for sale debt securities.  One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not that they will be required to sell.

 

The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures.  The transition adjustment of the adoption of CECL included an increase in the allowance for credit losses on loans of $2.2 million, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded commitments of $153 thousand, which is recorded within other liabilities.  The Company recorded an allowance for credit losses for held to maturity securities of $132 thousand, which is presented as a reduction to held to maturity securities outstanding.  The Company recorded a net decrease to retained earnings of $2.0 million as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded.  Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards.

 

The Company adopted ASC 326 using the prospective transition approach for purchase credit deteriorated (PCD) assets that were previously classified as purchase credit impaired (PCI) under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption.  As of September 30, 2023, the Company had no loans classified as PCD.

 

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023.  As of December 31, 2022, the Company did not have any other-than-temporary impaired investment securities.  Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale securities was not required.  

 

The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.

 

  

January 1, 2023

  

December 31, 2022

     
  

As reported Under

  

Pre-ASC 326

  

Impact of ASC

 

(dollars in thousands)

 

ASC 326

  

Adoption

  

326 Adoption

 

Assets:

            

Allowance for credit losses on held to maturity securities:

            

Corporate securities

  132   -   132 
             

Allowance for credit losses on loans:

          - 

Construction and land development

  233   546   (313)

Secured by 1-4 family residential

  2,517   1,108   1,409 

Other real estate loans

  5,311   3,609   1,702 

Commercial and industrial loans

  1,487   1,874   (387)

Consumer and other loans

  84   309   (225)

Allowance for credit losses on loans

  9,632   7,446   2,186 
             

Liabilities:

            

Allowance for credit losses for unfunded commitments

  153   -   153 

 

10

 

Notes to Consolidated Financial Statements (Unaudited)


 

Allowance for Credit Losses – Held-to-Maturity Securities

 

The Company estimates expected credit losses on held-to-maturity securities on an individual basis based on a Probability of Default/Loss Given Default (“PD/LGD”) methodology primarily using security-level credit ratings. The primary indicators of credit quality for the Company’s held-to-maturity portfolio are security type and credit ratings, which are influenced by a number of factors including obligor cash flow, geography, seniority, among other factors. The Company’s held-to-maturity securities with credit risk are municipal bonds and corporate debt securities. All other held-to-maturity securities are covered by the explicit or implied guarantee of the United States government or one if its agencies.

 

Changes in the allowance for credit loss are recorded as provision for (or recovery of) credit losses in the Consolidated Statements of Income. The Company recorded an allowance for credit losses on held-to-maturity securities of $132 thousand upon adoption of ASC 326.  During the three months ended September 30, 2023, the Company recorded a recovery of credit losses on held-to-maturity securities of $12 thousand.   The allowance for credit losses on held-to-maturity securities was $131 as of September 30, 2023.

 

Allowance for Credit Losses – Available-for-Sale Securities

 

Management evaluates all available-for-sale securities in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

 

If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specific to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any deficiency is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

 

Changes in the allowance for credit loss are recorded as a provision for (or recovery of) credit losses in the Consolidated Statements of Income. Losses are charged against the allowance for credit loss when management believes an available-for-sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At September 30, 2023, there was no allowance for credit loss related to the available-for-sale portfolio.

 

Accrued interest receivable on available-for-sale securities totaled $786 thousand at September 30, 2023 and was excluded from the estimate of credit losses.

 

Allowance for Credit Losses – Loans

 

The allowance for loan credit losses represents an amount which, in management’s judgement, is adequate to absorb the lifetime expected losses that may be sustained on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions, and prepayment experience. The allowance for loan credit losses is measured and recorded upon the initial recognition of a financial asset. The allowance for loan credit losses is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision for (or recovery of) credit losses, which is recorded in the Consolidated Statement of Income. 
 

The Company is utilizing a discounted cash flow model to estimate its current expected credit losses. For the purposes of calculating its quantitative reserves, the Company has segmented its loan portfolio based on loans which share similar risk characteristics. Within the quantitative portion of the calculation, the Company utilizes at least one or a combination of loss drivers, which may include unemployment rates, home price indices, and/or gross domestic product (“GDP”), to adjust its loss rates over a reasonable and supportable forecast period of one year. A straight-line reversion technique is used for the following eight quarters, at which time the Company reverts to historical averages. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider qualitative factors, including but not limited to: variability in the economic forecast, changes in volume and severity of adversity classified loans, changes in concentrations of credit, changes in the nature and volume of the loan segments, factors related to credit administration, and other idiosyncratic risks not embedded in the data used in the model.

 

Loans that do not share risk characteristics are evaluated on an individual basis. The Company designates individually evaluated loans on nonaccrual status as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk and loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.

 

The adoption of CECL did