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What changed in Virginia National Bankshares Corp's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Virginia National Bankshares Corp's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+294 added−319 removedSource: 10-K (2024-03-28) vs 10-K (2023-03-29)

Top changes in Virginia National Bankshares Corp's 2023 10-K

294 paragraphs added · 319 removed · 216 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

47 edited+44 added−22 removed100 unchanged
Biggest changeIf implemented, the rule would, among other things, (i) expand access to credit, investment and basic banking services in low- and moderate-income communities, (ii) adapt to changes in the banking industry, including internet and mobile banking, (iii) provide greater clarity, consistency and transparency in the application of the regulations and (iv) tailor performance standards to account for differences in bank size, business model, and local conditions.
Biggest changeOn October 24, 2023, the federal banking regulatory agencies jointly issued a final rule to modernize CRA regulations consistent with the following key goals: (i) to encourage banks to expand access to credit, investment, and banking services in low-income and moderate-income communities; (ii) to adapt to changes in the banking industry, including internet and mobile banking and the growth of non-branch delivery systems; (iii) to provide greater clarity and consistency in the application of the CRA regulations, including adoption of a new metrics-based approach to evaluating bank retail lending and community development financing; and (iv) to tailor CRA evaluations and data collection to bank size and type, recognizing that differences in bank size and business models may impact CRA evaluations and qualifying activities.
The Basel III Final Rules also include a requirement that banks maintain additional capital known as the “capital conservation buffer.” 11 The Basel III Final Rules and capital conservation buffer require banks and bank holding companies to maintain: i. a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer (which is added to the minimum CET1 ratio, effectively resulting in a required ratio of CET1 to risk-weighted assets of at least 7.0%); ii. a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (effectively resulting in a required Tier 1 capital ratio of 8.5%); iii. a minimum ratio of total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (effectively resulting in a required total capital ratio of 10.5%), and iv. a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average total assets, subject to certain adjustments and limitations.
The Basel III Final Rules also include a requirement that banks maintain additional capital known as the “capital conservation buffer.” 10 The Basel III Final Rules and capital conservation buffer require banks and bank holding companies to maintain: i. a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer (which is added to the minimum CET1 ratio, effectively resulting in a required ratio of CET1 to risk-weighted assets of at least 7.0%); ii. a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (effectively resulting in a required Tier 1 capital ratio of 8.5%); iii. a minimum ratio of total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (effectively resulting in a required total capital ratio of 10.5%), and iv. a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average total assets, subject to certain adjustments and limitations.
Section 22(h) of the Federal Reserve Act prohibits loans to any of those individuals where the aggregate amount exceeds an amount equal to 15% of an institution’s unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed the Bank’s unimpaired capital and unimpaired surplus.
Section 22(h) of the Federal Reserve Act prohibits loans to any of those individuals where the aggregate amount exceeds an amount equal to 15% of an institution’s unimpaired capital and surplus plus an additional 12 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed the Bank’s unimpaired capital and unimpaired surplus.
The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the DIF, subject in certain cases to specified procedures.
The appropriate federal banking agency for an undercapitalized institution also may take any number of 11 discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the DIF, subject in certain cases to specified procedures.
Transactions with Affiliates . Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the authority of the Bank to engage in transactions with related parties or “affiliates” or to make loans to insiders is limited.
Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the authority of the Bank to engage in transactions with related parties or “affiliates” or to make loans to insiders is limited.
In order to begin a successful career and have a successful financial future, these young adults must be prepared to effectively communicate with a multi-generational workforce and have the skills necessary to manage their own finances intelligently and productively. 8 Employees The Company has a shared vision of guiding principles, core values and strategies that work and have guided the Company through both good and challenging times.
In order to begin a successful career and have a successful financial future, these young adults must be prepared to effectively communicate with a multi-generational workforce and have the skills necessary to manage their own finances intelligently and productively. 7 Employees The Company has a shared vision of guiding principles, core values and strategies that work and have guided the Company through both good and challenging times.
For the purposes of these capital rules, (i) CET1 capital consists principally of common stock (including surplus) and retained earnings; (ii) Tier 1 capital consists principally of CET1 plus non-cumulative preferred stock and related surplus, and certain grandfathered cumulative preferred stocks and trust preferred securities; and (iii) Tier 2 capital consists of other capital instruments, principally qualifying subordinated debt and preferred stock, and limited amounts of an institution’s allowance for loan losses.
For the purposes of these capital rules, (i) CET1 capital consists principally of common stock (including surplus) and retained earnings; (ii) Tier 1 capital consists principally of CET1 plus non-cumulative preferred stock and related surplus, and certain grandfathered cumulative preferred stocks and trust preferred securities; and (iii) Tier 2 capital consists of other capital instruments, principally qualifying subordinated debt and preferred stock, and limited amounts of an institution’s allowance for credit losses.
Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any activity or to terminate ownership or control of any subsidiary when the Federal Reserve has reasonable cause to believe that a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company may result from such an activity. 9 Banking Acquisitions; Changes in Control .
Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any activity or to terminate ownership or control of any subsidiary when the Federal Reserve has reasonable cause to believe that a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company may result from such an activity. 8 Banking Acquisitions; Changes in Control .
In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. 10 Capital Requirements . The Federal Reserve imposes certain capital requirements on bank holding companies under the BHCA, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets.
In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. 9 Capital Requirements . The Federal Reserve imposes certain capital requirements on bank holding companies under the BHCA, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets.
The rule requires a banking organization to notify its primary federal regulator of any significant computer-security incident as soon as possible and no later than 36 hours after the banking organization determines that a cyber incident has occurred.
The rule requires a banking organization to notify its primary federal regulator of any significant computer-security incident as soon as possible and no later than 36 hours after the banking organization determines that a cybersecurity incident has occurred.
Confidentiality of Customer Information . The Company and the Bank are subject to various laws and regulations that address the privacy of nonpublic personal financial information of customers. A financial institution must provide to its customers information regarding its policies and procedures with respect to the handling of customers’ personal information.
The Company and the Bank are subject to various laws and regulations that address the privacy of nonpublic personal financial information of customers. A financial institution must provide to its customers information regarding its policies and procedures with respect to the handling of customers’ personal information.
Prompt Corrective Action . Federal banking regulators are authorized and, under certain circumstances, required to take certain actions against banks that fail to meet their capital requirements. The federal bank regulatory agencies have additional enforcement authority with respect to undercapitalized depository institutions. “Well capitalized” institutions may generally operate without additional supervisory restriction.
Federal banking regulators are authorized and, under certain circumstances, required to take certain actions against banks that fail to meet their capital requirements. The federal bank regulatory agencies have additional enforcement authority with respect to undercapitalized depository institutions. “Well capitalized” institutions may generally operate without additional supervisory restriction.
These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions. The Bank met the definition of being “well capitalized” as of December 31, 2022. 12 As described above in “The Bank – Capital Requirements,” the capital rules issued by the OCC incorporate new requirements into the prompt corrective action framework.
These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions. The Bank met the definition of being “well capitalized” as of December 31, 2023. As described above in “The Bank – Regulatory Capital Requirements,” the capital rules issued by the OCC incorporate new requirements into the prompt corrective action framework.
The Company, as a small creditor, does comply with the “qualified mortgage rules” and the other applicable Truth in Lending requirements. Incentive Compensation . Federal banking agencies have issued regulatory guidance (the Incentive Compensation Guidance) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking.
The Company, as a small creditor, does comply with the “qualified mortgage rules” and the other applicable TILA requirements. Incentive Compensation . Federal banking agencies have issued regulatory guidance (the Incentive Compensation Guidance) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking.
Each institution must conduct an internal risk assessment of its ability to protect customer information. These privacy laws and regulations generally prohibit a financial institution from providing a customer’s personal financial information to unaffiliated parties without prior notice and approval from the customer. 13 Anti-Money Laundering Laws and Regulations.
Each institution must conduct an internal risk assessment of its ability to protect customer information. These privacy laws and regulations generally prohibit a financial institution from providing a customer’s personal financial information to unaffiliated parties without prior notice and approval from the customer.
Based on existing regulatory guidance, the Company and the Bank are expected to consider the institution’s interest rate risk management, commercial real estate loan concentrations and other credit-related information, and funding and liquidity management during this analysis of adverse market conditions or outcomes. Volcker Rule.
Based on existing regulatory guidance, the Company and the Bank are expected to consider the institution’s interest rate risk management, commercial real estate loan concentrations and other credit-related information, and funding and liquidity management during this analysis of adverse market conditions or outcomes. Consumer Financial Protection .
With respect to “adequately capitalized” institutions, such banks (i) cannot normally pay dividends or make any capital contributions that would leave it undercapitalized, (ii) cannot pay a management fee to a controlling person if, after paying the fee, it would be undercapitalized, and (iii) cannot accept, renew, or roll over any brokered deposit unless the bank has applied for and been granted a waiver by the FDIC.
With respect to “adequately capitalized” institutions, such banks (i) cannot normally pay dividends or make any capital contributions that would leave them undercapitalized, (ii) cannot pay management fees to a controlling person if, after paying the fee, they would be undercapitalized, and (iii) cannot accept, renew, or roll over any brokered deposit unless they have applied for and been granted a waiver by the FDIC.
The federal bank regulatory agencies expect financial institutions to establish lines of defense and to ensure that their risk management processes address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance of the institution’s operations after a cyberattack.
The federal banking agencies expect financial institutions to establish lines of defense and ensure that their risk management processes also address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack.
The Company and the Bank are also subject to rules and regulations that require the collection and reporting of significant amounts of information with respect to mortgage loans and borrowers. The Company’s and the Bank’s mortgage origination activities are subject to Regulation Z, which implements the Truth in Lending Act.
The Company and the Bank are also subject to rules and regulations that require the collection and reporting of significant amounts of information with respect to mortgage loans and borrowers. The Company’s and the Bank’s mortgage origination activities are subject to Regulation Z, which implements the TILA.
In addition, the rule requires a bank service provider to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect banking organization customers for four or more hours. Compliance with the final rule was required by May 1, 2022.
In addition, the rule requires a bank service provider to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect banking organization customers for four or more hours. The rule became effective on May 1, 2022.
These discretionary supervisory actions include: (a) requiring the institution to raise additional capital; (b) restricting transactions with affiliates; (c) requiring divestiture of the institution or the sale of the institution to a willing purchaser; and (d) any other supervisory action that the agency deems appropriate.
These discretionary supervisory actions include: (i) requiring the institution to raise additional capital; (ii) restricting transactions with affiliates; (iii) requiring divestiture of the institution or the sale of the institution to a willing purchaser; and (iv) any other supervisory action that the agency deems appropriate.
The Company expects that its trust preferred securities will be included in the Company’s regulatory capital as Tier 1 capital instruments until their maturity. The Tier 1, CET1, total capital to risk-weighted assets, and leverage ratios of the Company were 17.07%, 17.07%, 17.63% and 9.77%, respectively, as of December 31, 2022, thus exceeding the minimum requirements.
The Company expects that its trust preferred securities will be included in the Company’s regulatory capital as Tier 1 capital instruments until their maturity. The Tier 1, CET1, total capital to risk-weighted assets, and leverage ratios of the Company were 17.41%, 17.41%, 18.24% and 11.13%, respectively, as of December 31, 2023, thus exceeding the minimum requirements.
We also aim for our employees to develop their careers in our businesses. At December 31, 2022, 35% of our employees have been employed by the Company or its subsidiaries for at least 10 years. The Company owns BOLI policies on each executive officer and certain other senior officers of the Company.
At December 31, 2023, 35% of our employees have been employed by the Company or its subsidiaries for at least 10 years. The Company owns BOLI policies on each executive officer and certain other senior officers of the Company.
The CFPB is responsible for implementing, examining and enforcing compliance with federal consumer financial laws for institutions with more than $10 billion of assets.
The CFPB is the federal regulatory agency that is responsible for implementing, examining and enforcing compliance with federal consumer financial laws for institutions with more than $10 billion of assets and, to a lesser extent, smaller institutions.
Pursuant to the Merger Agreement, Fauquier shareholders received 0.675 shares of Company stock for each share of Fauquier common stock, with cash paid in lieu of fractional shares, resulting in the Company issuing 2,571,213 shares of common stock. In connection with the transaction, TFB, Fauquier's wholly-owned bank subsidiary, was merged with and into the Bank.
Pursuant to the Merger Agreement, Fauquier shareholders received 0.675 shares of Company stock for each share of Fauquier common stock, with cash paid in lieu of fractional shares, resulting in the Company issuing 2,571,213 shares of common stock.
The Tier 1, CET1, total capital to risk-weighted assets, and leverage ratios of the Bank were 16.82%, 16.82%, 17.38% and 9.62%, respectively, as of December 31, 2022, also exceeding the minimum requirements.
The Tier 1, CET1, total capital to risk-weighted assets, and leverage ratios of the Bank were 17.29%, 17.29%, 18.12% and 11.05%, respectively, as of December 31, 2023, also exceeding the minimum requirements.
Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial non-compliance.” The Bank received a “satisfactory” CRA rating in its most recent examination. In May 2022, the federal bank regulatory agencies jointly issued a proposed rule intended to strengthen and modernize the CRA regulatory framework.
Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial non-compliance.” The Bank received a “satisfactory” CRA rating in its most recent examination.
The comment period for these proposed rules has closed and a final rule has not yet been published. 15 In October 2022, the SEC adopted a final rule directing national securities exchanges and associations, including Nasdaq, the exchange on which the Company’s common stock is listed, to implement listing standards that require listed companies to adopt policies mandating the recovery or “clawback” of excess incentive compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.
Nasdaq, the exchange on which our common stock is listed, enacted a listing rule that became effective in 2023 requiring listed companies to adopt policies mandating the recovery or “clawback” of excess incentive compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.
If the Company or the Bank fails to meet the expectations set forth in this regulatory guidance, the Company or the Bank could be subject to various regulatory actions, including financial penalties.
If the Company or the Bank fails to meet the expectations set forth in this regulatory guidance, the Company or the Bank could be subject to various regulatory actions and any remediation efforts may require significant resources of the Company or the Bank.
Qualified mortgages that are “higher-priced” (e.g. subprime loans) garner a rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not “higher-priced” (e.g. prime loans) are given a safe harbor of compliance. Small creditors, as described below, may originate qualified mortgages that are not restricted by the specific DTI threshold (however, the DTI must still be considered).
Qualified mortgages that are “higher-priced” (e.g. subprime loans) garner a rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not “higher-priced” (e.g. prime loans) are given a safe harbor of compliance.
On November 18, 2021, the federal bank regulatory agencies issued a final rule to improve the sharing of information about cyber incidents that may affect the U.S. banking system.
In addition, all federal and state banking agencies continue to increase focus on cybersecurity programs and risks as part of regular supervisory exams. On November 18, 2021, the federal bank regulatory agencies issued a final rule to improve the sharing of information about cybersecurity incidents that may affect the U.S. banking system.
Many of the Company’s competitors have substantially greater resources and lending limits than the Company and offer certain services such as extensive and established branch networks that the Company does not expect to match. Deposit competition is also very strong. Management believes, however, that a market exists for the personal and customized financial services an independent, community bank can offer.
The market areas served by the Company are highly competitive with respect to banking. Many of the Company’s competitors have substantially greater resources and lending limits than the Company and offer certain services such as extensive and established branch networks that the Company does not expect to match. Deposit competition is also very strong.
As part of the shared vision, the Company is dedicated and committed to its shareholders, customers, employees and communities. A critical part of this dedication and commitment is attracting and retaining high performing employees who desire to enrich the lives of customers and communities the Company serves.
As part of the shared vision, the Company is committed to its shareholders, customers, employees and communities. A critical part of this commitment is attracting and retaining high performing employees. To attract and retain high performing employees, the Company provides a competitive compensation and benefits program, including wellness benefits.
Competition for deposits and loans is affected by various factors including, without limitation, interest rates offered, the number and location of branches and types of products offered, digital capabilities, and the reputation of the institution.
Competition for deposits and loans is affected by various factors including, without limitation, interest rates offered, the number and location of branches and types of products offered, digital capabilities, and the reputation of the institution. Credit unions increasingly have been allowed to expand their membership definitions, yet they continue to enjoy a favorable tax status.
An institution ’ s assessment rate is based on a statistical analysis of financial ratios that estimates the likelihood of failure over a three-year period, which considers the institution ’ s weighted average CAMELS component rating.
An institution's assessment rate is based on a statistical analysis of financial ratios that estimates the likelihood of failure over a three-year period, which considers the institution’s weighted average CAMELS composite rating, and is subject to further adjustments including those related to levels of unsecured debt and brokered deposits.
These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services.
The federal banking agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution’s board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services.
Failure to comply with OFAC requirements could have serious legal, financial and reputational consequences for the Company. Stress Testing.
Failure to comply with OFAC requirements could have serious legal, financial and reputational consequences for the Company. To comply with these obligations, the Company has implemented appropriate internal practices, procedures, and controls. Cybersecurity .
In October 2022, the FDIC adopted a final rule that increased the initial base deposit insurance assessment rate schedules uniformly by 2 basis points beginning with the first quarterly assessment period of 2023. Further rate increases may occur in the future, including as a result of two prominent regional bank failures in the first quarter of 2023.
On October 18, 2022, the FDIC adopted a final rule to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis points, beginning in the first quarterly assessment period of 2023.
We strive for our workforce to reflect the diversity of the customers and communities we serve. Our selection and promotion process are without bias and include the active recruitment of minorities and women. At December 31, 2022, women represented 72% of our employees and racial and ethnic minorities represented 19% of our employees.
Our selection and promotion process are without bias and include the active recruitment of minorities and women. At December 31, 2023, women represented 73% of our employees and racial and ethnic minorities represented 20% of our employees. We also aim for our employees to develop their careers in our businesses.
The Company believes the formation of Masonry Capital allows the Company to offer its investment strategy to a wider range of clients. References to the Company’s subsidiaries in this document include both the Bank and Masonry Capital. In addition, the Company owns Fauquier Statutory Trust II (“Trust II”), which is an unconsolidated subsidiary.
No expenses will be incurred by the Company related to Masonry Capital subsequent to April 1, 2024. References to the Company’s subsidiaries in this document include both the Bank and Masonry Capital. In addition, the Company owns Fauquier Statutory Trust II (“Trust II”), which is an unconsolidated subsidiary.
To attract and retain high performing employees, the Company provides a competitive compensation and benefits program, including wellness benefits. At December 31, 2022, the Company had 157 full time equivalent employees, of which 9 were part-time employees. None of its employees are represented by any collective bargaining unit. The Company considers relations with its employees to be good.
At December 31, 2023, the Company had 155 full-time equivalent employees, of which 8 were part-time employees. None of its employees are represented by any collective bargaining unit. The Company considers relations with its employees to be good. We strive for our workforce to reflect the diversity of the customers and communities we serve.
Financial Statements and Supplementary Data, for further detail on the accounting policy for business combinations, fair values of assets and liabilities assumed, assumptions used in determining the fair values of assets and liabilities and the resulting goodwill. 7 Products and Services The Bank offers a full range of banking and related financial services, including checking accounts, NOW accounts, money market deposit accounts, certificates of deposit, individual retirement accounts, CDARS™, ICS ® and other depository services.
In connection with the transaction, TFB, Fauquier's wholly-owned bank subsidiary, was merged with and into the Bank. 6 Products and Services The Bank offers a full range of banking and related financial services, including checking accounts, NOW accounts, money market deposit accounts, certificates of deposit, individual retirement accounts, CDARS™, ICS ® and other depository services.
Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks, including the Company, in the past and are expected to do so in the future. After an extended period of low interest rates, market interest rates began to rise during 2022.
Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks, including the Company, in the past and are expected to do so in the future. 16 Reporting Obligations under Securities Laws; Availability of Information The Company is subject to the periodic and other reporting requirements of the Exchange Act, including the filing of annual, quarterly and other reports with the SEC.
The proposed rules also impose additional corporate governance requirements on the boards of directors of covered financial institutions and impose additional record-keeping requirements.
The proposed rules also impose additional corporate governance requirements on the boards of directors of covered financial institutions and impose additional record-keeping requirements. The comment period for these proposed rules has closed and a final rule has not yet been published. If the rules are adopted as proposed, they will restrict the manner in which executive compensation is structured.
The Company does not anticipate any material impact to its respective operations at this time. With increased focus on cybersecurity, the Company and the Bank continue to monitor legislative, regulatory and supervisory developments related thereto. Future Regulation From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies.
The Company updated its previous compensation recovery policy to comply with the new Nasdaq listing rule and the policy is included as Exhibit 97 to this Annual Report on Form 10-K. Future Regulation From time-to-time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies.
The Bank exceeds the thresholds to be considered well capitalized as of December 31, 2022. See “Prompt Corrective Action” below. On September 17, 2019 the FDIC finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations, referred to as the community bank leverage ratio framework, as required by the EGRRCPA.
The Bank exceeds the thresholds to be considered well capitalized as of December 31, 2023. See “Prompt Corrective Action” below.
While the Bank, like all banks, is subject to federal consumer protection rules enacted by the CFPB, because the Company and the Bank have total consolidated assets of $10 billion or less, the OCC oversees the application to the Bank of most consumer protection aspects of the Dodd-Frank Act and other laws and regulations.
To comply with these obligations, the Company has implemented appropriate internal practices, procedures, and controls. Because the Company and the Bank are smaller institutions (i.e., with assets of $10 billion or less), most consumer protection aspects of the Dodd-Frank Act will continue to be applied to the Company by the Federal Reserve Board and to the Bank by the OCC.
Removed
Refer to Note 2 - Business Combinations, in the Notes to Consolidated Financial Statements in Item 8.
Added
Note that the membership interests in this business line are planned to be sold to an officer of the Company effective April 1, 2024. Subsequent to the date of sale, the Company will receive an annual revenue-share amount for a period of six years.
Removed
Credit unions increasingly have been allowed to expand their membership definitions, and because they enjoy a favorable tax status, they have been able to offer more attractive loan and deposit pricing. The market areas served by the Company are highly competitive with respect to banking. Competition for loans to businesses and professionals is intense, and pricing is important.
Added
Management believes, however, that a market exists for the personal and customized financial services an independent, community bank can offer.
Removed
The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.
Added
The Basel III Final Rules provide deductions from and adjustments to regulatory capital measures, primarily to CET1, including deductions and adjustments that were not applied to reduce CET1 under historical regulatory capital rules.
Removed
In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities.
Added
For example, mortgage servicing rights, deferred tax assets dependent upon future taxable income, and significant investments in non-consolidated financial entities must be deducted from CET1 to the extent that any one such category exceeds 25% of CET1.
Removed
A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the prompt corrective action regulations and will not be required to report or calculate risk-based capital under the Basel III Final Rules. The Company has not opted into the CBLR framework.
Added
In July 2023, the Federal Reserve and the FDIC issued proposed rules to implement the final components of the Basel III agreement, often known as the “Basel III endgame.” These proposed rules contain provisions that apply to banks with $100 billion or more in total assets and that will significantly alter how those banks calculate risk-based assets.
Removed
The CAMELS component is a supervisory rating system designed to reflect financial and operational risks that a bank may face, including capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to market risk. In 2022 and 2021, the Company expensed $511 thousand and $858 thousand, respectively, in deposit insurance assessments.
Added
These proposed rules do not apply to holding companies or banks with less than $100 billion in assets, such as the Company and the Bank, but the final impacts of these rules cannot yet be predicted. The comment window for these proposed rules closed on January 16, 2024. Community Bank Leverage Ratio.
Removed
The Dodd-Frank Act and regulations under that act prohibit insured depository institutions and their affiliates, except as permitted under certain limited circumstances, from (i) engaging in short-term proprietary trading for their own accounts and (ii) having certain ownership interests in, and relationships with, hedge funds or private equity funds.
Added
As required by the EGRRCPA, qualifying banks with less than $10 billion in consolidated assets could elect to be subject to a 9% leverage ratio applied using less complex leverage calculations commonly referred to as the community bank leverage ratio CBLR.
Removed
The Volcker Rule did not have a material impact on the Company's operations or financial position in 2022 or 2021. Consumer Financial Protection . The Bank is subject to a number of other federal and state consumer protection laws that extensively govern its relationship with its customers.
Added
Banks that opt into the CBLR framework and maintain a leverage ratio of greater than 9% are not subject to other risk-based and leverage capital requirements and are deemed to meet Basel III Final Rules’ well capitalized ratio requirements.
Removed
These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Servicemembers’ Civil Relief Act, Secure and Fair Enforcement for Mortgage Licensing Act, laws governing flood insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws, and various regulations that implement some or all of the foregoing.
Added
As of December 31, 2023, the Bank has not elected to apply the CBLR framework, but the Bank continues to assess the potential impact of opting in to the CBLR framework as part of its ongoing capital management and planning processes. Prompt Corrective Action .
Removed
These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. If the Bank fails to comply with these laws and regulations, it may be subject to various penalties.
Added
The FDIC may also suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance if the institution has no tangible capital.
Removed
Failure to comply with consumer protection requirements may also result in failure to obtain any required bank regulatory approval for merger or acquisition transactions the Bank may wish to pursue or being prohibited from engaging in such transactions even if approval is not required.
Added
If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period from six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that could result in termination of the Bank’s deposit insurance. Deposit Insurance Assessments.
Removed
The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency, the CFPB, and giving it responsibility for implementing, examining, and enforcing compliance with federal consumer protection laws.
Added
The DIF is funded by assessments on banks and other depository institutions calculated based on average consolidated total assets minus average tangible equity (defined as Tier 1 capital).
Removed
The CFPB focuses on (i) risks to consumers and compliance with the federal consumer financial laws; (ii) the markets in which firms operate and risks to consumers posed by activities in those markets; (iii) depository institutions that offer a wide variety of consumer financial products and services; and (iv) non-depository companies that offer one or more consumer financial products or services.
Added
As required by the Dodd-Frank Act, the FDIC has adopted a large-bank pricing assessment scheme, set a target “designated reserve ratio” (described in more detail below) of 2 percent for the DIF and, in lieu of dividends, provides for a lower assessment rate schedule when the reserve ratio reaches 2 percent and 2.5 percent.
Removed
The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive, or abusive” acts and practices.
Added
The Dodd-Frank Act transferred to the FDIC increased discretion with regard to managing the required amount of reserves for the DIF, or the “designated reserve ratio.” The FDIA requires that the FDIC consider the appropriate level for the designated reserve ratio on at least an annual basis.
Removed
Abusive acts or practices are defined as those that materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer’s (i) lack of financial savvy, (ii) inability to protect himself in the selection or use of consumer financial products or services, or (iii) reasonable reliance on a covered entity to 14 act in the consumer’s interests.
Added
As a result of this final rule, the total base assessment rates beginning with the first quarter of 2023 for institutions with less than $10 billion in assets that have been insured for at least five years range from 2.5 to 32 basis points.
Removed
The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or injunction.
Added
This increase in assessment rate schedules is intended to increase the likelihood that the reserve ratio reaches 1.35 percent by the statutory deadline of September 30, 2028. The new assessment rate schedules will remain in effect unless and until the reserve ratio meets or exceeds 2 percent.
Removed
Further, regulatory positions taken by the CFPB with respect to financial institutions with more than $10 billion in assets may influence how other regulatory agencies apply the subject consumer financial protection laws and regulations. Mortgage Banking Regulation.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

66 edited+12 added−23 removed115 unchanged
Biggest changeMost of the Company’s commercial business and commercial real estate loans are made to small and mid-sized businesses and non-profits. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions.
Biggest changeThese businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. If general economic conditions in the market areas in which the Company operates negatively impact this important customer sector, the Company’s results of operations and financial condition may be adversely affected.
Any deterioration of the borrowers’ businesses may hinder their ability to repay their loans with the Company, which could have a material adverse effect on its financial condition and results of operations. Steps to mitigate such risks include underwriting multiple sources of repayment, including but not limited to, business cash flow, personal guarantees, collateral, and government guarantees, where applicable.
Any deterioration of the borrowers’ businesses may hinder their ability to repay their loans with the Company, which could have 18 a material adverse effect on its financial condition and results of operations. Steps to mitigate such risks include underwriting multiple sources of repayment, including but not limited to, business cash flow, personal guarantees, collateral, and government guarantees, where applicable.
There is no assurance that any such losses would not materially and adversely affect results of operations. The Company’s operations may be adversely affected by cybersecurity risks. In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information related to its customers and employees in systems and on networks.
There is no assurance that any such losses would not materially and adversely affect results of operations. 24 The Company’s operations may be adversely affected by cybersecurity risks. In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information related to its customers and employees in systems and on networks.
The rule also contains additional disclosure requirements at mortgage 26 loan origination and in monthly statements. The requirements under the CFPB’s regulations and policies could limit the Company’s ability to make certain types of loans or loans to certain borrowers, or could make it more expensive and/or time consuming to make these loans, which could adversely impact the Company’s profitability.
The rule also contains additional disclosure requirements at mortgage loan origination and in monthly statements. The requirements under the CFPB’s regulations and policies could limit the Company’s ability to make certain types of loans or loans to certain borrowers, or could make it more expensive and/or time consuming to make these loans, which could adversely impact the Company’s profitability.
The Company’s financial condition 24 and results of operations could be negatively impacted to the extent it relies on financial statements that do not comply with GAAP or are materially misleading. The Company’s success depends on its management team, and the unexpected loss of any of these personnel could adversely affect operations.
The Company’s financial condition and results of operations could be negatively impacted to the extent it relies on financial statements that do not comply with GAAP or are materially misleading. The Company’s success depends on its management team, and the unexpected loss of any of these personnel could adversely affect operations.
Negative public opinion can adversely affect the Company’s ability to attract and keep customers and employees and can expose it to litigation and regulatory action. 23 Further, if any of the Company’s financial, accounting, or other data processing systems fail or have other significant issues, the Company could be adversely affected.
Negative public opinion can adversely affect the Company’s ability to attract and keep customers and employees and can expose it to litigation and regulatory action. Further, if any of the Company’s financial, accounting, or other data processing systems fail or have other significant issues, the Company could be adversely affected.
The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on the Company’s financial condition and results of operations. The Company’s ability to operate profitably may be dependent on its ability to integrate or introduce various technologies into its operations.
The loss of these revenue streams and the loss of deposits as a lower cost source of funds could have a material adverse effect on our financial condition and results of operations. The Company’s ability to operate profitably may be dependent on its ability to integrate or introduce various technologies into its operations.
If the Company cannot provide reliable financial reports or prevent fraud, its reputation and operating results would be harmed. As part of the Company’s ongoing monitoring of internal control, it may discover material weaknesses or significant deficiencies in its internal control that require remediation.
If the Company cannot provide reliable financial reports or prevent fraud, its reputation and operating results would be harmed. As part of the Company’s ongoing monitoring of internal control, it may discover material weaknesses or significant deficiencies in its internal control 23 that require remediation.
Consumers may increasingly decide not to use banks to complete their financial transactions, which would have a material adverse impact on the Company’s financial condition and operations. Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks.
Consumers may increasingly decide not to directly use banks to complete their financial transactions, which would have a material adverse impact on the Company’s financial condition and operations. Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks.
In addition, loan volume and yields are affected by market interest rates on loans, and the current interest rate environment 21 encourages extreme competition for new loan originations from qualified borrowers. The Company’s management cannot ensure that it can minimize interest rate risk.
In addition, loan volume and yields are affected by market interest rates on loans, and the current interest rate environment encourages extreme competition for new loan originations from qualified borrowers. The Company’s management cannot ensure that it can minimize interest rate risk.
Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs. The Company is currently facing increased regulation and supervision of its industry. The Dodd-Frank Act instituted major changes to the banking and financial institutions regulatory regimes.
Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs. 25 The Company is currently facing increased regulation and supervision of its industry. The Dodd-Frank Act instituted major changes to the banking and financial institutions regulatory regimes.
This competition could increase prices for potential acquisitions that the Company believes are attractive. Acquisitions may also be subject to various regulatory approvals. If the Company fails to receive the appropriate regulatory approvals, it will not be able to consummate acquisitions that it believes are in its best interests.
This competition could increase prices for 22 potential acquisitions that the Company believes are attractive. Acquisitions may also be subject to various regulatory approvals. If the Company fails to receive the appropriate regulatory approvals, it will not be able to consummate acquisitions that it believes are in its best interests.
An increase in nonperforming loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on the Company’s financial condition and results of operations.
An increase in nonperforming loans could result in a net loss of earnings from these loans, an increase in the provision for credit losses and an increase in loan charge-offs, all of which could have a material adverse effect on the Company’s financial condition and results of operations.
The Bank is also required to establish and maintain an adequate internal control structure over financial reporting pursuant to regulations of the FDIC. As a public company, the Company is required by the Sarbanes-Oxley Act to design and maintain a system of internal control over financial reporting and include management’s assessment regarding internal control over financial reporting.
The Company is also required to establish and maintain an adequate internal control structure over financial reporting pursuant to regulations of the FDIC. As a public company, the Company is required by the Sarbanes-Oxley Act to design and maintain a system of internal control over financial reporting and include management’s assessment regarding internal control over financial reporting.
Other possible points of intrusion or disruption not within the Company’s control include internet service providers, electronic mail portal providers, social media portals, distant-server (cloud) service 25 providers, electronic data security providers, data processing service providers, telecommunications companies, and smart phone manufacturers.
Other possible points of intrusion or disruption not within the Company’s control include internet service providers, electronic mail portal providers, social media portals, distant-server (cloud) service providers, electronic data security providers, data processing service providers, telecommunications companies, and smart phone manufacturers.
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings, could be adversely affected.
If the interest rates paid on deposits and other borrowings increase at a faster 21 rate than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings, could be adversely affected.
The Company has adopted underwriting and credit monitoring procedures and policies, including regular reviews of appraisals and borrower financial statements, that management believes are appropriate to mitigate the risk of loss.
The Company has adopted underwriting 19 and credit monitoring procedures and policies, including regular reviews of appraisals and borrower financial statements, that management believes are appropriate to mitigate the risk of loss.
With respect to the secured loans, the collateral securing the repayment of 19 these loans may be insufficient to cover the obligations owed under such loans.
With respect to the secured loans, the collateral securing the repayment of these loans may be insufficient to cover the obligations owed under such loans.
The level of the allowance reflects management’s evaluation of the level of loans outstanding, the level of nonperforming loans, historical loan loss experience, delinquency trends, underlying collateral values, the amount of actual losses charged to the reserve in a given period and assessment of present and anticipated economic conditions.
The level of the allowance reflected management’s evaluation of the level of loans outstanding, the level of nonperforming loans, historical loan loss experience, delinquency trends, underlying collateral values, the amount of actual losses charged to the reserve in a given period and assessment of present and anticipated economic conditions.
While the Company believes that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if the Company continues to grow and experiences increasing loan demand.
While the Company believes that these sources are currently adequate, there can be no assurance they will be sufficient or available to meet future liquidity demands, particularly if the Company continues to grow and experiences increasing loan demand.
An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on the Company’s financial condition.
An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for credit losses and an increase in charge-offs, all of which could have a material adverse effect on the Company’s financial condition.
A deterioration in economic conditions, whether caused by global, national or local concerns (including the COVID-19 pandemic), especially within the Company’s market area, could result in the following potentially material consequences: loan delinquencies increasing; problem assets and foreclosures increasing; demand for products and services decreasing; low cost or noninterest bearing deposits decreasing; and collateral for loans, especially real estate, declining in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with existing loans.
A deterioration in economic conditions, whether caused by global, national or local concerns, especially within the Company’s market area, could result in the following potentially material consequences: loan delinquencies increasing; problem assets and foreclosures increasing; demand for products and services decreasing; low cost or noninterest bearing deposits decreasing; and collateral for loans, especially real estate, declining in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with existing loans.
It may be more difficult for commercial real estate borrowers to repay their loans in a timely manner, as commercial real estate borrowers’ abilities to repay their loans frequently depends on the successful rental of their properties.
It may be more difficult for commercial real estate borrowers to repay their loans in a timely manner, as commercial real estate borrowers’ abilities to repay their loans frequently depend on the successful rental of their properties.
The Company’s banking regulators generally give commercial real estate lending greater scrutiny and may require banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital as a result of commercial real estate lending growth and exposures, which could have a material adverse effect on the Company’s results of operations.
The Company’s banking regulators generally give commercial real estate lending greater scrutiny and may require banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of ACL and capital as a result of commercial real estate lending growth and exposures, which could have a material adverse effect on the Company’s results of operations.
On January 1, 2023, the Company adopted ASC 326, more commonly referred to as "CECL," which replaces existing accounting principles for the recognition of loan losses based on losses that have been incurred with a requirement to record an allowance for credit losses that represents expected credit losses over the lifetime of all loans in the Company’s portfolio.
On January 1, 2023, the Company adopted ASC 326, more commonly referred to as "CECL," which replaced prior accounting principles for the recognition of loan losses based on losses that have been incurred with a requirement to record an allowance for credit losses that represents expected credit losses over the lifetime of all loans in the Company’s portfolio.
The Bank’s ALLL/ACL may be insufficient and any increases in the ACL may have a material adverse effect on the Company’s financial condition and results of operations.
The Company’s ACL may be insufficient and any increases in the ACL may have a material adverse effect on the Company’s financial condition and results of operations.
Under ASC 326, the Company’s estimate of expected credit losses will be based on reasonable and supportable forecasts of future economic conditions and loan performance.
Under ASC 326, the Company’s estimate of expected credit losses is based on reasonable and supportable forecasts of future economic conditions and loan performance.
For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills or transferring funds directly without the assistance of banks.
For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds, general-purpose reloadable prepaid cards, or in other types of assets, including cryptocurrencies or other digital assets. Consumers can also complete transactions such as paying bills or transferring funds directly without the assistance of banks.
Collateral values may be adversely affected by changes in economic, environmental and other conditions, including the impacts of the COVID-19 pandemic, declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, terrorist activity, environmental contamination and other external events.
Collateral values may be adversely affected by changes in economic, environmental and other conditions, declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, terrorist activity, environmental contamination and other external events.
The Federal Reserve regulates the supply of money and credit in the United States, and its policies determine in large part the Company’s cost of funds for lending, investing and capital raising activities and the return it earns on those loans and investments, both of which affect the Company’s net interest margin.
The Company is affected by domestic monetary policy. The Federal Reserve regulates the supply of money and credit in the United States, and its policies determine in large part the Company’s cost of funds for lending, investing and capital raising activities and the return it earns on those loans and investments, both of which affect the Company’s net interest margin.
As of December 31, 2022, approximately 83.5% of the Company’s loans are secured by real estate, both residential and commercial. The Company has established concentration limits that are regularly monitored by management and reported to the Board.
As of December 31, 2023, approximately 82.6% of the Company’s loans are secured by real estate, both residential and commercial. The Company has established concentration limits that are regularly monitored by management and reported to the Board.
As of December 31, 2022, the Company had approximately $329.0 million in loans secured by commercial real estate, which represented approximately 35.1% of total loans outstanding at that date; such loans consist of non-owner occupied commercial real estate, construction, land development, multi-family and other land loans.
As of December 31, 2023, the Company had approximately $396.1 million in loans secured by commercial real estate, which represented approximately 36.3% of total loans outstanding at that date; such loans consist of non-owner occupied commercial real estate, construction, land development, multi-family and other land loans.
A major change in the real estate market in the regions in which the Company operates, resulting in a deterioration in real estate values, or in the local or national economy, including changes caused by the COVID-19 pandemic, could adversely affect the Company’s customers’ ability to pay these loans, which in turn could adversely impact the Company.
A major change in the real estate market in the regions in which the Company operates, resulting in a deterioration in real estate values, or in the local or national economy, could adversely affect the Company’s customers’ ability to pay these loans, which in turn could adversely impact the Company.
The Company also faces competition from many other types of financial institutions, including finance companies, mutual and money market fund providers, brokerage firms, insurance companies, credit unions, financial subsidiaries of certain industrial corporations and financial technology companies.
The Company also faces competition from many other types of financial institutions, including finance companies, mutual and money market fund providers, brokerage firms, insurance companies, credit unions, financial subsidiaries of certain industrial corporations and financial technology companies. Increased competition may result in reduced business for the Company.
Severe weather, earthquakes, other natural disasters, pandemics, acts of war or terrorism and other external events could significantly impact our business. Severe weather, earthquakes, other natural disasters, pandemics (such as the COVID-19 pandemic), acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business.
Severe weather, earthquakes, other natural disasters, pandemics, endemics, acts of war or terrorism and other external events could significantly impact our business. Severe weather, earthquakes, other natural disasters, pandemics, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business.
Additionally, deposit levels may be affected by a number of factors, including, but not limited to, rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to customers on alternative investments, customers' perceptions regarding the relative safety of their deposits, and general economic conditions.
Deposit levels may be affected by a number of factors, including, but not limited to, rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to customers on alternative investments and general economic conditions.
Ultimately, the Company may not be able to compete successfully against current and future competitors. Many competitors offer the same banking services that the Company offers in its service area. These competitors include national, regional and community banks.
The Company encounters substantial competition from other financial institutions in its market area and competition is increasing. Ultimately, the Company may not be able to compete successfully against current and future competitors. Many competitors offer the same banking services that the Company offers in its service area. These competitors include national, regional and community banks.
Accordingly, any failure, or perceived failure, to comply with applicable privacy or data protection laws and regulations may subject the Company to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage the Company’s reputation and otherwise adversely affect its operations, financial condition and results of operations.
Accordingly, any failure, or perceived failure, to comply with applicable privacy or data protection laws and regulations may subject the Company to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage the Company’s reputation and otherwise adversely affect its operations, financial condition and results of operations. 26 The Company’s business and earnings are impacted by governmental, fiscal and monetary policy over which it has no control.
Increased competition may result in reduced business for the Company. 22 Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers.
Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers.
The Company relies on other companies to provide key components of its business infrastructure. Third parties provide key components of the Company’s business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, internet connections and network access. While the Company has selected these third-party vendors carefully, it does not control their actions.
The Company relies on other companies to provide key components of its business infrastructure. Third parties provide key components of the Company’s business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, internet connections and network access.
Deterioration of economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside the Bank’s control, may require an increase in the allowance for loan losses.
Deterioration of economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside the Company’s control, may have required an increase in the ACL.
In the course of its business, the Company may foreclose and take title to real estate, potentially becoming subject to environmental liabilities associated with the properties.
General Risk Factors The Company is exposed to risk of environmental liabilities with respect to properties to which it takes title. In the course of its business, the Company may foreclose and take title to real estate, potentially becoming subject to environmental liabilities associated with the properties.
The Company’s business and earnings also are affected by the fiscal or other policies that are adopted by various regulatory authorities of the United States.
The Company’s business and earnings also are affected by the fiscal or other policies that are adopted by various regulatory authorities of the United States. Changes in fiscal or monetary policy are beyond the Company’s control and hard to predict.
The determination of the appropriate level of the ALLL inherently involves a high degree of subjectivity and requires the Bank to make significant estimates of current credit risks and future trends, all of which may undergo material changes.
The determination of the appropriate level of the ACL inherently involved a high degree of subjectivity and required the Company to make significant estimates of credit risks and future trends, all of which could undergo material changes.
If some investors find the Company’s common stock less attractive because the Company may rely on these reduced disclosure obligations, there may be a less active trading market for its common stock and its stock price may be more volatile.
If some investors find the Company’s common stock less attractive because the Company may rely on these reduced disclosure obligations, there may be a less active trading market for its common stock and its stock price may be more volatile. 27 While the Company’s common stock is currently listed on the Nasdaq Capital Market, it has less liquidity than stocks for larger companies listed on national securities exchanges.
Further, if the Company needs to raise capital in the future, it may have to do so when many other 20 financial institutions are also seeking to raise capital and would then have to compete with those institutions for investors.
Further, if the Company needs to raise capital in the future, it may have to do so when many other financial institutions are also seeking to raise capital and would then have to compete with those institutions for investors. 20 An inability to raise additional capital on acceptable terms when needed could have a material adverse impact on the Company’s business, financial condition and results of operations.
Although the Bank believes the ALLL is a reasonable estimate of known and inherent losses in the loan portfolio, it cannot precisely predict such losses or be certain that the loan loss allowance will be adequate in the future.
Although the Company believed the ACL was a reasonable estimate of known and inherent losses in the loan portfolio at the time, it could not precisely predict such losses or be certain that the loan loss allowance would be adequate in the future.
Sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, could cause the price of the Company’s common stock to decline, or reduce the Company’s ability to raise capital through future sales of common stock. 28 General Risk Factors The Company is exposed to risk of environmental liabilities with respect to properties to which it takes title.
Sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, could cause the price of the Company’s common stock to decline, or reduce the Company’s ability to raise capital through future sales of common stock.
If we are required to materially increase our level of ACL for any reason, such increase could adversely affect our business, financial condition, and results of operations. 18 The Company’s focus on lending to small to mid-sized community-based businesses may increase its credit risk.
If we are required to materially increase our level of ACL for any reason, such increase could adversely affect our business, financial condition, and results of operations.
Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. As a financial institution, market risk is inherent in the financial instruments associated with the Company’s operations and activities, including loans, deposits, securities, and short-term borrowings.
As a financial institution, market risk is inherent in the financial instruments associated with the Company’s operations and activities, including loans, deposits, securities, and short-term borrowings.
Accordingly, the Company may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations.
As of December 31, 2023, approximately 25.5% of our deposits were uninsured and we rely on these deposits for liquidity. Accordingly, the Company may be required from time-to-time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations.
In addition, bank regulatory agencies and the Bank’s auditors periodically review its ALLL and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management.
In addition, bank regulatory agencies and the Company’s auditors periodically reviewed its ACL and may have required an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different from those of management. No adjustments to the ACL have been recommended or required as a result of audits.
Access to sufficient capital is critical in order to enable the Company to implement its business plan, support its business, expand its operations and meet applicable capital requirements. The inability to have sufficient capital, whether internally generated through earnings or raised in the capital markets, could adversely impact the Company’s ability to support and to grow its operations.
The inability to have sufficient capital, whether internally generated through earnings or raised in the capital markets, could adversely impact the Company’s ability to support and to grow its operations. If the Company grows its operations faster than it generates capital internally, it will need to access the capital markets.
The Company’s ability to make dividend payments on its common stock depends primarily on certain regulatory considerations and the receipt of dividends and other distributions from the Bank. There are various regulatory restrictions on the ability of banks, such as the Bank, to pay dividends or make other payments to their holding companies.
Risks Related to the Company’s Common Stock The Company is not obligated to pay dividends and its ability to pay dividends is limited. The Company’s ability to make dividend payments on its common stock depends primarily on certain regulatory considerations and the receipt of dividends and other distributions from the Bank.
While the Company’s common stock is currently listed on the Nasdaq Capital Market, it has less liquidity than stocks for larger companies listed on national securities exchanges. The trading volume in the Company’s common stock on the Nasdaq Capital Market has been relatively low when compared with larger companies listed on national securities exchanges.
The trading volume in the Company’s common stock on the Nasdaq Capital Market has been relatively low when compared with larger companies listed on national securities exchanges. There is no assurance that a more active and liquid trading market for the common stock will exist in the future.
The Company’s ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, the Company’s financial condition and its results of operations. Economic conditions and a loss of confidence in financial institutions may increase the Company’s cost of capital and limit access to some sources of capital.
The Company may not be able to raise additional capital in the form of additional debt or equity on acceptable terms, or at all. The Company’s ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, the Company’s financial condition and its results of operations.
While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans.
Liquidity Risks The Company’s liquidity needs could adversely affect results of operations and financial condition. The Company’s primary sources of funds are deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans.
There is no assurance that a more active and liquid trading market for the common stock will exist in the future. Consequently, shareholders may not be able to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares.
Consequently, shareholders may not be able to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares.
If general economic conditions in the market areas in which the Company operates negatively impact this important customer sector, the Company’s results of operations and financial condition may be adversely affected. Moreover, a portion of these loans have been made by the Company in recent years and the borrowers may not have experienced a complete business or economic cycle.
Moreover, a portion of these loans have been made by the Company in recent years and the borrowers may not have experienced a complete business or economic cycle.
Strategic Risks The Company faces strong and growing competition from financial services companies and other companies that offer banking and other financial services, which could negatively affect the Company’s business. The Company encounters substantial competition from other financial institutions in its market area and competition is increasing.
The Company had no foreclosed property as of December 31, 2023 or December 31, 2022. Strategic Risks The Company faces strong and growing competition from financial services companies and other companies that offer banking and other financial services, which could negatively affect the Company’s business.
The Company is currently paying a quarterly cash dividend to holders of its common stock at a rate of $0.33 per share.
There are various regulatory restrictions on the ability of banks, such as the Bank, to pay dividends or make other payments to their holding companies. The Company is currently paying a quarterly cash dividend to holders of its common stock at a rate of $0.33 per share.
The Company may be required to slow or discontinue loan growth, capital expenditures or other investments, or liquidate assets should such sources not be adequate. The Company may need to raise additional capital in the future and may not be able to do so on acceptable terms, or at all.
The Company may be required to slow or discontinue loan growth, capital expenditures or other investments, or liquidate assets should such sources not be adequate. Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system.
The Company’s plans to expand could depress earnings in the short run, even if it efficiently executes a growth strategy leading to long-term financial benefits. The success of the Company’s strategy depends on its ability to identify and retain individuals with experience and relationships in its markets.
The Company’s plans to expand could depress earnings in the short run, even if it efficiently executes a growth strategy leading to long-term financial benefits. Operational Risks The Company is subject to a variety of operational risks, including reputational risk, legal and compliance risk, and the risk of fraud or theft by employees or outsiders.
Price-wage inflation may cause the Company to give higher than normal raises to employees and start new employees at a higher wage.
In response, the Federal Reserve increased the federal funds target rate at the fastest pace in over 40 years, increasing 425 bps during 2022 and an additional 100 bps in 2023. Price-wage inflation may cause the Company to give higher than normal raises to employees and start new employees at a higher wage.
If the Company grows its operations faster than it generates capital internally, it will need to access the capital markets. The Company may not be able to raise additional capital in the form of additional debt or equity on acceptable terms, or at all.
The Company may need to raise additional capital in the future and may not be able to do so on acceptable terms, or at all. Access to sufficient capital is critical in order to enable the Company to implement its business plan, support its business, expand its operations and meet applicable capital requirements.
An inability to raise additional capital on acceptable terms when needed could have a material adverse impact on the Company’s business, financial condition and results of operations. Market Risks The Company may be adversely impacted by changes in market conditions. The Company is directly and indirectly affected by changes in market conditions.
Market Risks The Company may be adversely impacted by changes in market conditions. The Company is directly and indirectly affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions.
Removed
The Bank has historically maintained an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents the Bank’s best estimate of probable losses that will be incurred within the existing portfolio of loans.
Added
The Company’s focus on lending to small to mid-sized community-based businesses may increase its credit risk. Most of the Company’s commercial business and commercial real estate loans are made to small and mid-sized businesses and 501(c)3 organizations.
Removed
The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio.
Added
Some degree of instability in the commercial real estate markets is expected in the coming quarters as loans are refinanced in markets with higher vacancy rates under current economic conditions.
Removed
Further, if charge-offs in future periods exceed the allowance for loan losses, the Bank will need additional provisions to increase the allowance for loan losses.
Added
The outlook for commercial real estate remains dependent on the broader economic environment and, specifically, how major subsectors respond to a higher interest rate environment and higher prices for commodities, goods and services.
Removed
The fair value of the Company’s investment securities can fluctuate due to factors outside of its control. As of December 31, 2022, the fair value of the Company’s portfolio of investment in debt securities was approximately $538.2 million.
Added
Additionally, negative news about the Company or the banking industry in general could negatively impact market and/or customer perceptions of the Company, which could lead to a loss of depositor confidence and an increase in deposit withdrawals, particularly among those with uninsured deposits.
Removed
Factors beyond the Company’s control can significantly influence the fair value of securities in its portfolio and can cause potential adverse changes to the fair value of these securities.
Added
Furthermore, as many regional banking organizations experienced in 2023, the failure of other financial institutions may cause deposit outflows as customers spread deposits among several different banks so as to maximize their amount of FDIC insurance, move deposits to banks deemed “too big to fail” or remove deposits from the banking system entirely.
Removed
These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and instability in the capital markets.
Added
The closures of Silicon Valley Bank and Signature Bank in March 2023, and First Republic Bank in May 2023, and concerns about similar future events, have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks. More recently, concerns about commercial real estate concentrations at regional and community banks have exacerbated this volatility.
Removed
Any of these factors, among others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could materially and adversely affect the Company’s business, financial condition or results of operations.
Added
These market developments have negatively impacted customer confidence in the safety and soundness of regional and community banks.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeVNB Trust and Estate Services is located at 103 Third Street, SE, Charlottesville, Virginia. Of the fifteen locations used as bank branches and commercial lending offices, eight of the buildings are owned by the Company and seven are leased from nonaffiliates. Leases with affiliates are described below.
Biggest changeVNB Trust and Estate Services is located at 103 Third Street, SE, Charlottesville, Virginia. Of the fourteen locations used as bank branches, seven of the buildings are owned by the Company and six are leased from nonaffiliates. Leases with affiliates are described below.
Dittmar, Jr., a director of the Company, is the manager and indirect owner of Pantops Park, LLC. The building, consisting of approximately 43,000 square feet, was completed in early 2008, and the Bank opened this full-service office in April 2008.
Dittmar, Jr., a director of the Company and the Bank, is the manager and indirect owner of Pantops Park, LLC. The building, consisting of approximately 43,000 square feet, was completed in early 2008, and the Bank opened this full-service office in April 2008.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeDividends Declared 2022 2021 2022 2021 High Low High Low First Quarter $ 40.00 $ 34.00 $ 31.05 $ 27.00 $ 0.30 $ 0.30 Second Quarter $ 35.53 $ 27.05 $ 39.18 $ 30.35 $ 0.30 $ 0.30 Third Quarter $ 34.50 $ 29.85 $ 39.74 $ 33.71 $ 0.30 $ 0.30 Fourth Quarter $ 36.93 $ 29.30 $ 38.00 $ 33.51 $ 0.30 $ 0.30 Total $ 1.20 $ 1.20 American Stock Transfer and Trust Company is the Company’s stock transfer agent and registrar.
Biggest changeDividends Declared 2023 2022 2023 2022 High Low High Low First Quarter $ 41.74 $ 34.69 $ 40.00 $ 34.00 $ 0.33 $ 0.30 Second Quarter $ 36.77 $ 27.30 $ 35.53 $ 27.05 $ 0.33 $ 0.30 Third Quarter $ 38.49 $ 30.01 $ 34.50 $ 29.85 $ 0.33 $ 0.30 Fourth Quarter $ 43.08 $ 24.96 $ 36.93 $ 29.30 $ 0.33 $ 0.30 Total $ 1.32 $ 1.20 Equiniti Trust Company, LLC (formerly American Stock Transfer and Trust Company) is the Company’s stock transfer agent and registrar.
Recent Issuances of Unregistered Securities No unregistered shares were issued in 2022 or 2021.
Recent Issuances of Unregistered Securities No unregistered shares were issued in 2023 or 2022.
As of December 31, 2022, the Company had issued and outstanding 5,337,271 shares of common stock, which included 51,664 shares of restricted stock that have not yet vested. These shares were held by approximately 690 registered shareholders of record, not including beneficial holders of securities held in street name at a brokerage or other firm.
As of December 31, 2023, the Company had issued and outstanding 5,365,982 shares of common stock, which included 62,721 shares of restricted stock that have not yet vested. These shares were held by approximately 690 registered shareholders of record, not including beneficial holders of securities held in street name at a brokerage or other firm.
The data in the table below represents the high sales and low sales prices that occurred between April 1, 2021 and December 31, 2022 as reported by Nasdaq and the high bid and low bid quotations that occurred between January 1 and March 31, 2021 as reported by the OTCQX.
The data in the table below represents the high sales and low sales prices that occurred between January 1, 2022 and December 31, 2023 as reported by Nasdaq. Additionally, the table shows the dividends declared per quarter in 2023 and 2022.
Removed
The OTCQX over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Additionally, the table shows the dividends declared per quarter in 2022 and 2021.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeNet income is discussed in Management’s Discussion and Analysis on a GAAP basis unless noted as “non-GAAP.” 33 A reconcilement of the non-GAAP financial measures used by the Company to evaluate and measure the Company's performance to the most directly comparable GAAP financial measures is presented below: (Dollars in thousands, except per share data) Reconcilement of Non-GAAP Measures: Year Ended December 31 2022 2021 Performance measures Return on average assets 1.30 % 0.61 % Impact of merger expenses 1 0.00 % 0.33 % Operating return on average assets 1 (non-GAAP) 1.30 % 0.94 % Return on average equity 16.61 % 7.17 % Impact of merger expenses 1 0.00 % 3.91 % Operating return on average equity 1 (non-GAAP) 16.61 % 11.08 % Net income $ 23,438 $ 10,071 Impact of merger expenses 1 - 5,495 Net income, excluding merger expenses 1 (non-GAAP) $ 23,438 $ 15,566 Net income per share, diluted $ 4.38 $ 2.14 Impact of merger expenses 1 - 1.17 Net income per share, excluding merger expenses 1 (non-GAAP) $ 4.38 $ 3.32 Fully taxable-equivalent measures Net interest income $ 53,547 $ 44,988 Fully taxable-equivalent adjustment 316 271 Net interest income (FTE) 2 $ 53,863 $ 45,259 Efficiency ratio 3 57.4 % 76.7 % Impact of FTE adjustment -0.3 % -0.4 % Efficiency ratio (FTE) 4 57.1 % 76.3 % Net interest margin 3.19 % 2.92 % Fully tax-equivalent adjustment 0.02 % 0.02 % Net interest margin (FTE) 2 3.21 % 2.94 % Other financial measures ALLL to total loans 0.59 % 0.56 % Impact of acquired loans and fair value mark 0.31 % 0.39 % ALLL to total loans, excluding acquired loans and fair value mark (non-GAAP) 0.90 % 0.95 % ALLL to total loans 0.59 % 0.56 % Fair value mark to total loans 1.70 % 1.74 % ALLL + fair value mark to total loans (non-GAAP) 2.29 % 2.30 % Book value per share $ 25.00 $ 30.50 Impact of intangible assets (1.23 ) (3.14 ) Tangible book value per share (non-GAAP) $ 23.76 $ 27.36 1 References to merger expenses include merger and merger-related expenses and are net of tax. 2 FTE calculations use a Federal income tax rate of 21%. 3 The efficiency ratio, GAAP basis, is computed by dividing noninterest expense by the sum of net interest income and noninterest income. 4 The efficiency ratio, FTE, is computed by dividing noninterest expense by the sum of net interest income (FTE) and noninterest income. 34 Results of Operations Consolidated Return on Assets and Equity and Other Key Ratios The ratio of net income to average total assets and average shareholders' equity and certain other ratios for the years indicated are as follows: 2022 2021 Return on average assets 1.30 % 0.61 % Operating return on average assets (non-GAAP) 1.30 % 0.94 % Return on average equity 16.61 % 7.17 % Operating return on average equity (non-GAAP) 16.61 % 11.08 % Average equity to average assets 7.85 % 8.52 % Cash dividend payout ratio 27.40 % 55.95 % Efficiency ratio (FTE) 57.10 % 76.30 % Net income for the year ended December 31, 2022 was $23.4 million, or $4.38 per diluted share, a 132.7% increase compared to $10.1 million, or $2.14 per diluted share for the year ended December 31, 2021.
Biggest changeNet income is discussed in Management’s Discussion and Analysis on a GAAP basis unless noted as “non-GAAP.” 33 A reconcilement of the non-GAAP financial measures used by the Company to evaluate and measure the Company's performance to the most directly comparable GAAP financial measures is presented below: (Dollars in thousands, except per share data) Reconcilement of Non-GAAP Measures: Year Ended December 31 2023 2022 Fully taxable-equivalent measures Net interest income $ 48,969 $ 53,547 Fully taxable-equivalent adjustment 349 333 Net interest income (FTE) 1 $ 49,318 $ 53,880 Efficiency ratio 2 58.7 % 57.4 % Impact of FTE adjustment -0.4 % -0.3 % Efficiency ratio (FTE) 3 58.3 % 57.1 % Net interest margin 3.34 % 3.19 % Fully tax-equivalent adjustment 0.02 % 0.02 % Net interest margin (FTE) 1 3.36 % 3.21 % Other financial measures Book value per share $ 28.52 $ 25.00 Impact of intangible assets (2.40 ) (2.69 ) Tangible book value per share (non-GAAP) $ 26.12 $ 22.31 1 FTE calculations use a Federal income tax rate of 21%. 2 The efficiency ratio, GAAP basis, is computed by dividing noninterest expense by the sum of net interest income and noninterest income. 3 The efficiency ratio, FTE, is computed by dividing noninterest expense by the sum of net interest income (FTE) and noninterest income.
Application of Critical Accounting Policies and Critical Accounting Critical Estimates The accounting and reporting policies followed by the Company conform, in all material respects, to GAAP and to general practices within the financial services industry.
Application of Critical Accounting Policies and Critical Accounting Estimates The accounting and reporting policies followed by the Company conform, in all material respects, to GAAP and to general practices within the financial services industry.
The mismatch between repricings or maturities within a time band is commonly referred to as the “gap” for that period. A positive gap (asset sensitive) where interest rate sensitive assets 50 exceed interest rate sensitive liabilities generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment.
The mismatch between repricings or maturities within a time band is commonly referred to as the “gap” for that period. A positive gap (asset sensitive) where interest rate sensitive assets exceed interest rate sensitive liabilities generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment.
Similarly, the base case simulation performed assumes interest rates on the measurement date are unchanged for the next 24 months. Then the simulation assumes all rate indices are instantaneously 51 shocked upward and downward by 100 bps to 400 basis points, in 100 basis point increments.
Similarly, the base case simulation performed assumes interest rates on the measurement date are unchanged for the next 24 months. Then the simulation assumes all rate indices are instantaneously shocked upward and downward by 100 bps to 400 basis points, in 100 basis point increments.
The Company had four reportable segments during the period presented: the Bank, VNB Trust and Estate Services, Sturman Wealth and Masonry Capital. • Bank - The Bank’s commercial banking activities involve making loans, taking deposits and offering related services to individuals, businesses and charitable organizations.
The Company had four reportable segments during the period(s) presented: the Bank, VNB Trust and Estate Services, Sturman Wealth and Masonry Capital. • Bank - The Bank’s commercial banking activities involve making loans, taking deposits and offering related services to individuals, businesses and charitable organizations.
Details of the changes in the various components of net income are further discussed below. Net Interest Income Net interest income is computed as the difference between the interest income on earning assets and the interest expense on deposits and other interest bearing liabilities.
Details of the changes in the various components of net income are further discussed below. 35 Net Interest Income Net interest income is computed as the difference between the interest income on earning assets and the interest expense on deposits and other interest bearing liabilities.
The table shown below details the amortized cost and fair value of AFS securities at December 31, 2022 based upon contractual maturities, by major investment categories. Expected maturities may differ from contractual maturities because issuers have the right to call or prepay obligations. The tax-equivalent yield is based upon a federal tax rate of 21%.
The table shown below details the amortized cost and fair value of AFS securities at December 31, 2023 based upon contractual maturities, by major investment categories. Expected maturities may differ from contractual maturities because issuers have the right to call or prepay obligations. The tax-equivalent yield is based upon a federal tax rate of 21%.
At December 31, 2022, the securities issued by political subdivisions or agencies were highly rated with 100% of the municipal bonds having A+ or higher ratings. Approximately 63% of the municipal bonds are general obligation bonds, and issuers are geographically diverse. The Company held no issues that exceeded 10% of the Company’s shareholders' equity at December 31, 2022.
At December 31, 2023, the securities issued by political subdivisions or agencies were highly rated with 100% of the municipal bonds having A+ or higher ratings. Approximately 63% of the municipal bonds are general obligation bonds, and issuers are geographically diverse. The Company held no issues that exceeded 10% of the Company’s shareholders' equity at December 31, 2023.
The Bank exceeds the thresholds to be considered well capitalized as of December 31, 2022. On September 17, 2019 the FDIC finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations, referred to as, the community bank leverage ratio framework, as required by the EGRRCPA.
The Bank exceeds the thresholds to be considered well capitalized as of December 31, 2023. On September 17, 2019 the FDIC finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations, referred to as, the community bank leverage ratio framework, as required by the EGRRCPA.
Management believes that an inverted or relatively flat yield curve could adversely the Company’s net interest income in 2023. Liquidity Liquidity represents the Company’s ability to provide funds to meet customer demand for loan and deposit withdrawals without impairing profitability.
Management believes that an inverted or relatively flat yield curve could adversely the Company’s net interest income in 2024. Liquidity Liquidity represents the Company’s ability to provide funds to meet customer demand for loan and deposit withdrawals without impairing profitability.
Financial Statements and Supplementary Data. 41 BALANCE SHEET ANALYSIS Securities The investment securities portfolio has a primary role in the management of the Company’s liquidity requirements and interest rate sensitivity, as well as generating significant interest income. Investment securities also play a key role in diversifying the Company’s balance sheet.
Financial Statements and Supplementary Data. 40 BALANCE SHEET ANALYSIS Securities The investment securities portfolio has a primary role in the management of the Company’s liquidity requirements and interest rate sensitivity, as well as generating significant interest income. Investment securities also play a key role in diversifying the Company’s balance sheet.
The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income (FTE) and net interest margin (FTE). The following table details the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest bearing liabilities, for the years ended December 31, 2022, 2021, and 2020.
The level of interest rates and the volume and mix of earning assets and interest bearing liabilities impact net interest income (FTE) and net interest margin (FTE). The following table details the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest bearing liabilities, for the years ended December 31, 2023, 2022, and 2021.
Yields on tax-exempt securities have been computed on a tax-equivalent basis using the federal corporate income tax rate of 21 percent. As stated, the preceding table reflects the distribution of the contractual maturities of the investment portfolio at December 31, 2022.
Yields on tax-exempt securities have been computed on a tax-equivalent basis using the federal corporate income tax rate of 21 percent. As stated, the preceding table reflects the distribution of the contractual maturities of the investment portfolio at December 31, 2023.
Business.” In addition, information regarding the Company’s risk-based capital at December 31, 2022 and December 31, 2021 is presented in Note 15 – Capital Requirements of the Notes to Consolidated Financial Statements, contained in Item 8. Financial Statements and Supplementary Data.
Business.” In addition, information regarding the Company’s risk-based capital at December 31, 2023 and December 31, 2022 is presented in Note 15 – Capital Requirements of the Notes to Consolidated Financial Statements, contained in Item 8. Financial Statements and Supplementary Data.
Cash flow projections are subject to change based upon changes to market interest rates. 43 Loan Portfolio The Company’s objective is to maintain the historically strong credit quality of the loan portfolio by maintaining rigorous underwriting standards.
Cash flow projections are subject to change based upon changes to market interest rates. 42 Loan Portfolio The Company’s objective is to maintain the historically strong credit quality of the loan portfolio by maintaining rigorous underwriting standards.
Net aggregate unrealized gains or losses on these securities are included, net of taxes, as a component of shareholders’ equity. All of the Company’s unrestricted securities were investment grade or better as of December 31, 2022.
Net aggregate unrealized gains or losses on these securities are included, net of taxes, as a component of shareholders’ equity. All of the Company’s unrestricted securities were investment grade or better as of December 31, 2023.
Additional discussion of the accounting policies and composition of goodwill and other intangibles assets is presented in Note 1 – Summary of Significant Accounting Policies, Note 2 - Business Combinations and Note 8 – Goodwill and Other Intangible Assets, in the Notes to Consolidated Financial Statements. 32 • Income tax accounting policies have the objective to recognize the amount of taxes payable or refundable for the current year and the deferred tax assets and liabilities for future tax consequences of events that have been recognized in an entity’s financial statements or tax returns.
Additional discussion of the accounting policies and composition of goodwill and other intangibles assets is presented in Note 1 – Summary of Significant Accounting Policies and Note 8 – Goodwill and Other Intangible Assets, in the Notes to Consolidated Financial Statements. • Income tax accounting policies have the objective to recognize the amount of taxes payable or refundable for the current year and the deferred tax assets and liabilities for future tax consequences of events that have been recognized in an entity’s financial statements or tax returns.
Using the most recent capital requirements, the Bank’s capital ratios remain above the levels designated by bank regulators as "well capitalized" at December 31, 2022.
Using the most recent capital requirements, the Bank’s capital ratios remain above the levels designated by bank regulators as "well capitalized" at December 31, 2023.
Additional information concerning management’s methodology in determining the adequacy of the allowance for loan losses is contained later in this section under Allowance for Loan Losses, in addition to Note 1 – Summary of Significant Accounting Policies and Note 5 – Allowance for Loan Losses of the Notes to Consolidated Financial Statements, found in Item 8.
Additional information concerning management’s methodology in determining the adequacy of the ACL is contained later in this section under allowance for credit losses, in addition to Note 1 – Summary of Significant Accounting Policies and Note 5 – Allowance for Credit Losses of the Notes to Consolidated Financial Statements, found in Item 8. Financial Statements and Supplementary Data.
The Company’s holdings of restricted securities totaled $5.1 million and $5.0 million at December 31, 2022 and December 31, 2021, respectively, and consisted of stock in the Federal Reserve Bank, stock in the FHLB, and stock in CBB Financial Corporation, the holding company for Community Bankers’ Bank, and an investment in an SBA loan fund.
The Company’s holdings of restricted securities totaled $8.4 million and $5.1 million at December 31, 2023 and December 31, 2022, respectively, and consisted of stock in the Federal Reserve Bank, stock in the FHLB, and stock in CBB Financial Corporation, the holding company for Community Bankers’ Bank, and an investment in an SBA loan fund.
Interest expense as a percentage of average earning assets declined to 19 bps for 2022, compared to 21 and 44 bps for 2021 and 2020, respectively. Net interest margin will be impacted by future changes in short-term and long-term interest rate levels on deposits, as well as the impact from the competitive environment.
Interest expense as a percentage of average earning assets increased to 143 bps for 2023, compared to 19 and 21 bps for 2022 and 2021, respectively. Net interest margin will be impacted by future changes in short-term and long-term interest rate levels on deposits, as well as the impact from the competitive environment.
To illustrate the difference between contractual maturity and average life, consider the difference for the fixed rate mortgage-backed securities (MBS) component of this portfolio. At December 31, 2022, the weighted average maturity of the fixed rate MBS sector was 17.5 years, and the projected average life for this group of securities is 7.7 years.
To illustrate the difference between contractual maturity and average life, consider the difference for the fixed rate mortgage-backed securities (MBS) component of this portfolio. At December 31, 2023, the weighted average maturity of the fixed rate MBS sector was 16.5 years, and the projected average life for this group of securities is 7.3 years.
This represents approximately 61% of the investment portfolio’s AFS balance at December 31, 2022 that will be available to support the future liquidity needs of the Company.
This represents approximately 46% of the investment portfolio’s AFS balance at December 31, 2023 that will be available to support the future liquidity needs of the Company.
Consumer loans ended 2022 with balances $8.0 million lower than the prior year-end, primarily due to normal amortization within the student loan portfolio. 44 The following table presents the maturity/repricing distribution of the Company’s loans at December 31, 2022.
Consumer loans ended 2023 with balances $7.4 million lower than the prior year-end, primarily due to normal amortization within the student loan portfolio. The following table presents the maturity/repricing distribution of the Company’s loans at December 31, 2023.
The Company’s real estate loan portfolio decreased by $91.3 million to a balance of $819.9 million at December 31, 2022 from $911.1 million at December 31, 2021. This category comprises 87.6% of all loans, and these loans are secured by mortgages on real property located principally in our market area.
The Company’s real estate loan portfolio increased by $82.3 million to a balance of $902.1 million at December 31, 2023 from $819.9 million at December 31, 2022. This category comprises 82.6% of all loans, and these loans are secured by mortgages on real property located principally in our market area.
The decrease in 2022 also was impacted by the decline in overall loan balances as part of the Company's strategy to further improve asset quality through negotiation of loan paydowns as well as PPP forgiveness. The allowance for loan losses as a percentage of total loans was 0.59% at December 31, 2022 compared to 0.56% at December 31, 2021.
The decrease in 2022 was impacted by the decline in overall loan balances as part of the Company's strategy to further improve asset quality through negotiation of loan paydowns. The allowance for credit losses as a percentage of total loans was 0.77% at December 31, 2023 compared to 0.59% at December 31, 2022.
Another indication of the investment portfolio’s liquidity potential is shown by the projected annual principal cash flow from maturities, callable bonds, and monthly principal repayments. For the next three years, the principal cash flows are estimated to be $220.9 million for 2023, $77.2 million for 2024, and $31.0 million for 2025, based upon rates remaining at current levels.
Another indication of the investment portfolio’s liquidity potential is shown by the projected annual principal cash flow from maturities, callable bonds, and monthly principal repayments. For the next three years, the principal cash flows are estimated to be $161.0 million for 2024, $32.4 million for 2025, and $25.0 million for 2026, based upon rates remaining at current levels.
Of this amount, approximately $323.2 million represented loans on 1-4 family residential properties. Commercial real estate loans totaled $459.1 million as of December 31, 2022. Sources of repayment are from the borrower’s operating profits, cash flows and liquidation of pledged collateral.
Of this amount, approximately $317.6 million represented loans on 1-4 family residential properties. Commercial real estate loans totaled $550.9 million as of December 31, 2023. Sources of repayment are from the borrower’s operating profits, cash flows and liquidation of pledged collateral.
Net interest income represents the principal source of revenue for the Company and accounted for 79.7% of the total revenue in 2022. Net interest margin (FTE) is the ratio of taxable-equivalent 35 net interest income to average earning assets for the period.
Net interest income represents the principal source of revenue for the Company and accounted for 84.3% of the total revenue in 2023. Net interest margin (FTE) is the ratio of taxable-equivalent net interest income to average earning assets for the period.
The Company offers ICS ® , which allows customers access to multi-million-dollar FDIC insurance on funds placed into demand deposit and/or money market deposit accounts. As of December 31, 2022, the reciprocal ICS ® balances included in demand deposit and money market accounts were $42.0 million and $92.6 million, respectively.
The Company offers ICS ® , which allows customers access to multi-million-dollar FDIC insurance on funds placed into demand deposit and/or money market deposit accounts. As of December 31, 2023, the reciprocal ICS ® balances included in demand deposit and money market accounts were $44.2 million and $107.3 million, respectively.
Following is a schedule of future minimum rental payments under non-cancelable operating leases that have initial or remaining terms in excess of one year as of December 31, 2022: (Dollars in thousands) 1 year or less 1-3 years 3-5 years After 5 years Total Operating lease obligations $ 1,567 $ 2,387 $ 1,398 $ 1,141 $ 6,493
Following is a schedule of future minimum rental payments under non-cancelable operating leases that have initial or remaining terms in excess of one year as of December 31, 2023: (Dollars in thousands) 1 year or less 1-3 years 3-5 years After 5 years Total Operating lease obligations $ 1,520 $ 2,532 $ 1,877 $ 913 $ 6,842
More information on this sale can be found under Goodwill and Other Intangible Assets in Note 8 and Sale of Sturman Wealth Segment in Note 21 of the Notes to Consolidated Financial Statements, which is found in Item 8.
More 34 information on this sale can be found under Sale of Sturman Wealth Segment in Note 27 of the Notes to Consolidated Financial Statements, which is found in Item 8.
As of December 31, 2022, the Company had an off-balance sheet letter of credit in the amount of $30.0 million, issued in favor of the Commonwealth of Virginia Department of the Treasury to secure public fund depository accounts.
As of December 31, 2022, the Company had an off-balance sheet letter of credit in the amount of $30.0 million, issued in favor of the Commonwealth of Virginia Department of the Treasury to secure public fund depository accounts. This letter of credit was cancelled by the Company in 2023 and was previously secured by commercial mortgages.
The average balance for loans as a percentage of earnings assets for 2022 was 58.3%, compared to 66.1% and 79.4% in 2021 and 2020, respectively. The 2022 net interest margin (FTE) improved 27 bps to 3.21% from 2.94% in 2021. The 2021 net interest margin (FTE) declined 23 bps from 3.17% in 2020.
The average balance for loans as a percentage of earnings assets for 2023 was 66.8%, compared to 58.3% and 66.1% in 2022 and 2021, respectively. 37 The 2023 net interest margin (FTE) improved 15 bps to 3.36% from 3.21% in 2022. The 2022 net interest margin (FTE) improved 27 bps from 2.94% in 2021.
The Company’s loan portfolio totaled $936.4 million as of December 31, 2022 or 57.7% of total assets. Loan balances decreased $124.8 million, or 11.8%, from the balance of $1.1 billion as of December 31, 2021. Note that all loan balances are presented net of credit and other fair value discounts, when applicable.
The Company’s loan portfolio totaled $1.1 billion as of December 31, 2023 or 66.4% of total assets. Loan balances increased $156.3 million, or 16.7%, from the balance of $936.4 million as of December 31, 2022. Note that all loan balances are presented net of credit and other fair value discounts, when applicable.
In accordance with ASC 320, “Investments - Debt and Equity Securities,” the Company has categorized its unrestricted securities portfolio as Available for Sale. Securities classified as AFS may be sold in the future, prior to maturity.
Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company. In accordance with ASC 320, “Investments - Debt and Equity Securities,” the Company has categorized its unrestricted securities portfolio as Available for Sale. Securities classified as AFS may be sold in the future, prior to maturity.
Borrowing Lines As of December 31, 2022 Correspondent Banks $ 117,000 Federal Home Loan Bank of Atlanta 39,120 Total Available $ 156,120 As of December 31, 2022, the Company had no outstanding advances with the FHLB. Any excess funds are sold on a daily basis in the federal funds market or maintained on account at the Federal Reserve.
Borrowing Lines As of December 31, 2023 Correspondent Banks $ 119,000 Federal Home Loan Bank of Atlanta 70,446 Total Available $ 189,446 As of December 31, 2023, the Company had $66.5 million in outstanding advances with the FHLB. 51 Any excess funds are sold on a daily basis in the federal funds market or maintained on account at the Federal Reserve.
In simulating the effects of upward and downward changes in market rates to net interest income over a rolling two-year horizon, the model utilizes a “static” balance sheet approach where balance sheet composition or mix as of the measurement date is maintained over the two-year horizon.
Furthermore, this sensitivity analysis does not reflect actions that the ALCO might take in responding to or anticipating changes in interest rates. 50 In simulating the effects of upward and downward changes in market rates to net interest income over a rolling two-year horizon, the model utilizes a “static” balance sheet approach where balance sheet composition or mix as of the measurement date is maintained over the two-year horizon.
The tax-equivalent yield on average earning assets for 2022 of 3.40% was 25 bps higher than the 2021 yield of 3.15%. The 2021 tax-equivalent yield on average earning assets was 47 bps lower than the comparable 2020 yield of 3.62%. Loan yields for 2022 were 4.52%, improving 20 bps from the loan yield of 4.32% for 2021.
The tax-equivalent yield on average earning assets for 2023 of 4.79% was 140 bps higher than the 2022 yield of 3.40%. The 2022 tax-equivalent yield on average earning assets was 25 bps higher than the comparable 2021 yield of 3.15%. Loan yields for 2023 were 5.72%, improving 120 bps from the loan yield of 4.52% for 2022.
Consolidated Average Balance Sheets and Analysis of Net Interest Income (FTE) 2022 2021 2020 Interest Average Interest Average Interest Average (Dollars in thousands) Average Balance Income Expense Yield/ Cost Average Balance Income Expense Yield/ Cost Average Balance Income Expense Yield/ Cost ASSETS Interest earning assets: Securities Taxable securities $ 373,680 $ 8,696 2.33 % $ 198,450 $ 2,980 1.50 % $ 101,199 $ 1,706 1.69 % Tax exempt securities 1 65,861 1,582 2.40 % 53,716 1,292 2.41 % 20,195 601 2.98 % Total securities 1 439,541 10,278 2.34 % 252,166 4,272 1.69 % 121,394 2,307 1.90 % Loans: Real estate 847,238 38,011 4.49 % 808,707 35,303 4.37 % 404,391 16,680 4.12 % Commercial 81,410 3,583 4.40 % 145,462 5,731 3.94 % 132,282 5,115 3.87 % Consumer 49,619 2,637 5.31 % 63,039 2,865 4.54 % 64,181 3,150 4.91 % Total Loans 978,267 44,231 4.52 % 1,017,208 43,899 4.32 % 600,854 24,945 4.15 % Fed funds sold 100,033 1,088 1.09 % 109,104 139 0.13 % 34,130 104 0.30 % Other interest-bearing deposits 161,260 1,467 0.91 % 160,960 233 0.14 % - - - Total earning assets 1,679,101 57,064 3.40 % 1,539,438 48,543 3.15 % 756,378 27,356 3.62 % Less: Allowance for loan losses (5,702 ) (5,297 ) (4,886 ) Total non-earning assets 124,525 115,193 46,186 Total assets $ 1,797,924 $ 1,649,334 $ 797,678 LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities: Interest bearing deposits: Interest checking $ 409,504 $ 230 0.06 % $ 355,419 $ 261 0.07 % $ 132,465 $ 120 0.09 % Money market and savings deposits 563,374 2,097 0.37 % 529,027 2,047 0.39 % 261,370 1,704 0.65 % Time deposits 144,564 657 0.45 % 152,211 1,108 0.73 % 100,846 1,454 1.44 % Total interest-bearing deposits 1,117,442 2,984 0.27 % 1,036,657 3,416 0.33 % 494,681 3,278 0.66 % Borrowings - - - 23,700 (280 ) -1.18 % 15,419 73 0.47 % Junior subordinated debt 3,389 200 5.90 % 2,565 148 5.77 % - - - Total interest-bearing liabilities 1,120,831 3,184 0.28 % 1,062,922 3,284 0.31 % 510,100 3,351 0.66 % Non-interest-bearing liabilities: Demand deposits 526,389 434,989 203,143 Other liabilities 9,581 10,875 4,697 Total liabilities 1,656,801 1,508,786 717,940 Shareholders' equity 141,123 140,548 79,738 Total liabilities & shareholders' equity $ 1,797,924 $ 1,649,334 $ 797,678 Net interest income (FTE) $ 53,880 $ 45,259 $ 24,005 Interest rate spread 2 3.12 % 2.84 % 2.96 % Cost of funds 0.19 % 0.22 % 0.47 % Interest expense as a percentage of average earning assets 0.19 % 0.21 % 0.44 % Net interest margin (FTE) 3 3.21 % 2.94 % 3.17 % (1) Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 21%.
Consolidated Average Balance Sheets and Analysis of Net Interest Income (FTE) 2023 2022 2021 Interest Average Interest Average Interest Average (Dollars in thousands) Average Balance Income Expense Yield/ Cost Average Balance Income Expense Yield/ Cost Average Balance Income Expense Yield/ Cost ASSETS Interest earning assets: Securities Taxable securities $ 400,189 $ 11,921 2.98 % $ 373,680 $ 8,696 2.33 % $ 198,450 $ 2,980 1.50 % Tax exempt securities 1 66,895 1,655 2.47 % 65,861 1,582 2.40 % 53,716 1,292 2.41 % Total securities 1 467,084 13,576 2.91 % 439,541 10,278 2.34 % 252,166 4,272 1.69 % Loans: Real estate 839,326 47,996 5.72 % 847,238 38,011 4.49 % 808,707 35,303 4.37 % Commercial 100,122 5,121 5.11 % 81,410 3,583 4.40 % 145,462 5,731 3.94 % Consumer 41,140 2,936 7.14 % 49,619 2,637 5.31 % 63,039 2,865 4.54 % Total Loans 980,588 56,053 5.72 % 978,267 44,231 4.52 % 1,017,208 43,899 4.32 % Fed funds sold 3,825 207 5.41 % 100,033 1,088 1.09 % 109,104 139 0.13 % Other interest bearing deposits 15,489 501 3.23 % 161,260 1,467 0.91 % 160,960 233 0.14 % Total earning assets 1,466,986 70,337 4.79 % 1,679,101 57,064 3.40 % 1,539,438 48,543 3.15 % Less: Allowance for credit losses (7,907 ) (5,702 ) (5,297 ) Total non-earning assets 115,908 124,525 115,193 Total assets $ 1,574,987 $ 1,797,924 $ 1,649,334 LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities: Interest bearing deposits: Interest checking $ 321,154 $ 346 0.11 % $ 409,504 $ 230 0.06 % $ 355,419 $ 261 0.07 % Money market and savings deposits 421,083 9,673 2.30 % 563,374 2,097 0.37 % 529,027 2,047 0.39 % Time deposits 220,348 8,617 3.91 % 144,564 657 0.45 % 152,211 1,108 0.73 % Total interest bearing deposits 962,585 18,636 1.94 % 1,117,442 2,984 0.27 % 1,036,657 3,416 0.33 % Borrowings 37,286 1,934 5.19 % - - - 23,700 (280 ) -1.18 % Federal Funds Purchased 2,632 138 5.24 % - - - - - - Junior subordinated debt 3,436 313 9.11 % 3,389 200 5.90 % 2,565 148 5.77 % Total interest bearing liabilities 1,005,939 21,021 2.09 % 1,120,831 3,184 0.28 % 1,062,922 3,284 0.31 % Non-interest bearing liabilities: Demand deposits 418,091 526,389 434,989 Other liabilities 9,989 9,581 10,875 Total liabilities 1,434,019 1,656,801 1,508,786 Shareholders' equity 139,443 141,123 140,548 Total liabilities & shareholders' equity $ 1,573,462 $ 1,797,924 $ 1,649,334 Net interest income (FTE) $ 49,316 $ 53,880 $ 45,259 Interest rate spread 2 2.70 % 3.12 % 2.84 % Cost of funds 1.48 % 0.19 % 0.22 % Interest expense as a percentage of average earning assets 1.43 % 0.19 % 0.21 % Net interest margin (FTE) 3 3.36 % 3.21 % 2.94 % (1) Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 21%.
Following is a table illustrating the average balances of deposit accounts as a percentage of total deposit account balances. 38 (Dollars in thousands) 2022 2021 2020 Average Balance % of Total Deposits Average Balance % of Total Deposits Average Balance % of Total Deposits Non-interest demand deposits $ 526,389 32.0 % $ 434,989 29.6 % $ 203,143 29.1 % Interest checking accounts 409,504 24.9 % 355,419 24.2 % 132,465 19.0 % Money market and savings deposit accounts 563,374 34.3 % 529,027 35.9 % 261,370 37.4 % Total non-interest and low-cost deposit accounts $ 1,499,267 91.2 % $ 1,319,435 89.7 % $ 596,978 85.5 % Time deposits 144,564 8.8 % 152,211 10.3 % 100,846 14.5 % Total deposit account balances $ 1,643,831 100.0 % $ 1,471,646 100.0 % $ 697,824 100.0 % Provision for Loan Losses The level of the allowance reflects changes in the size of the portfolio or in any of its components, as well as management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, and economic, political and regulatory conditions.
(Dollars in thousands) 2023 2022 2021 Average Balance % of Total Deposits Average Balance % of Total Deposits Average Balance % of Total Deposits Non-interest demand deposits $ 418,091 30.3 % $ 526,389 32.0 % $ 434,989 29.6 % Interest checking accounts 321,154 23.2 % 409,504 24.9 % 355,419 24.2 % Money market and savings deposit accounts 421,083 30.5 % 563,374 34.3 % 529,027 35.9 % Total non-interest and low-cost deposit accounts $ 1,160,328 84.0 % $ 1,499,267 91.2 % $ 1,319,435 89.7 % Time deposits 220,348 16.0 % 144,564 8.8 % 152,211 10.3 % Total deposit account balances $ 1,380,676 100.0 % $ 1,643,831 100.0 % $ 1,471,646 100.0 % Provision for Credit Losses The level of the ACL reflects changes in the size of the portfolio or in any of its components, as well as management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, and economic, political and regulatory conditions.
The following is a summary of the changes in the allowance for loan losses for the years ended December 31, 2022, 2021, and 2020: (Dollars in thousands) 2022 2021 2020 Allowance for loan losses, January 1 $ 5,984 $ 5,455 $ 4,209 Charge-offs (1,255 ) (835 ) (805 ) Recoveries 717 350 429 Provision for loan losses 106 1,014 1,622 Allowance for loan losses, December 31 $ 5,552 $ 5,984 $ 5,455 Allowance for loan losses as a percentage of period-end total loans 0.59 % 0.56 % 0.90 % 39 Noninterest Income The major components of noninterest income are detailed below.
The following is a summary of the changes in the allowance for credit losses for the years ended December 31, 2023, 2022, and 2021: (Dollars in thousands) 2023 2022 2021 Allowance for credit losses, January 1 $ 5,552 $ 5,984 $ 5,455 Impact of ASC 326 adoption $ 2,491 $ - $ - Charge-offs (721 ) (1,255 ) (835 ) Recoveries 377 717 350 Provision for credit losses 696 106 1,014 Allowance for credit losses, December 31 $ 8,395 $ 5,552 $ 5,984 Allowance for credit losses as a percentage of period-end total loans 0.77 % 0.59 % 0.56 % 38 Noninterest Income The major components of noninterest income are detailed below.
Net interest income (FTE) for 2021 totaled $45.3 million, a $21.3 million increase over the 2020 total of $24.0 million. Average earning assets increased $139.7 million or 9.1% in 2022 compared to 2021 and increased $783.1 million or 103.5% in 2021 compared to 2020.
Net interest income (FTE) for 2022 totaled $53.9 million, a $8.6 million increase over the 2021 total of $45.3 million. Average earning assets decreased $212.1 million or 12.6% in 2023 compared to 2022 and increased $139.7 million or 9.1% in 2022 compared to 2021.
The ratio of net charge-offs to average loans was 0.05% and 0.05% for 2022 and 2021, respectively. The table below provides an allocation of year-end allowance for loan losses by loan type; however, allocation of a portion of the allowance to one loan category does not preclude its availability to absorb losses in other categories.
The table below provides an allocation of year-end allowance for credit losses by loan type; however, allocation of a portion of the allowance to one loan category does not preclude its availability to absorb losses in other categories.
Management is in communication with the issuer regarding the alternative reference rate that will apply after the discontinuance of LIBOR. The Trust II issuance of capital securities and the respective subordinated debentures are callable at any time.
The interest rate on the capital security resets every three months at 1.70% above the then current three-month LIBOR and is paid quarterly. Management is in communication with the issuer regarding the alternative reference rate that will apply after the discontinuance of LIBOR. The Trust II issuance of capital securities and the respective subordinated debentures are callable at any time.
The Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios of the Bank were 16.82%, 16.82%, 17.38% and 9.62%, respectively, as of December 31, 2022, exceeding the minimum requirements.
The Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios of the Bank were 17.29%, 17.29%, 18.12% and 11.05%, respectively, as of December 31, 2023, exceeding the minimum requirements.
As of December 31, 2022, the Company’s investment portfolio totaled $543.3 million, with obligations of U.S. government corporations and government-sponsored enterprises amounting to $438.3 million, or approximately 81% of the total. The Company’s investment portfolio totaled $308.8 million as of December 31, 2021. In 2022, $248 million of U.S.
As of December 31, 2023, the Company’s investment portfolio totaled $429.0 million, with obligations of U.S. government corporations and government-sponsored enterprises amounting to $316.5 million, or approximately 74% of the total. The Company’s investment portfolio totaled $543.3 million as of December 31, 2022.
The effective tax rate was lower in 2021 due to the impact on the combined income statement of low-income housing tax credits acquired during the Merger. The effective income tax rates for 2022 and 2021 were lower than the U.S. statutory rate of 21% due to the effect of tax-exempt income from municipal bonds and bank owned life insurance policies.
The effective income tax rates for 2023 and 2022 were lower than the U.S. statutory rate of 21% due to the effect of tax-exempt income from municipal bonds and tax-exempt interest from bank owned life insurance policies.
Sturman Wealth earned $122 thousand in 2022 compared to $384 thousand in the prior year. VNB Trust and Estate Services realized net income of $1.6 million in 2022, compared to $162 thousand in 2021. Masonry Capital realized net income of $103 thousand in 2022, compared to $561 thousand in 2021.
VNB Trust and Estate Services realized a net loss of $307.0 thousand in 2023, compared to net income of $1.6 million in 2022. Masonry Capital realized net income of $145 thousand in 2023, compared to $103 thousand in 2022. Sturman Wealth earned $122 thousand in the prior year and was sold in the fourth quarter of 2022.
(Dollars in thousands) December 31, 2022 December 31, 2021 Amount Percent Amount Percent U.S. treasury securities $ 242,470 45 % $ - 0 % U.S. government agencies 28,755 6 % 31,581 11 % Mortgage-backed securities/CMOs 167,076 31 % 170,964 56 % Corporate bonds 18,729 3 % - 0 % Municipal bonds 81,156 15 % 101,272 33 % Total available for sale securities at fair value $ 538,186 100 % $ 303,817 100 % All mortgage-backed securities included in the above tables were issued by U.S. government agencies and corporations.
(Dollars in thousands) December 31, 2023 December 31, 2022 Amount Percent Amount Percent U.S. treasury securities $ 121,708 29 % $ 242,470 45 % U.S. government agencies 39,581 9 % 28,755 6 % MBS/CMOs 155,144 37 % 167,076 31 % Corporate bonds 19,129 5 % 18,729 3 % Municipal bonds 85,033 20 % 81,156 15 % Total available for sale securities at fair value $ 420,595 100 % $ 538,186 100 % All mortgage-backed securities included in the above tables were issued by U.S. government agencies and corporations.
See Note 1 – Summary of Significant Accounting Policies and Note 3 – Securities, in the Notes to Consolidated Financial Statements, for further details on the accounting policies for other-than-temporary impairment of securities and the methodology used by management to make this evaluation. • Intangible asset accounting policies require that goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually, or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed.
Additional discussion of valuation methodologies is presented in Note 17 – Fair Value Measurements, in the Notes to Consolidated Financial Statements. • Intangible asset accounting policies require that goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually, or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed.
Financial Statements and Supplementary Data. Based on management’s continuing evaluation of the loan portfolio in 2022, the Company recorded a provision for loan losses of $106 thousand compared to $1.0 million in 2021 and $1.6 million in 2020.
Based on management’s continuing evaluation of the loan portfolio in 2023, the Company recorded a provision for credit losses of $734 thousand, which includes $38 thousand of provision for unfunded commitments, compared to $106 thousand in 2022 and $1.0 million in 2021.
The Company’s low-cost deposit accounts, which include both non-interest and interest bearing checking accounts as well as money market accounts, represented 92.2% of total deposit account balances at December 31, 2022 and compared favorably to the 91.0% of total deposit account balances at December 31, 2021.
The Company’s low-cost deposit accounts, which include both non-interest and interest bearing checking accounts as well as money market accounts, represented 77.4% of total deposit account balances at December 31, 2023 compared to 92.2% of total deposit account balances at December 31, 2022, declining due to the rising rate environment and customers' desires to earn higher rates of interest.
Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented. ​Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods, other financial institutions, and between different sources of interest income.
Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented.
A continuing primary driver of the Company’s low cost of funds is the Company’s level of non-interest bearing demand deposits and low-cost deposit accounts.
A continuing primary driver of the Company’s low cost of funds compared to peers is the Company’s level of non-interest bearing demand deposits and low-cost deposit accounts. Following is a table illustrating the average balances of deposit accounts as a percentage of total deposit account balances.
In 2022 and 2021, leasing/rental expenditures of $528 thousand and $520 thousand respectively, 53 (including reimbursements for taxes, insurance, and other expenses) were paid to an entity indirectly owned by a director of the Company.
Related Party Transactions The Company and its subsidiaries have business dealings with companies owned by directors and beneficial shareholders of the Company. In 2023 and 2022, leasing/rental expenditures of $543 thousand and $528 thousand respectively, (including reimbursements for taxes, insurance, and other expenses) were paid to an entity indirectly owned by a director of the Company.
This increase was primarily the result of a $8.6 million increase in net interest income, a $3.2 million increase in noninterest income, a $908 thousand reduction in provision for loan losses and a $4.0 million decrease in noninterest expense. Each component of such year-over-year changes are described in more detail below.
This decrease was the result of a $4.6 million decrease in net interest income, a $4.6 million decrease in noninterest income, offset by a $4.5 million decrease in noninterest expense. Each component of such year-over-year changes are described in more detail below.
At December 31, 2022 and 2021, the Company had loans classified as non-accrual with balances of $673 thousand and $495 thousand, respectively.
At December 31, 2023 and 2022, the Company had loans classified as non-accrual with balances of $1.9 million and $673 thousand, respectively. The non-accrual balance as of December 31, 2023 consists of eight loans to seven borrowers.
Average Balances and Rates Paid (Dollars in thousands) Years Ended December 31 2022 2021 Average Average Average Average Balance Rate Balance Rate Non-interest-bearing demand deposits $ 526,389 $ 434,989 Interest-bearing deposits: Interest checking 409,504 0.06 % 355,419 0.07 % Money market and savings deposits 563,374 0.37 % 529,027 0.39 % Time deposits 144,564 0.45 % 152,211 0.73 % Total interest-bearing deposits $ 1,117,442 0.27 % $ 1,036,657 0.33 % Total deposits $ 1,643,831 $ 1,471,646 As of December 31, 2022 and 2021, the estimated amounts of total uninsured deposits were $459.4 million and $585.6 million, respectively.
Average Balances and Rates Paid (Dollars in thousands) Years Ended December 31 2023 2022 Average Average Average Average Balance Rate Balance Rate Non-interest bearing demand deposits $ 418,091 $ 526,389 Interest bearing deposits: Interest checking 321,154 0.11 % 409,504 0.06 % Money market and savings deposits 421,083 2.30 % 563,374 0.37 % Time deposits 220,348 3.91 % 144,564 0.45 % Total interest bearing deposits $ 962,585 1.94 % $ 1,117,442 0.27 % Total deposits $ 1,380,676 $ 1,643,831 As of December 31, 2023 and 2022, the estimated amounts of total uninsured deposits were $360.0 million and $459.4 million, respectively.
Non-GAAP Presentations The accounting and reporting policies of the Company conform to GAAP and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Company’s performance.
Non-GAAP Presentations The accounting and reporting policies of the Company conform to GAAP and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Company’s performance. These include adjusted tangible book value per share and the following fully-taxable equivalent measures: net interest income-FTE, efficiency ratio-FTE and net interest margin-FTE.
During 2022, there were $1.3 million in loan balances charged off, with a total of $717 thousand in recoveries of previously charged-off balances, resulting in net charge-offs of $538 thousand. During 2021, there were $835 thousand in loan balances charged off, with a total of $350 thousand in recoveries of previously charged-off balances, resulting in net charge-offs of $485 thousand.
During 2022, there were $1.3 million in loan balances charged off, with a total of $717 thousand in recoveries of previously charged-off balances, resulting in net charge-offs of $538 thousand. The ratio of net charge-offs to average loans was 0.04% and 0.05% for 2023 and 2022, respectively.
The non-GAAP measures used by management enhance comparability by excluding the effects of (1) items that do not reflect ongoing operating performance, such as merger and merger-related expenses, (2) items that do not reflect the implicit percentage of the ALLL to total loans, such as the impact of fair value adjustment and PPP loans, (3) balances of intangible assets, including goodwill, that vary significantly between institutions, and (4) tax benefits that are not consistent across different opportunities for investment.
The non-GAAP measures used by management enhance comparability by excluding the effects of (1) balances of intangible assets, including goodwill, that vary significantly between institutions and (2) tax benefits that are not consistent across different opportunities for investment.
Allocation of the Allowance for Loan Losses December 31, 2022 (Dollars in thousands) Allowance Percentage of loans in each category to total loans Commercial loans $ 194 7.60 % Real estate construction and land 221 4.01 % Real estate mortgages 4,438 83.54 % Consumer 699 4.85 % Total $ 5,552 100.00 % December 31, 2021 (Dollars in thousands) Allowance Percentage of loans in each category to total loans Commercial loans $ 252 9.11 % Real estate construction 399 7.48 % Real estate mortgages 4,478 78.38 % Consumer 855 5.03 % Total $ 5,984 100.00 % Deposits Depository accounts represent the Company’s primary source of funding and are comprised of demand deposits, interest-bearing checking accounts, money market deposit accounts and time deposits.
Allocation of the Allowance for Credit Losses December 31, 2023 (Dollars in thousands) Allowance Percentage of loans in each category to total loans Commercial loans $ 193 13.95 % Real estate construction and land 462 3.08 % 1-4 family residential mortgages 1,492 29.07 % Real estate mortgages 5,261 50.42 % Consumer 987 3.48 % Total $ 8,395 100.00 % December 31, 2022 (Dollars in thousands) Allowance Percentage of loans in each category to total loans Commercial loans $ 194 7.60 % Real estate construction and land 221 4.01 % 1-4 family residential mortgages 1,618 34.51 % Real estate mortgages 2,820 49.03 % Consumer 699 4.85 % Total $ 5,552 100.00 % Deposits Depository accounts represent the Company’s primary source of funding and are comprised of demand deposits, interest bearing checking accounts, money market deposit accounts and time deposits.
Maturities of time deposits in excess of FDIC insurance limits as of December 31, 2022 were as follows: (Dollars in thousands) Amount Percentage Three months or less $ 18,657 64.49 % Over three months to six months 3,373 11.66 % Over six months to one year 1,395 4.82 % Over one year 5,505 19.03 % Totals $ 28,930 100.00 % Borrowings Borrowings, consisting primarily of FHLB advances and federal funds purchased, are additional sources of funds for the Company.
Maturities of time deposits in excess of FDIC insurance limits as of December 31, 2023 were as follows: (Dollars in thousands) Amount Percentage Three months or less $ 44,338 41.6 % Over three months to six months 20,033 18.8 % Over six months to one year 33,497 31.4 % Over one year 8,755 8.2 % Totals $ 106,623 100.0 % Borrowings Borrowings, consisting primarily of FHLB advances and federal funds purchased, are additional sources of funds for the Company.
Volume and Rate Analysis 2022 compared to 2021 Change due to: Increase/ (Dollars in thousands) Volume Rate (Decrease) Assets: Securities $ 3,815 $ 2,191 $ 6,006 Loans: Real estate 1,833 875 2,708 Commercial (2,780 ) 632 (2,148 ) Consumer (669 ) 441 (228 ) Total loans (1,616 ) 1,948 332 Federal funds sold (13 ) 962 949 Other interest-bearing deposits (21 ) 1,255 1,234 Total earning assets $ 2,165 $ 6,356 $ 8,521 Liabilities and Shareholders' equity: Interest-bearing deposits: Interest checking $ 36 (67 ) $ (31 ) Money market and savings 130 (80 ) 50 Time deposits (53 ) (398 ) (451 ) Total interest-bearing deposits 113 (545 ) (432 ) Short term borrowings 280 - 280 Junior subordinated debt 14 38 52 Total interest-bearing liabilities 407 (507 ) (100 ) Change in net interest income $ 1,758 $ 6,863 $ 8,621 37 2021 compared to 2020 Change due to: Increase/ (Dollars in thousands) Volume Rate (Decrease) Assets: Securities $ 2,240 $ (275 ) $ 1,965 Loans: Real estate 17,596 1,027 18,623 Commercial 518 98 616 Consumer (55 ) (230 ) (285 ) Total loans 18,059 895 18,954 Federal funds sold 123 (88 ) 35 Other interest-bearing deposits: 233 - 233 Total earning assets $ 20,655 $ 532 $ 21,187 Liabilities and Shareholders' equity: Interest-bearing deposits: Interest checking $ 168 (27 ) $ 141 Money market and savings 1,237 (894 ) 343 Time deposits 555 (901 ) (346 ) Total interest-bearing deposits 1,960 (1,822 ) 138 Short term borrowings 21 (374 ) (353 ) Junior subordinated debt 148 - 148 Total interest-bearing liabilities 2,129 (2,196 ) (67 ) Change in net interest income $ 18,526 $ 2,728 $ 21,254 For 2022, net interest income (FTE) of $53.9 million was recognized, an increase of $8.6 million over 2021.
Volume and Rate Analysis 2023 compared to 2022 Change due to: Increase/ (Dollars in thousands) Volume Rate (Decrease) Assets: Securities $ 677 $ 2,623 $ 3,300 Loans: Real estate (483 ) 10,468 9,985 Commercial 922 616 1,538 Consumer (501 ) 800 299 Total loans (62 ) 11,884 11,822 Federal funds sold (1,857 ) 976 (881 ) Other interest bearing deposits (2,220 ) 1,254 (966 ) Total earning assets $ (3,462 ) $ 16,737 $ 13,275 Liabilities and Shareholders' equity: Interest bearing deposits: Interest checking $ (58 ) 174 $ 116 Money market and savings (657 ) 8,233 7,576 Time deposits 513 7,447 7,960 Total interest bearing deposits (202 ) 15,854 15,652 Short term borrowings - 1,934 1,934 Federal Funds Purchased - 138 138 Junior subordinated debt 3 110 113 Total interest bearing liabilities (199 ) 18,036 17,837 Change in net interest income $ (3,263 ) $ (1,299 ) $ (4,562 ) 2022 compared to 2021 Change due to: Increase/ (Dollars in thousands) Volume Rate (Decrease) Assets: Securities $ 3,815 $ 2,191 $ 6,006 Loans: Real estate 1,833 875 2,708 Commercial (2,780 ) 632 (2,148 ) Consumer (669 ) 441 (228 ) Total loans (1,616 ) 1,948 332 Federal funds sold (13 ) 962 949 Other interest bearing deposits: (21 ) 1,255 1,234 Total earning assets $ 2,165 $ 6,356 $ 8,521 Liabilities and Shareholders' equity: Interest bearing deposits: Interest checking $ 36 (67 ) $ (31 ) Money market and savings 130 (80 ) 50 Time deposits (53 ) (398 ) (451 ) Total interest bearing deposits 113 (545 ) (432 ) Short term borrowings 280 - 280 Junior subordinated debt 14 38 52 Total interest bearing liabilities 407 (507 ) (100 ) Change in net interest income $ 1,758 $ 6,863 $ 8,621 For 2023, net interest income (FTE) of $49.3 million was recognized, a decrease of $4.6 million over 2022.
Certificates of deposit and other time deposit balances decreased $46.9 million to $115.1 million at December 31, 2022 from the balance of $162.0 million at December 31, 2021. Included in this deposit total were reciprocal relationships under CDARS™, whereby depositors can obtain FDIC insurance on deposits up to $50 million.
Included in this deposit total were reciprocal relationships under CDARS™, whereby depositors can obtain FDIC insurance on deposits up to $50 million. These reciprocal CDARS™ deposits totaled $5.5 million and $4.0 million at December 31, 2023 and 2022, respectively.
Total borrowings consist of the following as of December 31, 2022, 2021, and 2020: (Dollars in thousands) 2022 2021 2020 FHLB advances $ - $ - $ 30,000 Total borrowings $ - $ - $ 30,000 Maximum amount at any month-end during the year $ - $ 42,575 $ 40,000 Annual average balance outstanding $ - $ 23,700 $ 15,419 Annual average interest rate paid - 0.82 % 0.47 % Annual average interest rate, including impact of fair value mark - -1.18 % 0.47 % Annual interest rate at end of period - - 0.48 % Details on available borrowing lines can be found later under Liquidity in the Asset/Liability Management section.
The Company had $3.5 million in federal funds purchased as of December 31, 2023 compared to no outstanding balances in federal funds purchased as of December 31, 2022 or 2021. 47 Borrowings, excluding federal funds purchased, consist of the following as of December 31, 2023, 2022, and 2021: (Dollars in thousands) 2023 2022 2021 FHLB advances $ 66,500 $ - $ - Total borrowings $ 66,500 $ - $ - Maximum amount at any month-end during the year $ 66,500 $ - $ 42,575 Annual average balance outstanding $ 37,286 $ - $ 23,700 Annual average interest rate paid 5.19 % 0.00 % 0.82 % Annual average interest rate, including impact of fair value mark 4.87 % 0.00 % -1.18 % Annual interest rate at end of period - - 0.00 % Details on available borrowing lines can be found later under Liquidity in the Asset/Liability Management section. 48 Junior Subordinated Debt In 2006, a subsidiary of Fauquier, Fauquier Statutory Trust II, privately issued $4.0 million face amount of the trust’s Floating Rate Capital Securities in a pooled capital securities offering.
(Dollars in thousands) Change in Net Interest Income Change in Yield Curve Percentage Amount +400 bps 15.42 % $ 15,451 +300 bps 14.97 % 15,002 +200 bps 10.34 % 10,363 +100 bps 5.35 % 5,365 Base case 0.00 % - -100 bps -2.85 % (2,853 ) -200 bps -5.86 % (5,870 ) In addition to monitoring the effects to interest income, the model computes the effects to the economic value of equity using the same “static” balance sheet with immediate and parallel rate changes for the same rate change horizons.
(Dollars in thousands) Change in Net Interest Income Change in Yield Curve Percentage Amount +400 bps 27.34 % $ 25,452 +300 bps 19.93 % 18,558 +200 bps 12.91 % 12,016 +100 bps 5.95 % 5,542 Base case 0.00 % - -100 bps -2.25 % (2,096 ) -200 bps -5.04 % (4,694 ) -300 bps -8.16 % (7,597 ) -400 bps -8.90 % (8,284 ) In addition to monitoring the effects to interest income, the model computes the effects to the economic value of equity using the same “static” balance sheet with immediate and parallel rate changes for the same rate change horizons.
(Dollars in thousands) For the year ended December 31 Variance 2022 2021 $ % Noninterest income: Trust and estate services fees $ 1,423 $ 1,929 $ (506 ) -26.2 % Performance fees 265 822 (557 ) -67.8 % Investment management income 752 757 (5 ) -0.7 % Advisory and brokerage income 770 1,154 (384 ) -33.3 % Royalty income 115 40 75 187.5 % Deposit account fees 1,799 1,459 340 23.3 % Debit/credit card and ATM fees 2,794 2,070 724 35.0 % Bank owned life insurance income 963 708 255 36.0 % Resolution of commercial dispute 2,400 - 2,400 - Gain on sale of business line 404 - 404 - Gains (losses) on sale of assets, net 1,043 - 1,043 - Other 933 1,526 (593 ) -38.9 % Total noninterest income $ 13,661 $ 10,465 $ 3,196 30.5 % Noninterest income of $13.7 million for the year ended December 31, 2022 experienced a net increase over the prior year of $3.2 million, as a result of the following: • The Company received and recognized a $2.4 million one-time payment to resolve a commercial dispute in the first quarter of 2022; • A $1.0 million gain was recognized in connection with the sale of two buildings during the second quarter of 2022, and • A $404 thousand gain was recognized in the fourth quarter of 2022 in connection with the sale of Sturman Wealth Advisors.
(Dollars in thousands) For the year ended December 31 Variance 2023 2022 $ % Noninterest income: Trust and estate services fees $ 968 $ 1,538 $ (570 ) -37.1 % Performance fees 376 265 111 41.9 % Investment management income 632 752 (120 ) -16.0 % Advisory and brokerage income - 770 (770 ) - Deposit account fees 1,593 1,799 (206 ) -11.5 % Debit/credit card and ATM fees 2,277 2,794 (517 ) -18.5 % Bank owned life insurance income 1,764 963 801 83.2 % Resolution of commercial dispute - 2,400 (2,400 ) - Gains on sale of assets, net 112 1,043 (931 ) -89.3 % Gain on termination of interest rate swap 460 - 460 - Gain on sale of business line - 404 (404 ) - Losses on sales of AFS, net (206 ) - (206 ) - Other 1,125 933 192 20.6 % Total noninterest income $ 9,101 $ 13,661 $ (4,560 ) -33.4 % Noninterest income of $9.1 million for the year ended December 31, 2023 decreased $4.6 million over the prior year, as a result of the following nonrecurring items in the year ended December 31, 2022: • The Company received and recognized a $2.4 million one-time payment to resolve a commercial dispute in the first quarter of 2022; • A $1.0 million gain was recognized in connection with the sale of two buildings during the second quarter of 2022, and • $770 thousand of advisory and brokerage income was earned in the prior year by Sturman Wealth Advisors, and a $404 thousand gain was recognized in the fourth quarter of 2022 in connection with the sale of this business line.
The table below summarizes the Company's credit ratios as of December 31, 2022 and 2022: (Dollars in thousands) 2022 2021 Total loans $ 936,415 $ 1,061,211 Nonaccrual loans $ 673 $ 495 Allowance for loan losses $ 5,552 $ 5,984 Nonaccrual loans to total loans 0.07 % 0.05 % ALLL to total loans 0.59 % 0.56 % ALLL to nonaccrual loans 824.96 % 1208.89 % See Note 4 – Loans and Note 5 – Allowance for Loan Losses in the accompanying Notes to Consolidated Financial Statements included in Item 8.
Allowance for Credit Losses The relationship of the ACL to total loans and nonaccrual loans appears below: (Dollars in thousands) 2023 2022 Total loans $ 1,092,665 $ 936,415 Nonaccrual loans $ 1,852 $ 673 Allowance for credit losses $ 8,395 $ 5,552 Nonaccrual loans to total loans 0.17 % 0.07 % ACL to total loans 0.77 % 0.59 % ACL to nonaccrual loans 453.29 % 824.96 % See Note 4 – Loans and Note 5 – Allowance for Credit Losses in the accompanying Notes to Consolidated Financial Statements included in Item 8.
The efficiency ratio (FTE) was 57.1% for the year ended December 31, 2022, compared to 76.3% for the same period of 2021, decreasing due primarily to the increase in net interest income year-over-year and the one-time impact of merger and merger-related expenses incurred in 2021.
The efficiency ratio (FTE) was 58.3% for the year ended December 31, 2023, compared to 57.1% for the same period of 2022, increasing due to the fluctuations in net interest income, noninterest income and noninterest expense noted above.
At December 31, 2022, the balances of non-interest bearing demand deposits were $495.6 million or 33.5% of total deposits, a 5.10% decrease from $522.3 million at December 31, 2021. Interest-bearing transaction and money market accounts totaled $867.6 million at December 31, 2022, a decrease of $244.3 million compared to $1.1 billion at December 31, 2021.
Depository accounts held by the Company as of December 31, 2023, totaled $1.4 billion, a decrease of $69.2 million or 4.68% compared to the December 31, 2022 total of $1.5 billion. 46 At December 31, 2023, the balances of non-interest bearing demand deposits were $372.9 million or 26.5% of total deposits, a 24.8% decrease from $495.6 million at December 31, 2022. interest bearing transaction and money market accounts totaled $717.7 million at December 31, 2023, a decrease of $149.9 million compared to $0.9 billion at December 31, 2022.
The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and the income tax bases of assets and liabilities using the applicable enacted marginal tax rate.
Deferred tax assets or liabilities are computed based on the difference between the financial statement and the income tax bases of assets and liabilities using the applicable enacted marginal tax rate. For 2023, the Company provided $4.0 million for Federal income taxes, resulting in an effective income tax rate of 17.2%.
(Dollars in thousands) December 31, December 31, Variance 2022 2021 $ % Noninterest expense: Salaries and employee benefits $ 17,260 $ 16,129 $ 1,131 7.0 % Net occupancy 4,526 3,575 951 26.6 % Equipment 897 966 (69 ) -7.1 % Bank franchise tax 1,216 1,136 80 7.0 % Computer software 1,136 1,020 116 11.4 % Data processing 2,727 2,793 (66 ) -2.4 % FDIC deposit insurance assessment 511 858 (347 ) -40.4 % Marketing, advertising and promotion 1,224 922 302 32.8 % Merger and merger-related expenses - 7,423 (7,423 ) -100.0 % Plastics expense 394 978 (584 ) -59.7 % Professional fees 1,357 1,117 240 21.5 % Core deposit intangible amortization 1,684 1,389 295 -- Impairment on assets held for sale 242 - 242 0.0 % Other 5,382 4,216 1,166 27.7 % Total noninterest expense $ 38,556 $ 42,522 $ (3,966 ) -9.3 % Noninterest expense of $38.6 million for the year ended December 31, 2022 decreased $4.0 million from the prior year, predominantly due to no merger or merger-related expense recognition in the current year, compared to $7.4 million of merger and merger-related expenses incurred during the year ended December 31, 2021.
(Dollars in thousands) December 31, December 31, Variance 2023 2022 $ % Noninterest expense: Salaries and employee benefits $ 15,900 $ 17,260 $ (1,360 ) -7.9 % Net occupancy 4,017 4,526 (509 ) -11.2 % Equipment 762 897 (135 ) -15.1 % Bank franchise tax 1,220 1,216 4 0.3 % Computer software 778 1,136 (358 ) -31.5 % Data processing 2,799 2,727 72 2.6 % FDIC deposit insurance assessment 710 511 199 38.9 % Marketing, advertising and promotion 1,098 1,224 (126 ) -10.3 % Plastics expense 177 394 (217 ) -55.1 % Professional fees 674 1,357 (683 ) -50.3 % Core deposit intangible amortization 1,493 1,684 (191 ) -11.3 % Impairment on assets held for sale - 242 (242 ) - Other 4,435 5,382 (947 ) -17.6 % Total noninterest expense $ 34,063 $ 38,556 $ (4,493 ) -11.7 % Noninterest expense of $34.1 million for the year ended December 31, 2023 decreased $4.5 million from the prior year, predominantly due to continued efficiencies gained from the Merger in the areas of salaries and employee benefits, occupancy and professional fees.
Although interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. The Company’s management reviews pricing of its products and services, in light of current and expected costs due to inflation, to mitigate the inflationary impact on financial performance.
Although interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate.
Loans 90 days or more past due and still accruing interest amounted to $705 thousand as of December 31, 2022, compared to $801 thousand as of December 31, 2021. The 2022 balance includes a $646 thousand loan which was brought current shortly after year-end.
Loans 90 days or more past due and still accruing interest amounted to $879 thousand as of December 31, 2023, compared to $705 thousand as of December 31, 2022. The 2023 balance includes two loans totaling $782 thousand which are 100% government-guaranteed, and five student loans totaling $97 thousand.
Additional information concerning the Company’s off-balance sheet arrangements is contained in Note 13 of the Notes to Consolidated Financial Statements , found in Item 8. Financial Statements and Supplementary Data. Related Party Transactions The Company and its subsidiaries have business dealings with companies owned by directors and beneficial shareholders of the Company.
These financial instruments consist primarily of commitments to extend credit and standby letters of credit. Additional information concerning the Company’s off-balance sheet arrangements is contained in Note 13 of the Notes to Consolidated Financial Statements , found in Item 8. Financial Statements and Supplementary Data.
Junior Subordinated Debt In 2006, a subsidiary of Fauquier, Fauquier Statutory Trust II, privately issued $4.0 million face amount of the trust’s Floating Rate Capital Securities in a pooled capital securities offering. Simultaneously, the trust used the proceeds of that sale to purchase $4.0 million principal amount of the Fauquier’s Floating Rate Junior Subordinated Deferrable Interest Debentures due 2036.
Simultaneously, the trust used the proceeds of that sale to purchase $4.0 million principal amount of the Fauquier’s Floating Rate Junior Subordinated Deferrable Interest Debentures due 2036. As of December 31, 2023, total capital securities were $3.5 million, as adjusted to fair value as of the date of the Merger.
These deposits have been provided predominantly by individuals, businesses and charitable organizations in the Charlottesville/Albemarle County, Fauquier County, Manassas, Prince William County, Richmond and Winchester market areas. 48 Depository accounts held by the Company as of December 31, 2022, totaled $1.5 billion, a decrease of $317.8 million or 17.69% compared to the December 31, 2021 total of $1.8 billion.
These deposits have been provided predominantly by individuals, businesses and charitable organizations in the Charlottesville/Albemarle County, Fauquier County, Manassas, Prince William County, Richmond and Winchester market areas.
Provision for Income Taxes The provision for income taxes is based upon the results of operations, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes.
In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit.

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