Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
The following discussion is intended to assist readers in understanding and evaluation the results of operations, financial condition, liquidity and capital resources of the Company, consisting of the
parent company (the Parent) and its wholly-owned subsidiaries, the Bank and Wealth. This discussion and analysis should be read in conjunction with the accompanying Consolidated Financial Statements, the notes to the financial statements, and the
other financial information contained elsewhere in this report, as well as the Company’s 2022 Form 10-K. In addition to current and historical information, the following discussion and analysis contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements relate to the Company’s future business, financial condition or results of operations. For a description of certain factors that may have a significant impact on the
Company’s future business, financial condition or results of operations, see “Cautionary Statement Regarding Forward-Looking Statements” at the end of this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” Results of operations for the three months ended March 31, 2023 and 2022 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes while some of the percentages
presented are computed based on unrounded amounts.
Overview
The Company’s primary goals are to maximize earnings by maintaining strong asset quality and deploying capital in profitable growth initiatives that will enhance long-term stockholder value. The Company operates in
three principal business segments: the Bank, Wealth, and the Company as a separate segment, the Parent. Revenues from the Bank’s operations consist primarily of interest earned on loans and investment securities, fees earned on deposit accounts,
debit card interchange, and treasury and commercial services and mortgage banking income. Wealth’s operating revenues consist principally of income from fiduciary and asset management fees. The Parent’s revenues are mainly fees and dividends
received from the Bank and Wealth Management.
Net income for the three months ended March 31, 2023 was $3.1 million ($0.62 per diluted share) compared to $2.0 million ($0.39 per diluted share) for the three months ended March 31, 2022. Total assets of $1.4
billion as of March 31, 2023 increased by $60.8 million from December 31, 2022.
Key factors affecting comparisons of consolidated net income for the three months ended March 31, 2023 are as follows. Comparisons are to the three months ended March 31, 2022 unless otherwise stated.
|
• |
Net loans held for investment grew $53.2 million, or 5.2%, from December 31, 2022. Loans held for investment, (net of deferred fees and costs), excluding PPP (non-GAAP), grew $54.2 million, or 5.3%, from
December 31, 2022 and $233.1 million, or 27.5%, from March 31, 2022.
|
|
• |
Total deposits increased $43.6 million, or 3.8%, from December 31, 2022.
|
|
• |
Return on average equity (ROE) increased to 12.5% for the first quarter of 2023, compared to 11.0% for the fourth quarter of 2022, and 7.0% for the prior year quarter.
|
|
• |
Net income improved $440 thousand, or 16.7%, to $3.1 million for the first quarter of 2023 from $2.6 million for the fourth quarter of 2022, and $1.1 million, or 51.8%, from $2.0 million in the 2022
comparative quarter.
|
|
• |
Net interest margin (NIM) was 4.02% in the first quarter of 2023, compared to 3.14% in the first quarter of 2022. NIM on a fully tax-equivalent basis (FTE) (non-GAAP) was 4.04% in the first quarter of 2022
and 3.16% in the first quarter of 2022.
|
|
• |
Net interest income for the first quarter of 2023, decreased $96 thousand, or 0.7%, compared to the prior quarter and increased $3.2 million, or 33.0%, compared to the first quarter of 2022.
|
|
• |
Provision for credit losses of $376 thousand was recognized for the first quarter of 2023, compared to $633 thousand for the fourth quarter of 2022 and $101 thousand for the first quarter of 2022.
|
|
• |
Noninterest expense decreased $119 thousand, or 1.0%, to $12.2 million for the first quarter of 2023, compared to $12.3 million for the fourth quarter of 2022 but increased $1.5 million, or 13.6%, from the
first quarter of 2022.
|
|
• |
On January 1, 2023, the Company adopted the Current Expected Credit Loss (CECL) methodology for estimating credit losses, which resulted in a decrease to opening retained earnings of $991 thousand.
|
For more information about financial measures that are not calculated in accordance with GAAP, please see “Non-GAAP Financial Measures” below.
Capital Management and Dividends
Total equity was $102.6 million at March 31, 2023, compared to $98.7 million at December 31, 2022. Total equity increased $3.9 million at March 31, 2023 compared to December 31, 2022, due primarily to lower
unrealized losses in the market value of securities available-for-sale, which are recognized as a component of accumulated other comprehensive loss, and net income, partially offset by the adoption of CECL and dividends. The Company’s securities
available for sale are fixed income debt securities, and their unrealized loss position is a result of increases in market interest rates rather than credit quality issues. The Company expects to recover its investments in debt securities through
scheduled payments of principal and interest and unrealized losses are not expected to affect net income or regulatory capital of the Company or its subsidiaries.
For the first quarter of 2023 and 2022, the Company declared dividends of $0.14 per share and $0.13 per share, respectively. The dividend represents a payout ratio of 22.7% of earnings per share for the first quarter
of 2023. The Board of Directors of the Company continually reviews the amount of cash dividends per share and the resulting dividend payout ratio in light of changes in economic conditions, current and future capital requirements, and expected
future earnings. The Company’s principal goals related to the maintenance of capital are to provide adequate capital to support the Company’s risk profile consistent with the Board-approved risk appetite, provide financial flexibility to support
future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, and provide a competitive return to stockholders. Risk-based capital ratios, which include CET1 capital, Tier 1 capital and Total capital for the Bank
are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.
At March 31, 2023, the book value per share of the Company’s common stock was $20.52, and tangible book value per share (non-GAAP) was $20.14, compared to $19.75 and $19.37, respectively, at December 31, 2022. Refer
to “Non-GAAP Financial Measures,” below, for information about non-GAAP financial measures, including a reconciliation to the most directly comparable financial measures calculated in accordance with U.S. GAAP.
Critical Accounting Estimates
The accounting and reporting policies of the Company are in accordance with U.S. GAAP and conform to general practices within the banking industry. The Company’s financial
position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues,
expenses, and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations. The Company evaluates its critical
accounting estimates and assumptions on an ongoing basis and updates them, as needed. Management has discussed the Company’s critical accounting policies and estimates with the Audit Committee of the Board of Directors.
For further information on the Company’s critical accounting estimates, refer to Note 1, Description of Business and Summary of Significant Accounting Policies and under
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in its 2022 Form 10-K.
Allowance for Credit Losses on Loans
The ACLL represents the estimated balance the Company considers adequate to absorb expected credit losses over the expected contractual life of the loan portfolio. The ACLL is estimated using a loan-level discounted
cash flows method for all loans with the exception of its automobile, farmland, and consumer portfolios. For the automobile, farmland, and consumer portfolios, the Company has elected to pool those loans based on similar risk characteristics to
determine the ACLL using the remaining life methods.
Determining the appropriateness of the ACLL is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in
light of the factors then prevailing, may result in significant changes in the ACLL in future periods. There are both internal factors (i.e. loan balances, credit quality, and the contractual lives of loans) and external factors (i.e. economic
conditions such as trends in interest rates, GDP, inflation, and unemployment) that can impact the ACLL estimate.
For instance, the Company considers the national unemployment rate as an external economic variable in developing the ACLL. The quantitative ACLL estimate is sensitive to changes in the unemployment rate forecast
over a one-year reasonable and supportable period, with the commercial loan portfolio being the most sensitive to fluctuations in unemployment. Because current economic conditions and forecasts can change and future events are inherently difficult
to predict, the anticipated amount of estimated credit losses on loans and therefore the appropriateness of the ACLL, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the
overall ACLL because changes in those factors and inputs may not occur at the same rate and may not be consistent across all loan types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one
factor may offset deterioration in others.
The Company reviews its ACLL estimation process regularly for appropriateness as the economic and internal environment are constantly changing. While the ACLL estimate represents management’s current estimate of
expected credit losses, due to uncertainty surrounding internal and external factors, there is potential that the estimate may not be adequate over time to cover credit losses in the portfolio. While management uses available information to
estimate expected losses on loans, future changes in the ACLL may be necessary based on changes in portfolio composition, portfolio credit quality, economic conditions and/or other factors.
For further information concerning accounting policies, refer to Note 1. Description of Business and Summary of Significant Accounting Policies and Note 3. Loans and the Allowance for Credit Losses on Loans included
in Item 1. “Financial Statements” above, as well as Note 1, Significant Accounting Policies included in Item 8 “Financial Statements and Supplementary Data” of the Company’s 2022 Form 10-K.
Results of Operations
Net Interest Income
The principal source of earnings for the Company is net interest income. Net interest income is the difference between interest and fees generated by earning assets and interest expense paid to fund them. Changes in
the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. The NIM is calculated by dividing net interest income by
average earning assets, or on a fully tax-equivalent basis, tax-equivalent net interest income by average earning assets.
Net interest income for the first quarter of 2023 was $12.8 million, an increase of $3.2 million, or 33.0%, from the first quarter of 2022. The increase from the prior-year comparative quarter was due
primarily to deployment of lower yielding cash to fund growth in higher yielding loans and investments, and higher average yields on earning asset balances due to the effect of rising market interest rates, partially offset by higher average
interest-bearing liabilities at higher average rates.
Net interest income, on a fully tax-equivalent basis (non-GAAP), was $12.9 million for the first quarter of 2023, an increase of $3.2 million from the 2022 comparative quarter. NIM for the first
quarter of 2023 was 4.02%, an increase from 3.14% for the prior year quarter. On a fully tax-equivalent basis (non-GAAP), NIM was 4.04% and 3.16%, for the three months ended March 31, 2023 and 2022, respectively.
Average loans increased $192.0 million, or 22.2%, for the first three months of 2023 compared to the prior year comparative period. The
increase in average loans outstanding in 2023 compared to 2022 was due primarily to growth in the real estate mortgage, commercial real estate, automobile, and consumer segments of the loan portfolio. Average
loan yields were higher in the first three months of 2023 compared to the same period of 2022, due primarily to the effects of rising interest rates. During 2022 and continuing into 2023, market interest rates increased, and while the Company
expects asset yields to continue to rise, the cost of funds is expected to rise at a faster pace. The extent to which rising interest rates will ultimately affect the Company’s NIM is uncertain. For more information about these FTE financial
measures, please see “Non-GAAP Financial Measures” below.
Average securities available for sale decreased $14.5 million during the first three months of 2023, compared to the same period in 2022, due primarily to fluctuations in fair market value. The average yield on the
securities portfolio on a fully tax-equivalent basis increased 154 basis points for the first three months of 2023 compared to the same period in 2022.
Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the Federal Reserve Bank, decreased $131.0 million for the first three months of 2023, compared to the same
period in 2022 due primarily to deployment of liquidity in loans held for investment. The average yield on interest-bearing deposits in other banks increased 372 basis points for the first three months of 2023 compared to the same period in 2022
due to rising interest rates. The Federal Reserve Bank increased the interest rate on excess cash reserve balances from 0.10 percent at the end of 2020 to 5.15 percent during the second quarter of 2023.
Average money market, savings and interest-bearing demand deposits, in aggregate, increased $24.3 million first three months of 2023, respectively, and average time deposits decreased $19.3 million for the first
three months of 2023, compared to the same periods in 2022. Average noninterest-bearing demand deposits increased $15.8 million for the first quarter of 2023 compared to the same periods of 2022. The average cost of interest-bearing deposits
increased 45 basis points for the first quarter of 2023, compared to the same period in 2022, due primarily to higher rates on deposits driven by depositors seeking increased yields and competitive pricing pressures. As the rising interest rate
environment lengthens, average cost of funding will continue to increase at a faster pace. Changes in rates take effect immediately for interest checking, money market and savings accounts, while changes in the average cost of time deposits lag
changes in pricing based on the repricing of time deposits at maturity. Average borrowings increased $56.1 million for the first three months of 2023 compared to the same period in 2022 as average loan growth outpaced average deposit growth over
the comparative periods.
The following table shows analyses of average earning assets, interest-bearing liabilities and rates and yields for the periods indicated. Nonaccrual loans are included in loans outstanding.
TABLE 1: AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES
|
|
For the quarters ended March 31,
|
|
|
|
2023
|
|
|
2022
|
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Yield/
Rate**
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Yield/
Rate**
|
|
|
|
(dollars in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans*
|
|
$
|
1,055,878
|
|
|
$
|
13,042
|
|
|
|
5.01
|
%
|
|
$
|
863,897
|
|
|
$
|
9,196
|
|
|
|
4.32
|
%
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
186,292
|
|
|
|
1,764
|
|
|
|
3.84
|
%
|
|
|
201,940
|
|
|
|
989
|
|
|
|
1.99
|
%
|
Tax-exempt*
|
|
|
38,206
|
|
|
|
268
|
|
|
|
2.85
|
%
|
|
|
37,007
|
|
|
|
265
|
|
|
|
2.90
|
%
|
Total investment securities
|
|
|
224,498
|
|
|
|
2,032
|
|
|
|
3.67
|
%
|
|
|
238,947
|
|
|
|
1,254
|
|
|
|
2.13
|
%
|
Interest-bearing due from banks
|
|
|
6,596
|
|
|
|
64
|
|
|
|
3.94
|
%
|
|
|
137,601
|
|
|
|
73
|
|
|
|
0.22
|
%
|
Federal funds sold
|
|
|
577
|
|
|
|
6
|
|
|
|
4.23
|
%
|
|
|
4,441
|
|
|
|
1
|
|
|
|
0.09
|
%
|
Other investments
|
|
|
3,632
|
|
|
|
66
|
|
|
|
7.32
|
%
|
|
|
1,142
|
|
|
|
14
|
|
|
|
4.90
|
%
|
Total earning assets
|
|
|
1,291,181
|
|
|
$
|
15,210
|
|
|
|
4.78
|
%
|
|
|
1,246,028
|
|
|
$
|
10,538
|
|
|
|
3.43
|
%
|
Allowance for loan losses
|
|
|
(11,339
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,989
|
)
|
|
|
|
|
|
|
|
|
Other non-earning assets
|
|
|
104,511
|
|
|
|
|
|
|
|
|
|
|
|
93,796
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,384,353
|
|
|
|
|
|
|
|
|
|
|
$
|
1,329,835
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Time and savings deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing transaction accounts
|
|
$
|
70,254
|
|
|
$
|
3
|
|
|
|
0.02
|
%
|
|
$
|
75,129
|
|
|
$
|
3
|
|
|
|
0.02
|
%
|
Money market deposit accounts
|
|
|
428,941
|
|
|
|
842
|
|
|
|
0.80
|
%
|
|
|
389,368
|
|
|
|
163
|
|
|
|
0.17
|
%
|
Savings accounts
|
|
|
115,880
|
|
|
|
9
|
|
|
|
0.03
|
%
|
|
|
126,258
|
|
|
|
10
|
|
|
|
0.03
|
%
|
Time deposits
|
|
|
148,563
|
|
|
|
537
|
|
|
|
1.47
|
%
|
|
|
167,859
|
|
|
|
361
|
|
|
|
0.87
|
%
|
Total time and savings deposits
|
|
|
763,638
|
|
|
|
1,391
|
|
|
|
0.74
|
%
|
|
|
758,614
|
|
|
|
537
|
|
|
|
0.29
|
%
|
Federal funds purchased, repurchase
agreements and other borrowings
|
|
|
7,959
|
|
|
|
37
|
|
|
|
1.91
|
%
|
|
|
4,589
|
|
|
|
1
|
|
|
|
0.10
|
%
|
Federal Home Loan Bank advances
|
|
|
52,626
|
|
|
|
617
|
|
|
|
4.69
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
0.00
|
%
|
Long term borrowings
|
|
|
29,551
|
|
|
|
295
|
|
|
|
4.00
|
%
|
|
|
29,419
|
|
|
|
295
|
|
|
|
4.01
|
%
|
Total interest-bearing liabilities
|
|
|
853,774
|
|
|
|
2,340
|
|
|
|
1.11
|
%
|
|
|
792,622
|
|
|
|
833
|
|
|
|
0.43
|
%
|
Demand deposits
|
|
|
429,928
|
|
|
|
|
|
|
|
|
|
|
|
414,080
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
8,347
|
|
|
|
|
|
|
|
|
|
|
|
5,368
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
100,453
|
|
|
|
|
|
|
|
|
|
|
|
117,765
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,392,502
|
|
|
|
|
|
|
|
|
|
|
$
|
1,329,835
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
$
|
12,870
|
|
|
|
4.04
|
%
|
|
|
|
|
|
$
|
9,705
|
|
|
|
3.16
|
%
|
*Computed on a fully tax-equivalent basis using a 21% rate, adjusting interest income by $57 thousand and $68 thousand for March 31, 2023 and 2022, respectively.
**Annualized
Interest income and expense are affected by fluctuations in interest rates, by changes in volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors.
The following table shows the direct causes of the period-to-period changes in the components of net interest income. The Company calculates the rate and volume variances using a formula prescribed by the SEC. Rate/volume variances, the third
element in the calculation, are not show separately in the table, but are allocated to the rate and volume variances in proportion to the absolute dollar amounts of each.
TABLE 2: VOLUME AND RATE ANALYSIS*
|
|
Three months ended March 31, 2023 from 2022
Increase (Decrease)
|
|
|
|
|
|
|
Due to Changes in:
|
|
|
|
|
(dollars in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
EARNING ASSETS
|
|
|
|
|
|
|
|
|
|
Loans*
|
|
$
|
2,044
|
|
|
$
|
1,802
|
|
|
$
|
3,846
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(77
|
)
|
|
|
852
|
|
|
|
775
|
|
Tax-exempt*
|
|
|
9
|
|
|
|
(6
|
)
|
|
|
3
|
|
Total investment securities
|
|
|
(68
|
)
|
|
|
846
|
|
|
|
778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
|
(1
|
)
|
|
|
6
|
|
|
|
5
|
|
Other investments**
|
|
|
(39
|
)
|
|
|
82
|
|
|
|
43
|
|
Total earning assets
|
|
|
1,936
|
|
|
|
2,736
|
|
|
|
4,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing transaction accounts
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Money market deposit accounts
|
|
|
17
|
|
|
|
662
|
|
|
|
679
|
|
Savings accounts
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
Time deposits
|
|
|
(41
|
)
|
|
|
217
|
|
|
|
176
|
|
Total time and savings deposits
|
|
|
(25
|
)
|
|
|
879
|
|
|
|
854
|
|
Federal funds purchased, repurchase
agreements and other borrowings
|
|
|
1
|
|
|
|
35
|
|
|
|
36
|
|
Federal Home Loan Bank advances
|
|
|
-
|
|
|
|
617
|
|
|
|
617
|
|
Long term borrowings
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
Total interest-bearing liabilities
|
|
|
(23
|
)
|
|
|
1,530
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income
|
|
$
|
1,959
|
|
|
$
|
1,206
|
|
|
$
|
3,165
|
|
* Computed on a fully tax-equivalent basis using a 21% rate.
** Other investments include interest-bearing balances due from banks.
The Company believes NIM may be affected in future periods by several factors that are difficult to predict, including (1) changes in interest rates, which may depend on the severity of adverse
economic conditions, inflationary pressures, the timing and extent of any economic recovery, which are inherently uncertain; (2) possible changes in the composition of earning assets which may result from decreased loan demand as a result of the
current economic environment; and (3) possible changes in the composition of interest-bearing liabilities, which may result from decreased deposit balances or increased competition for deposits, or from changes in the availability of certain types
of wholesale funding.
Provision for Credit Losses
For the three months ended March 31, 2023, the Company recognized a provision for credit losses of $376 thousand compared to $101 thousand for the three months ended March 31, 2022. The provision for
credit losses for the first quarter of 2023 reflected a provision of $563 thousand for loans and a recovery of provision for unfunded commitments of $187 thousand. The increase in provision expense for loans was due primarily to growth in the
portfolio. The recovery of provision for unfunded commitments was due to fluctuations in utilization levels. Charged-off loans totaled $449 thousand and $700 thousand in the first three months of 2023 and 2022, respectively. Recoveries amounted to
$270 thousand and $254 thousand for the three months ended March 31, 2023 and 2022, respectively. The Company’s annualized net loans charged off to average loans were 0.07% for the first quarter of 2023 compared to 0.21% for the first quarter of
2022.
The state of the local economy can have a significant impact on the level of loan charge-offs. If the economy begins to contract, nonperforming assets could increase as a result of declines in real
estate values and home sales or increases in unemployment rates and financial stress on borrowers. Increased nonperforming assets would increase charge-offs and reduce earnings due to larger contributions to the provision for loan losses.
Noninterest Income
Total noninterest income was $3.4 million for the first quarter of 2023 compared to $3.5 million for the first quarter of 2022. Although fiduciary and asset management fees, service charges on deposit
accounts, other service charges, commissions and fees, and bank-owned life insurance increased compared to the prior year quarter, these increases were offset by lower mortgage banking income and other operating income. The decrease in mortgage
banking income for the first quarter of 2023 compared to the first quarter of 2022 was due to declines in volume of mortgage originations attributable to changes in mortgage market conditions.
Noninterest Expense
Noninterest expense totaled $12.2 million for the first quarter of 2023 compared to $10.7 million for the first quarter of 2022. The increase over the prior year quarter was primarily driven by
increased salary and benefit expense, data processing, ATM and other losses, and other operating expenses. The increase in salary and benefits was primarily driven by the addition of revenue producing officers, a return to normalized position
vacancy levels, incentive compensation expense, and lower deferred loan costs. The Company completed negotiations with a major vendor relationship during the fourth quarter of 2022 which began reducing certain existing cost structures during the
first quarter of 2023 and will provide an opportunity for operational leverage for future growth at fixed cost levels. Several other major vendor contracts and relationships continue to be assessed and negotiated as a key component of efforts to
reduce noninterest expense levels while improving operational efficiency.
The Company’s income tax expense increased $300 thousand for the first quarter of 2023 when compared to the same period in 2022 primarily due to changes in the levels of pre-tax income and the mix of
effective tax-exempt income. The effective federal income tax rates for the three months ended March 31, 2023 and 2022 was 16.5% and 13.1%, respectively.
Balance Sheet Review
At March 31, 2023, the Company had total assets of $1.4 billion, an increase of $60.8 million compared to assets as of December 31, 2022.
Net loans held for investment increased $53.2 million or 5.2%, from $1.0 billion at December 31, 2022 to $1.1 billion at March 31, 2023, driven by diversified loan growth in the following segments:
construction, land development, and other land loans of $8.7 million, residential real estate of $17.1 million, and indirect automobile of $25.0 million. Cash and cash equivalents increased $9.8 million from December 31, 2022 to March 31, 2023.
Securities available for sale, at fair value, decreased $1.6 million or 0.7% over the same period due to increases in the rate environment.
Total deposits of $1.2 billion as of March 31, 2023 increased $43.6 million, or 3.8% from December 31, 2022. Noninterest-bearing deposits decreased $15.4 million, or 3.2%, savings deposits increased
$45.0 million, or 7.7%, and time deposits increased $12.1 million, or 7.9%, as depositors shift into higher yielding deposit products.
The Company utilizes FHLB advances as a primary source of liquidity as needed. At March 31, 2023 and December 31, 2022, the Company had FHLB advances of $72.5 million and $46.1 million, respectively.
Securities Portfolio
When comparing March 31, 2023 to December 31, 2022, securities available-for-sale decreased $1.6 million, or 0.7%. The change in market value was due primarily to changes in market interest rates.
The Company’s strategy for the securities portfolio is primarily intended to manage the portfolio’s susceptibility to interest rate risk and to provide liquidity to fund loan growth. The securities
portfolio is also adjusted to achieve other asset/liability objectives, including pledging requirements, and to manage tax exposure when necessary.
The following table sets forth a summary of the securities portfolio in dollar amounts at fair value and as a percentage of the Company’s total securities available-for-sale as of the dates indicated:
TABLE 3: SECURITIES PORTFOLIO
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2023
|
|
|
2022
|
|
U.S. Treasury securities
|
|
$
|
7,748
|
|
|
|
3
|
%
|
|
$
|
7,671
|
|
|
|
3
|
%
|
Obligations of U.S. Government agencies
|
|
|
39,741
|
|
|
|
17
|
%
|
|
|
42,399
|
|
|
|
19
|
%
|
Obligations of state and political subdivisions
|
|
|
60,653
|
|
|
|
27
|
%
|
|
|
59,384
|
|
|
|
26
|
%
|
Mortgage-backed securities
|
|
|
88,696
|
|
|
|
39
|
%
|
|
|
88,913
|
|
|
|
39
|
%
|
Money market investments
|
|
|
1,661
|
|
|
|
1
|
%
|
|
|
1,816
|
|
|
|
1
|
%
|
Corporate bonds and other securities
|
|
|
25,414
|
|
|
|
11
|
%
|
|
|
25,335
|
|
|
|
11
|
%
|
|
|
|
223,913
|
|
|
|
98
|
%
|
|
|
225,518
|
|
|
|
99
|
%
|
Restricted securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank stock
|
|
$
|
3,754
|
|
|
|
2
|
%
|
|
|
2,709
|
|
|
|
1
|
%
|
Federal Reserve Bank stock
|
|
|
683
|
|
|
|
-
|
|
|
|
683
|
|
|
|
-
|
|
Community Bankers’ Bank stock
|
|
|
42
|
|
|
|
-
|
|
|
|
42
|
|
|
|
-
|
|
|
|
|
4,479
|
|
|
|
|
|
|
|
3,434
|
|
|
|
|
|
Total Securities
|
|
$
|
228,392
|
|
|
|
100
|
%
|
|
$
|
228,952
|
|
|
|
100
|
%
|
The following table summarizes the contractual maturity of the securities portfolio and their weighted average yields as of March 31, 2023.
TABLE 4: MATURITY OF SECURITIES
|
|
1 year or less
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2023
|
|
|
1-5 years
|
|
|
5-10 years
|
|
|
Over 10 years
|
|
|
Total
|
|
U.S. Treasury securities
|
|
$
|
-
|
|
|
$
|
7,748
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,748
|
|
Weighted average yield
|
|
|
-
|
|
|
|
2.75
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
2.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government agencies
|
|
$
|
779
|
|
|
$
|
4,418
|
|
|
$
|
2,788
|
|
|
$
|
31,756
|
|
|
$
|
39,741
|
|
Weighted average yield
|
|
|
0.73
|
%
|
|
|
2.22
|
%
|
|
|
4.25
|
%
|
|
|
5.73
|
%
|
|
|
5.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and policitcal subdivisions
|
|
$
|
164
|
|
|
$
|
1,271
|
|
|
$
|
18,786
|
|
|
$
|
40,432
|
|
|
$
|
60,653
|
|
Weighted average yield
|
|
|
0.75
|
%
|
|
|
2.95
|
%
|
|
|
2.22
|
%
|
|
|
2.72
|
%
|
|
|
2.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
-
|
|
|
$
|
5,321
|
|
|
$
|
10,994
|
|
|
$
|
72,381
|
|
|
$
|
88,696
|
|
Weighted average yield
|
|
|
-
|
|
|
|
3.92
|
%
|
|
|
2.29
|
%
|
|
|
2.93
|
%
|
|
|
2.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments
|
|
$
|
1,661
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,661
|
|
Weighted average yield
|
|
|
4.28
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and other securities
|
|
$
|
484
|
|
|
$
|
-
|
|
|
$
|
24,930
|
|
|
$
|
-
|
|
|
$
|
25,414
|
|
Weighted average yield
|
|
|
3.44
|
%
|
|
|
-
|
|
|
|
4.44
|
%
|
|
|
-
|
|
|
|
4.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank stock
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,754
|
|
|
$
|
3,754
|
|
Weighted average yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6.37
|
%
|
|
|
6.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank stock
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
683
|
|
|
$
|
683
|
|
Weighted average yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Bankers’ Bank stock
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
42
|
|
|
$
|
42
|
|
Weighted average yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Total Securities
|
|
$
|
3,088
|
|
|
$
|
18,758
|
|
|
$
|
57,498
|
|
|
$
|
149,048
|
|
|
$
|
228,392
|
|
Weighted average yield
|
|
|
2.99
|
%
|
|
|
2.97
|
%
|
|
|
3.29
|
%
|
|
|
3.54
|
%
|
|
|
3.43
|
%
|
The table above is based on maturity; therefore, it does not reflect cash flow from principal payments or prepayments prior to maturity. The weighted average yield is calculated on a fully
tax-equivalent basis using a 21% rate on a pro rata basis for each security based on its relative amortized cost.
For more information about the Company’s securities available-for-sale, including information about securities in an unrealized loss position at March 31, 2023 and December 31, 2022, see Part I, Item
1, “Financial Statements” under the heading Note 2, Securities in this Quarterly Report on Form 10-Q.
Loan Portfolio
The following table shows a breakdown of total loans by segment at March 31, 2023 and December 31, 2022.
TABLE 5: LOAN PORTFOLIO
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2023
|
|
|
2022
|
|
Commercial and industrial
|
|
$
|
73,367
|
|
|
$
|
72,578
|
|
Real estate-construction
|
|
|
86,690
|
|
|
|
77,944
|
|
Real estate-mortgage (1)
|
|
|
276,112
|
|
|
|
259,091
|
|
Real estate-commercial
|
|
|
431,011
|
|
|
|
429,863
|
|
Consumer
|
|
|
210,287
|
|
|
|
185,269
|
|
Other
|
|
|
3,798
|
|
|
|
2,340
|
|
Ending Balance
|
|
$
|
1,081,265
|
|
|
$
|
1,027,085
|
|
(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.
The maturity distribution and rate sensitivity of the Company’s loan portfolio at March 31, 2023 is presented below:
TABLE 6: MATURITY/REPRICING SCHEDULE OF LOAN PORTFOLIO
(Dollars in thousands)
|
|
As of March 31, 2023
|
|
|
|
|
|
Commercial and industrial
|
|
|
Real estate-construction
|
|
|
Real estate-mortgage (1)
|
|
|
Real estate-commercial
|
|
|
Consumer
|
|
|
Other
|
|
|
Total
|
|
Variable Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
12,451
|
|
|
$
|
55,381
|
|
|
$
|
68,605
|
|
|
$
|
42,876
|
|
|
$
|
8,067
|
|
|
$
|
2,991
|
|
|
$
|
190,371
|
|
1 to 5 years
|
|
|
505
|
|
|
|
447
|
|
|
|
21,859
|
|
|
|
29,041
|
|
|
|
2
|
|
|
|
498
|
|
|
|
52,352
|
|
5 to 15 years
|
|
|
-
|
|
|
|
1,964
|
|
|
|
43,462
|
|
|
|
1,046
|
|
|
|
25
|
|
|
|
-
|
|
|
|
46,497
|
|
After 15 years
|
|
|
-
|
|
|
|
486
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77
|
|
|
|
-
|
|
|
|
563
|
|
Fixed Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
1,318
|
|
|
$
|
8,835
|
|
|
$
|
5,139
|
|
|
$
|
19,805
|
|
|
$
|
3,023
|
|
|
$
|
-
|
|
|
$
|
38,120
|
|
1 to 5 years
|
|
|
21,070
|
|
|
|
11,585
|
|
|
|
41,533
|
|
|
|
188,361
|
|
|
|
69,295
|
|
|
|
-
|
|
|
|
331,844
|
|
5 to 15 years
|
|
|
38,023
|
|
|
|
7,947
|
|
|
|
39,446
|
|
|
|
144,400
|
|
|
|
120,153
|
|
|
|
309
|
|
|
|
350,278
|
|
After 15 years
|
|
|
-
|
|
|
|
45
|
|
|
|
56,068
|
|
|
|
5,482
|
|
|
|
9,645
|
|
|
|
-
|
|
|
|
71,240
|
|
|
|
$
|
73,367
|
|
|
$
|
86,690
|
|
|
$
|
276,112
|
|
|
$
|
431,011
|
|
|
$
|
210,287
|
|
|
$
|
3,798
|
|
|
$
|
1,081,265
|
|
(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.
For more information about the Company’s loan portfolio at March 31, 2023 and December 31, 2022, see Part I, Item 1, “Financial Statements” under the heading Note 3, Loans and the Allowance for Credit
Losses on Loans in this Quarterly Report on Form 10-Q.
Nonperforming Assets
The following table summarizes information concerning credit ratios and nonperforming assets. Balances and ratios presented as of March 31, 2023 are in accordance with ASC 326, whereas balances and
ratios presented as of December 31, 2022 are presented in accordance with previously applicable GAAP.
The Company continued to experience historically low levels of nonperforming assets in 2023, however, the economic environment could be impact performance, which could increase NPAs in future periods.
Refer to Part I, Item 1, “Financial Statements” under the heading Note 3, Loans and the Allowance for Credit Losses on Loans in this Quarterly Report on Form 10-Q for more information.
TABLE 7: NONPERFORMING ASSETS
|
|
March 31,
|
|
|
December 31,
|
|
(dollars in thousands)
|
|
2023
|
|
|
2022
|
|
Total loans
|
|
$
|
1,081,265
|
|
|
$
|
1,027,085
|
|
Nonaccrual loans
|
|
$
|
980
|
|
|
$
|
1,243
|
|
Loans past due 90 days or more and accruing interest
|
|
|
722
|
|
|
$
|
840
|
|
Total Nonperforming Assets
|
|
$
|
1,702
|
|
|
$
|
2,083
|
|
ACLL
|
|
$
|
11,551
|
|
|
$
|
10,526
|
|
Nonaccrual loans to total loans
|
|
|
0.09
|
%
|
|
|
0.12
|
%
|
ACLL to total loans
|
|
|
1.07
|
%
|
|
|
1.02
|
%
|
ACLL to nonaccrual loans
|
|
|
1178.67
|
%
|
|
|
846.82
|
%
|
Annualized year-to-date net charge-offs to average loans
|
|
|
0.07
|
%
|
|
|
0.02
|
%
|
The adoption of ASC 326 replaced previous impaired loan and TDR accounting guidance, and the evaluation of ACLL includes loans previously designated as impaired or TDRs together with other loans that
share similar risk characteristics.
Management believes the Company has excellent credit quality review processes in place to identify problem loans quickly. For a detailed discussion of the Company’s nonperforming assets, refer to Part
I, Item 1, “Financial Statements” under the heading Note 3, Loans and the Allowance for Credit Losses on Loans in this Quarterly Report on Form 10-Q.
Allowance for Credit Losses
At March 31, 2023, the ACL was $11.8 million, comprised of ACLL of $11.6 million and a reserve for unfunded commitments of $214 thousand. The increase in the ACLL during the first quarter of 2023 was
due primarily to growth in the portfolio and the adoption of CECL, which resulted in an implementation adjustment on January 1, 2023 of $641 thousand. The following table summarizes the ACL as of March 31, 2023.
(Dollars in thousands)
|
|
March 31, 2023
|
|
Total ACLL
|
|
$
|
11,551
|
|
Total Reserve for Unfunded Commitments
|
|
|
214
|
|
Total ACL
|
|
$
|
11,765
|
|
ACLL to total loans
|
|
|
1.07
|
%
|
ACL to total loans
|
|
|
1.09
|
%
|
For more information regarding the ACL and ACLL, refer to Part I, Item 1, “Financial Statements” under the heading Note 1. Description of Business and Summary of Significant Accounting Policies and
Note 3. Loans and the Allowance for Credit Losses on Loans in this Quarterly Report on Form 10-Q.
The ACLL represents an amount that, in management’s judgement, will be adequate to absorb expected credit losses in the loan portfolio; however, if elevated levels of risk are identified, provision
for credit losses may increase in future periods. The following tables present the Company’s loan loss experience for the periods indicated:
TABLE 8: ALLOWANCE FOR CREDIT LOSSES ON LOANS
For the three months ended March 31, 2023
|
|
(Dollars in thousands)
|
|
Commercial
and Industrial
|
|
|
Real Estate Construction
|
|
|
Real Estate -
Mortgage (1)
|
|
|
Real Estate -
Commercial
|
|
|
Consumer
|
|
|
Other
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for credit losses on loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning
|
|
$
|
673
|
|
|
$
|
552
|
|
|
$
|
2,575
|
|
|
$
|
4,499
|
|
|
$
|
2,065
|
|
|
$
|
156
|
|
|
$
|
6
|
|
|
$
|
10,526
|
|
Day 1 impact of adoption of CECL
|
|
|
(11
|
)
|
|
|
19
|
|
|
|
87
|
|
|
|
1,048
|
|
|
|
(365
|
)
|
|
|
(137
|
)
|
|
|
-
|
|
|
|
641
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(377
|
)
|
|
|
(72
|
)
|
|
|
-
|
|
|
|
(449
|
)
|
Recoveries
|
|
|
8
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
237
|
|
|
|
14
|
|
|
|
-
|
|
|
|
270
|
|
Provision for credit losses
|
|
|
(6
|
)
|
|
|
82
|
|
|
|
199
|
|
|
|
70
|
|
|
|
81
|
|
|
|
143
|
|
|
|
(6
|
)
|
|
|
563
|
|
Ending Balance
|
|
$
|
664
|
|
|
$
|
653
|
|
|
$
|
2,872
|
|
|
$
|
5,617
|
|
|
$
|
1,641
|
|
|
$
|
104
|
|
|
$
|
-
|
|
|
$
|
11,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans
|
|
|
77,014
|
|
|
|
81,771
|
|
|
|
268,620
|
|
|
|
425,751
|
|
|
|
200,020
|
|
|
|
2,702
|
|
|
|
|
|
|
|
1,055,878
|
|
Ratio of net charge-offs to average
loans
|
|
|
-0.01
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.07
|
%
|
|
|
2.15
|
%
|
|
|
|
|
|
|
0.02
|
%
|
For the three months ended March 31, 2022
|
|
(Dollars in thousands)
|
|
Commercial
and Industrial
|
|
|
Real Estate Construction
|
|
|
Real Estate
- Mortgage (1)
|
|
|
Real Estate -
Commercial
|
|
|
Consumer
|
|
|
Other
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning
|
|
$
|
683
|
|
|
$
|
459
|
|
|
$
|
2,390
|
|
|
$
|
4,787
|
|
|
$
|
1,362
|
|
|
$
|
184
|
|
|
$
|
-
|
|
|
$
|
9,865
|
|
Charge-offs
|
|
|
(296
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(307
|
)
|
|
|
(97
|
)
|
|
|
-
|
|
|
|
(700
|
)
|
Recoveries
|
|
|
77
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
116
|
|
|
|
31
|
|
|
|
-
|
|
|
|
254
|
|
Provision for loan losses
|
|
|
72
|
|
|
|
45
|
|
|
|
14
|
|
|
|
(187
|
)
|
|
|
170
|
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
101
|
|
Ending Balance
|
|
$
|
536
|
|
|
$
|
504
|
|
|
$
|
2,434
|
|
|
$
|
4,600
|
|
|
$
|
1,341
|
|
|
$
|
105
|
|
|
$
|
-
|
|
|
$
|
9,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans
|
|
|
67,002
|
|
|
|
60,513
|
|
|
|
212,063
|
|
|
|
398,547
|
|
|
|
116,691
|
|
|
|
7,375
|
|
|
|
|
|
|
|
862,191
|
|
Ratio of net charge-offs to average
loans
|
|
|
0.33
|
%
|
|
|
0.00
|
%
|
|
|
-0.01
|
%
|
|
|
0.00
|
%
|
|
|
0.16
|
%
|
|
|
0.89
|
%
|
|
|
|
|
|
|
0.05
|
%
|
(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.
The following table shows the amount of the ACLL allocated to each category and the ratio of corresponding outstanding loan balances as of the periods indicated. Although the ACLL is allocated into these categories,
the entire ACLL is available to cover credit losses in any category.
TABLE 9: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES ON LOANS
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2023
|
|
|
2022
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Percent of
Loans to
Total
Loans
|
|
|
Amount
|
|
|
Percent of
Loans to
Total
Loans
|
|
Commercial and industrial
|
|
$
|
664
|
|
|
|
6.79
|
%
|
|
$
|
673
|
|
|
|
7.07
|
%
|
Real estate-construction
|
|
|
653
|
|
|
|
8.02
|
%
|
|
|
552
|
|
|
|
7.59
|
%
|
Real estate-mortgage (1)
|
|
|
2,872
|
|
|
|
25.54
|
%
|
|
|
2,575
|
|
|
|
25.23
|
%
|
Real estate-commercial
|
|
|
5,617
|
|
|
|
39.86
|
%
|
|
|
4,499
|
|
|
|
41.85
|
%
|
Consumer
|
|
|
1,641
|
|
|
|
19.45
|
%
|
|
|
2,065
|
|
|
|
18.04
|
%
|
Other
|
|
|
104
|
|
|
|
0.35
|
%
|
|
|
156
|
|
|
|
0.23
|
%
|
Unallocated
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
Ending Balance
|
|
$
|
11,551
|
|
|
|
100.00
|
%
|
|
$
|
10,526
|
|
|
|
100.00
|
%
|
(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.
Deposits
The Company’s predominant source of funds is depository accounts, which are comprised of demand deposits, savings and money market accounts and time deposits. The Company’s deposits are principally provided by
individuals and businesses located within the communities served.
As of December 31, 2022, total deposits were $1.2 billion, an increase of $43.6 million, or 3.8%, compared to December 31, 2022. The following table presents average balances and average rates paid on deposits for
the periods presented.
TABLE 10: DEPOSITS
|
|
Three Months ended March 31,
|
|
|
|
2023
|
|
|
2022
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
Interest-bearing transaction
|
|
$
|
70,254
|
|
|
|
0.02
|
%
|
|
$
|
75,129
|
|
|
|
0.02
|
%
|
Money market
|
|
|
428,941
|
|
|
|
0.80
|
%
|
|
|
389,368
|
|
|
|
0.17
|
%
|
Savings
|
|
|
115,880
|
|
|
|
0.03
|
%
|
|
|
126,258
|
|
|
|
0.03
|
%
|
Time deposits
|
|
|
148,563
|
|
|
|
1.47
|
%
|
|
|
167,859
|
|
|
|
0.87
|
%
|
Total interest bearing
|
|
|
763,638
|
|
|
|
0.74
|
%
|
|
|
758,614
|
|
|
|
0.29
|
%
|
Demand
|
|
|
429,928
|
|
|
|
|
|
|
|
414,080
|
|
|
|
|
|
Total deposits
|
|
$
|
1,193,566
|
|
|
|
|
|
|
$
|
1,172,694
|
|
|
|
|
|
As of March 31, 2023 and 2022, the estimated amounts of total uninsured deposits were $235.0 million and $273.7 million, respectively. The following table shows maturities of the estimated amounts of uninsured time
deposits at March 31, 2023. The estimate of uninsured deposits generally represents the portion of deposit accounts that exceed the FDIC insurance limit of $250,000 and is calculated based on the same methodologies and assumptions used for purposes
of the Bank’s regulatory reporting requirements.
TABLE 11: MATURITIES OF UNINSURED TIME DEPOSITS
|
|
As of March 31,
|
|
(dollars in thousands)
|
|
2023
|
|
Maturing in:
|
|
|
|
Within 3 months
|
|
$
|
11,883
|
|
4 through 6 months
|
|
|
5,817
|
|
7 through 12 months
|
|
|
14,006
|
|
Greater than 12 months
|
|
|
22,000
|
|
|
|
$
|
53,706
|
|
Capital Resources
Total stockholders’ equity as of March 31, 2023 was $102.6 million, up 3.9% from $98.7 million on December 31, 2022. The increase was primarily due to lower unrealized losses in the market value of securities
available for sale, which are recognized as a component of accumulated other comprehensive loss, and net income, partially offset by the adoption of CECL. The Company’s securities available-for-sale are fixed income debt securities, and their
unrealized loss position is a result of changes in market interest rates rather than credit quality issues. The Company expects to recover its investments in debt securities through scheduled payments of principal and interest and unrealized losses
are not expected to affect the net income or regulatory capital of the Company or its subsidiaries.
The assessment of capital adequacy depends on such factors as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the Company’s and the Bank’s
capital is regularly reviewed. The Company targets regulatory capital levels that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. While the Company will continue to look for opportunities
to invest capital in profitable growth, the Company will also consider investing capital in other transactions, such as share repurchases, that facilitate improving shareholder return, as measured by ROE and EPS.
The Bank’s capital position remains strong as evidenced by the regulatory capital measurements. Under the banking regulations, Total Capital is composed of core capital (Tier 1) and supplemental capital (Tier 2).
Tier 1 capital consists of common stockholders’ equity less goodwill. Tier 2 capital consists of certain qualifying debt and a qualifying portion of the allowance for credit losses. In addition, the Bank has made the one-time irrevocable election
to continue treating accumulated other comprehensive income under regulatory standards that were in place prior to the Basel III Capital Rules in order to eliminate volatility of regulatory capital that can result from fluctuations in accumulated
other comprehensive (loss) income and the inclusion of accumulated other comprehensive (loss) income in regulatory capital, as would otherwise be required under the Basel III Capital Rule. As a result of this election, changes in accumulated other
comprehensive (loss) income, including unrealized losses on securities available for sale, do not affect regulatory capital amounts
shown in the table below for the Bank
Pursuant to applicable regulations and regulatory guidance, the Company is treated as a small bank holding company and will not be subject to regulatory capital requirements. For more information, refer to
“Regulation and Supervision” included in Item 1, “Business” of the Company’s 2022 Form 10-K.
On September 17, 2019 the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR)
framework), as required by the EGRRCPA. 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.
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. 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. The CBLR framework was available for banks to begin using in their March 31, 2020, Call Report. The Bank did not opt
into the CBLR framework.
The following is a summary of the Bank’s capital ratios as of March 31, 2023 and December 31, 2022. As shown below, these ratios were all well above the recommended regulatory minimum levels.
TABLE 12: REGULATORY CAPITAL
|
|
2023
Regulatory
Minimums
|
|
|
March 31, 2023
|
|
|
2022
Regulatory
Minimums
|
|
|
December 31, 2022
|
|
Common Equity Tier 1 Capital to Risk-Weighted Assets
|
|
|
4.500
|
%
|
|
|
11.12
|
%
|
|
|
4.500
|
%
|
|
|
10.80
|
%
|
Tier 1 Capital to Risk-Weighted Assets
|
|
|
6.000
|
%
|
|
|
11.12
|
%
|
|
|
6.000
|
%
|
|
|
10.80
|
%
|
Tier 1 Leverage to Average Assets
|
|
|
4.000
|
%
|
|
|
9.74
|
%
|
|
|
4.000
|
%
|
|
|
9.43
|
%
|
Total Capital to Risk-Weighted Assets
|
|
|
8.000
|
%
|
|
|
12.08
|
%
|
|
|
8.000
|
%
|
|
|
11.70
|
%
|
Capital Conservation Buffer
|
|
|
2.500
|
%
|
|
|
4.08
|
%
|
|
|
2.500
|
%
|
|
|
3.70
|
%
|
Risk-Weighted Assets (in thousands)
|
|
|
|
|
|
$
|
1,225,088
|
|
|
|
|
|
|
$
|
1,177,600
|
|
On July 14, 2021, the Company issued $30.0 million in aggregate principal amount of 3.50% fixed-to-floating rate subordinated notes due 2031 (the Notes) in a private placement transaction. The Notes initially bear
interest at a fixed rate of 3.50% for five years and convert to three-month SOFR plus 286 basis points, resetting quarterly, thereafter. The Notes were structured to qualify as Tier 2 capital for regulatory purposes and are included in the
Company’s Tier 2 capital as of March 31, 2023 and December 31, 2022.
Liquidity
Liquidity is the ability of the Company to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability
management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments in securities and loans maturing within one year. Additional sources of liquidity available to the Company include cash flows from
operations, loan payments and payoffs, deposit growth, maturities, calls and sales of securities, the issuance of brokered certificates of deposits and the capacity to borrow additional funds.
A major source of the Company’s liquidity is its large, stable deposit base. In addition, secondary liquidity sources are available through the use of borrowed funds if the need should arise,
including secured advances from the FHLB and FRB. As of the end of the first quarter of 2023, the Company had $404.1 million in FHLB borrowing availability based on loans and securities currently available for pledging. The Company believes that
the availability at the FHLB is sufficient to meet future cash-flow needs. The Company also has available short-term, unsecured borrowed funds in the form of federal funds lines of credit with correspondent banks.
Based on the Company’s management of liquid assets, the availability of borrowed funds, and the ability to generate liquidity through liability funding, management believes that the Company maintains
overall liquidity sufficient to satisfy its depositors’ requirements and to meet its customers’ future borrowing needs. The Bank also participates in the IntraFi Cash Sweep, a product which provides the Bank the capability of providing additional
deposit insurance to customers through three types of account arrangements. The Company experienced a change in liquidity mix beginning during the fourth quarter of 2022 as short-term FHLB borrowings were utilized to fund loan growth.
Notwithstanding the foregoing, the Company’s ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in the Company’s markets. The Company is closely monitoring changes in the
industry and market conditions that may affect the Company’s liquidity, including the potential impacts on the Company’s liquidity of declines in the fair value of the Company’s securities portfolio as a result of rising market interest rates and
developments in the financial services industry that may change the availability of traditional sources of liquidity or market expectations with respect to available sources and amounts of additional liquidity. Depending on its liquidity levels,
its capital position, conditions in the capital markets and other factors, the Company may from time to time consider the issuance of debt, equity, other securities or other possible capital markets transactions, the proceeds of which could provide
additional liquidity for the Company’s operations.
The following table sets forth information relating to the Company’s sources of liquidity and the outstanding commitments for use of liquidity at March 31, 2023. Dividing the total short-term sources of liquidity by
the outstanding commitments for use of liquidity derives the liquidity coverage ratio.
TABLE 13: LIQUIDITY SOURCES AND USES
|
|
March 31,
|
|
|
|
2023
|
|
(dollars in thousands)
|
|
Total
|
|
|
In Use
|
|
|
Available
|
|
Sources:
|
|
|
|
|
|
|
|
|
|
Federal funds lines of credit
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
$
|
100,000
|
|
Federal Home Loan Bank advances
|
|
|
404,145
|
|
|
|
72,500
|
|
|
|
331,645
|
|
Federal funds sold & balances at the Federal Reserve
|
|
|
|
|
|
|
|
|
|
|
11,234
|
|
Securities, available for sale and unpledged at fair value
|
|
|
|
|
|
|
|
|
|
|
141,004
|
|
Total short-term funding sources
|
|
|
|
|
|
|
|
|
|
$
|
583,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uses: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded loan commitments and lending lines of credit
|
|
|
|
|
|
|
|
|
|
|
80,876
|
|
Letters of credit
|
|
|
|
|
|
|
|
|
|
|
131
|
|
Total potential short-term funding uses
|
|
|
|
|
|
|
|
|
|
|
81,007
|
|
Liquidity coverage ratio
|
|
|
|
|
|
|
|
|
|
|
720.8
|
%
|
(1) Represents partial draw levels based on loan segment.
As a result of the ability to generate liquidity through liability funding and management of liquid assets, management believes the Company maintains overall liquidity sufficient to satisfy operational requirements
and contractual obligations. The Company’s internal sources of liquidity are deposits, loan and investment repayments and securities available-for-sale. The Company’s primary external source of liquidity is advances from the FHLB.
In the ordinary course of business the Company has entered into contractual obligations and has made other commitments to make future payments. As of March 31, 2023, there have
been no material changes outside the ordinary course of business as disclosed in the Company’s contractual obligations disclosed in the Company’s 2022 Form 10-K.
Off-Balance Sheet Arrangements
As of March 31, 2023, there were no material changes in the Company’s off-balance sheet arrangements disclosed in the Company’s 2022 Form 10-K.
Non-GAAP Financial Measures
In reporting the results as of and for the three months ended March 31, 2023, the Company has provided supplemental financial measures on a tax equivalent, tangible, or adjusted basis. These non-GAAP
financial measures are a supplement to GAAP, which is used to prepare the Company’s financial statements, and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, the
Company’s non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. The Company uses the non-GAAP financial measures discussed herein in its analysis of the Company’s performance. The Company’s management
believes that these non-GAAP financial measures provide additional understanding of ongoing operations and enhance comparability of results of operations with prior periods presented without the impact of items or events that may obscure trends in
the Company’s underlying performance. A reconciliation 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.
TABLE 14: Non-GAAP FINANCIAL MEASURES
|
|
Three Months Ended March 31,
|
|
(dollar in thousands, except share and per share data)
|
|
2023
|
|
|
2022
|
|
Fully Taxable Equivalent Net Interest Income
|
|
|
|
|
|
|
Net interest income (GAAP)
|
|
$
|
12,813
|
|
|
$
|
9,637
|
|
FTE adjustment
|
|
|
57
|
|
|
|
68
|
|
Net interest income (FTE) (non-GAAP)
|
|
$
|
12,870
|
|
|
$
|
9,705
|
|
Noninterest income (GAAP)
|
|
|
3,421
|
|
|
|
3,515
|
|
Total revenue (FTE) (non-GAAP)
|
|
$
|
16,291
|
|
|
$
|
13,220
|
|
Noninterest expense (GAAP)
|
|
|
12,168
|
|
|
|
10,713
|
|
|
|
|
|
|
|
|
|
|
Average earning assets
|
|
$
|
1,291,181
|
|
|
$
|
1,246,028
|
|
Net interest margin
|
|
|
4.02
|
%
|
|
|
3.14
|
%
|
Net interest margin (FTE) (non-GAAP)
|
|
|
4.04
|
%
|
|
|
3.16
|
%
|
|
|
|
|
|
|
|
|
|
Efficiency ratio
|
|
|
74.95
|
%
|
|
|
81.46
|
%
|
Efficiency ratio (FTE) (non-GAAP)
|
|
|
74.69
|
%
|
|
|
81.04
|
%
|
Tangible Book Value Per Share
|
|
March 31, 2023
|
|
|
December 31, 2022
|
|
Total Stockholders Equity (GAAP)
|
|
$
|
102,598
|
|
|
$
|
98,734
|
|
Less goodwill
|
|
|
1,650
|
|
|
|
1,650
|
|
Less core deposit intangible
|
|
|
220
|
|
|
|
231
|
|
Tangible Stockholders Equity (non-GAAP)
|
|
$
|
100,728
|
|
|
$
|
96,853
|
|
Shares issued and outstanding, including nonvested restricted stock
|
|
|
5,000,331
|
|
|
|
4,999,083
|
|
|
|
|
|
|
|
|
|
|
Book value per share
|
|
$
|
20.52
|
|
|
$
|
19.75
|
|
Tangible book value per share
|
|
$
|
20.14
|
|
|
$
|
19.37
|
|
ACLL as a Percentage of Loans Held for Investment
|
|
March 31, 2023
|
|
|
December 31, 2022
|
|
|
March 31, 2022
|
|
Loans held for investment (net of deferred fees and costs) (GAAP)
|
|
$
|
1,081,265
|
|
|
$
|
1,027,085
|
|
|
$
|
855,234
|
|
Less PPP originations
|
|
|
471
|
|
|
|
530
|
|
|
|
7,509
|
|
Loans held for investment, (net of deferred fees and costs), excluding
PPP (non-GAAP)
|
|
$
|
1,080,794
|
|
|
$
|
1,026,555
|
|
|
$
|
847,725
|
|
ACLL
|
|
$
|
11,551
|
|
|
$
|
10,526
|
|
|
$
|
9,520
|
|
ACLL as a Percentage of Loans Held for Investment
|
|
|
1.07
|
%
|
|
|
1.02
|
%
|
|
|
1.11
|
%
|
ACLL as a Percentage of Loans Held for Investment, net of PPP originations
|
|
|
1.07
|
%
|
|
|
1.03
|
%
|
|
|
1.12
|
%
|
Cautionary Statement Regarding Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q, which use language such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” and similar
expressions, may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the beliefs of the Company’s management, as well as estimates and
assumptions made by, and information available to, management, as of the time such statements are made. These statements are inherently uncertain, and there can be no assurance that the underlying beliefs, estimates, or assumptions will prove to be
accurate. Actual results, performance, achievements, or trends could differ materially from historical results or those anticipated by such statements. The actual results or developments anticipated may not be realized or, even if substantially
realized, they may not have the expected consequences to or effects on the Company or its business or operations. Forward-looking statements in this Quarterly Report on Form 10-Q may include, without limitation: statements regarding strategic
business initiatives, including vendor review initiatives and new vendor relationships, and the future financial impact of those initiatives; expected future operations and financial performance; current and future interest rate levels and
fluctuations and potential impacts on the Company’s NIM, future financial and economic conditions, industry conditions, and loan demand; impacts of economic uncertainties; performance of loan and securities portfolios, asset quality, future levels
of the ALLL and the provision for credit losses and the level of future charge-offs; deposit growth; management’s belief regarding liquidity and capital resources; the Company’s technology and efficiency initiatives and anticipated completion
timelines; changes in NIM and items affecting NIM; expected future recovery of investments in debt securities; expected impact of unrealized losses on earnings and regulatory capital of the Company or the Bank; liquidity and capital levels;
cybersecurity risks; inflation; the effect of future market and industry trends; and other statements that include projections, predictions, expectations, or beliefs about future events or results, or otherwise are not statements of historical
fact. These forward-looking statements are subject to significant risks and uncertainties due to factors that could have a material adverse effect on the operations and future prospects of the Company including, but not limited to, changes in or
the effects of:
|
• |
interest rates and yields, such as increases or volatility in short-term interest rates or yields on U.S. Treasury bonds and increases or volatility in mortgage interest rates, and the impacts on macroeconomic conditions, customer and
client behavior, the Company’s funding costs, and the Company’s loan and securities portfolios
|
|
• |
inflation and its impacts on economic growth and customer and client behavior
|
|
• |
adverse developments in the financial services industry, such as the recent bank failures, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on
customer and client behavior
|
|
• |
the sufficiency of liquidity
|
|
• |
general economic and business conditions in the United States generally and particularly in the Company’s service area, including unemployment levels, supply chain disruptions, higher inflation, slowdowns in economic growth, continuing
economic impacts of the COVID-19 pandemic, and the ongoing conflict between Russia and Ukraine, and the impacts on customer and client behavior
|
|
• |
conditions within the financial markets and in the banking industry, as well as the financial condition and capital adequacy of other participants in the banking industry, and the market reactions thereto
|
|
• |
monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System (the Federal Reserve), the effect of these policies on interest rates
and business in our markets and any changes associated with the current administration
|
|
• |
the quality or composition of the loan or securities portfolios and changes therein
|
|
• |
effectiveness of expense control initiatives
|
|
• |
an insufficient ACL or volatility in the ACL resulting from the CECL methodology, either alone or as may be affected by inflation, changing interest rates, or other factors
|
|
• |
the Company’s liquidity and capital positions
|
|
• |
the value of securities held in the Company’s investment portfolios
|
|
• |
the Company’s technology, efficiency, and other strategic initiatives
|
|
• |
the legislative/regulatory climate, regulatory initiatives with respect to financial institutions, products and services, the Consumer Financial Protection Bureau (the CFPB) and the regulatory and enforcement activities of the CFPB
|
|
• |
future levels of government defense spending particularly in the Company’s service areas
|
|
• |
uncertainty over future federal spending or budget priorities, particularly in connection with the Department of Defense, on the Company’s service areas
|
|
• |
the impact of potential changes in the political landscape and related policy changes, including monetary, regulatory and trade policies
|
|
• |
the U.S. Government’s guarantee of repayment of student or small business loans purchased by the Company
|
|
• |
potential claims, damages and fines related to litigation or government actions
|
|
• |
demand for loan products and the impact of changes in demand on loan growth
|
|
• |
changes in the volume and mix of interest-earning assets and interest-bearing liabilities
|
|
• |
the effects of management’s investment strategy and strategy to manage the NIM
|
|
• |
the level of net charge-offs on loans
|
|
• |
performance of the Company’s dealer lending program
|
|
• |
the Company’s branch realignment initiatives
|
|
• |
the strength of the Company’s counterparties
|
|
• |
the Company’s ability to compete in the market for financial services and increased competition from both banks and non-banks, including fintech companies
|
|
• |
demand for financial services in the Company’s market area
|
|
• |
implementation of new technologies
|
|
• |
the Company’s ability to develop and maintain secure and reliable electronic systems
|
|
• |
any interruption or breach of security in the Company’s information systems or those of the Company’s third-party vendors or their service providers
|
|
• |
reliance on third parties for key services
|
|
• |
cyber threats, attacks or events
|
|
• |
the impact of changes in the political landscape and related policy changes, including monetary, regulatory, and trade policies
|
|
• |
the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, financial crises, political crises, war and other geopolitical conflicts, such as the war between Russia and
Ukraine, or public health events, such as the COVID-19 pandemic, and of governmental and societal responses thereto, on, among other things, the Company’s operations, liquidity and credit quality
|
|
• |
the use of inaccurate assumptions in management’s modeling systems
|
|
• |
technological risks and developments
|
|
• |
the commercial and residential real estate markets
|
|
• |
the demand in the secondary residential mortgage loan markets
|
|
• |
expansion of the Company’s product offerings
|
|
• |
effectiveness of expense reduction plans
|
|
• |
changes in accounting principles, standards, rules and interpretations and elections made by the Company thereunder, and the related impact on the Company’s financial statements.
|
These risks and uncertainties, and the factors discussed in more detail in Part I, Item 1A. “Risk Factors,” and Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
of the Company’s 2022 Form 10-K should be considered in evaluating the forward-looking statements contained herein. Forward-looking statements are not statements of historical fact. Readers are cautioned not to place undue reliance on such
statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company does not intend or assume any obligation to update, revise, or clarify any forward-looking statements that may be made from time to time or on
behalf of the Company, whether as a result of new information, future events, or otherwise, except as otherwise required by law. In addition, past results of operations are not necessarily indicative of future results.