John Marshall Bancorp, Inc. (JMSB) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the consolidated financial condition and results of operations of the Company and its subsidiary should be read in conjunction with the consolidated financial statements and related notes presented in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not be indicative of results of operations or trends in operations for any future periods.
Overview
We are a bank holding company headquartered in Reston, Virginia primarily serving the Washington, D.C. metropolitan area. The material business operations of our organization are performed through the Bank. As a result, the discussion and analysis within this section primarily relate to activities conducted at the Bank.
As with most community banks, the Bank derives a significant portion of its income from interest received on loans and investments. The Bank’s primary source of funding is deposits, both interest-bearing and non-interest-bearing. To account for credit risk inherent in all loans, the Bank maintains an allowance for loan losses to absorb probable losses on existing
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loans that may become uncollectible. The Bank establishes and maintains this allowance by recording a provision for loan losses against earnings. In addition to net interest income, the Bank also generates income through service charges on deposits, insurance commission income, income from bank owned life insurance, and merchant services fee income. In order to maintain its operations, the Bank incurs various operating expenses which are further described within the “Results of Operations” later in this section.
As of December 31, 2022, the Company had total consolidated assets of $2.35 billion, total loans net of unearned income of $1.79 billion, total deposits of $2.07 billion and total shareholders’ equity of $212.8 million.
Critical Accounting Policies and Estimates
The Company’s accounting and reporting policies conform to GAAP, as well as general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely more extensively on the use of estimates, assumptions, and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported.
The following is a discussion of the critical accounting policy and significant estimate that require us to make complex and subjective judgments. Additional information about this policy can be found in Note 1 of our consolidated financial statements included in Item 8 of this Form 10-K.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged off when management believes the collectability of a loan balance is unlikely, which reduces the allowance. Loans are generally written down to the estimated net realizable value of the underlying collateral when the loan is 180 days past due. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans by segment in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonimpaired loans and is based on historical loss experience adjusted for qualitative factors. Qualitative factors used for each segment include an analysis of the levels of and trends in delinquencies, nonaccrual loans, and watch list loans; trends in concentrations, volume and term of loans; effects of any changes in lending policies and practices; experience, ability, and depth of management; national and local economic trends and conditions; and any other factor, as deemed appropriate. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on
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a loan-by-loan basis for commercial, construction, and commercial mortgage loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures unless the loan has been modified in a troubled debt restructuring.
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Selected Financial Data
The following table contains selected historical consolidated financial data as of the dates and for the periods shown. The selected balance sheet data as of December 31, 2022 and 2021 and the selected income statement data for the years ended December 31, 2022 and 2021 have been derived from our audited consolidated financial statements included elsewhere in this Form 10-K and should be read in conjunction with the other information contained in this Form 10-K, including the information contained within this “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8 – Financial Statements and Supplementary Data.”
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| (Dollars in thousands, except per share data) | December 31, 2022 | December 31, 2021 | |||||
| Balance Sheet Data: | | | | | | | |
| Loans, net of unearned income | | $ | 1,789,508 | | $ | 1,666,469 | |
| Allowance for loan losses | | (20,208) | | (20,032) | | ||
| Total assets | | 2,348,235 | | 2,149,309 | | ||
| Deposits | | 2,067,740 | | 1,881,553 | | ||
| Shareholders’ equity | | 212,800 | | 208,470 | | ||
| Asset Quality Data: | | | | ||||
| Net (charge-offs) recoveries to average total loans, net of unearned income (annualized) | | 0.00 | % | (0.01) | % | ||
| Allowance for loan losses to nonperforming loans | | NM | | NM | | ||
| Allowance for loan losses to total gross loans net of unearned income(1) | | 1.13 | % | 1.20 | % | ||
| Non-performing assets to total assets | | 0.00 | % | 0.00 | % | ||
| Non-performing loans to total loans | | 0.00 | % | 0.00 | % | ||
| Capital Ratios (Bank level): | | | | ||||
| Total risk-based capital ratio | | 15.6 | % | 15.3 | % | ||
| Tier 1 risk-based capital ratio | | 14.4 | % | 14.0 | % | ||
| Leverage ratio | | 11.3 | % | 11.0 | % | ||
| Common equity tier 1 ratio | | 14.4 | % | 14.0 | % | ||
| Equity-to-total assets ratio | | 10.0 | % | 10.8 | % | ||
| Income Statement Data: | | | | ||||
| Interest and dividend income | | $ | 84,066 | | $ | 74,119 | |
| Interest expense | | 13,645 | | 8,211 | | ||
| Net interest income | | $ | 70,421 | | $ | 65,908 | |
| Provision for loan losses | | 175 | | 3,105 | | ||
| Non-interest income | | 1,691 | | 1,719 | | ||
| Non-interest expense | | 31,874 | | 32,262 | | ||
| Income before taxes | | $ | 40,063 | | $ | 32,260 | |
| Income tax expense | | 8,260 | | 6,799 | | ||
| Net income | | $ | 31,803 | | $ | 25,461 | |
| Shares Outstanding and Per Share Data: | | | | ||||
| Weighted average common shares (basic) | | 13,931,841 | | 13,581,586 | | ||
| Weighted average common shares (diluted) | | 14,084,427 | | 13,879,595 | | ||
| Common shares outstanding | | 14,098,986 | | 13,745,598 | | ||
| Earnings per share, basic | | $ | 2.27 | | $ | 1.87 | |
| Earnings per share, diluted | | $ | 2.25 | | $ | 1.83 | |
| Book value | | $ | 15.09 | | $ | 15.17 | |
| Performance Ratios: | | | | ||||
| Return on average assets ("ROAA") | | 1.40 | % | 1.25 | % | ||
| Return on average equity ("ROAE") | | 15.18 | % | 12.90 | % | ||
| Net interest margin(2) | | 3.16 | % | 3.29 | % | ||
| Efficiency ratio | | 44.2 | % | 47.7 | % | ||
| Non-interest expense to average assets | | | 1.40 | % | | 1.58 | % |
NM – Not meaningful
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| Column 1 | Column 2 |
|---|---|
| (1) | Excluding PPP loan balances, the allowance for loan losses as a percentage of gross loans, net of unearned income was 1.13% and 1.25% at December 31, 2022 and December 31, 2021, respectively. |
| Column 1 | Column 2 |
|---|---|
| (2) | Net interest margin for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. |
Financial Overview
General
The following is a summary of the Company’s financial highlights for the year ended December 31, 2022.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Record Earnings –The Company reported record net income of $31.8 million for the year ended December 31, 2022, a $6.3 million or 24.9% increase over the $25.5 million reported for the same period of 2021. Earnings per diluted share for the year ended December 31, 2022 were $2.25, a 22.9% increase over the $1.83 reported for the same period of 2021. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Robust Loan Growth – Gross loans net of unearned income grew $123.0 million or 7.4% from December 31, 2021 to December 31, 2022. Excluding PPP loans, gross loans net of unearned income grew $190.6 million or 11.9% from December 31, 2021 to December 31, 2022. The Company remains steadfast in adhering to our strict underwriting standards to maintain pristine asset quality. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Consistently Strong Returns –ROAA was 1.40% and annualized ROAE was 15.18% for the year ended December 31, 2022. ROAA and ROAE were 1.25% and 12.90%, respectively, for the year ended December 31, 2021. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Commitment to Cost Conscious Growth – Revenues (net interest income plus non-interest income) grew 6.6% during the year ended December 31, 2022 relative to the year ended December 31, 2021. Over the same period, overhead decreased 1.2%. The ratio of non-interest expense to average assets was 1.40% for the year ended December 31, 2022 compared to 1.58% for the year ended December 31, 2021. The efficiency ratio for the year ended December 31, 2022 was 44.2% compared to 47.7% for the year ended December 31, 2021. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | No Non-performing Assets; No Loans More Than 30 Days Past Due – For the thirteenth consecutive quarter, the Company had no nonperforming loans, no other real estate owned, and no loans 30 days or more past due. There were no charge-offs during the quarter. The Company believes its allowance for loan losses is appropriate for the inherent risks and uncertainties associated with the portfolio. |
Results of Operations – Years Ended December 31, 2022 and December 31, 2021
Overview
The Company reported record net income of $31.8 million for the year ended December 31, 2022, a $6.3 million or 24.9% increase over the $25.5 million reported for the same period of 2021.
Earnings per diluted share for the year ended December 31, 2022 were $2.25, a 22.9% increase over the $1.83 reported for the same period of 2021.
Net interest income increased $4.5 million to $70.4 million for the year ended December 31, 2022, compared to $65.9 million for the year ended December 31, 2021. Growth in our loan and investment portfolios resulted in an increase in net interest income of 6.8% for the year ended December 31, 2022 when compared to the year ended December 31, 2021.
The Company recorded a $175 thousand provision for loan losses for the year ended December 31, 2022, compared to a $3.1 million provision for the year ended December 31, 2021. The decrease in the provision for loan losses as compared to the same period in 2021 primarily reflects changes in the Company’s evaluation of environmental factors impacting the Company’s loan portfolio during 2022. During 2021, the environmental or qualitative factor allocations within the allowance for loan losses were adjusted to account for the risks to certain industry subgroups and portfolio segments within our portfolio as a result of the continuing COVID-19 pandemic. The decrease in the provision for loan losses primarily reflects an estimated decrease in uncertainty as it relates to the estimated impact of the COVID-19 pandemic on the Company’s loan portfolio and the broader economy. Additional discussion of the provision for loan losses is included below under the heading Provision Expense.
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Non-interest income decreased $28 thousand or 1.6% during the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease in non-interest income was primarily due to mark-to-market adjustments of $(548) thousand resulting from a reduction in value of investments related to the Company’s nonqualified deferred compensation plan. The decrease in non-interest income was partially offset by a non-recurring BOLI related benefit claim realized and interest rate swap fee income recognized, as well as increases in insurance commissions and interchange and other fee income due to higher production and increased customer activity, respectively. During the year ended December 31, 2021, the Company also realized a $10 thousand gain on a called security. Excluding the impacts of the gain on the called security, mark-to-market adjustments, and BOLI related benefit claim, non-interest income increased $373 thousand or 24.6%.
Non-interest expense decreased $388 thousand or 1.2% during the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease in non-interest expense was primarily due to non-recurring legal and professional fees incurred in 2021, as well as decreases in marketing expense, FDIC insurance fees, and salaries and benefits expense. The decrease in marketing expense was primarily due to lower marketing vendor related expenses. The decrease in FDIC insurance fees was primarily due to lower insurance premiums. The decrease in salaries and benefits expense was primarily due to lower accruals related to deferred compensation and employer health insurance fees. The decrease in non-interest expense was partially offset by increases in state franchise taxes as a result of an increase in the Bank’s equity year-over-year and data processing fees due to new investments in technology solutions to support our operations.
The ROAA for the years ended December 31, 2022 and 2021 was 1.40% and 1.25%, respectively. The ROAE for the years ended December 31, 2022 and 2021 was 15.18% and 12.90%, respectively.
Net Interest Income and Net Interest Margin
Net interest income is the excess of interest earned on loans and investments over the interest paid on deposits and borrowings, and is the Company’s primary revenue source. Net interest income is affected by overall balance sheet growth, changes in interest rates and changes in the mix of investments, loans, deposits and borrowings. The Company’s interest-earning assets include loans, investment securities and interest-bearing deposits in other banks, while our interest-bearing liabilities include interest-bearing deposits and borrowings. Net interest margin represents the difference between interest received and interest paid as a percentage of average total interest-earning assets. Management seeks to maximize net interest income without exposing the Company to an excessive level of interest rate risk through management’s asset and liability management policies. Interest rate risk is managed by monitoring the pricing, maturity, and repricing options of all classes of interest-bearing assets and liabilities. Management expects net interest income and net interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of the Company’s interest-earning assets and interest-bearing liabilities.
The following table presents the annual average balance for each principal balance sheet category, and the amount of interest income or expense associated with that category, as well as corresponding average yields earned and rates paid for the years ended December 31, 2022 and 2021.
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Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities
| | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | December 31, 2022 | | December 31, 2021 | |||||||||||||
| | | | Interest Income / | Average | | | Interest Income / | Average | |||||||||
| (Dollars in thousands) | | Average Balance | | Expense | | Rate | | Average Balance | | Expense | | Rate | |||||
| Assets: | | | | | | ||||||||||||
| Securities: | | | | | | ||||||||||||
| Taxable | | $ | 440,899 | $ | 8,183 | 1.86 | % | $ | 275,071 | $ | 4,409 | 1.60 | % | ||||
| Tax-exempt(1) | | 5,001 | | 152 | 3.04 | % | 5,007 | | 152 | 3.04 | % | ||||||
| Total securities | | $ | 445,900 | | $ | 8,335 | 1.87 | % | $ | 280,078 | | $ | 4,561 | 1.63 | % | ||
| Loans, net of unearned income(2): | | | | | | | |||||||||||
| Taxable | | 1,652,940 | | 73,497 | 4.45 | % | 1,577,418 | | 68,685 | 4.35 | % | ||||||
| Tax-exempt(1) | | 24,211 | | 993 | 4.10 | % | 19,631 | | 924 | 4.71 | % | ||||||
| Total loans, net of unearned income | | $ | 1,677,151 | | $ | 74,490 | 4.44 | % | $ | 1,597,049 | | $ | 69,609 | 4.36 | % | ||
| Interest-bearing deposits in other banks | | $ | 116,092 | | $ | 1,482 | 1.28 | % | $ | 135,360 | | $ | 175 | 0.13 | % | ||
| Total interest-earning assets | | $ | 2,239,143 | | $ | 84,307 | 3.77 | % | $ | 2,012,487 | | $ | 74,345 | 3.69 | % | ||
| Total non-interest earning assets | | 36,624 | | | | | 31,132 | | | ||||||||
| Total assets | | $ | 2,275,767 | | | | | $ | 2,043,619 | | | ||||||
| Liabilities & Shareholders’ Equity: | | | | | | ||||||||||||
| Interest-bearing deposits | | | | | | ||||||||||||
| NOW accounts | | $ | 311,950 | | $ | 1,359 | 0.44 | % | $ | 262,319 | | $ | 798 | 0.30 | % | ||
| Money market accounts | | 395,369 | | 3,340 | 0.84 | % | 337,993 | | | 1,256 | 0.37 | % | |||||
| Savings accounts | | 108,178 | | 504 | 0.47 | % | 83,032 | | | 300 | 0.36 | % | |||||
| Time deposits | | 682,674 | | 6,575 | 0.96 | % | 657,986 | | | 4,245 | 0.65 | % | |||||
| Total interest-bearing deposits | | $ | 1,498,171 | | $ | 11,778 | 0.79 | % | $ | 1,341,330 | | $ | 6,599 | 0.49 | % | ||
| Federal funds purchased | | | 386 | | | 15 | | 3.89 | % | | — | | | — | | — | |
| Subordinated debt | | 26,754 | | 1,810 | 6.77 | % | 24,702 | | 1,487 | 6.02 | % | ||||||
| Other borrowed funds | | 6,175 | | 42 | 0.68 | % | 18,375 | | 125 | 0.68 | % | ||||||
| Total interest-bearing liabilities | | $ | 1,531,486 | | $ | 13,645 | 0.89 | % | $ | 1,384,407 | | $ | 8,211 | 0.59 | % | ||
| Demand deposits | | 518,284 | | | | | 448,723 | | | ||||||||
| Other liabilities | | 16,518 | | | | | 13,146 | | | ||||||||
| Total liabilities | | $ | 2,066,288 | | | | | $ | 1,846,276 | | | ||||||
| Shareholders’ equity | | $ | 209,479 | | | | | $ | 197,343 | | | ||||||
| Total liabilities and shareholders’ equity | | $ | 2,275,767 | | | | | $ | 2,043,619 | | | ||||||
| Net interest spread | | | | | | | | 2.88 | % | | 3.10 | % | |||||
| Net interest income and margin | | | | | $ | 70,662 | | 3.16 | % | | | | $ | 66,134 | | 3.29 | % |
| Column 1 | Column 2 |
|---|---|
| (1) | Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. |
| Column 1 | Column 2 |
|---|---|
| (2) | The Company did not have any loans on non-accrual as of December 31, 2022 or December 31, 2021. |
Net interest margin as presented above is calculated by dividing tax-equivalent net interest income by total average earning assets. Net interest income, on a tax equivalent basis, is a financial measure that the Company believes provides a more accurate picture of the interest margin for comparative purposes. Tax-equivalent net interest income is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The following table, “Tax-Equivalent Net Interest Income,” reconciles net interest income to tax-equivalent net interest income, which is a non-GAAP measure.
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Tax-Equivalent Net Interest Income
| | | | | | | |
|---|---|---|---|---|---|---|
| | | Year Ended | ||||
| (Dollars in thousands) | December 31, 2022 | December 31, 2021 | ||||
| GAAP Financial Measurements: | | | | |||
| Interest Income - Loans | | $ | 74,281 | | $ | 69,415 |
| Interest Income - Securities and Other Interest-Earning Assets | | 9,785 | | 4,704 | ||
| Interest Expense - Deposits | | 11,778 | | 6,599 | ||
| Interest Expense - Borrowings | | 1,867 | | 1,612 | ||
| Total Net Interest Income | | $ | 70,421 | | $ | 65,908 |
| | | | | | | |
| Non-GAAP Financial Measurements: | | | ||||
| Add: Tax Benefit on Tax-Exempt Interest Income - Loans | | 209 | | 194 | ||
| Add: Tax Benefit on Tax-Exempt Interest Income - Securities | | 32 | | 32 | ||
| Total Tax Benefit on Tax-Exempt Interest Income (1) | | $ | 241 | | $ | 226 |
| Tax-Equivalent Net Interest Income | | $ | 70,662 | | $ | 66,134 |
| Column 1 | Column 2 |
|---|---|
| (1) | Tax benefit was calculated using the federal statutory tax rate of 21%. |
Net interest income increased $4.5 million or 6.8% to $70.7 million on a fully tax-equivalent basis for the year ended December 31, 2022. The increase in net interest income was driven by an increase in the average balance of interest-earning assets, and to a lesser extent, an increase in yield on interest-earning assets as a result of rising interest rates during 2022.
On a fully tax-equivalent basis, the net interest margin was 3.16% for the year ended December 31, 2022, compared to 3.29% for the year ended December 31, 2021. The decrease in net interest margin was primarily due to an increase in the cost of interest-bearing liabilities, which more than offset the increase in yield on loans, investments, and interest-bearing deposits in other banks. The cost of interest-bearing liabilities was 0.89% for the year ended December 31, 2022 compared to 0.59% for the same period of the prior year. The increase in the cost of interest-bearing liabilities was primarily due to higher interest expense on deposits and our subordinated debt. The increase in interest expense on subordinated debt was primarily the result of carrying the $25.0 million fixed-to-floating 5.75% subordinated notes that were issued on July 6, 2017 (“2017 notes”) and the $25.0 fixed-to-floating 5.25% subordinated note issued on June 15, 2022 (the “2022 note”) from June 15, 2022 until July 15, 2022, when the 2017 notes were redeemed, coupled with the accelerated amortization of $272 thousand in deferred issuance costs associated with our 2017 notes. The 2022 note currently bears interest at a fixed rate of 5.25% compared to the fixed rate of 5.75% paid on the 2017 notes that were redeemed on July 15, 2022. Increases in rates offered on NOW and money market deposit accounts and the repricing of our time deposits during the year ended December 31, 2022 also contributed to the increase in the cost of interest-bearing liabilities.
The loan portfolio’s yield for the year ended December 31, 2022 was 4.44% compared to 4.36% for the year ended December 31, 2021. The increase in yield on the Company’s loan portfolio was primarily due to an increase in interest rates during 2022.
The investment securities portfolio’s yield for the year ended December 31, 2022 was 1.87% compared to 1.63% for the year ended December 31, 2021. The increase of 0.24% was primarily due to higher yields on investment securities purchased during 2022.
The yield on interest-bearing deposits due from banks for the year ended December 31, 2022 was 1.28% compared to 0.13% for the year ended December 31, 2021. The increase of 1.15% was primarily due to an increase in the federal funds rate during the year ended December 31, 2022 when compared to the federal funds rate during the year ended December 31, 2021.
The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column
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represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated to volume.
Rate/Volume Analysis
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | For the Year Ended December 31, | |||||||
| | | 2022 and 2021 | |||||||
| | | Increase | | | | ||||
| | | (Decrease) Due to | | | | ||||
| (Dollars in thousands) | Volume | Rate | Total Increase (Decrease) | ||||||
| Interest-earning Assets: | | | | ||||||
| Securities: | | | | ||||||
| Taxable | | $ | 3,043 | | $ | 731 | | $ | 3,774 |
| Tax-exempt(1) | | — | | — | | — | |||
| Total securities | | $ | 3,043 | | $ | 731 | | $ | 3,774 |
| Loans, net of unearned income: | | | | ||||||
| Taxable | | 3,420 | | 1,392 | | 4,812 | |||
| Tax-exempt(1) | | 131 | | | (62) | | 69 | ||
| Total loans, net of unearned income(2) | | $ | 3,551 | | $ | 1,330 | | $ | 4,881 |
| Interest-bearing deposits in other banks | | $ | (229) | | $ | 1,536 | | $ | 1,307 |
| Total interest-earning assets | | $ | 6,365 | | $ | 3,597 | | $ | 9,962 |
| Interest-bearing Liabilities: | | | | ||||||
| Interest-bearing deposits: | | | | ||||||
| NOW accounts | | $ | 218 | | $ | 343 | | $ | 561 |
| Money market accounts | | 341 | | 1,743 | | 2,084 | |||
| Savings accounts | | 117 | | 87 | | 204 | |||
| Time deposits | | 270 | | 2,060 | | 2,330 | |||
| Total interest-bearing deposits | | $ | 946 | | $ | 4,233 | | $ | 5,179 |
| Federal funds purchased | | 15 | | — | | 15 | |||
| Subordinated debt | | 139 | | 184 | | 323 | |||
| Other borrowed funds | | (83) | | — | | (83) | |||
| Total interest-bearing liabilities | | $ | 1,017 | | $ | 4,417 | | $ | 5,434 |
| Change in net interest income | | $ | 5,348 | | $ | (820) | | $ | 4,528 |
| Column 1 | Column 2 |
|---|---|
| (1) | Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. |
(2)The Company did not have any loans on non-accrual as of December 31, 2022 or December 31, 2021.
Interest Income
Interest income increased by $10.0 million or 13.4% to $84.3 million on a fully tax-equivalent basis for the year ended December 31, 2022 compared to $74.3 million for the year ended December 31, 2021, driven by both an increase in volume and rates on interest-earning assets. The increase in volume of average interest-earning assets was primarily attributable to the Company’s loan and investment portfolios. The increase in rate on interest-earning assets was primarily attributable to interest-bearing deposits due from banks, the loan portfolio, and to a lesser extent, the investment portfolio.
Fully tax-equivalent interest income on loans increased by approximately $4.9 million as a result of volume growth and an increase in rate. Average loans increased approximately $80.1 million between the years ended December 31, 2022 and December 31, 2021, which was primarily attributable to growth in the investor real estate and residential mortgage portfolios.
Fully tax-equivalent interest income on investment securities increased by approximately $3.8 million as a result of volume growth and rate increases. Average investment securities increased approximately $165.8 million between the years ended December 31, 2022 and December 31, 2021. The increase in investment securities was funded primarily by PPP loan payoffs and deposit growth.
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The increase in rates on loans, investment securities, and interest-bearing deposits in other banks was primarily attributable to an increase in benchmark interest rates throughout 2022.
Interest Expense
Interest expense increased by $5.4 million or 66.2% to $13.6 million for the year ended December 31, 2022 compared to $8.2 million for the year ended December 31, 2021, primarily due to an increase in rates and, to a lesser extent, volume of deposits. The increase in rates was primarily a result of the repricing of the Company’s time deposits coupled with an increase in rates offered on NOW and money market deposit accounts during the year ended December 31, 2022. Our overall cost of funds benefited from an increase in average non-interest bearing deposits to total average deposits, which increased from 25.1% for the year ended December 31, 2021 to 25.7% for the year ended December 31, 2022.
Provision Expense
The Company maintains an allowance for loan losses that represents management’s best estimate of probable losses inherent in the loan portfolio as of each balance sheet date. Both the amount of the provision, which is charged to earnings, and the level of the allowance for loan losses are impacted by many factors, including general, industry-specific, and geographic-specific economic conditions, current and historical credit losses, conditions specific to individual borrowers, the value of collateral underlying secured loans, among other factors.
The Company recorded a $175 thousand provision for loan losses for the year ended December 31, 2022, compared to a $3.1 million provision for the year ended December 31, 2021. The decrease in the provision for loan losses as compared to the same period in 2021 primarily reflects changes in the Company’s evaluation of environmental factors impacting the Company’s loan portfolio during 2022. During 2021, the environmental or qualitative factor allocations within the allowance for loan losses were adjusted to account for the risks to certain industry subgroups and portfolio segments within our portfolio as a result of the continuing COVID-19 pandemic. The decrease in the provision for loan losses primarily reflects a decrease in uncertainty as it relates to the estimated impact of the COVID-19 pandemic on the Company’s loan portfolio and the broader economy.
See “Asset Quality” section below for additional information on the credit quality of the loan portfolio.
Non-interest Income
The Company’s recurring sources of non-interest income consist primarily of interchange income, bank owned life insurance income, service charges on deposit accounts and insurance commissions. Generally speaking, loan fees are included in interest income on the loan portfolio and not reported as non-interest income.
The following table summarizes non-interest income for the years ended December 31, 2022 and December 31, 2021.
| | | | | | | |
|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2022 | 2021 | ||||
| Service charges on deposit accounts | | | | | | |
| Overdrawn account fees | | $ | 88 | | $ | 76 |
| Account service fees | | 236 | | 186 | ||
| Other service charges and fees | | | ||||
| Interchange income | | 409 | | 379 | ||
| Other charges and fees | | 247 | | 98 | ||
| Bank owned life insurance | | 544 | | 411 | ||
| Gains on securities | | — | | 10 | ||
| Net gains on premises and equipment | | — | | 29 | ||
| Insurance commissions | | 382 | | 284 | ||
| Other operating income (loss) | | (215) | | 246 | ||
| Total non-interest income | | $ | 1,691 | | $ | 1,719 |
Non-interest income decreased $28 thousand or 1.6% during the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease in non-interest income was primarily due to mark-to-market adjustments of
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$(548) thousand resulting from a reduction in value of investments related to the Company’s nonqualified deferred compensation plan. The decrease in non-interest income was partially offset by a non-recurring BOLI related benefit claim realized and interest rate swap fee income recognized, as well as increases in insurance commissions and interchange and other fee income due to higher production and increased customer activity, respectively. During the year ended December 31, 2021, the Company also realized a $10 thousand gain on a called security. Excluding the impacts of the gain on the called security, mark-to-market adjustments, and BOLI related benefit claim, non-interest income increased $373 thousand or 24.6%.
Non-interest Expense
Generally, non-interest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing banking services. The largest component of non-interest expense is salaries and employee benefits. Non-interest expense also includes operational expenses, such as occupancy and equipment expenses, data processing expenses, professional fees, advertising expenses and other general and administrative expenses, including FDIC assessments, and Virginia state franchise taxes.
The following table summarizes non-interest expense for the years ended December 31, 2022 and December 31, 2021.
| | | | | | | |
|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2022 | 2021 | ||||
| Salaries and employee benefits expense | | $ | 20,190 | | $ | 20,411 |
| Occupancy expense of premises | | 1,893 | | 1,985 | ||
| Furniture and equipment expenses | | 1,325 | | 1,436 | ||
| Advertising expense | | 193 | | 395 | ||
| Data processing | | 1,940 | | 1,471 | ||
| FDIC insurance | | 605 | | 887 | ||
| Professional fees | | 1,231 | | 1,418 | ||
| State franchise tax | | 2,092 | | 1,849 | ||
| Bank insurance | | 204 | | 176 | ||
| Vendor services | | 594 | | 574 | ||
| Supplies, printing, and postage | | 133 | | 181 | ||
| Director costs | | 810 | | 797 | ||
| Other operating expenses | | 664 | | 682 | ||
| Total non-interest expense | | $ | 31,874 | | $ | 32,262 |
Non-interest expense decreased $388 thousand or 1.2% during the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease in non-interest expense was primarily due to non-recurring legal and professional fees incurred in 2021, as well as decreases in marketing expense, FDIC insurance fees, and salaries and benefits expense. The decrease in marketing expense was primarily due to lower marketing vendor related expenses. The decrease in FDIC insurance fees was primarily due to lower insurance premiums. The decrease in salaries and benefits expense was primarily due to lower accruals related to deferred compensation and employer health insurance fees. The decrease in non-interest expense was partially offset by increases in state franchise taxes as a result of an increase in the Bank’s equity year-over-year and data processing fees due to new investments in technology solutions to support our operations. The increase in state franchise taxes was due to an increase in the Bank’s equity as that is the basis the Commonwealth of Virginia uses to assess taxes on banking institutions. The increase in data processing fees was due to new investments in technology solutions to support our operations.
Income Taxes
Income tax expense increased $1.5 million or 21.5% to $8.3 million for the year ended December 31, 2022 compared to $6.8 million for the year ended December 31, 2021. Our effective tax rate for the year ended December 31, 2022 was 20.6%, compared to 21.1% for the same period ended December 31, 2021. The decrease in our effective tax rate was primarily due to tax benefits realized in connection with the exercise of certain nonqualified stock options during the year ended December 31, 2022.
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Discussion and Analysis of Financial Condition – Years Ended December 31, 2022 and December 31, 2021
Assets, Liabilities, and Shareholders’ Equity
The Company’s total assets increased $198.9 million or 9.3% to $2.35 billion at December 31, 2022 compared to $2.15 billion at December 31, 2021. The increase in total assets is primarily attributable to an increase in loans net of unearned income of $123.0 million and an increase in the carrying value of the Company’s investment portfolio of $111.9 million. The increase was partially offset due to a decrease in interest-bearing deposits in banks of $47.9 million.
The Company’s total liabilities increased $194.6 million or 10.0% to $2.14 billion at December 31, 2022 compared to $1.94 billion at December 31, 2021. The increase in total liabilities was primarily attributable to an increase in total deposits of $186.2 million.
The Company’s total shareholders’ equity increased $4.3 million or 2.1% to $212.8 million at December 31, 2022 compared to $208.5 million at December 31, 2021. The increase was primarily due to increases in retained earnings and additional paid-in capital, which were partially offset by the increase in the unrealized loss on our available-for-sale investment portfolio and the one-time special cash dividend declared during the first quarter of 2022. Total common shares outstanding increased from 13,745,598, including 75,826 shares relating to unvested stock awards, at December 31, 2021, to 14,098,986, including 55,185 shares relating to unvested stock awards, at December 31, 2022. The year-over-year increase in shares outstanding was the result of exercises of stock options and additional grants of restricted stock awards. Excluding accumulated other comprehensive loss, which primarily includes the impact of unrealized losses on the Company’s available-for-sale investment portfolio, total shareholders’ equity increased $32.6 million or 15.6% from December 31, 2021 to December 31, 2022.
Investment Securities
The Company maintains a primarily fixed income investment securities portfolio that had a total carrying value of $457.0 million at December 31, 2022 and $344.8 million at December 31, 2021. The investment portfolio is used as a source of liquidity, interest income, and credit risk diversification, as well as to manage rate sensitivity and provide collateral for secured public funds. Investment securities are classified as available-for-sale or held-to-maturity based on management’s investment strategy and management’s assessment of the intent and ability to hold the securities until maturity. Investment securities that we may sell prior to maturity in response to changes in management’s investment strategy, liquidity needs, interest rate risk profile or for other reasons are classified as available-for-sale. The Company also had restricted stock and equity securities within its investment securities portfolio with total carrying values of $4.4 million and $2.1 million, respectively, as of December 31, 2022 and $5.0 million and $1.9 million, respectively, as of December 31, 2021. Restricted stock is comprised of investments in Federal Home Loan Bank stock, Federal Reserve Bank stock, and Community Bankers’ Bank stock. The Company’s equity securities consist of mutual funds held in a trust and were obtained for the purpose of economically hedging changes in the Company’s nonqualified deferred compensation liability.
The Company purchased $207.9 million of investment securities during 2022, which were comprised of $151.1 million of mortgage-backed securities, $32.3 million of U.S. Treasuries, $12.9 million of collateralized mortgage obligation securities, $9.6 million of U.S. government and federal agency securities, and $2.0 million of corporate bonds. The Company had $59.9 million in maturities, calls and principal repayments on securities during 2022, which is comprised of $41.1 million of mortgage-backed securities, $12.0 million of collateralized mortgage obligation securities, $5.8 million of U.S. government and federal agency securities and $1.0 million in municipal securities.
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The following table summarizes the amortized cost and fair value of the Company’s primarily fixed income investment portfolio as of December 31, 2022 and December 31, 2021, respectively.
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | December 31, 2022 | December 31, 2021 | |||||||||
| | | Amortized | | Fair | | Amortized | | Fair | ||||
| (Dollars in thousands) | Cost | Value | Cost | Value | ||||||||
| Held-to-maturity | | | | | ||||||||
| U.S. Treasuries | | $ | 6,000 | | $ | 5,160 | | $ | 6,000 | | $ | 5,850 |
| U.S. government and federal agencies | | 35,551 | | 29,416 | | 35,720 | | 34,994 | ||||
| Collateralized mortgage obligations | | 21,275 | | 17,048 | | 25,606 | | 25,072 | ||||
| Taxable municipal | | 6,073 | | 4,709 | | 6,089 | | 5,895 | ||||
| Mortgage-backed | | 30,516 | | 24,828 | | 32,094 | | 31,447 | ||||
| Total Held-to-maturity Securities | | $ | 99,415 | | $ | 81,161 | | $ | 105,509 | | $ | 103,258 |
| Available-for-sale | | | | | ||||||||
| U.S. Treasuries | | $ | 63,480 | | $ | 59,210 | | $ | 30,954 | | $ | 30,543 |
| U.S. government and federal agencies | | 38,748 | | 34,760 | | 34,803 | | 34,537 | ||||
| Corporate bonds | | 3,000 | | 2,614 | | 1,000 | | 1,031 | ||||
| Collateralized mortgage obligations | | 44,732 | | 38,474 | | 39,596 | | 39,049 | ||||
| Tax-exempt municipal | | 4,993 | | 4,645 | | 5,007 | | 5,262 | ||||
| Taxable municipal | | 608 | | 579 | | 1,653 | | 1,685 | ||||
| Mortgage-backed | | 238,652 | | 217,294 | | 127,287 | | 127,193 | ||||
| Total Available-for-sale Securities | | $ | 394,213 | | $ | 357,576 | | $ | 240,300 | | $ | 239,300 |
In the prevailing rate environments as of both December 31, 2022 and December 31, 2021, the Company’s investment portfolio had an estimated weighted average remaining life of approximately 4.5 years. The Company’s available-for-sale investment portfolio had an estimated weighted average remaining life of approximately 3.8 years and 4.1 years in the prevailing rate environments as of December 31, 2022 and December 31, 2021, respectively.
The following table summarizes the maturity composition of our investment securities as of December 31, 2022, including the weighted average yield of each maturity band. Maturities are based on the final contractual payment date, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. The weighted-average yield below represents the effective yield for the investment securities and is calculated based on the amortized cost of each security.
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | December 31, 2022 | ||||||||
| | | Amortized | | Fair | | Weighted-Average | |||
| (Dollars in thousands) | Cost | Value | Yield | ||||||
| Held-to-maturity | | | | ||||||
| Due in one year or less | | $ | — | | $ | — | — | | |
| Due after one year through five years | | 5,208 | | 4,474 | 0.94 | % | |||
| Due after five years through ten years | | 39,496 | | 32,806 | 1.26 | % | |||
| Due after ten years | | 54,711 | | 43,881 | 1.39 | % | |||
| Total Held-to-maturity Securities | | $ | 99,415 | | $ | 81,161 | 1.27 | % | |
| Available-for-sale | | | | ||||||
| Due in one year or less | | $ | 1,929 | | $ | 1,899 | 3.54 | % | |
| Due after one year through five years | | 104,037 | | 96,292 | 1.70 | % | |||
| Due after five years through ten years | | 153,724 | | 142,314 | 2.33 | % | |||
| Due after ten years | | 134,523 | | 117,071 | 1.82 | % | |||
| Total Available-for-sale Securities | | $ | 394,213 | | $ | 357,576 | 2.00 | % |
Loan Portfolio
Gross loans net of unearned income increased $123.0 million or 7.4% to $1.79 billion as of December 31, 2022 compared to $1.67 billion as of December 31, 2021. Excluding PPP loans, gross loans held for investment net of unearned income
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increased $190.6 million or 11.9% from December 31, 2021 to December 31, 2022. PPP loans held for investment net of unearned income totaled $132 thousand at December 31, 2022, a decrease from $67.7 million at December 31, 2021.
The following table presents the Company’s composition of loans held for investment, net of deferred fees and costs, in dollar amounts and as a percentage of total gross loans as of December 31, 2022 and December 31, 2021.
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | December 31, 2022 | December 31, 2021 | |||||||||
| (Dollars in thousands) | Amount | Percent | Amount | Percent | |||||||
| Real Estate Loans: | | | | | |||||||
| Commercial | | $ | 1,118,127 | 62.62 | % | $ | 968,442 | 58.15 | % | ||
| Construction and land development | | 195,027 | 10.92 | % | 231,090 | 13.87 | % | ||||
| Residential | | 426,841 | 23.91 | % | 342,491 | 20.56 | % | ||||
| Commercial - Non Real Estate: | | | | ||||||||
| Commercial loans(1) | | 44,924 | 2.52 | % | 122,945 | 7.38 | % | ||||
| Consumer - Non-Real Estate: | | | | ||||||||
| Consumer loans | | 529 | 0.03 | % | 586 | 0.04 | % | ||||
| Total Gross Loans | | $ | 1,785,448 | 100.00 | % | $ | 1,665,554 | 100.00 | % | ||
| Allowance for loan losses | | (20,208) | | | | (20,032) | | ||||
| Net deferred loan costs | | 4,060 | | | | 915 | | ||||
| Total net loans | | $ | 1,769,300 | | | | $ | 1,646,437 | |
| Column 1 | Column 2 |
|---|---|
| (1) | Includes gross PPP loans of $136 thousand and $69.6 million as of December 31, 2022 and December 31, 2021, respectively. |
The following table summarizes the contractual maturities of the loans as of December 31, 2022 by loan type. Maturities are based on the final contractual payment date, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. The table also summarizes the fixed and floating rate composition of loans held for investment for contractual maturities greater than one year.
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | December 31, 2022 | ||||||||||||||
| | | | After 1 | After 5 | | | | | |||||||
| | | | | | Year | | years | | Maturing | | | | |||
| | | Within 1 | | Within 5 | | Within 15 | | After 15 | | | | ||||
| (Dollars in thousands) | | Year | | Years | | Years | | Years | | Total | |||||
| Real Estate Loans: | | | | | | | |||||||||
| Residential | | $ | 7,354 | | $ | 37,839 | | $ | 37,995 | | $ | 343,653 | | $ | 426,841 |
| Commercial | | 35,066 | | 253,073 | | | 818,107 | | | 11,881 | | 1,118,127 | |||
| Construction and land development | | 119,403 | | 51,032 | | | 23,634 | | | 958 | | 195,027 | |||
| Commercial - Non-Real Estate: | | | | | | | | | | | | | |||
| Commercial loans | | 12,771 | | 23,156 | | | 8,078 | | | 919 | | 44,924 | |||
| Consumer - Non-Real Estate: | | | | | | | | | | | | | |||
| Consumer loans | | 406 | | 106 | | | — | | | 17 | | 529 | |||
| Total Gross Loans | | $ | 175,000 | | $ | 365,206 | | $ | 887,814 | | $ | 357,428 | | $ | 1,785,448 |
| | | | | | | | | | | | | | | | |
| For Maturities Over One Year: | | | | | | ||||||||||
| Floating rate loans | | | | | $ | 144,844 | | $ | 288,586 | | $ | 345,223 | | $ | 778,653 |
| Fixed rate loans | | | | | 220,362 | | | 599,228 | | | 12,205 | | 831,795 | ||
| | | | | | $ | 365,206 | | $ | 887,814 | | $ | 357,428 | | $ | 1,610,448 |
Asset Quality
The Company maintains policies and procedures to promote sound underwriting and mitigate credit risk. The Chief Credit Officer is responsible for establishing credit risk policies and procedures, including underwriting and hold guidelines and credit approval authority, and monitoring credit exposure and performance of the Company’s lending-related transactions.
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The Company’s asset quality remained strong during the year ended December 31, 2022. The Company did not have any nonperforming assets, which includes nonperforming loans and OREO, as of December 31, 2022 or December 31, 2021. As a result, the Company did not have any nonperforming loans, which consists of loans that are 90 days or more past due or loans placed on nonaccrual as of December 31, 2022 or December 31, 2021.
The Company did not have any nonaccrual loans as of December 31, 2022 or December 31, 2021 nor were there any loans placed on nonaccrual during those periods. A loan is placed on nonaccrual status when (i) the Company is advised by the borrower that scheduled principal or interest payments cannot be met, (ii) when management’s best judgment indicates that payment in full of principal and interest can no longer be expected, or (iii) when any such loan or obligation becomes delinquent for 90 days, unless it is both well-secured and in the process of collection. As a result, the Company did not have any interest income that would have been recognized on nonaccrual loans for the years ended December 31, 2022 or December 31, 2021.
The Company may, for economic or legal reasons related to a borrower’s financial condition, grant a concession to the borrower that it would not otherwise consider, which results in the related loan being classified as a TDR. All modifications are evaluated by management on a loan-by-loan basis to determine whether the loan modification constitutes a TDR. Total TDRs were $418 thousand and $549 thousand as of December 31, 2022 and December 31, 2021, respectively, and were performing in accordance with their modified terms as of those dates.
The following table summarizes the Company’s asset quality as of December 31, 2022 and December 31, 2021.
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | December 31, 2022 | December 31, 2021 | |||||
| Nonaccrual loans | | $ | — | | $ | — | |
| Loans past due 90 days and accruing interest | | — | | — | | ||
| Other real estate owned and repossessed assets | | — | | — | | ||
| Total nonperforming assets | | $ | — | | $ | — | |
| | | | | | | | |
| Allowance for loan losses to nonperforming assets | | NM | | NM | | ||
| Nonaccrual loans to gross loans | | 0.00 | % | 0.00 | % | ||
| Nonperforming assets to period end loans and OREO | | 0.00 | % | 0.00 | % |
NM – Not meaningful
Allowance for Loan Losses
Refer to the discussion in the “Critical Accounting Policies and Estimates” section above for management’s approach to estimating the allowance for loan losses.
Gross charged-off loans were $1 thousand and $91 thousand for the years ended December 31, 2022 and December 31, 2021, respectively. The charge-off in 2021 related to a loan that the Company sold as part of a portfolio management strategy. Gross recoveries totaled $2 thousand and $1 thousand for the years ended December 31, 2022 and December 31, 2021, respectively. The allowance for loan loss as a percentage of gross loans, net of unearned income was 1.13% and 1.20% as of December 31, 2022 and December 31, 2021, respectively. Excluding PPP loan balances, the allowance for loan losses as a percentage of gross loans, net of unearned income was 1.13% and 1.25% at December 31, 2022 and December 31, 2021, respectively. The Company does not have a reserve on PPP loan balances, as they are 100% guaranteed by the SBA. The decrease in the allowance as a percentage of outstanding loans, net of unearned income, was primarily due to changes in the loan portfolio’s composition as well as net changes in qualitative adjustments.
The following table summarizes the Company’s loan loss experience by loan portfolio for the years ended December 31, 2022 and December 31, 2021.
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| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | December 31, 2022 | | December 31, 2021 | ||||||||
| | | Net | | Net | | Net | | Net | ||||
| | | (charge-offs) | | (charge-off) | | (charge-offs) | | (charge-off) | ||||
| (Dollars in thousands) | recoveries | recovery rate (1) | recoveries | recovery rate (1) | ||||||||
| Real estate loans: | | | | | ||||||||
| Commercial | | $ | (1) | | (0.00) | % | $ | (90) | (0.01) | % | ||
| Construction and land development | | — | | — | | — | — | | ||||
| Residential | | — | | — | | — | — | | ||||
| Commercial loans | | 2 | | 0.00 | % | — | — | | ||||
| Consumer loans | | — | | — | | — | — | | ||||
| Total | | $ | 1 | | | | | $ | (90) | | ||
| | | | | | | | | | | | | |
| Average loans outstanding during the period | | $ | 1,677,151 | | | | | $ | 1,597,049 | | ||
| Allowance coverage ratio (2) | | | | 1.13 | % | 1.20 | % | |||||
| Total net (charge-off) recovery rate (1) | | | | 0.00 | % | (0.01) | % | |||||
| Allowance to nonaccrual loans ratio(3) | | | | NM | | NM | |
NM – Not meaningful
| Column 1 | Column 2 |
|---|---|
| (1) | The net (charge-off) recovery rate is calculated by dividing total net (charge-offs) recoveries during the period by average gross loans outstanding during the period. |
| Column 1 | Column 2 |
|---|---|
| (2) | The allowance coverage ratio is calculated by dividing the allowance for loan losses at the end of the period by gross loans, net of unearned income at the end of the period. |
| Column 1 | Column 2 |
|---|---|
| (3) | The allowance to nonaccrual loans ratio is calculated by dividing the allowance for loan losses at the end of the period by nonaccrual loans at the end of the period. |
The following table summarizes the allowance for loan losses by portfolio with a comparison of the percentage composition in relation to total allowance for loan losses and total loans as of December 31, 2022 and December 31, 2021.
| | | | | | | | | |
|---|---|---|---|---|---|---|---|---|
| | December 31, 2022 | |||||||
| | | Allowance | | Percent of Allowance | | Percent of Loans in | ||
| | | for Loan | | in Each Category to | | Each Category to Total | ||
| (Dollars in thousands) | | Losses | | Total Allocated Allowance | | Loans | ||
| Real Estate Loans: | | | | |||||
| Commercial | | $ | 13,205 | 67.48 | % | 62.62 | % | |
| Construction and land development | | 2,860 | 14.61 | % | 10.92 | % | ||
| Residential | | 3,044 | 15.55 | % | 23.91 | % | ||
| Commercial - Non-Real Estate: | | | ||||||
| Commercial loans | | 456 | 2.33 | % | 2.52 | % | ||
| Consumer - Non-Real Estate: | | | ||||||
| Consumer loans | | 5 | 0.03 | % | 0.03 | % | ||
| Unallocated | | 638 | — | — | | |||
| Total | | $ | 20,208 | 100.00 | % | 100.00 | % |
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| | | | | | | | | |
|---|---|---|---|---|---|---|---|---|
| | | December 31, 2021 | ||||||
| | Allowance | Percent of Allowance | Percent of Loans in | |||||
| | | for Loan | | in Each Category to | | Each Category to Total | ||
| (Dollars in thousands) | | Losses | | Total Allocated Allowance | | Loans | ||
| Real Estate Loans: | | | ||||||
| Commercial | | $ | 13,091 | 67.48 | % | 58.15 | % | |
| Construction and land development | | 2,824 | 14.56 | % | 13.87 | % | ||
| Residential | | 2,769 | 14.27 | % | 20.56 | % | ||
| Commercial - Non-Real Estate: | | | ||||||
| Commercial loans | | 711 | 3.66 | % | 7.38 | % | ||
| Consumer - Non-Real Estate: | | | ||||||
| Consumer loans | | 5 | 0.03 | % | 0.04 | % | ||
| Unallocated | | 632 | — | — | | |||
| Total | | $ | 20,032 | 100.00 | % | 100.00 | % |
Management believes that the allowance for loan losses is adequate to absorb credit losses inherent in the portfolio as of December 31, 2022. There can be no assurance, however, that adjustments to the provision for loan losses will not be required in the future. Changes in the economic assumptions underlying management’s estimates and judgments; adverse developments in the economy, on a national basis or in the Company’s market area; or changes in the circumstances of particular borrowers are criteria that could change and make adjustments to the provision for loan losses necessary.
Deposits
Total deposits increased $186.2 million or 9.9% to $2.07 billion as of December 31, 2022 compared to $1.88 billion as of December 31, 2021.
Non-interest bearing demand deposits decreased $12.1 million or 2.5% to $476.7 million as of December 31, 2022 compared to $488.8 million at December 31, 2021. Non-interest bearing demand deposits represented 23.1% and 26.0% of total deposits at December 31, 2022 and December 31, 2021, respectively.
Interest-bearing deposits, which include NOW accounts, regular savings accounts, money market accounts, and time deposits, increased $198.3 million or 14.2% to $1.59 billion as of December 31, 2022 compared to $1.39 billion as of December 31, 2021. Interest-bearing demand deposits represented 76.9% and 74.0% of total deposits at December 31, 2022 and December 31, 2021, respectively.
The Company focuses on funding asset growth with deposit accounts, with an emphasis on core deposit growth, as its primary source of deposits. Core deposits consist of checking accounts, NOW accounts, money market accounts, regular savings accounts, time deposits, reciprocal IntraFi Demand® deposits, IntraFi Money Market® deposits and IntraFi CD® deposits. Core deposits totaled $1.69 billion or 81.9% of total deposits and $1.64 billion or 87.1% of total deposits at December 31, 2022 and December 31, 2021, respectively.
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The following table sets forth the average balances of deposits and the average interest rates paid for the years ended December 31, 2022 and 2021.
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | December 31, 2022 | | December 31, 2021 | |||||||
| | Average | | Average | | |||||||
| (Dollars in thousands) | | Amount | | Rate | | Amount | | Rate | |||
| Non-interest bearing | | $ | 518,284 | | | $ | 448,723 | | |||
| Interest bearing: | | | | | |||||||
| NOW accounts | | 311,950 | | 0.44 | % | | 262,319 | 0.30 | % | ||
| Money market accounts | | 395,369 | | 0.84 | % | | 337,993 | 0.37 | % | ||
| Savings accounts | | 108,178 | | 0.47 | % | | 83,032 | 0.36 | % | ||
| Time deposits | | 682,674 | | 0.96 | % | | 657,986 | 0.65 | % | ||
| Total interest-bearing | | 1,498,171 | | 0.79 | % | | 1,341,330 | 0.49 | % | ||
| Total | | $ | 2,016,455 | | | $ | 1,790,053 | |
The following table sets forth the maturity ranges of certificates of deposit with balances of $250,000 or more as of December 31, 2022.
| | | | | | | |
|---|---|---|---|---|---|---|
| | | December 31, 2022 | ||||
| (Dollars in thousands) | Total | Uninsured | ||||
| Three months or less | | $ | 75,670 | | $ | 60,921 |
| Over three through 6 months | | 80,806 | | 55,556 | ||
| Over 6 through 12 months | | 66,581 | | 53,831 | ||
| Over 12 months | | 95,681 | | 78,181 | ||
| Total | | $ | 318,738 | | $ | 248,489 |
The total amount of our uninsured deposits (deposits in excess of $250,000, as calculated in accordance with FDIC regulations) was estimated at $963.9 million at December 31, 2022 and $862.8 million at December 31, 2021. Included in these amounts were $161.2 million and $118.1 million of public fund deposits that are collateralized by securities as of December 31, 2022 and December 31, 2021, respectively. Uninsured deposits and deposits not otherwise collateralized by securities represented 39% and 40% of total deposits, respectively, as of December 31, 2022 and December 31, 2021.
Capital Resources
The Company is a bank holding company with less than $3 billion in assets and does not (i) have significant off balance sheet exposure, (ii) engage in significant non-banking activities, or (iii) have a material amount of securities registered under the Exchange Act. As a result, the Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement and is currently not subject to consolidated regulatory requirements.
The Bank is subject to capital adequacy standards adopted by the Federal Reserve, including the capital rules that implemented the Basel III regulatory capital reforms developed by the Basel Committee on Banking Supervision.
Note 16 to the Consolidated Financial Statements, included in Item 8 of this Form 10-K, contains additional discussion and analysis regarding the Company and Bank’s regulatory capital requirements.
Shareholders’ equity increased $4.3 million or 2.1% to $212.8 million at December 31, 2022 compared to $208.5 million at December 31, 2021. The increase was primarily due to increases in retained earnings and additional paid-in capital, which were partially offset by the increase in the unrealized loss on our available-for-sale investment portfolio and the one-time special dividend declared during the first quarter of 2022. Excluding accumulated other comprehensive loss, which primarily includes the impact of unrealized losses on the Company’s available-for-sale investment portfolio, total shareholders’ equity increased $32.6 million or 15.6% from December 31, 2021 to December 31, 2022.
In August of 2022, the Company’s Board of Directors authorized the extension of the Company’s stock repurchase program that was originally adopted in August of 2021. Under the stock repurchase program, the Company may repurchase up to 700,000 shares of its outstanding common stock, or 5.0% of outstanding shares as of December 31, 2022. The stock
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repurchase program will expire on August 31, 2023 or earlier if all the authorized shares have been repurchased. The Company has not repurchased any of its outstanding common stock under the program as of December 31, 2022.
Liquidity
Liquidity reflects a financial institution’s ability to fund assets and meet current and future financial obligations. Liquidity is essential in all banks to meet customer withdrawals, compensate for balance sheet fluctuations, and provide funds for growth. Monitoring and managing both liquidity measurements is critical in developing prudent and effective balance sheet management. Management conducts liquidity stress testing on a quarterly basis to prepare for unexpected adverse scenarios and contemporaneously develops mitigating strategies to reduce losses in the event of an economic downturn.
The Company’s principal source of liquidity and funding is its deposit base. The level of deposits necessary to support the Company’s lending and investment activities is determined through monitoring loan demand. Liquidity needs are also met with cash and cash equivalents and unencumbered securities. Liquid assets totaled $397.5 million as of December 31, 2022 compared to $371.2 million at December 31, 2021. These amounts represented 16.9% and 17.3% of total assets as of December 31, 2022 and December 31, 2021, respectively.
In addition to the liquidity provided by balance sheet cash flows, the Company supplements its liquidity with additional sources such as credit lines with the FHLB, the Reserve Bank and other correspondent banks. Specifically, the Company has pledged a portion of its commercial real estate and residential real estate loan portfolios to the FHLB and a portion of its commercial and industrial portfolio to the Reserve Bank. Additional borrowing capacity at the FHLB was approximately $363.4 million as of December 31, 2022. Additional borrowing capacity with the Reserve Bank was approximately $24.9 million as of December 31, 2022. Undrawn lines of credit with other correspondent banks totaled $79.5 million at December 31, 2022. On March 12, 2023, the Federal Reserve announced the creation of the Bank Term Funding Program (“BTFP”), whereby eligible depository institutions can obtain advances up to one year in length upon pledging eligible collateral. BTFP advances, if requested, provide an additional source of liquidity to the Company. As of March 12, 2023, the Company had eligible collateral totaling $349.4 million available for pledging to the BTFP.
Liquidity is a core pillar of the Company’s operations. Conditions may arise in the future that could negatively impact the Company’s future liquidity position resulting in funding mismatches. These include market constraints on the ability to convert assets into cash or accessing sources of funds (i.e., market liquidity) and contingent liquidity events. Changes in economic conditions or exposure to credit, market, operational, legal, and reputation risks also can affect a bank’s liquidity. Management maintains that the Company has a strong liquidity position, but any of the factors referenced above could materially impact that in the future.
Off-Balance Sheet Arrangements
The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of its customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit and financial guarantees which would impact the Company’s liquidity and capital resources to the extent customers accept and or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. With the exception of these off-balance sheet arrangements, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors. For further information, see Note 11 to the Consolidated Financial Statements, included in Item 8 of this Form 10-K, for further discussion of the nature, business purpose and elements of risk involved with these off-balance sheet arrangements.