FVCBANKCORP, INC. The following presents management's discussion and analysis of our consolidated financial condition atDecember 31, 2022 and 2021 and the results of our operations for the years endedDecember 31, 2022 and 2021. This discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management's expectations.
Overview
We are a bank holding company headquartered inFairfax County, Virginia . Our sole subsidiary, FVCbank, was formed inNovember 2007 as a community-oriented, locally-owned and managed commercial bank under the laws of theCommonwealth of Virginia . The Bank offers a wide range of traditional bank loan and deposit products and services to both our commercial and retail customers. Our commercial relationship officers focus on attracting small and medium sized businesses, commercial real estate developers and builders, including government contractors, non-profit organizations, and professionals. Our approach to our market features competitive customized financial services offered to customers and prospects in a personal relationship context by seasoned professionals. OnOctober 12, 2018 , we completed our acquisition ofColombo .Colombo , which was headquartered inRockville, Maryland , merged into FVCbank effectiveOctober 12, 2018 , adding five banking locations inWashington, D.C. , andMontgomery County and theCity of Baltimore inMaryland . OnAugust 31, 2021 , we announced that the Bank made an investment in ACM for$20.4 million to obtain a 28.7% ownership interest in ACM. This ownership interest is subject to an earnback option of up to 3.7% over the next three years, and our investment had decreased to 27.7% as ofDecember 31, 2022 . In addition, the Bank provides a warehouse lending facility to ACM, which includes a construction-to-permanent financing line, and has developed portfolio mortgage products to diversify our held to investment loan portfolio. OnDecember 15, 2022 , the Company announced that the Board of Directors approved a five-for-four split of the Company's common stock in the form of a 25% stock dividend for shareholders of record onJanuary 9, 2023 , payable onJanuary 31, 2023 . Earnings per share and all other per share information reflected herein have been adjusted for the five-for-four split of the Company's common stock for comparative purposes. Net interest income is our primary source of revenue. We define revenue as net interest income plus non-interest income. We manage our balance sheet and interest rate risk exposure to maximize, and concurrently stabilize, net interest income. We do this by monitoring our liquidity position and the spread between the interest rates earned on interest-earning assets and the interest rates paid on interest-bearing liabilities. We attempt to minimize our exposure to interest rate risk, but are unable to eliminate it entirely. In addition to managing interest rate risk, we also analyze our loan portfolio for exposure to credit risk. Loan defaults and foreclosures are inherent risks in the banking industry, and we attempt to limit 39
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our exposure to these risks by carefully underwriting and then monitoring our
extensions of credit. In addition to net interest income, non-interest income is
a complementary source of revenue for us and includes, among other things,
service charges on deposits and loans, income from minority membership interest
in ACM, merchant services fee income, insurance commission income, income from
bank owned life insurance ("BOLI"), and gains and losses on sales of investment
securities available-for-sale.
Critical Accounting Policies
General
The accounting principles we apply under GAAP are complex and require management to apply significant judgment to various accounting, reporting and disclosure matters. Management must use assumptions, judgments and estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such judgments, assumptions and estimates may have a significant impact on the consolidated financial statements. Actual results, in fact, could differ from initial estimates. The accounting policies we view as critical are those relating to judgments, assumptions and estimates regarding the determination of the allowance for loan losses, accounting for purchase credit-impaired loans, and fair value measurements.
Allowance for Loan Losses
We maintain the allowance for loan losses at a level that represents management's best estimate of known and inherent losses in our loan portfolio. We were not required to implement the provisions of the CECL untilJanuary 1, 2023 , and are were accounting for the allowance for loan losses under an incurred loss model as ofDecember 31, 2022 . Both the amount of the provision expense and the level of the allowance for loan losses are impacted by many factors, including general and industry-specific economic conditions, actual and expected credit losses, historical trends and specific conditions of individual borrowers. Unusual and infrequently occurring events, such as weather-related disasters and health related events, such as the COVID-19 pandemic and associated efforts to restrict the spread of the disease, may impact our assessment of possible credit losses. As a part of our analysis, we use comparative peer group data and qualitative factors such as levels of and trends in delinquencies, nonaccrual loans, charged-off loans, changes in volume and terms of loans, effects of changes in lending policy, experience and ability and depth of management, national and local economic trends and conditions and concentrations of credit, competition, and loan review results to support estimates. The allowance for loan losses is based first on a segmentation of the loan portfolio by general loan type, or portfolio segments. For originated loans, certain portfolio segments are further disaggregated and evaluated collectively for impairment based on loan segments, which are largely based on the type of collateral underlying each loan. For purposes of this analysis, we categorize loans into one of five categories: commercial and industrial, commercial real estate, commercial construction, consumer residential, and consumer nonresidential loans. Typically, financial institutions use their historical loss experience and trends in losses for each loan category which are then adjusted for portfolio trends and economic and environmental factors in determining their allowance for loan losses. Since the Bank's inception in 2007, we have experienced minimal loss history within our loan portfolio. Because of this, our allowance model uses the average loss rates of similar institutions (our custom peer group) as a baseline which is then adjusted based on our particular qualitative loan portfolio characteristics and environmental factors. The indicated loss factors resulting from this analysis are applied for each of the five categories of loans. Our peer group is defined by selecting commercial banking institutions of similar size withinVirginia ,Maryland and theDistrict of Columbia . This is known as our custom peer group. The commercial banking institutions comprising the custom peer group can change based on certain factors including but not limited to the characteristics, size, and geographic footprint of the institution. We have identified 16 banks for our custom peer group which are within$1 billion to$3 billion in total assets, the majority of whom are geographically concentrated in theWashington, D.C. metropolitan area in which we operate, as this area has experienced more stable economic conditions than many other areas of the country. These baseline peer group loss rates are then adjusted based on an analysis of our loan portfolio characteristics, trends, economic considerations and other conditions that should be considered in assessing our credit risk. Our peer loss rates are updated on a quarterly basis.
The allowance for loan losses consists of specific and general components. The specific component relates to loans that are determined to be impaired and, therefore, individually evaluated for impairment. We individually assign loss
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factors to all loans that have been identified as having loss attributes, as indicated by deterioration in the financial condition of the borrower or a decline in underlying collateral value if the loan is collateral dependent. We evaluate the impairment of certain loans on a loan by loan basis for those loans that are adversely risk rated. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are discounted at the loan's effective interest rate, or measured on an observable market value, if one exists, or the fair value of the collateral underlying the loan, discounted to consider estimated costs to sell the collateral for collateral-dependent loans. If the net collateral value is less than the loan balance (including accrued interest and any unamortized premium or discount associated with the loan) we recognize an impairment and establish a specific reserve for the impaired loan. Credit losses are an inherent part of our business and, although we believe the methodologies for determining the allowance for loan losses and the current level of the allowance are appropriate, it is possible that there may be unidentified losses in the portfolio at any particular time that may become evident at a future date pursuant to additional internal analysis or regulatory comment. Additional provisions for such losses, if necessary, would be recorded, and would negatively impact earnings.
Fair Value Measurements
We determine the fair values of financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. Our investment securities available-for-sale are recorded at fair value using reliable and unbiased evaluations by an industry-wide valuation service. This service uses evaluated pricing models that vary based on asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable.
LIBOR and Other Benchmark Rates
We have certain loans, interest rate swap agreements, investment securities, and debt obligations with interest rates indexed to LIBOR. The administrator of LIBOR announced that the most commonly usedU.S. dollar LIBOR settings would cease to be published or cease to be representative afterJune 30, 2023 . Central banks and regulators around the world have commissioned working groups to find suitable replacements for Interbank Offered Rates ("IBOR") and other benchmark rates and to implement financial benchmark reforms more generally. There continues to be uncertainty regarding the use of alternative reference rates ("ARRs"), which may cause disruptions in a variety of markets, as well as adversely impact our business, operations and financial results. The Adjustable Interest Rate (LIBOR) Act, enacted inMarch 2022 , provides a statutory framework to replace LIBOR with a benchmark rate based on SOFR for contracts governed byU.S. law that have no or ineffective fallbacks. Although governmental authorities have endeavored to facilitate an orderly discontinuation of LIBOR, no assurance can be provided that this aim will be achieved or that the use, level, and volatility of LIBOR or other interest rates, or the value of LIBOR-based securities will not be adversely affected. To facilitate an orderly transition from IBORs and other benchmark rates to ARRs, we have established an enterprise-wide initiative led by senior management. The objective of this initiative is to identify, assess and monitor risks associated with the expected discontinuation or unavailability of benchmarks, including LIBOR, achieve operational readiness and engage impacted clients in connection with the transition to ARRs. To mitigate the risks associated with the expected discontinuation of LIBOR, we have ceased originating LIBOR-linked loans, implemented fallback language for LIBOR-linked commercial loans, adhered to theInternational Swaps and Derivatives Association 2020 Fallbacks Protocol for interest rate swap agreements, and have updated our systems to accommodate loans linked to SOFR. In accordance with regulatory guidance, we ceased entering into new LIBOR transactions at the end of 2021 and have selected SOFR, as the rate that best represents an alternative to LIBOR. Uncertainty as to the adoption, market acceptance or availability of SOFR or other alternative reference rates may adversely affect the value of LIBOR-based loans and securities in our portfolio and may impact the availability and cost of hedging instruments and borrowings. 41
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Financial Overview
For the years ended
•Total assets increased to$2.34 billion compared to$2.20 billion atDecember 31, 2022 and 2021, respectively, an increase of$141.4 million , or 6%. The increase in total assets is primarily attributable to our record loan growth during 2022. •Total loans, net of deferred fees, increased$336.6 million , or 22%, fromDecember 31, 2021 toDecember 31, 2022 . Excluding PPP loans, which decreased$26.2 million as a result of loan forgiveness, net loan growth was$362.8 million for the year endedDecember 31, 2022 . Asset quality remains sound with nonperforming loans and loans past due 90 days or more as a percentage of total assets being 0.19% atDecember 31, 2022 , compared to 0.16% atDecember 31, 2021 .
•Total deposits decreased
•Net income was$25.0 million for the year endedDecember 31, 2022 compared to$21.9 million for 2021. Our 2022 and 2021 results were impacted by merger-related expenses totaling$125 thousand and$1.4 million , respectively, which were associated with our previously announced proposed merger with Blue Ridge Bankshares, Inc. ("Blue Ridge"), which was mutually terminated by us and Blue Ridge onJanuary 20, 2022 . Our 2021 results were also impacted by one-time accelerated debt issuance costs of$380 thousand associated with the redemption of our 2016 subordinated debt issuance during the third quarter of 2021 and a gain on the sale of OREO of$236 thousand during the fourth quarter of 2021. Excluding the merger-related expenses, accelerated debt issuance costs and gain on OREO, we would have recorded net income of$25.1 million and$23.2 million for the years endedDecember 31, 2022 andDecember 31, 2021 , respectively. For a reconciliation of this non-GAAP information which excludes the effect of merger-related expenses, accelerated debt issuance costs, and the gain on sale of OREO, please refer to the table below. •Net interest income increased$7.3 million , or 13%, to$65.2 million for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . While loan growth resulted in interest income increasing$12.3 million , despite the$4.8 million reduction in PPP interest and fees, it was partially offset by the$5.0 million increase in interest expense. Excluding PPP interest and fees, net interest income increased$17.1 million or 27% for the current year compared to the prior year. The net interest margin for 2022 was 3.19% compared to 3.09% for 2021. •The provision for loan losses for 2022 totaled$2.6 million compared to a reversal of provision totaling$500 thousand in 2021. The provision for loan losses for 2022 was a reflection of the growth in the loan portfolio. The credit to the provision for loan losses for the prior year was a reflection of improved credit quality in the loan portfolio during 2021 as economic activity improved due to the resumption of business activity previously stalled by the COVID-19 pandemic. •Noninterest income for 2022 decreased to$2.8 million compared to$4.3 million for 2021. This decrease was primarily driven by the loss recorded for our portion of membership interest in ACM of$659 thousand compared to income of$1.5 million for the year endedDecember 31, 2021 . •Noninterest expense was$34.5 million for each of the years endedDecember 31, 2022 and 2021. When excluding the aforementioned merger-related expenses, noninterest expense for the years endedDecember 31, 2022 and 2021 was$34.3 million and$33.1 million , respectively, an increase of$1.2 million , or 4%. 42
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Reconciliation of Net Income (GAAP) to Operating Earnings (Non-GAAP)
Years Ended December 31, 2022 and 2021
(Dollars in thousands, except per share data)
2022 2021
Net income (as reported) $ 24,984 $ 21,933
Add: merger and acquisition expense 125 1,445
Add: Accelerated debt issuance costs - 380
Subtract: Gains on sales of other real estate owned - (236)
Subtract: provision for income taxes associated with impairment and merger and acquisition expense
(28) (358)
Non-GAAP Operating Earnings, excluding above items $ 25,081 $ 23,164
Earnings per share - basic (GAAP net income) $ 1.43 $ 0.01 $ 0.07 Earnings per share - basic (non-GAAP operating earnings)$ 1.44 $ 1.36 Earnings per share - diluted (GAAP net income)$ 1.35
$ 0.01 $ 0.07 Earnings per share - diluted (non-GAAP operating earnings)$ 1.36 $ 1.27 Return on average assets (GAAP net income) 1.18 % 1.11 % Non-GAAP expenses including provision for income taxes - % 0.06 % Return on average assets (nonGAAP operating earnings) 1.18 % 1.17 % Return on average equity (GAAP net income) 12.34 % 10.92 % Non-GAAP expenses including provision for income taxes 0.05 % 0.61 % Return on average equity (nonGAAP operating earnings) 12.39 % 11.53 % 43
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Below shows selected financial data for the periods endedDecember 31, 2022 and 2021. Selected Financial Data (Dollars and shares in thousands, except per share data) Years Ended December 31, Income Statement Data: 2022 2021 Interest income $ 80,682 $ 68,428 Interest expense 15,438 10,481 Net interest income 65,244 57,947 Provision for (reversal of) loan losses 2,629 (500) Net interest income after provision for (reversal of) loan losses 62,615 58,447 Noninterest income 2,834 4,302 Noninterest expense 34,460 34,540 Net income before income taxes 30,989 28,209 Provision for income taxes 6,005 6,276 Net income $ 24,984 $ 21,933 Balance Sheet Data: Total assets$ 2,344,322 $ 2,202,924 Loans receivable, net of fees 1,840,434 1,503,849 Allowance for loan losses (16,040) (13,829) Total investment securities 278,333 358,038 Total deposits 1,830,162 1,883,769 Other borrowed funds 284,565 44,510 Total shareholders' equity 202,382 209,796 Common shares outstanding 17,476 13,727 Per Common Share Data(1): Basic net income $ 1.43 $ 1.29 Fully diluted net income 1.35 1.20 Book value 11.58 12.23 Tangible book value(2) 11.14 11.76 Performance Ratios: Return on average assets 1.18 % 1.11 % Return on average equity 12.34 10.92 Net interest margin(3) 3.19 3.09 Efficiency ratio(4) 50.62 55.49 Noninterest income to average assets 0.13 0.22 Noninterest expense to average assets 1.62 1.75 Loans receivable, net of fees to total deposits 100.56 79.83 Asset Quality Ratios: Net chargeoffs (recoveries) to average loans receivable, net of fees 0.03 % 0.04 % Nonperforming loans to loans receivable, net of fees 0.24 0.23 Nonperforming assets to total assets 0.19 0.16 Allowance for loan losses to nonperforming loans 357.00 394.21 Allowance for loan losses to loans receivable, net of fees 0.87 0.92 Capital Ratios (Bank Only): Tier 1 riskbased capital 13.28 % 13.54 % Total riskbased capital 12.45 12.72 Common Equity Tier 1 capital 12.45 12.72 Leverage capital ratio 10.75 10.55 Other: Average shareholders' equity to average total assets 9.53 % 10.15 % Average loans receivable, net of fees to average total deposits 86.77 86.80 Average common shares outstanding (1): Basic 17,431 17,062 Diluted 18,484 18,227 44
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_________________________
(1)Amounts for all periods reflect the effect of a 5-for-4 stock split declared
on
(2)Tangible book value is calculated as total stockholders' equity, less goodwill and other intangible assets, divided by common shares outstanding.
(3)Net interest margin is calculated as net interest income divided by total average earning assets.
(4)Efficiency ratio is calculated as total non-interest expense divided by the total of net interest income and non-interest income.
Years Ended NonGAAP Reconciliation (Dollars in thousands, except per share data) 2022 2021 Total stockholders' equity$ 202,382 $ 209,796 Less: goodwill and intangibles, net (7,790) (8,052) Tangible Common Equity$ 194,592 $ 201,744 Book value per common share $ 11.58$ 12.23 Less: intangible book value per common share (0.44) (0.47) Tangible book value per common share $ 11.14$ 11.76
Results of Operations-Years Ended
Overview
We recorded record net income of$25.0 million , or$1.35 per diluted common share, for the year endedDecember 31, 2022 , compared to net income of$21.9 million , or$1.20 per diluted common share for the year endedDecember 31, 2021 . Our 2022 results were impacted by merger-related expenses totaling$125 thousand . Our 2021 results were impacted by merger-related expenses totaling$1.4 million . We also recorded one-time accelerated debt issuance costs of$380 thousand associated with our redemption of our 2016 subordinated debt issuance during the third quarter of 2021 and a gain on the sale of OREO of$236 thousand . Excluding the merger-related expenses, accelerated debt issuance costs and gain on OREO and their related tax effects, we would have recorded net income of$25.1 million , or$1.36 per diluted common share, for the year endedDecember 31, 2022 , and$23.2 million , or$1.27 per diluted common share, for the year endedDecember 31, 2021 . See above table for a reconciliation of GAAP net income to operating earnings (non-GAAP). Net interest income increased$7.3 million to$65.2 million for the year endedDecember 31, 2022 , compared to$57.9 million for the year endedDecember 31, 2021 . For the year endedDecember 31, 2022 , we recorded a provision for loan losses of$2.6 million due to continued loan growth compared to a reversal of$500 thousand during 2021 which was primarily driven by the improvement of economic conditions subsequent to the COVID-19 pandemic. Noninterest income for the year endedDecember 31, 2022 was$2.8 million , compared to$4.3 million for 2021, a decrease of$1.5 million , which was primarily driven by the loss recorded from our membership interest in ACM of$659 thousand for the year endedDecember 31, 2022 , compared to income from our membership interest in ACM of$1.5 million for the year endedDecember 31, 2021 . Noninterest expense was$34.5 million for each of the years endedDecember 31, 2022 and 2021. For the years endedDecember 31, 2022 and 2021, noninterest expense included merger-related expenses totaling$125 thousand and$1.4 million , respectively, associated with the Company's proposed merger with Blue Ridge. When excluding merger-related expenses, noninterest expense for the years endedDecember 31, 2022 and 2021 was$34.3 million and$33.1 million , respectively, an increase of$1.2 million , or 4%, which was primarily a result of increases in salaries and benefits expenses, offset by a year-over-year decrease in professional fees of$279 thousand , which were attributable to the Company's membership interest purchase in ACM during 2021. The return on average assets for the years endedDecember 31, 2022 and 2021 was 1.18% and 1.11%, respectively. The return on average equity for the years endedDecember 31, 2022 and 2021 was 12.34% and 10.92%, respectively. The return on average assets for the years endedDecember 31, 2022 and 2021 based on operating earnings (a non-GAAP metric) was 1.18% and 1.17%, respectively. The return on average equity for the years endedDecember 31, 2022 and 2021 45
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based on operating earnings (a non-GAAP metric) was 12.39% and 11.53%, respectively. See the above table for a reconciliation of GAAP net income to operating earnings (non-GAAP).
Net Interest Income/Margin
The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the years endedDecember 31, 2022 and 2021. Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities Years Ended December 31, 2022 and 2021 (Dollars in thousands) 2022 2021 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Assets Interestearning assets: Loans(1): Commercial real estate$ 978,983 $ 42,646 4.36 %$ 832,138 $ 35,104 4.22 % Commercial and industrial 199,957 10,317 5.16 % 135,017 6,127 4.54 % Paycheck protection program 9,112 592 6.50 % 105,980 5,410 5.11 % Commercial construction 165,088 8,762 5.31 % 209,957 9,790 4.66 % Consumer residential 255,794 10,602 4.14 % 169,168 6,685 3.95 % Consumer nonresidential 9,143 705 7.71 % 11,569 858 7.41 % Total loans(1) 1,618,077 73,624 4.55 % 1,463,829 63,974 4.37 % Investment securities(2) 344,725 5,974 1.73 % 204,952 3,878 1.89 % Restricted stock 7,339 408 5.56 % 6,269 328 5.24 % Deposits at other financial institutions 74,477 685 0.92 % 197,987 260 0.13 % Total interestearning assets and interest income 2,044,618 80,691 3.95 % 1,873,037 68,440 3.65 % Noninterestearning assets: Cash and due from banks 873 18,556 Premises and equipment, net 1,410 1,578 Accrued interest and other assets 92,761 99,562 Allowance for loan losses (14,596) (14,513) Total assets$ 2,125,066 $ 1,978,220 Liabilities and Stockholders' Equity Interest bearing liabilities: Interest bearing deposits: Interest checking$ 724,881 $ 5,966 0.82 %$ 587,151 $ 3,224 0.55 % Savings and money markets 315,653 2,662 0.84 % 303,317 1,421 0.47 % Time deposits 203,719 2,908 1.43 % 230,668 2,783 1.21 % Wholesale deposits 61,478 932 1.52 % 37,657 173 0.46 % Total interest bearing deposits 1,305,731 12,468 0.95 % 1,158,793 7,601 0.66 % Other borrowed funds 89,834 2,970 3.31 % 62,878 2,880 4.58 % Total interestbearing liabilities and interest expense 1,395,565 15,438 1.11 % 1,221,671 10,481 0.86 % Noninterestbearing liabilities: Demand deposits 501,962 527,675 Other liabilities 25,059 27,988 Common stockholders' equity 202,480 200,886 Total liabilities and stockholders' equity$ 2,125,066 $ 1,978,220 Net interest income and net interest margin$ 65,253 3.19 %$ 57,959 3.09 % ________________________
(1)Non-accrual loans are included in average balances and do not have a material effect on the average yield. Interest income on non-accruing loans was not material for the years presented.
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(2)The average yields for investment securities are reported on a fully taxable-equivalent basis at a rate of 21% for 2022 and 2021.
The level of net interest income is affected primarily by variations in the
volume and mix of these assets and liabilities, as well as changes in interest
rates. The following table shows the effect that these factors had on the
interest earned from our interest-earning assets and interest incurred on our
interest-bearing liabilities.
Rate and Volume Analysis
Years Ended December 31, 2022 and 2021
(Dollars in thousands)
2022 Compared to 2021
Average Average Increase
Volume(3) Rate (Decrease)
Interest income:
Loans(1):
Commercial real estate $ 6,195 $ 1,347 $ 7,542
Commercial and industrial 2,947 1,243 4,190
Paycheck protection program (4,944) 126 (4,818)
Commercial construction (2,092) 1,064 (1,028)
Consumer residential 3,423 494 3,917
Consumer nonresidential (180) 27 (153)
Total loans(1) 5,349 4,301 9,650
Investment securities(2) 2,645 (549) 2,096
Restricted stock 56 24 80
Deposits at other financial institutions (162) 587 425
Total interest income 7,888 4,363 12,251
Interest expense:
Interest - bearing deposits:
Interest checking 756 1,986 2,742
Savings and money markets 58 1,183 1,241
Time deposits (325) 450 125
Wholesale deposits 109 650 759
Total interest - bearing deposits 598 4,269 4,867
Other borrowed funds 1,235 (1,145) 90
Total interest expense 1,833 3,124 4,957
Net interest income $ 6,055 $ 1,239 $ 7,294
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(1)Non-accrual loans are included in average balances and do not have a material effect on the average yield. Interest income on non-accruing loans was not material for the years presented.
(2)The average yields for investment securities are reported on a fully taxable-equivalent basis at a rate of 21% for 2022 and 2021.
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Net interest income, on a tax equivalent basis, is a financial measure that we believe provides a more accurate picture of the interest margin for comparative purposes. To derive our net interest margin on a tax equivalent basis, net interest income is adjusted to reflect tax-exempt income on an equivalent before tax basis with a corresponding increase in income tax expense. For purposes of this calculation, we use our federal and state statutory tax rates for the periods presented. This measure ensures comparability of net interest income arising from taxable and tax-exempt sources.
The following table provides a reconciliation of our GAAP net interest income to our tax equivalent net interest income.
Supplemental Financial Data and Reconciliations to GAAP Financial Measures
Years Ended December 31, 2022 and 2021
(Dollars in thousands)
2022 2021
GAAP Financial Measurements:
Interest income:
Loans $ 73,624 $ 63,974
Deposits at other financial institutions 685 260
Investment securities availableforsale 5,959
3,860
Investment securities heldtomaturity 6 6 Restricted stock 408 328 Total interest income 80,682 68,428 Interest expense: Interestbearing deposits 12,468 7,601 Other borrowed funds 2,970 2,880 Total interest expense 15,438 10,481 Net interest income$ 65,244 $ 57,947 NonGAAP Financial Measurements: Add: Tax benefit on taxexempt interest income - securities 9
12
Total tax benefit on interest income$ 9 $ 12 Tax equivalent net interest income$ 65,253 $ 57,959 Net interest margin on a tax-equivalent basis 3.19 %
3.09 %
Net interest income for the year endedDecember 31, 2022 was$65.3 million on a fully taxable-equivalent basis, compared to$58.0 million for the year endedDecember 31, 2021 , an increase of$7.3 million , or 13%. The increase in net interest income was primarily a result of an increase in interest earned on earning assets that exceeded the increase in costs of interest-bearing liabilities. We have been disciplined in our approach to rising interest rates as theFederal Open Market Committee of theFederal Reserve has enacted a contractionary monetary policy, increasing its targeted fed funds rate 425 basis points during 2022 to combat inflation. Our net interest margin, on a tax equivalent basis, for the years endedDecember 31, 2022 and 2021 was 3.19% and 3.09%, respectively. The increase in our net interest margin was primarily a result of the increased rate environment during 2022, as our variable rate loan portfolio repriced and we funded loans at higher interest rates, which increased yields on interest-earning assets. The yield on interest-earning assets increased 30 basis points to 3.95% for the year endedDecember 31, 2022 , compared to 3.65% for the same period of 2021, a result of the increased rate environment during 2022. Offsetting the increase in yields on earning assets was a 25 basis point increase in the cost of interest-bearing liabilities, which reflects the increases in funding costs during 2022. Average interest-earning assets increased by 9% to$2.04 billion atDecember 31, 2022 compared to$1.87 billion atDecember 31, 2021 , which resulted in an increase in total interest income on a tax equivalent basis of$12.3 million , to$80.7 million for the year endedDecember 31, 2022 compared to$68.4 million for the year endedDecember 31, 2021 . Both average volume and rate significantly impacted interest income during 2022, with volume contributing an additional 48
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Average loans receivable increased$154.2 million to$1.62 billion for the year endedDecember 31, 2022 , compared to$1.46 billion for the year endedDecember 31, 2021 . The yield on average loans increased 18 basis points to 4.55% for the year endedDecember 31, 2022 . The increase in average volume of loans receivable contributed$5.3 million to interest income while the increase in average rate of loans receivable contributed$4.3 million to interest income. Average balances of nonperforming loans, which consist of nonaccrual loans, are included in the net interest margin calculation and did not have a material impact on our net interest margin in 2022 and 2021. Average investment securities increased$139.8 million to$344.7 million for the year endedDecember 31, 2022 , compared to$205.0 million for the year endedDecember 31, 2021 . The significant increase in average investment securities was primarily a result of the increase in liquidity at the Bank as a result of PPP loan forgiveness and payoffs, along with increases in deposit activity that was in excess of loan originations during 2021. This liquidity was invested in fixed income securities which increased interest income by$2.1 million on a tax equivalent basis for the year endedDecember 31, 2022 . The yield on average investment securities decreased 16 basis points to 1.73% for the year endedDecember 31, 2022 , primarily as a result of purchasing securities at lower interest rates relative to the average yield of the securities portfolio. Average interest-earning deposits at other financial institutions, consisting primarily of excess cash reserves maintained at theFederal Reserve , decreased$123.5 million to$74.5 million for the year endedDecember 31, 2022 , compared to$198.0 million for the year endedDecember 31, 2021 . The significant decrease in average interest-earning deposits at other financial institutions was primarily a result of our deployment of excess liquidity during 2022 to fund loan growth. The yield on average interest-earning deposits increased 79 basis points to 0.92% for the year endedDecember 31, 2022 . Total average interest-bearing deposits increased$146.9 million to$1.31 billion atDecember 31, 2022 compared to$1.16 billion atDecember 31, 2021 . Average noninterest-bearing deposits decreased$25.7 million , or 5%, to$502.0 million atDecember 31, 2022 , compared to$527.7 million atDecember 31, 2021 . The largest increase in average interest-bearing deposit balances was in our interest checking accounts, which increased$137.7 million compared to 2021. Average time deposits decreased$26.9 million to$203.7 million as ofDecember 31, 2022 compared to$230.7 million atDecember 31, 2021 , as customers continue to prefer short-term deposit options for liquidity purposes. Average wholesale deposits increased$23.8 million to$61.5 million as ofDecember 31, 2022 compared to$37.7 million as ofDecember 31, 2021 , to assist in funding our record loan growth during 2022. The cost of other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes, decreased 127 basis points to 3.31% for the year endedDecember 31, 2022 , from 4.58% for the same period in 2021, a result of a reduction in subordinated debt outstanding during 2022 and the recognition of accelerated debt issuance costs of$380 thousand recorded during 2021.
Provision Expense and Allowance for Loan Losses
Our policy is to maintain the allowance for loan losses at a level that represents our best estimate of inherent losses in the loan portfolio. Both the amount of the provision and the level of the allowance for loan losses are impacted by many factors, including general and industry-specific economic conditions, actual credit losses, historical trends and specific conditions of individual borrowers. We were not required to implement the provisions of CECL untilJanuary 1, 2023 , and were accounting for the allowance for losses under the incurred loss model. The Company adopted ASU 2016-13 as ofJanuary 1, 2023 in accordance with the required implementation date and recorded the impact of adoption to retained earnings, net of deferred income taxes, as required by the standard. The adjustment recorded at adoption was not significant to the overall allowance for credit losses or shareholders' equity as compared toDecember 31, 2022 and consisted of adjustments to the allowance for credit losses on loans as well as an adjustment to the Company's reserve for unfunded commitments. We recorded a provision for loan losses of$2.6 million for the year endedDecember 31, 2022 compared to a release of provision of$500 thousand for the year endedDecember 31, 2021 . The allowance for loan losses atDecember 31, 2022 was$16.0 million compared to$13.8 million atDecember 31, 2021 . Our allowance for loan loss ratio as a percent of total loans, net of deferred fees and costs, forDecember 31, 2022 and 2021 was 0.87% and 0.92%, respectively. The increase in 49
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the allowance for loan losses for the year endedDecember 31, 2022 was primarily related to supporting the growth recorded in the our loan portfolio during the year. The Company continues to maintain its disciplined credit guidelines adding support during the current rising rate environment. The Company proactively monitors the impact of rising interest rates on its adjustable loans as the industry navigates through this economic cycle of increased inflation and higher interest rates. Credit quality metrics remained strong for 2022 with specific reserves on the loan portfolio totaling$86 thousand . Net charge-offs for the year endedDecember 31, 2022 were$418 thousand compared to$629 thousand for the year endedDecember 31, 2021 , consistent with our track record of low historical charge-offs. The allowance coverage to nonperforming loans decreased to 357% atDecember 31, 2022 , compared to 394% for the year endedDecember 31, 2021 . See "Asset Quality" section below for additional information on the credit quality of the loan portfolio.
Noninterest Income
The following table provides detail for non-interest income for the years ended
Non-Interest Income
Years Ended December 31, 2022 and 2021
(Dollars in thousands)
Change from Prior Year
2022 2021 Amount Percent
Service charges on deposit accounts
$ (74) (7.2) % Fees on loans 232 110 122 110.9 % BOLI income 1,200 994 206 20.7 % (Loss) income from minority membership interest (33) 1,464 (1,497) (102.3) % Other fee income 481 706 (225) (31.9) % Total noninterest income$ 2,834 $ 4,302 $ (1,468) (34.1) % Noninterest income includes service charges on deposits and loans, loan swap fee income, income from our membership interest in ACM and other investments, income from our BOLI policies, and other fee income, and continues to supplement our operating results. Noninterest income for the years endedDecember 31, 2022 and 2021 was$2.8 million and$4.3 million , respectively, a decrease of$1.5 million , which was primarily driven by the loss recorded from our membership interest in ACM of$659 thousand for the year endedDecember 31, 2022 , compared to income from ACM of$1.5 million for the year endedDecember 31, 2021 . During the last several months of 2022, ACM made strategic investments through hiring top tier mortgage originators and additional support infrastructure, including new branches, to position itself for the current and future mortgage environment. This investment, which has significantly increased ACM's overhead expenses ahead of future earnings, coupled with historically low origination volumes and tighter margins, have caused short-term losses that were not previously forecasted or budgeted. However, ACM has significant cash reserves to draw from and it is expected that these strategic investments will buoy ACM as a top mortgage originator in our region within the next several years. We continue to benefit from synergies created by our ACM investment, including warehouse line activity, loan purchases and customer referrals. Fee income from service charges on deposits and other fee income was$1.4 million for the year endedDecember 31, 2022 as compared$1.7 million for the same period of 2021. The decrease in other fee income is a result of decreases in both insurance commission income of$88 thousand and rental income on OREO of$120 thousand , during 2022 when compared to 2021. There were no loan swap fees for the years endedDecember 31, 2022 andDecember 31, 2021 . Income from BOLI increased 21% to$1.2 million for the year endedDecember 31, 2022 as compared to$994 thousand for the year endedDecember 31, 2021 as we purchased$15 million in BOLI during the second quarter of 2022. 50
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Noninterest Expense
The following table reflects the components of non-interest expense for the
years ended
Non-Interest Expense
Years Ended December 31, 2022 and 2021
(Dollars in thousands)
Change from Prior Year
2022 2021 Amount Percent
Salaries and employee benefits $ 20,316 $ 18,980 $ 1,336 7.0 %
Occupancy and equipment expense 3,252 3,290 (38) (1.2) %
Data processing and network
administration 2,303 2,203 100 4.5 %
State franchise taxes 2,036 1,983 53 2.7 %
Audit, legal and consulting fees 1,210 1,489 (279) (18.7) %
Merger and acquisition expense 125 1,445 (1,320) (91.3) %
Loan related expenses 555 1,247 (692) (55.5) %
FDIC insurance 620 770 (150) (19.5) %
Marketing, business development and
advertising 483 220 263 119.5 %
Director fees 668 651 17 2.6 %
Postage, courier and telephone 181 190 (9) (4.7) %
Internet banking 645 542 103 19.0 %
Dues, memberships & publications 194 174 20 11.5 %
Bank insurance 453 411 42 10.2 %
Printing and supplies 147 104 43 41.3 %
Bank charges 90 118 (28) (23.7) %
State assessments 161 167 (6) (3.6) %
Core deposit intangible amortization 262 305 (43) (14.1) %
Gain on sale of other real estate owned - (236) 236 (100.0) %
Tax credit amortization 126 - 126 100.0 %
Other operating expenses 633 487 146 30.0 %
Total noninterest expense $ 34,460 $ 34,540 $ (80) (0.2) %
Noninterest expense includes, among other things, salaries and benefits,
occupancy and equipment costs, professional fees, data processing, insurance and
miscellaneous expenses. Noninterest expense was $34.5 million for each of the
years ended December 31, 2022 and December 31, 2021 .
Salaries and benefits expense increased $1.3 million to $20.3 million for the
year ended December 31, 2022 compared to $19.0 million for the same period in
2021, which was primarily related to business development staff expansion in
addition to market rate adjustments to employee compensation during 2022.
Merger-related expenses associated with our proposed merger with Blue Ridge
totaled $125 thousand and $1.4 million for the years ended December 31, 2022 and
December 31, 2021 , respectively. Audit, legal and consulting fees decreased $279
thousand to $1.2 million for the year ended December 31, 2022 as compared to the
same period of 2021, primarily as a result of expenses incurred in 2021 for our
membership interest purchase of ACM in 2021. Loan related expenses decreased
$692 thousand to $555 thousand for the year ended December 31, 2022 compared to
the prior year, as loan workout expense decreased during 2022.
During 2021, we sold our OREO property which resulted in a gain of
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Income Taxes
We recorded a provision for income tax expense of$6.0 million for the year endedDecember 31, 2022 , a decrease of$276 thousand compared to$6.3 million for the year endedDecember 31, 2021 . Our effective tax rate forDecember 31, 2022 was 19.4%, compared to 22.2% for 2021. Our effective tax rates for 2022 and 2021 are less than our combined federal and state statutory rate of 22.5% because of discrete tax benefits recorded as a result of nonqualified option exercises during the aforementioned periods.
Discussion and Analysis of Financial Condition
Overview
AtDecember 31, 2022 , total assets were$2.34 billion , an increase of 6%, or$141.4 million , from$2.20 billion atDecember 31, 2021 . Total loans receivable, net of deferred fees and costs, increased 22%, or$336.6 million , to$1.84 billion atDecember 31, 2022 , from$1.50 billion atDecember 31, 2021 . Total investment securities decreased by$79.7 million , or 22%, to$278.3 million atDecember 31, 2022 , from$358.0 million atDecember 31, 2021 . Total deposits decreased 3%, or$53.6 million , to$1.83 billion atDecember 31, 2022 , from$1.88 billion atDecember 31, 2021 . From time to time, we may utilize other borrowed funds such as federal funds purchased and FHLB advances as an additional funding source for the Bank. ForDecember 31, 2022 and 2021, we had$30.0 million and$0 federal funds purchased, respectively. The Bank had FHLB advances outstanding of$235.0 million and$25.0 million for the years endedDecember 31, 2022 and 2021. Subordinated debt, net of unamortized issuance costs, totaled$19.6 million and$19.5 million atDecember 31, 2022 and 2021, respectively. We review our balance sheet and interest rate sensitivity on an ongoing basis as part of our asset/liability risk management process. DuringFebruary 2023 , with the expectation that short-term interest rates would continue to increase during 2023, we modeled various scenarios to improve balance sheet efficiency, reduce our cost of funds, improve margin and our capital ratios. As a result, we executed a de-lever strategy through the sale of a portion ofU.S. government agency low-yielding mortgage-backed investment securities available-for-sale at a one-time loss. The proceeds of this strategy were used to paydown high cost short-term FHLB advances and assist in the funding of higher yielding newly originated commercial loans. During late February, we sold$40.3 million in investment securities available-for-sale, or 12% of the portfolio, for an after-tax loss of$3.6 million , which will be recorded in ourMarch 31, 2023 quarterly results. This transaction was neutral to shareholders' equity and tangible book value, as the loss recorded was already reflected in our accumulated other comprehensive loss. Tangible common equity to total assets is expected to improve approximately 7 basis points as a result of the reduction in total assets. From an earnings perspective, the balance sheet re-positioning is expected to be accretive to net interest income, net interest margin and return on average assets in future periods. Our model results indicate that net interest margin is expected to improve 9 basis points as a result of this de-leverage strategy. Additionally, during the first quarter, we fixed$150 million of our wholesale funding through the execution of pay-fixed/receive-floating interest rate swaps. The interest rate swaps have a weighted average rate of 3.50%, have a maturity of five years, and are designated against a mix of FHLB advances and brokered certificates of deposits. Classified as cash flow hedges, the market value fluctuations will not impact future earnings, but will impact accumulated other comprehensive income. Loans Receivable, Net Total loans receivable, net of deferred fees and costs, were$1.84 billion atDecember 31, 2022 , an increase of$336.6 million , or 22%, compared to$1.50 billion atDecember 31, 2021 . Excluding PPP loans, which decreased$26.2 million as a result of loan forgiveness, net loan growth was$362.8 million for the year endedDecember 31, 2022 . Loans outstanding under our warehouse facility with ACM totaled$42.7 million atDecember 31, 2022 , a decrease of$29.3 million , or 41%, from$72 million atDecember 31, 2021 , which is consistent with the slowdown of residential mortgage loan demand in our market.
PPP loans, net of deferred fees and costs, totaled
Commercial real estate loans totaled$1.10 billion atDecember 31, 2021 , or 60% of total loan receivable, compared to$906.1 million atDecember 31, 2021 , an increase of$194.1 million , or 21%. Owner-occupied commercial real estate loans were$206.8 million atDecember 31, 2022 compared to$191.8 million atDecember 31, 2021 . Nonowner-occupied 52
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commercial real estate loans were$893.2 million atDecember 31, 2022 compared to$714.3 million atDecember 31, 2021 . Commercial construction loans totaled$147.9 million atDecember 31, 2022 , or 8% of total loans receivable. Of the$147.9 million in construction loans,$43.8 million are collateralized by land, and lot acquisition and development loans (which have a higher degree of credit risk than the remaining portion of the construction portfolio) totaled$6.4 million atDecember 31, 2022 . Our commercial real estate portfolio, including construction loans, is diversified by asset type and geographic concentration. We plan to manage this portion of our portfolio in a disciplined manner. We have comprehensive policies to monitor, measure, and mitigate our loan concentrations within this portfolio segment, including rigorous credit approval, monitoring and administrative practices. Commercial and industrial loans, excluding PPP loans, increased$69.2 million to$243.2 million atDecember 31, 2022 , from$174.1 million atDecember 31, 2021 . Consumer residential loans increased$139.0 million to$339.6 million atDecember 31, 2022 , from$200.6 million atDecember 31, 2021 . The increase in residential loans was primarily a result of purchasing ACM originated mortgages, which were portfolio product offered by the Bank and which met our underwriting criteria.
The following table sets forth the repricing characteristics and sensitivity to
interest rate changes of our loan portfolio at
Loan Maturities and Interest Rate Sensitivity
At December 31, 2022
(Dollars in thousands)
One Year Between One Between Five and After Fifteen
or Less and Five Years Fifteen Years Years Total
Commercial real estate $ 55,428 $ 522,217 $ 519,116 $ 3,500 $ 1,100,261
Commercial and industrial 41,670 120,783 26,815 53,964 243,232
Paycheck protection program - 1,988 - - 1,988
Commercial construction 68,003 64,615 15,321 - 147,939
Consumer residential 25,920 56,536 71,659 185,476 339,591
Consumer nonresidential 3,581 2,162 858 1,084 7,685
Total loans receivable $ 194,602 $ 768,301 $ 633,769 $ 244,024 $ 1,840,696
Fixed-rate loans $ 99,530 $ 517,069 $ 379,594 $ 150,321 $ 1,146,514
Floating-rate loans 95,072 251,232 254,175 93,703 694,182
Total loans receivable $ 194,602 $ 768,301 $ 633,769 $ 244,024 $ 1,840,696
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*Payments due by period are based on the repricing characteristics and not contractual maturities.
Asset Quality
Nonperforming assets, defined as nonaccrual loans, loans contractually past due 90 days or more as to principal or interest and still accruing, and OREO atDecember 31, 2022 were$4.5 million compared to$3.5 million atDecember 31, 2021 . Our ratio of nonperforming assets to total assets was 0.19% atDecember 31, 2022 compared to 0.16% atDecember 31, 2021 . TDRs, as ofDecember 31, 2022 and 2021, totaled$830 thousand and$92 thousand , respectively. Nonperforming loans, which are primarily commercial real estate and commercial and industrial loans, increased$1.0 million during 2022 as compared to 2021. Loans that we have classified as nonperforming are a result of customer specific deterioration, mostly financial in nature, and not a result of economic, industry, or environmental causes that we might see as a pattern for possible future losses within our loan portfolio. For each of our criticized assets, we conduct an impairment analysis to determine the level of additional or specific reserves required for any portion of the loan that may result in a loss. As a result of the analysis completed, we had specific reserves totaling$86 thousand and$186 thousand atDecember 31, 2022 and 2021, respectively. Because these loans are individually evaluated for impairment, no general reserve was assessed for valuation purposes. 53
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We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis includes, larger non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. AtDecember 31, 2022 , we had$10.4 million in loans identified as special mention within the originated loan portfolio, an increase from$3.0 million as ofDecember 31, 2021 . Special mention rated loans are loans that have a potential weakness that deserves management's close attention; however, the borrower continues to pay in accordance with their contract. These loans do not have a specific reserve and are considered well-secured. AtDecember 31, 2022 , we had$4.1 million in loans identified as substandard within the originated loan portfolio, a decrease from$19.0 million as ofDecember 31, 2021 due to a combination of loan payoffs and risk rating improvements during the current year. Substandard rated loans are loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. For each of these substandard loans, a liquidation analysis is completed. AtDecember 31, 2022 , specific reserves on originated and acquired loans totaling$86 thousand , have been allocated within the allowance for loan losses to supplement any shortfall of collateral.
We recorded annualized net charge-offs of 0.03% and 0.04% for the years ended
Nonperforming Assets
At December 31, 2022 and 2021
(Dollars in thousands)
2022 2021Nonperforming assets:
Nonaccrual loans $ 3,150 $ 3,485
Loans contractually pastdue 90 days or more 1,343
23
Total nonperforming loans (NPLs) $ 4,493 $ 3,508
Other real estate owned (OREO) - -
Total nonperforming assets (NPAs) $ 4,493 $ 3,508
Performing troubled debt restructurings (TDRs)
92
NPLs/Total Assets 0.19 % 0.16 %
NPAs/Total Assets 0.19 % 0.16 %
NPAs and TDRs/Total Assets 0.23 % 0.16 %
Allowance for loan losses/NPLs 357.00 % 394.21 %
AtDecember 31, 2022 and 2021, there were no performing loans considered a potential problem loan. Potential problem loans are defined as loans that are not included in the 90 day past due, nonaccrual or adversely classified or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories. We take a conservative approach with respect to risk rating loans in our portfolio. Based upon the status as a potential problem loan, these loans receive heightened scrutiny and ongoing intensive risk management. Additionally, our loan loss allowance methodology incorporates increased reserve factors for certain loans that are adversely rated but not impaired as compared to the general portfolio. We have evaluated our exposure to credit risks directly related to the COVID-19 pandemic. During 2020, as a result of the COVID-19 pandemic, we implemented loan payment deferral programs to allow customers who were required to close or reduce business operations to defer loan principal and interest payments primarily for 90 days. During the first and second quarters of 2020, we modified 277 loans for a total outstanding principal balance of$360.2 million , or 24% of the total loan portfolio. As ofDecember 31, 2022 , there were no remaining loans on payment deferral related to the pandemic. 54
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At
While our loan growth has continued to be strong, unexpected changes in economic growth could adversely affect our loan portfolio, including causing increases in delinquencies and default rates, which would adversely impact our charge-offs and provision for loan losses. Deterioration in real estate values, employment data and household incomes may also result in higher loan losses for us. Also, in the ordinary course of business, we may also be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer. AtDecember 31, 2022 , our commercial real estate portfolio, net of fees (including construction lending) was 68% of our total loan portfolio. A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our business, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities and industries, may not function as we have anticipated.
See "Critical Accounting Policies" above for more information on our allowance for loan losses methodology.
The following tables present additional information pertaining to the activity
in and allocation of the allowance for loan losses by loan type and the
percentage of the loan type to the total loan portfolio. The allocation of the
allowance for loan losses to a category of loans is not necessarily indicative
of future losses or charge-offs, and does not restrict the use of the allowance
to any specific category of loans.
Allowance for Loan Losses
Years Ended December 31, 2022 and 2021
(Dollars in thousands)
2022 2021
Percentage of net Percentage of net
charge-offs (annualized) charge-offs (annualized)
Net to average loans Net to average loans
(charge-offs) outstanding during the (charge-offs) outstanding during the
recoveries year recoveries year
Commercial real estate $ - - % $ (453) (0.03) %
Commercial and industrial (396) (0.02) % (117) (0.01) %
Consumer residential 1 - % 35 - %
Consumer nonresidential (23) - % (94) (0.01) %
Total $ (418) (0.03) % $ (629) (0.04) %
Average loans outstanding during
the period $ 1,618,077 $ 1,463,829
Allowance for loan losses to loans
receivable, net of fees 0.87 % 0.92 %
Allowance for loan losses to loans
receivable, net of fees, excluding
PPP 0.87 % 0.94 %
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Allocation of the Allowance for Loan Losses
At December 31, 2022 and 2021
(Dollars in thousands)
2022 2021
Allocation % of Total* Allocation % of Total*
Commercial real estate $ 10,777 59.77 % $ 8,995 60.11 %
Commercial and industrial 2,623 13.21 % 1,827 11.55 %
Paycheck protection program - 0.11 % - 1.90 %
Commercial construction 1,499 8.04 % 2,009 12.45 %
Consumer residential 1,044 18.45 % 781 13.31 %
Consumer nonresidential 97 0.42 % 217 0.68 %
Total allowance for loan losses
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*Percentage of loan type to the total loan portfolio.
Our investment securities portfolio is used as a source of income and liquidity. The investment portfolio consists of investment securities available-for-sale and investment securities held-to-maturity. Investment securities available-for-sale are those securities that we intend to hold for an indefinite period of time, but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability strategy, liquidity management or regulatory capital management. Investment securities held-to-maturity were$264 thousand at each ofDecember 31, 2022 and 2021, and are those securities that we have the intent and ability to hold to maturity and are carried at amortized cost. Our investment securities portfolio was$278.3 million atDecember 31, 2022 compared to$358.0 million atDecember 31, 2021 . Investment securities decreased$79.7 million during the year endedDecember 31, 2022 , primarily as a result of principal paydowns of$37.1 million and a$49.0 million decrease in the market value of the available-for-sale portfolio during 2022. The decrease in market value is due to the current increasing rate environment and not a result of any credit deterioration of the portfolio. These purchases were primarily funded through our increase in deposits and PPP loan forgiveness to deploy excess liquidity and optimize net interest margin.
As of
We complete reviews for other-than-temporary impairment at least quarterly. Investment securities with unrealized losses are a result of pricing changes due to recent rising rate conditions in the current market environment and not as a result of permanent credit impairment. Contractual cash flows for the agency mortgage-backed securities are guaranteed and/or funded by theU.S. government. Municipal securities have third party protective elements and there are no negative indications that the contractual cash flows will not be received when due. We do not intend to sell nor do we believe we will be required to sell any of our temporarily impaired securities prior to the recovery of the amortized cost.
No other-than-temporary impairment has been recognized for the securities in our
investment portfolio as of
We hold restricted investments in equities of the FRB and FHLB. AtDecember 31, 2022 , we owned$11.1 million in FHLB stock and$4.4 million in FRB stock. AtDecember 31, 2021 , we owned$1.8 million in FHLB stock and$4.4 million in FRB stock. 56
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The following table presents the weighted average yields of our investment
portfolio for each of the maturity ranges at
Investment Securities by Stated Maturity
At December 31, 2022 and 2021
(Dollars in thousands)
2022
Five to Ten
Within One Year One to Five Years Years Over Ten Years Total
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Yield Yield Yield Yield Yield
Heldtomaturity
Securities of state and local
municipalities tax exempt - 2.32 % - - 2.32 %
Total heldtomaturity securities - 2.32 % - - 2.32 %
Availableforsale
Securities of U.S. government and federal
agencies - - 1.49 % - 1.49 %
Securities of state and local
municipalities - 2.25 % - 2.92 % 2.43 %
Corporate bonds - 6.02 % 4.09 % - 4.27 %
Mortgagedbacked securities - 2.09 % 2.48 % 1.57 % 1.62 %
Total availableforsale securities - 3.73 % 2.84 % 1.57 % 1.79 %
Total investment securities - 3.65 % 2.51 % 1.57 % 1.79 %
2021
Five to Ten
Within One Year One to Five Years Years Over Ten Years Total
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Yield Yield Yield Yield Yield
Heldtomaturity
Securities of state and local
municipalities tax exempt - - 2.32 % - 2.32 %
Total heldtomaturity securities - - 2.32 % - 2.32 %
Availableforsale
Securities ofU.S. government and federal agencies - - 1.49 % - 1.49 % Securities of state and local municipalities - 2.25 % - 2.92 % 2.45 % Corporate bonds - 3.98 % 4.15 % - 4.12 % Mortgagedbacked securities - - 2.21 % 1.53 % 1.57 % Total availableforsale securities - 3.27 % 2.51 % 1.53 % 1.68 % Total investment securities - 3.27 % 2.51 % 1.53 % 1.68 %
Deposits and Other Borrowed Funds
The following table sets forth the average balances of deposits and the percentage of each category to total average deposits for the years endedDecember 31, 2022 and 2021: Average Balance (Dollars in thousands) 2022 2021 Noninterest-bearing demand$ 501,962 27.77 %$ 527,675 31.29 % Interest-bearing deposits Interest checking 724,881 40.10 % 587,151 34.82 % Savings and money markets 315,653 17.46 % 303,317 17.99 % Certificate of deposits,$100,000 to$249,999 51,490 2.85 % 58,453 3.47 % Certificate of deposits,$250,000 or more 152,229 8.42 % 172,215 10.21 % Other time deposits 61,478 3.39 % 37,657 2.22 % Total$ 1,807,693 100.00 %$ 1,686,468 100.00 % 57
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Total deposits were$1.83 billion atDecember 31, 2022 , a decrease of$53.6 million , or 3%, from$1.88 billion atDecember 31, 2021 . Noninterest-bearing deposits totaled$438.3 million atDecember 31, 2022 , comprising 24% of total deposits. Wholesale deposits increased to$248.0 million atDecember 31, 2022 from$35.0 million atDecember 31, 2021 , which offset the year-over-year declines in all other deposit categories, which was a result of customers using their excess liquidity to fund their business activity, and decreases in escrow funds from title and real estate companies due to the slowdown in real estate activity in the market. We are a member of the IntraFi Network ("IntraFi"), which gives us the ability to offer Certificates of Deposit Account Registry Service ("CDARS"), and Insured Cash Sweep ("ICS"), products to our customers who seek to maximizeFDIC insurance protection. When a customer places a large deposit with us for IntraFi, funds are placed into certificates of deposit or other deposit products with other banks in the CDARS and ICS networks in increments of less than$250 thousand so that principal and interest are eligible forFDIC insurance protection. These deposits are part of our core deposit base. AtDecember 31, 2022 andDecember 31, 2021 , we had$117.6 million and$186.0 million , respectively, in either CDARS reciprocal or ICS reciprocal products. The decrease fromDecember 31, 2021 is a result of certain customers utilizing excess liquidity for their day-to-day operations. As ofDecember 31, 2022 and 2021, the estimated amount of total uninsured deposits were$727.3 million and$901.1 million , respectively. The estimate of uninsured deposits generally represents the portion of deposit accounts that exceed theFDIC insurance limit of$250 thousand and is calculated based on the same methodologies and assumptions used for purposes of the Bank's regulatory reporting requirements. The following table reports maturities of the estimated amount of uninsured certificates of deposit atDecember 31, 2022 . Certificates of Deposit Greater than$250,000 At December 31, 2022 (Dollars in thousands) 2022 Three months or less$ 38,589 Over three months through six months 45,366
Over six months through twelve months 51,820 Over twelve months
23,747
$ 159,522
Other borrowed funds, which include federal funds purchased, FHLB advances, and
our subordinated notes, were $284.6 million at December 31, 2022 , and $44.5
million at December 31, 2021 . For December 31, 2022 and 2021, we had $235.0
million and $25.0 million , respectively, in FHLB advances. The increase in FHLB
advances was a result of the aforementioned decrease in customer deposits and to
assist in funding loan origination activity. Subordinated debt, net of
unamortized issuance costs, totaled $19.6 million and $19.5 million at December
31, 2022 and 2021, respectively. For December 31, 2022 and 2021, we had $30.0
million and $0 federal funds purchased, respectively.
Capital Resources
Capital adequacy is an important measure of financial stability and performance.
Our objectives are to maintain a level of capitalization that is sufficient to
sustain asset growth and promote depositor and investor confidence.
Regulatory agencies measure capital adequacy utilizing a formula that takes into
account the individual risk profile of the financial institution. The minimum
capital requirements are: (i) CET1 capital ratio of 4.5%; (ii) a Tier 1 to
risk-based assets capital ratio of 6%; (iii) a total risk based capital ratio of
8%; and (iv) a Tier 1 leverage ratio of 4%. Additionally, a capital conservation
buffer requirement of 2.5% of risk-weighted assets is designed to absorb losses
during periods of economic stress and is applicable to our CET1 capital, Tier 1
capital and total capital ratios. Including the conservation buffer, we
currently consider our minimum capital ratios to be as follows: 7.00% for CET1;
8.50% for Tier 1 capital; and 10.50% for Total capital. Banking institutions
with a ratio of common equity Tier 1 to risk-weighted assets above the minimum
but below the minimum plus the conservation buffer will face constraints on
dividends, equity repurchases, and compensation.
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OnJanuary 1, 2020 , the federal banking agencies adopted a CBLR, which is calculated by dividing tangible equity capital by average consolidated total assets. If a "qualified community bank," generally a depository institution or depository institution holding company with consolidated assets of less than$10 billion , opts into the CBLR framework and has a leverage ratio that exceeds the CBLR threshold, which was initially set at 9%, then such bank will be considered to have met all generally applicable leverage and risk based capital requirements under Basel III, the capital ratio requirements for "well capitalized" status under Section 38 of the FDIA, and any other leverage or capital requirements to which it is subject. A bank or holding company may be excluded from qualifying community bank status base on its risk profile, including consideration of its off-balance sheet exposures; trading assets and liabilities; total notional derivatives exposures and such other facts as the appropriate federal banking agencies determine to be appropriate. AtJanuary 1, 2020 , we qualified for and adopted this simplified capital structure. EffectiveSeptember 30, 2022 , we opted out of the CBLR framework. A banking organization that opts out of the CBLR framework can subsequently opt back into the CBLR framework if it meets the criteria listed above. We believe that the Bank met all capital adequacy requirements to which it was subject as ofDecember 31, 2022 andDecember 31, 2021 . Stockholders' equity atDecember 31, 2022 was$202.4 million , a decrease of$7.4 million , compared to$209.8 million atDecember 31, 2021 . The decrease in shareholders' equity was attributable to a decrease in accumulated other comprehensive income of$34.5 million , which was primarily related to the decrease in the market value of the Company's available-for-sale investment securities portfolio, offset by net income recorded for the year endedDecember 31, 2022 totaling$25.0 million . Total stockholders' equity to total assets forDecember 31, 2022 was 8.6% and forDecember 31, 2021 was 9.5%. Tangible book value per share (a non-GAAP financial measure which is defined in the table below) atDecember 31, 2022 andDecember 31, 2021 was$11.14 and$11.76 , respectively. As noted below, regulatory capital levels for the bank meets those established for "well capitalized" institutions. While we are currently considered "well capitalized," we may from time to time find it necessary to access the capital markets to meet our growth objectives or capitalize on specific business opportunities. As the Company is a bank holding company with less than$3 billion in assets, and which does not (i) conduct significant off balance sheet activities, (ii) engage in significant non-banking activities, and (iii) have a material amount of securities registered under the Securities Exchange Act of 1934 (the "Exchange Act"), it is not currently subject to risk-based capital requirements adopted by theFederal Reserve , pursuant to the small bank holding company policy statement. TheFederal Reserve has not historically deemed a bank holding company ineligible for application of the small bank holding company policy statement solely because its common stock is registered under the Exchange Act. There can be no assurance that theFederal Reserve will continue this practice. 59
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The following tables shows the minimum capital requirement and our capital
position at
Capital Components
At December 31, 2022 and 2021
(Dollars in thousands)
Minimum to be Well Capitalized Under
Actual
Minimum Capital Requirement Prompt Corrective Action
Amount Ratio Amount Ratio (1) Amount Ratio
At December 31, 2022
Total risk-based capital $ 256,898 13.28 % $ 203,113 > 10.50 % $ 193,441 > 10.00 %
Tier 1 risk-based capital 240,858 12.45 % 164,425 > 8.50 % 154,753 > 8.00 %
Common equity tier 1 capital 240,858 12.45 % 135,409 > 7.00 % 125,737 > 6.50 %
Leverage capital ratio 240,858 10.75 % 87,894 > 4.00 % 109,867 > 5.00 %
At December 31, 2021
Total risk-based capital $ 222,871 13.54 % $ 177,069 > 10.50 % $ 168,638 > 10.00 %
Tier 1 risk-based capital 214,442 12.72 % 143,342 > 8.50 % 134,910 > 8.00 %
Common equity tier 1 capital 214,442 12.72 % 118,046 > 7.00 % 109,614 > 6.50 %
Leverage capital ratio 214,442 10.55 % 81,712 > 4.00 % 102,140 > 5.00 %
(1) Ratios include capital conservation buffer.
Reconciliation of Book Value (GAAP) to Tangible Book Value (non-GAAP)
At December 31, 2022 and 2021
(Dollars in thousands, except per share data)
2022 2021
Total stockholders' equity (GAAP)$ 202,382 $
209,796
Less: goodwill and intangibles, net (7,790)
(8,052)
Tangible Common Equity (non-GAAP)$ 194,592 $
201,744
Book value per common share (GAAP)$ 11.58 $
12.23
Less: intangible book value per common share (0.44)
(0.47)
Tangible book value per common share (non-GAAP)
11.76 Liquidity Liquidity in the banking industry is defined as the ability to meet the demand for funds of both depositors and borrowers. We must be able to meet these needs by obtaining funding from depositors or other lenders or by converting non-cash items into cash. The objective of our liquidity management program is to ensure that we always have sufficient resources to meet the demands of our depositors and borrowers. Stable core deposits and a strong capital position provide the base for our liquidity position. We believe we have demonstrated our ability to attract deposits because of our convenient branch locations, personal service, technology and pricing. In addition to deposits, we have access to the different wholesale funding markets. These markets include the brokered certificate of deposit market and the federal funds market. We are a member of the IntraFi Network, which allows banking customers to accessFDIC insurance protection on deposits through our Bank which exceedFDIC insurance limits. We also have one-way authority with IntraFi for both their CDARs and ICS products which provides the Bank the ability to access additional wholesale funding as needed. We also maintain secured lines of credit with the FRB and the FHLB for which we can borrow up to the allowable amount for the collateral pledged. Having diverse funding alternatives reduces our reliance on any one source for funding. 60
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Cash flow from amortizing assets or maturing assets also provides funding to meet the needs of depositors and borrowers.
We have established a formal liquidity contingency plan which establishes a liquidity management team and provides guidelines for liquidity management. For our liquidity management program, we first determine our current liquidity position and then forecast liquidity based on anticipated changes in the balance sheet. In this forecast, we expect to maintain a liquidity cushion. We also stress test our liquidity position under several different stress scenarios, from moderate to severe. Guidelines for the forecasted liquidity cushion and for liquidity cushions for each stress scenario have been established. We believe that we have sufficient resources to meet our liquidity needs. Our primary and secondary sources of liquidity remain strong. Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled$359.6 million atDecember 31, 2022 , or 15% of total assets, a decrease from$598.7 million , or 27%, atDecember 31, 2021 . To maintain ready access to the Bank's secured lines of credit, the Bank has pledged a portion of its commercial real estate and residential real estate loan portfolios to the FHLB and FRB. Additional borrowing capacity at the FHLB atDecember 31, 2022 was approximately$138.5 million . Borrowing capacity with the FRB was approximately$94.2 million atDecember 31, 2022 . These facilities are subject to the FHLB and the FRB approving disbursement to us. We also have unsecured federal funds purchased lines of approximately$265.0 million available to us of which$30.0 million was advanced as ofDecember 31, 2022 . We anticipate maintaining liquidity at a level sufficient to protect depositors as we endure through this pandemic, provide for reasonable growth, and fully comply with all regulatory requirements. Liquidity is essential to our business. Our liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash, including deposits. This situation may arise due to circumstances that we may be unable to control, such as general market disruption, negative views about the financial services industry generally, or an operational problem that affects a third party or us. Our ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events. While we believe we have a healthy liquidity position and do not anticipate the loss of deposits of any of the significant deposit customers, any of the factors discussed above could materially impact our liquidity position in the future.
Financial Instruments with Off-Balance-Sheet Risk and Credit Risk
We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Bank's maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. We evaluate each customer's credit worthiness on a case-by-case basis and require collateral to support financial instruments when deemed necessary. The amount of collateral obtained upon extension of credit is based on management's evaluation of the counterparty. Collateral held varies but may include deposits held by us, marketable securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates up to one year or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These instruments represent obligations to extend credit or guarantee borrowings and are not recorded on the consolidated statements of financial condition. The rates and terms of these instruments are competitive with others in the market in which we do business. Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not be drawn upon to the total extent to which we have committed.
Standby letters of credit are conditional commitments we issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as
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that involved in extending loan facilities to customers. We hold certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.
With the exception of these off-balance sheet arrangements, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, changes in financial condition, revenue, expenses, capital expenditures, or capital resources, that is material to the business of the Company.
AtDecember 31, 2022 andDecember 31, 2021 , unused commitments to fund loans and lines of credit totaled$235.6 million and$183.1 million , respectively. Commercial and standby letters of credit totaled$6.5 million and$8.9 million atDecember 31, 2022 andDecember 31, 2021 , respectively.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required.
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