LIMESTONE BANCORP, INC. Management's discussion and analysis of financial condition and results of operations analyzes the consolidated financial condition and results of operations ofLimestone Bancorp, Inc. (the Company) and its wholly owned subsidiary,Limestone Bank, Inc. (the Bank). The Company is aLouisville, Kentucky -based bank holding company that operates banking offices in 14Kentucky counties. The Bank's markets include metropolitanLouisville inJefferson County and the surrounding counties ofBullitt andHenry . The Bank serves south central, southern, and westernKentucky from banking offices inBarren ,Butler ,Daviess ,Edmonson ,Green ,Hardin ,Hart ,Ohio , andWarren Counties. The Bank also has offices inLexington , the second largest city in the state, andFrankfort , the state capital. The Bank is a traditional community bank with a wide range of personal and business banking products and services.
Selected Consolidated Financial Data
As of and for the Years Ended December 31,
(Dollars in thousands except
per share data) 2022 2021 2020 2019 2018
Income Statement Data:
Interest income $ 57,810 $ 49,915 $ 50,753 $ 49,584 $ 43,461
Interest expense 8,732 5,693 10,152 14,234 9,790
Net interest income 49,078 44,222 40,601 35,350 33,671
Provision (negative provision)
for loan losses 80 1,150 4,400 - (500 )
Non-interest income (1) 8,877 8,439 6,844 5,918 5,779
Non-interest expense (2) 33,757 31,971 32,416 30,270 29,126
Income before income taxes 24,118 19,540 10,629 10,998 10,824
Income tax expense (3) 5,776 4,631 1,624 480 2,030
Net income 18,342 14,909 9,005 10,518 8,794
Less:
Earnings allocated to
participating securities 302 219 68 106 144
Net income attributable to
common $ 18,040 $ 14,690 $ 8,937 $ 10,412 $ 8,650
Common Share Data:
Basic earnings per common share $ 2.40 $ 1.96 $ 1.20 $ 1.41 $ 1.23
Diluted earnings per common
share 2.40 1.96 1.20 1.41 1.23
Cash dividends declared per
common share 0.20 - - - -
Book value per common share 17.52 17.24 15.47 14.15 12.34
Tangible book value per common
share (4) 16.48 16.16 14.34 12.98 12.34
Balance Sheet Data (at period
end):
Total assets $ 1,462,455 $ 1,415,692 $ 1,312,302 $ 1,245,779 $ 1,069,692
Debt obligations:
FHLB advances 70,000 20,000 20,623 61,389 46,549
Junior subordinated debentures 21,000 21,000 21,000 21,000 21,000
Subordinated capital notes 25,000 25,000 25,000 17,000 -
Senior debt - - - 5,000 10,000
Average Balance Data:
Average assets $ 1,434,437 $ 1,363,397 $ 1,294,934 $ 1,112,388 $ 1,026,310
Average loans 1,072,330 958,549 964,088 801,813 743,352
Average deposits 1,197,906 1,164,355 1,099,383 936,243 860,825
Average FHLB advances 50,274 20,152 34,101 35,038 43,363
Average junior subordinated
debentures 21,000 21,000 21,000 21,000 21,000
Average subordinated capital
notes 25,000 25,000 20,366 7,545 791
Average senior debt - - 2,896 7,781 10,000
Average stockholders' equity 129,453 123,942 109,958 100,126 84,860
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(1) In 2022, the Company recognized a
sale.
In 2021, the Company recognized a $191,000 gain on the sale of OREO and a
for sale securities portfolio.
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(2) On
Agreement. Merger expenses totaled
taxes.
On
purchase included
premises and equipment, as well as
Acquisition related costs totaled
taxes.
(3) Effective
franchise tax, which was previously reported as a non-interest expense, and
implemented a state income tax at a statutory rate of 5%. State income tax
was
tax expense benefitted
establishment of a net deferred tax asset related to a change in
law enacted during 2019.
(4) Tangible book value per common share is a non-GAAP financial measure derived
from GAAP based amounts. Tangible book value is calculated by excluding the
balance of intangible assets from common stockholders' equity. Tangible book
value per common share is calculated by dividing tangible common equity by
common shares outstanding, as compared to book value per common share, which
is calculated by dividing common stockholders' equity by common shares
outstanding. Management believes this is consistent with bank regulatory
agency treatment, which excludes tangible assets from the calculation of
risk-based capital.
As of and for the Years Ended December 31,
2022 2021 2020 2019 2018
Tangible Book Value Per Share (in thousands, except share and per share data)
Common stockholder's equity$ 133,858 $ 130,959 $ 116,024 $ 105,750 $ 92,097 Less: Goodwill 6,252 6,252 6,252 6,252 - Less: Intangible assets 1,733 1,989 2,244 2,500 - Tangible common equity 125,873 122,718 107,528 96,998 92,097 Shares outstanding 7,638,633 7,594,749 7,498,865 7,471,975 7,462,720 Tangible book value per common share$ 16.48 $ 16.16 $ 14.34 $ 12.98 $ 12.34 Book value per common share 17.52 17.24 15.47 14.15 12.34
The following discussion should be read in conjunction with the Company's consolidated financial statements and accompanying notes and other schedules presented elsewhere in the report.
Overview For the year endedDecember 31, 2022 , the Company reported net income of$18.3 million compared with net income of$14.9 million for the year endedDecember 31, 2021 and net income of$9.0 million for the year endedDecember 31, 2020 . Basic and diluted income per common share were$2.40 for the year endedDecember 31, 2022 , compared with$1.96 for 2021, and$1.20 for 2020. OnOctober 24, 2022 , the Company entered into an Agreement and Plan of Merger (Merger Agreement) with Peoples Bancorp Inc. (Peoples). The Merger Agreement provides for a business combination whereby the Company will merge with and into Peoples (the Merger), with Peoples as the surviving corporation in the Merger. Under the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger (the "Effective Time"), each share of the Company's common stock, issued and outstanding immediately prior to the Effective Time (except for Dissenting Shares, as provided for in the Merger Agreement), will be converted, in accordance with the procedures set forth in the Merger Agreement, into 0.90 common shares, no par value, of Peoples. Upon the terms and subject to the conditions set forth in the Merger Agreement, the Merger is expected to close in the second quarter of 2023.
The following significant items are of note for the year ended
? Average loans receivable increased approximately
million for the year ended
during 2022. SBA Paycheck Protection Program ("PPP") loans averaged
and
? Net interest margin increased 14 basis points to 3.62% for the year ended
The
its last seven meetings of 2022. As a result, the Bank's fed funds sold,
floating rate investment securities, loans with variable rate pricing
features, and new loan originations benefitted from the upward movement in
short-term rates during 2022.
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? The yield on earning assets increased to 4.27% for the year ended
2022, compared to 3.92% for the year ended
earning assets for the year ended
by
31, 2022. During the year ended
approximately one basis point of earning asset yield and net interest margin,
compared to 21 basis points for the year ended
reduction in PPP fee income was offset by an increase in interest revenue due
to an increase in average loans between periods. The increase in average loans
resulted in an increase in interest revenue volume of approximately
million for the year ended
interest revenue attributable to rates of
of the increase in interest rates on new and renewed loans and the upward
repricing of variable rate loans.
? The cost of interest-bearing liabilities increased to 0.86% in 2022 from 0.59%
in 2021 as a result of increases in short-term interest rates during 2022.
? Net loan recoveries were$1.4 million for 2022, compared to net loan
charge-offs of
2020. During the third quarter of 2022, the Bank received a payoff on a
million nonaccrual commercial real estate loan resulting in a recovery of
million.
? A provision for loan losses of
provision for loan losses of
provisions were primarily attributable to growth trends within the portfolio,
offset by a significant recovery during the third quarter and its impact on
the historical loss percentages. The 2021 loan loss provisions were
attributable to growth trends within the portfolio and net loan charge-offs
impacting historical loss percentages during the period.
? Deposits were
at
and interest checking accounts increased
increases were offset by a decrease of
a decrease of
in non-interest bearing demand deposits.
? The Company paid a
record during 2022.
? In conjunction with the Merger Agreement discussed above, the Company, with
the unanimous approval of the Board of Directors, terminated its Tax Benefit
Preservation Plan on
placed in service in 2015 and designed to preserve the benefits of the
Company's substantial tax assets. Restrictions on transfer designed to protect
the Company's tax assets remain in effect under the Company's Articles of
Incorporation, as approved by shareholders.
These items are discussed in further detail throughout this Item 7.
Application of Critical Accounting Policies
The Company's accounting and reporting policies comply with GAAP and conform to
general practices within the banking industry. Management believes the following
significant accounting policies may involve a higher degree of management
assumptions and judgments that could result in materially different amounts to
be reported if conditions or underlying circumstances were to change.
Allowance for Loan Losses - The Bank maintains an allowance for loan losses
believed to be sufficient to absorb probable incurred credit losses existing in
the loan portfolio. The Board of Directors evaluates the adequacy of the
allowance for loan losses on a quarterly basis. Management evaluates the
adequacy of the allowance using, among other things, historical loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of the underlying
collateral, and current economic conditions and trends. The allowance may be
allocated for specific loans or loan categories, but the entire allowance is
also available for any loan. The allowance consists of specific and general
components. The specific component relates to loans that are individually
evaluated and measured for impairment. The general component is based on
historical loss experience adjusted for qualitative environmental factors.
Management develops allowance estimates based on actual loss experience adjusted
for current economic conditions and trends. Allowance estimates are a prudent
measurement of the risk in the loan portfolio applied to individual loans based
on loan type. If the mix and amount of future charge-off percentages differ
significantly from the assumptions used by management in making its
determination, management may be required to materially increase its allowance
for loan losses and provision for loan losses, which could adversely affect
results.
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InJune 2016 , the FASB issued ASU, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," which replaces the current "incurred loss" model for recognizing credit losses with an "expected loss" model. Whereas the incurred loss model delays recognition of loss on financial instruments until it is probable a loss has occurred, the expected loss model will recognize a loss at the time the loan is first added to the balance sheet. The CECL standard became effective for the Company onJanuary 1, 2023 . Management continues to refine assumptions, analyze forecast scenarios, and stress test the volatility of the model. Additionally, management is finalizing various accounting processes, and related controls. As a result, the Company estimates a one-time cumulative adjustment to the allowance for credit losses of up to$2.0 million . This estimate and the ongoing impact of adopting CECL are dependent on various factors, including credit quality, macroeconomic forecasts and conditions, composition of the loan and securities portfolios, and other management judgments. The ultimate adjustment to record the impact of adoption may differ from the current estimate as the model is subject to further review and analysis by the Company's management team. Interagency guidance issued inDecember 2018 allows for a three-year phase-in of the cumulative-effect adjustment for regulatory capital reporting. Results of Operations
The following table summarizes components of income and expense and the change in those components for 2022 compared with 2021:
For the
Years Ended December 31, Change from Prior Period
2022 2021 Amount Percent
(dollars in thousands)
Gross interest income $ 57,810 $ 49,915 $ 7,895 15.8 %
Gross interest expense 8,732 5,693 3,039 53.4
Net interest income 49,078 44,222 4,856 11.0
Provision for loan losses 80 1,150 (1,070 ) (93.0 )
Non-interest income 8,880 7,979 901 11.3
Gain (loss) on sales and calls of
securities, net (3 ) 460 (463 ) NM
Non-interest expense 33,757 31,971 1,786 5.6
Net income before taxes 24,118 19,540 4,578 23.4
Income tax expense 5,776 4,631 1,145 24.7
Net income 18,342 14,909 3,433 23.0
NM: Not Meaningful
Net income of $18.3 million for the year ended December 31, 2022 increased by
$3.4 million from net income of $14.9 million for 2021. Net interest income
increased $4.9 million for 2022 as a result of growth in the loan portfolio and
increasing yields on earning assets, offset by $3.0 million increase in the cost
of interest-bearing liabilities primarily due to recent increases in short-term
interest rates. A provision for loan losses of $80,000 was recorded in 2022,
compared to a $1.2 million provision for loan losses in 2021. The 2022 loan loss
provisions were primarily attributable to growth trends within the portfolio,
offset by a significant recovery during the third quarter and its impact on the
historical loss percentages. The 2021 loan loss provisions were attributable to
growth trends within the portfolio and net loan charge-offs impacting historical
loss percentages during the period.
Non-interest income increased $438,000 during 2022. The increase was primarily
due to an increase in service charges on deposit accounts of $519,000 and an
increase in bank card interchange fees of $162,000 , both of which were due to an
increase in transaction volumes. Bank owned life insurance income increased
$180,000 for the year ended December 31, 2022 due to additional policies being
purchased in March 2022 . Non-interest income for the year ended December 31,
2022 also included a $163,000 gain on sale of premises held for sale from the
first quarter of 2022, while the year ended December 31, 2021 included a
$191,000 gain on sale of OREO from the second quarter of 2021, as well as a
$465,000 gain on the call of a corporate bond from the third quarter of 2021.
Non-interest expense increased $1.8 million during 2022. The increase was
primarily due to an increase of $889,000 in salaries and benefits as a result of
the inflationary impact on salary administration, increased health care
utilization costs, and increased performance-based incentive compensation,
merger expenses of $691,000 related to the pending Merger with Peoples as
announced on October 24, 2022 , and a $396,000 increase in other non-interest
expense primarily related to losses associated with demand deposit charge-offs
and fraudulent check and debit card activity during the period. These increases
from the prior year were offset by a decrease in communications expense of
$262,000 for 2022 as a result of changes in information technology
infrastructure during the period.
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The following table summarizes components of income and expense and the change in those components for 2021 compared with 2020:
For the
Years Ended December 31, Change from Prior Period
2021 2020 Amount Percent
(dollars in thousands)
Gross interest income $ 49,915 $ 50,753 $ (838 ) (1.7 )%
Gross interest expense 5,693 10,152 (4,459 ) (43.9 )
Net interest income 44,222 40,601 3,621 8.9
Provision for loan losses 1,150 4,400 (3,250 ) (73.9 )
Non-interest income 7,979 6,849 1,130 16.5
Gain (loss) on sales and calls of
securities, net 460 (5 ) 465 NM
Non-interest expense 31,971 32,416 (445 ) (1.4 )
Net income before taxes 19,540 10,629 8,911 83.8
Income tax expense 4,631 1,624 3,007 185.2
Net income 14,909 9,005 5,904 65.6
NM: Not Meaningful
Net income of $14.9 million for the year ended December 31, 2021 increased by
$5.9 million from net income of $9.0 million for 2020. Net interest income
increased $3.6 million for 2021 as a result of $1.7 million in increased PPP fee
recognition connected to the forgiveness and payoff of PPP loans, partially
offset by declining yields on earning assets, and a $4.5 million decrease in the
cost of interest-bearing liabilities primarily due to downward repricing within
the time deposit portfolio, and a reduction in the size of the time deposit
portfolio. Provision for loan losses of $1.2 million was recorded in 2021,
compared to a $4.4 million provision for loan losses in 2020. The 2021 loan loss
provision was attributable to net loan charge-offs impacting historical loss
percentages and growth trends within the portfolio during the year, while the
provision for 2020 was largely attributable to the uncertainty surrounding the
COVID-19 pandemic related economic and business disruptions.
Non-interest income increased
Non-interest expense decreased$445,000 during 2021. The decrease was primarily attributable to a decrease of$1.1 million in deposit and state franchise tax expense as a result of the elimination of theKentucky bank franchise tax discussed below. This decrease was partially offset by an increase in salaries and employee benefits of$381,000 attributable to moderate merit increases in compensation and performance-based incentive compensation partially offset in 2021 by year over year average FTE reductions. Additionally, deposit account related expense increased$268,000 due to an increase in debit card transactions and the related processing costs. Income tax expense was$4.6 million and$1.6 million for the year endedDecember 31, 2021 and 2020, respectively. EffectiveJanuary 1, 2021 , theCommonwealth of Kentucky eliminated the bank franchise tax and implemented a state income tax at a statutory rate of 5%. State income tax expense was$939,000 for the year endedDecember 31, 2021 , compared to a state income tax benefit of$478,000 for the year endedDecember 31, 2020 related to the establishment of a net deferred tax asset due to the tax law change. Net Interest Income - Net interest income was$49.1 million for the year endedDecember 31, 2022 , an increase of$4.9 million , or 11.0%, compared with$44.2 million for the same period in 2021. Net interest spread and margin were 3.41% and 3.62%, respectively, for 2022, compared with 3.33% and 3.48%, respectively, for 2021. TheFederal Reserve increased the fed funds target by 425 basis points over its last seven meetings of 2022. As a result, the Bank's fed funds sold, floating rate investment securities, loans with variable rate pricing features, and new loan originations benefitted from the upward movement in short-term rates during 2022. The cost of interest-bearing liabilities were also impacted, although to a lesser extent. The yield on earning assets increased to 4.27% for the year endedDecember 31, 2022 , as compared to 3.92% for the year endedDecember 31, 2021 due to the rising interest rate environment. Average interest-earning assets increased$81.8 million during 2022 primarily attributable to an increase in loans and investment securities. Average loans increased approximately$113.8 million and average investment securities increased$20.2 million , while average lower yielding interest-bearing deposits in other financial institutions decreased$51.7 million during 2022. PPP loans averaged$294,000 and$15.5 million for the year endedDecember 31, 2022 and 2021, respectively. The increase in average loans resulted in an increase in interest revenue volume of approximately$5.3 million and an increase in interest revenue related to the increase in rates on new and renewed loans and the upward repricing of variable rate loans of$552,000 . The increase in average investment securities also resulted in approximately$995,000 in additional income as compared to the prior year. Total interest income increased 15.8%, or$7.9 million , in 2022 compared to 2021. 27
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Loan fee income can meaningfully impact net interest income, loan yields, and net interest margin. The amount of loan fee income included in total interest income was$1.0 million and$4.3 million for the years endedDecember 31, 2022 and 2021, respectively. This represents eight basis points of yield on earning assets and net interest margin for the year endedDecember 31, 2022 as compared to 33 basis points for the year endedDecember 31, 2021 . Loan fee income for 2022 included$45,000 in fees earned on PPP loans, compared to$2.8 million in 2021, which represents approximately one basis point and 21 basis points of earning asset yield and net interest margin for those years, respectively. The cost of interest-bearing liabilities increased to 0.86% for the year endedDecember 31, 2022 , as compared to 0.59% for the year endedDecember 31, 2021 . The cost of interest-bearing liabilities was negatively impacted by the increases in short-term interest rates. Average interest-bearing liabilities increased by$57.7 million during 2022 primarily due to a$73.9 million increase in average money market accounts and$30.1 million increase in FHLB advances offset by a$48.4 million decrease in average certificates of deposits. Total interest expense increased by 53.4% to$8.7 million for the year endedDecember 31, 2022 as compared to$5.7 million for the year endedDecember 31, 2021 . As ofDecember 31, 2022 , time deposits comprise$290.2 million of the Company's liabilities with$233.0 million , or 80%, set to reprice or mature within one year of which,$69.3 million with a current average rate of 0.98% reprice or mature within the first quarter of 2023.
Net interest income was
The yield on earning assets decreased to 3.92% for the year endedDecember 31, 2021 , as compared to 4.20% for the year endedDecember 31, 2020 due to the lower interest rate environment. Average interest-earning assets increased$67.4 million during 2021 primarily attributable to an increase in investment securities. Average loans decreased approximately$5.5 million during 2021. PPP loans averaged$15.5 million and$22.5 million for the year endedDecember 31, 2021 and 2020, respectively. Interest revenue in 2021 declined$390,000 due to lower interest rates on new and renewed loans, the downward repricing of variable rate loans, and lower rates on securities purchased over the past eight quarters, as compared to 2020. Total interest income decreased 1.7%, or$838,000 , in 2021 compared to 2020. Loan fee income can meaningfully impact net interest income, loan yields, and net interest margin. The amount of loan fee income included in total interest income was$4.3 million and$2.1 million for the years endedDecember 31, 2021 and 2020, respectively. This represents 33 basis points of yield on earning assets and net interest margin for the year endedDecember 31, 2021 as compared to 18 basis points for the year endedDecember 31, 2020 . Loan fee income for 2021 included$2.8 million in fees earned on PPP loans, compared to$1.1 million in 2020, which represents 21 basis points and 10 basis points of earning asset yield and net interest margin for those years, respectively. The cost of interest-bearing liabilities decreased to 0.59% for the year endedDecember 31, 2021 , as compared to 1.05% for the year endedDecember 31, 2020 primarily based on downward repricing of time and other interest-bearing deposits and reduction in the size of the time deposit portfolio, as well as a shift in deposit mix. Average interest-bearing liabilities decreased by$4.1 million during 2021 primarily due to a$13.9 million decrease in FHLB advances. Total interest expense decreased by 43.9% to$5.7 million for the year endedDecember 31, 2021 as compared to$10.2 million for the year endedDecember 31, 2020 . As ofDecember 31, 2021 , time deposits comprise$266.0 million of the Company's liabilities with$161.9 million , or 61%, set to reprice or mature within one year of which,$55.0 million with a current average rate of 0.33% reprice or mature within the first quarter of 2022. 28
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Average Balance Sheets
The following table sets forth the average daily balances, the interest earned
or paid on such amounts, and the weighted average yield on interest-earning
assets and weighted average cost of interest-bearing liabilities for the periods
indicated. Dividing income or expense by the average daily balance of assets or
liabilities, respectively, derives such yields and costs for the periods
presented.
For the Years Ended December 31,
2022 2021
Average Interest Average Average Interest Average
Balance Earned/Paid Yield/Cost Balance Earned/Paid Yield/Cost
(dollars in thousands)
ASSETS
Interest-earning assets:
Loans receivables (1)
Real estate $ 767,859 $ 35,526 4.63 % $ 675,791 $ 30,615 4.53 %
Commercial 230,519 10,471 4.54 211,573 10,266 4.85
Consumer 34,237 1,947 5.69 34,041 1,608 4.72
Agriculture 39,190 2,375 6.06 36,596 1,945 5.31
Other 525 13 2.48 548 11 2.01
U.S. Treasury and agencies 25,695 523 2.04 25,657 542 2.11
Mortgage-backed securities 87,335 1,855 2.12 81,829 1,561 1.91
Collateralized loan
obligations 48,539 1,712 3.53 44,396 831 1.87
State and political
subdivision securities
(non-taxable) 29,749 660 2.96 26,509 643 3.23
State and political
subdivision securities
(taxable) 14,525 393 2.71 16,971 425 2.50
Corporate bonds 45,058 1,682 3.73 35,340 1,253 3.55
FHLB stock 5,031 199 3.96 5,493 115 2.09
Federal funds sold 35 1 2.86 35 - -
Interest-bearing deposits
in other financial
institutions 32,050 453 1.41 83,736 100 0.12
Total interest-earning
assets 1,360,347 57,810 4.27 % 1,278,515 49,915 3.92 %
Less: Allowance for loan
losses (12,469 ) (12,714 )
Non-interest-earning assets 86,559 97,596
Total assets $ 1,434,437 $ 1,363,397
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities
Certificates of deposit and
other time deposits $ 262,692 $ 1,929 0.73 % $ 311,140 $ 1,788 0.57 %
Interest checking and money
market deposits 497,811 2,712 0.54 423,938 1,289 0.30
Savings accounts 159,422 561 0.35 157,283 441 0.28
FHLB advances 50,274 1,162 2.31 20,152 154 0.76
Junior subordinated
debentures 21,000 867 4.13 21,000 521 2.48
Subordinated capital notes 25,000 1,501 6.00 25,000 1,500 6.00
Senior debt - - - - - -
Total interest-bearing
liabilities 1,016,199 8,732 0.86 % 958,513 5,693 0.59 %
Non-interest-bearing
liabilities
Non-interest-bearing
deposits 277,981 271,994
Other liabilities 10,804 8,948
Total liabilities 1,304,984 1,239,455
Stockholders' equity 129,453 123,942
Total liabilities and
stockholders' equity $ 1,434,437 $ 1,363,397
Net interest income $ 49,078 $ 44,222
Net interest spread 3.41 % 3.33 %
Net interest margin 3.62 % 3.48 %
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 133.87 % 133.39 %
--------------------------------------------------------------------------------
(1) Includes loan fees in both interest income and the calculation of yield on
loans.
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For the Years Ended December 31,
2021 2020
Average Interest Average Average Interest Average
Balance Earned/Paid Yield/Cost Balance Earned/Paid Yield/Cost
(dollars in thousands)
ASSETS
Interest-earning assets:
Loans receivables (1)
Real estate $ 675,791 $ 30,615 4.53 % $ 684,447 $ 32,572 4.76 %
Commercial 211,573 10,266 4.85 200,260 8,398 4.19
Consumer 34,041 1,608 4.72 39,931 2,051 5.14
Agriculture 36,596 1,945 5.31 38,833 2,058 5.30
Other 548 11 2.01 617 14 2.27
U.S. Treasury and agencies 25,657 542 2.11 20,239 491 2.43
Mortgage-backed securities 81,829 1,561 1.91 82,330 1,863 2.26
Collateralized loan
obligations 44,396 831 1.87 45,595 1,234 2.71
State and political
subdivision securities
(non-taxable) 26,509 643 3.23 14,139 370 3.31
State and political
subdivision securities
(taxable) 16,971 425 2.50 16,301 494 3.03
Corporate bonds 35,340 1,253 3.55 23,572 960 4.07
FHLB stock 5,493 115 2.09 6,208 143 2.30
Federal funds sold 35 - - 72 - -
Interest-bearing deposits
in other financial
institutions 83,736 100 0.12 38,525 105 0.27
Total interest-earning
assets 1,278,515 49,915 3.92 % 1,211,069 50,753 4.20 %
Less: Allowance for loan
losses (12,714 ) (9,819 )
Non-interest-earning assets 97,596 93,684
Total assets $ 1,363,397 $ 1,294,934
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities
Certificates of deposit and
other time deposits $ 311,140 $ 1,788 0.57 % $ 436,083 $ 5,802 1.33 %
Interest checking and money
market deposits 423,938 1,289 0.30 336,596 1,464 0.43
Savings accounts 157,283 441 0.28 111,559 530 0.48
FHLB advances 20,152 154 0.76 34,101 371 1.09
Junior subordinated
debentures 21,000 521 2.48 21,000 660 3.14
Subordinated capital notes 25,000 1,500 6.00 20,366 1,206 5.92
Senior debt - - - 2,896 119 4.11
Total interest-bearing
liabilities 958,513 5,693 0.59 % 962,601 10,152 1.05 %
Non-interest-bearing
liabilities
Non-interest-bearing
deposits 271,994 215,145
Other liabilities 8,948 7,230
Total liabilities 1,239,455 1,184,976
Stockholders' equity 123,942 109,958
Total liabilities and
stockholders' equity $ 1,363,397 $ 1,294,934
Net interest income $ 44,222 $ 40,601
Net interest spread 3.33 % 3.15 %
Net interest margin 3.48 % 3.36 %
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 133.39 % 125.81 %
--------------------------------------------------------------------------------
(1) Includes loan fees in both interest income and the calculation of yield on
loans.
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Rate/Volume Analysis
The table below sets forth information regarding changes in interest income and
interest expense for the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (1) changes in rate (changes in rate
multiplied by old volume); (2) changes in volume (changes in volume multiplied
by old rate); and (3) changes in rate-volume (change in rate multiplied by
change in volume). Changes in rate-volume are proportionately allocated between
rate and volume variance.
Year Ended December 31, 2022 vs. 2021 Year Ended December 31, 2021 vs. 2020
Increase (decrease) Increase (decrease)
due to change in due to change in
Net Net
Rate Volume Change Rate Volume Change
(in thousands)
Interest-earning
assets:
Loan receivables $ 552 $ 5,335 $ 5,887 $ (390 ) $ (258 ) $ (648 )
U.S. Treasury and
agencies (20 ) 1 (19 ) (69 ) 120 51
Mortgage-backed
securities 185 109 294 (291 ) (11 ) (302 )
Collateralized loan
obligations 796 85 881 (372 ) (31 ) (403 )
State and political
subdivision
securities (35 ) 20 (15 ) (128 ) 332 204
Corporate bonds 69 360 429 (137 ) 430 293
FHLB stock 95 (11 ) 84 (13 ) (15 ) (28 )
Federal funds sold 1 - 1 - - -
Interest-bearing
deposits in other
financial
institutions 451 (98 ) 353 (81 ) 76 (5 )
Total increase
(decrease) in
interest income 2,094 5,801 7,895 (1,481 ) 643 (838 )
Interest-bearing
liabilities:
Certificates of
deposit and other
time deposits 447 (306 ) 141 (2,668 ) (1,346 ) (4,014 )
Interest checking and
money market accounts 1,166 257 1,423 (502 ) 327 (175 )
Savings accounts 114 6 120 (262 ) 173 (89 )
FHLB advances 580 428 1,008 (91 ) (126 ) (217 )
Junior subordinated
debentures 346 - 346 (139 ) - (139 )
Subordinated capital
notes 1 - 1 16 278 294
Senior debt - - - (59 ) (60 ) (119 )
Total increase
(decrease) in
interest expense 2,654 385 3,039 (3,705 ) (754 ) (4,459 )
Increase (decrease)
in net interest
income $ (560 ) $ 5,416 $ 4,856 $ 2,224 $ 1,397 $ 3,621 Non-interest Income - The following table presents for the periods indicated the major categories of non-interest income:
For the Years Ended
December 31,
2022 2021 2020
(in thousands)
Service charges on deposit accounts $ 2,775 $ 2,256 $ 2,268
Bank card interchange fees 4,278 4,116 3,376
Income from bank owned life insurance 706 526
424
Gain on sale of other real estate owned - 191
-
Gain (loss) on sales and calls of securities, net (3 ) 460
(5 )
Gain on sale of premises held for sale 163 - -
Other 958 890 781
Total non-interest income $ 8,877 $ 8,439 $ 6,844
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Non-interest Income Comparison - 2022 to 2021
Non-interest income increased by$438,000 for 2022 to$8.9 million compared with$8.4 million for the year endedDecember 31, 2021 . The increase was primarily due to an increase in services charges on deposit accounts of$519,000 and an increase in bank card interchange fees of$162,000 , both of which were due to an increase in transaction volumes. Bank owned life insurance income increased$180,000 for the year endedDecember 31, 2022 due to additional policies being purchased inMarch 2022 . Non-interest income for the year endedDecember 31, 2022 also included a$163,000 gain on sale of premises held for sale from the first quarter of 2022, while the year endedDecember 31, 2021 included a$191,000 gain on sale of OREO from the second quarter of 2021, as well as a$465,000 gain on the call of a corporate bond from the third quarter of 2021.
Non-interest Income Comparison - 2021 to 2020
Non-interest income increased by$1.6 million for 2021 to$8.4 million compared with$6.8 million for the year endedDecember 31, 2020 . This increase was primarily related to bank card interchange fees of$740,000 as a result of an increase in debit card transactions, a$191,000 gain on the sale of OREO, and a$465,000 gain on the call of a corporate bond from the Bank's available for sale securities portfolio. Non-interest Expense - The following table presents the major categories of non-interest expense: For the Years Ended December 31, 2022 2021 2020 (in thousands) Salary and employee benefits$ 19,021 $ 18,132 $ 17,751 Occupancy and equipment 4,201 4,041 4,001
Deposit account related expense 2,249 2,158 1,890 Data processing expense
1,591 1,512 1,502
FDIC insurance 360 405 229
Marketing expense 605 727 629
Deposit and state franchise tax 396 375 1,475
Professional fees 818 952 937
Communications 419 681 856
Insurance expense 420 415 428
Postage and delivery 622 605 627
Merger expenses 691 - -
Other 2,364 1,968 2,091
Total non-interest expense $ 33,757 $ 31,971 $ 32,416 Non-interest Expense Comparison - 2022 to 2021
Non-interest expense increased$1.8 million , or 5.6%, to$33.8 million for the year endedDecember 31, 2022 , compared with$32.0 million for the year endedDecember 31, 2021 . The increase was primarily due to an increase of$889,000 in salaries and benefits as a result of the inflationary impact on salary administration, increased health care utilization costs, and increased performance-based incentive compensation, merger expenses of$691,000 related to the pending merger with Peoples, and a$396,000 increase in other non-interest expense primarily related to losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the period. These increases from the prior year were offset by a decrease in communications expense of$262,000 for 2022 as a result of changes in information technology infrastructure during the period.
Non-interest Expense Comparison - 2021 to 2020
Non-interest expense for the year endedDecember 31, 2021 of$32.0 million represented a$445,000 , or 1.4%, decrease from$32.4 million for 2020. The decrease in non-interest expense was primarily due to a$1.1 million decrease in deposit and state franchise tax expense as a result of the elimination of theKentucky bank franchise tax discussed below. This decrease was partially offset by an increase in salaries and employee benefits of$381,000 attributable to moderate merit increases in compensation and performance-based incentive compensation partially offset in 2021 by year over year average FTE reductions. Additionally, deposit account related expense increased$268,000 due to an increase in debit card transactions. 32
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Income Tax Expense - Effective tax rates differ from the federal statutory rate applied to income before income taxes due to the following:
2022 2021 2020
(in thousands)
Federal statutory tax rate 21 % 21 % 21 %
Federal statutory rate times financial statement income $ 5,065 $ 4,103 $ 2,232
Effect of:
State income taxes 907 741 -
Tax-exempt interest income (107 ) (123 ) (73 )
Establish state deferred tax asset - - (478 )
Non-taxable life insurance income (148 ) (111 ) (89 )
Restricted stock vesting (30 ) (10 ) 7
Other, net 89 31 25
Total income tax expense $ 5,776 $ 4,631 $ 1,624
State income tax expense was $1.0 million for 2022, compared to $939,000 for
2021. For 2020, income tax expense benefitted $478,000 from the establishment of
a net deferred tax assets related to a change in Kentucky tax law enacted during
2019. Effective January 1, 2021 , the Commonwealth of Kentucky eliminated the
bank franchise tax, which was previously recorded as non-interest expense, and
implemented a state income tax at a statutory rate of 5%.
See Note 12, "Income Taxes", to the financial statements for additional discussion of the Company's income taxes.
Analysis of Financial Condition
Total assets atDecember 31, 2022 were$1.46 billion compared with$1.42 billion atDecember 31, 2021 , an increase of$46.8 million or 3.3%. This increase was primarily attributable to an increase in net loans of$108.5 million , offset by a decrease in investment securities of$37.2 million , as well as$33.0 million decrease in cash and cash equivalents. Total assets atDecember 31, 2021 were$1.42 billion compared with$1.31 billion atDecember 31, 2020 , an increase of$103.4 million or 7.9%. This increase was primarily attributable to an increase in investment securities of$56.8 million , as well as$40.7 million in net loans.Investment Securities - The securities portfolio serves as a source of liquidity and earnings and contributes to the management of interest rate risk. Investments are made in various types of liquid assets, includingU.S. Treasury obligations and securities of various federal agencies, collateralized loan obligations, corporate bonds, and obligations of states and political subdivisions. The investment portfolio decreased by$37.2 million , or 14.3%, to$223.4 million atDecember 31, 2022 , compared with$260.7 million atDecember 31, 2021 . The decrease was comprised primarily of$28.0 million in payment proceeds and$19.2 million in fair value declines attributable to the rising interest rate environment, partially offset by purchases of$10.6 million .
The following table sets forth the carrying value of the securities portfolio at the dates indicated (in thousands):
December 31, 2022 December 31, 2021
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
(dollars in thousands)
Securities available
for sale
U.S. Government and
federal agencies $ 24,541 $ - $ (2,784 ) $ 21,757 $ 26,075 $ 301 $ (133 ) $ 26,243
Agency
mortgage-backed:
residential 80,283 9 (10,387 ) 69,905 93,650 1,339 (970 ) 94,019
Collateralized loan
obligations 48,202 - (2,161 ) 46,041 50,227 - (78 ) 50,149
Corporate bonds 45,512 - (3,042 ) 42,470 43,432 572 (202 ) 43,802
Total available for
sale $ 198,538 $ 9 $ (18,374 ) $ 180,173 $ 213,384 $ 2,212 $ (1,383 ) $ 214,213
Gross Gross Gross Gross
Amortized Unrecognized Unrecognized Fair Amortized Unrecognized Unrecognized Fair
Cost Gains Losses Value Cost Gains Losses Value
Securities held to maturity
State and municipal $ 43,282 $ - $ (8,386 ) $ 34,896 $ 46,460 $ 158 $ (338 ) $ 46,280
Total held to maturity $ 43,282 $ - $ (8,386 ) $ 34,896 $ 46,460 $ 158 $ (338 ) $ 46,280
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The Bank owns Collateralized Loan Obligations (CLOs), which are debt securities secured by professionally managed portfolios of senior-secured loans to corporations. CLOs are typically$300 million to$1 billion in size, contain one hundred or more loans and have five to six credit tranches with credit ratings ranging fromAAA , AA, A, BBB, BB, B and an equity tranche. Interest and principal are paid first to theAAA tranche then to the next lower rated tranche. Losses are borne first by the equity tranche then by the subsequently higher rated tranche. CLOs may be less liquid than government securities from time to time and volatility in the CLO market may cause the value of these investments to decline. The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors. AtDecember 31, 2022 ,$27.0 million and$19.0 million of the Bank's CLOs were risk rated AA and A rated, respectively. None of the CLOs were subject to a ratings downgrade during the year endedDecember 31, 2022 . Stress testing was completed on each security in the CLO portfolio as ofDecember 31, 2022 . Each security in the portfolio passed, without dollar loss, a stress scenario characterized as severe, which assumed a ten percent per annum constant prepayment rate, a twelve percent per annum constant default rate for four years followed by a four percent rate thereafter, and a forty-five percent recovery rate on a one-year lag. The corporate bond portfolio consists of 16 subordinated debt securities and two senior debt securities ofU.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities are either initially fixed rate for five years converting to floating rate at an index over LIBOR or SOFR, or floating rate at an index over LIBOR or SOFR from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings. The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer's financial condition. As ofDecember 31, 2022 , management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired. The following table sets forth the contractual maturities, carrying values and weighted-average yields for the Bank's investment securities held atDecember 31, 2022 : After One Year After Five Years Due Within But Within But Within One Year Five Years Ten Years After Ten Years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Available for sale U.S. Government and federal agencies $ - - %$ 1,405 2.18 %$ 10,099 2.18 %$ 10,253 1.91 %$ 21,757 2.05 % Agency mortgage-backed: residential - - 1,186 2.29 6,632 2.06 62,087 2.38 69,905 2.35 Collateralized loan obligations - - - - 36,628 5.75 9,413 5.65 46,041 5.73 Corporate bonds - - 3,078 5.14 32,952 3.48 6,440 7.63 42,470 4.22 Total available for sale $ - - %$ 5,669 3.78 %$ 86,311 4.15 %$ 88,193 3.01 %$ 180,173 3.56 % Held to maturity State and municipal$ 3,265 1.71 %$ 5,571 1.39 %$ 4,713 1.84 %$ 29,733 2.42 %$ 43,282 2.17 % Total available for sale$ 3,265 1.71 %$ 5,571 1.39 %$ 4,713 1.84 %$ 29,733 2.42 %$ 43,282 2.17 %
-------------------------------------------------------------------------------- Average yields in the table above were calculated on a tax equivalent basis. Mortgage-backed securities are securities that have been developed by pooling a number of real estate mortgages. These securities are issued by federal agencies such asGinnie Mae , Fannie Mae and Freddie Mac, as well as non-agency company issuers. These securities are deemed to have high credit ratings, and minimum regular monthly cash flows of principal and interest. Cash flows from agency backed mortgage-backed securities are guaranteed by the issuing agencies. UnlikeU.S. Treasury andU.S. government agency securities, which have a lump sum payment at maturity, mortgage-backed securities provide cash flows from regular principal and interest payments and principal prepayments throughout the lives of the securities. Mortgage-backed securities that are purchased at a premium will generally return decreasing net yields as interest rates drop because home owners tend to refinance their mortgages. Thus, the premium paid must be amortized over a shorter period. Therefore, those securities purchased at a discount will obtain higher net yields in a decreasing interest rate environment. As interest rates rise, the opposite will generally be true. During a period of increasing interest rates, fixed rate mortgage-backed securities generally do not experience increasing prepayments of principal and, consequently, average life will not be shortened. When interest rates fall, prepayments will generally increase. Non-agency issuer mortgage-backed securities do not carry a government guarantee. Management limits purchases of these securities to bank qualified issues with high credit ratings. At this time, there are no holdings of this type in the portfolio. AtDecember 31, 2022 , 88.8% of the Bank's agency mortgage-backed securities had contractual final maturities of more than ten years with a weighted maturity of 21.6 years. 34
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Loans Receivable - Loans receivable increased$110.0 million , or 11.0%, during the year endedDecember 31, 2022 , to$1.10 billion . The Bank's commercial and commercial real estate portfolios increased by an aggregate of$112.4 million , or 15.8%, during 2022 and comprised 74.0% of the total loan portfolio atDecember 31, 2022 . The residential real estate and consumer portfolios decreased by an aggregate of$8.1 million , or 3.2%, during 2022 and comprised 22.3% of the total loan portfolio atDecember 31, 2022 . Loans receivable increased$39.8 million , or 4.1%, during the year endedDecember 31, 2021 , to$1.0 billion . The Bank's commercial and commercial real estate portfolios increased by an aggregate of$72.1 million , or 11.3%, during 2021 and comprised 70.9% of the total loan portfolio atDecember 31, 2021 . The residential real estate and consumer portfolios decreased by an aggregate of$26.0 million , or 9.2%, during 2021 and comprised 25.5% of the total loan portfolio atDecember 31, 2021 . Loan Portfolio Composition - The following table presents a summary of the loan portfolio at the dates indicated, net of deferred loan fees, by type. There are no foreign loans in the Bank's portfolio and other than the categories noted, there is no concentration of loans in any industry exceeding 10% of total loans. As of December 31, 2022 2021 Amount Percent Amount Percent (dollars in thousands) Commercial (1)$ 230,262 20.71 %$ 220,826 22.04 %Commercial Real Estate : Construction 135,159 12.16 74,806 7.47 Farmland 65,256 5.87 68,388 6.83 Nonfarm nonresidential 391,701 35.23 345,893 34.53Residential Real Estate : Multi-family 45,222 4.07 50,224 5.01 1-4 Family 166,988 15.02 168,873 16.86 Consumer 35,277 3.17 36,440 3.64 Agriculture 41,498 3.73 35,924 3.59 Other 491 0.04 466 0.03 Total loans$ 1,111,854 100.00 %$ 1,001,840 100.00 %
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(1) Includes PPP loans of
2021, respectively.
Lending activities are subject to a variety of lending limits imposed by state
and federal law. The Bank's statutory secured legal lending limit to a single
borrower or guarantor was approximately $48.7 million at December 31, 2022 as
measured at 30% of the Bank's unimpaired capital and surplus.
The Bank had 22 loan relationships each with aggregate extensions of credit in
excess of $10.0 million at year end 2022 and 2021. The aggregate extension of
credit to these relationships totaled $355.2 million and $310.7 million at year
end 2022 and 2021, respectively. With respect to these large loan relationships,
all 22 were classified as pass by the Bank's internal loan review process at
December 31, 2022 and 2021. At December 31, 2022 , the largest relationship
totaled $32.4 million and was secured by multiple income producing commercial
real estate properties.
As of
35
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Loan Maturity Schedule - The following table sets forth at
As of December 31, 2022
Maturing Maturing Maturing Maturing
Within 1 through 5 through Over 15 Total
One Year 5 Years 15 Years Years Loans
(dollars in thousands)
Loans with fixed rates:
Commercial $ 6,815 $ 65,747 $ 63,145 $ - $ 135,707
Commercial Real Estate :
Construction 4,747 27,826 18,045 - 50,618
Farmland 2,856 17,353 10,513 1,844 32,566
Nonfarm nonresidential 16,803 152,005 94,100 5,110 268,018
Residential Real Estate :
Multi-family 22 24,522 6,849 - 31,393
1-4 Family 2,325 13,860 22,610 47,944 86,739
Consumer 3,010 18,507 766 844 23,127
Agriculture 1,974 6,569 528 - 9,071
Other - 491 - - 491
Total fixed rate loans $ 38,552 $ 326,880 $ 216,556 $ 55,742 $ 637,730
Loans with floating rates:
Commercial $ 31,739 $ 45,209 $ 17,607 $ - $ 94,555
Commercial Real Estate :
Construction 14,486 61,110 8,416 529 84,541
Farmland 1,158 5,224 9,855 16,453 32,690
Nonfarm nonresidential 10,681 50,453 25,927 36,622 123,683
Residential Real Estate :
Multi-family - 11,096 2,305 428 13,829
1-4 Family 3,072 10,210 34,896 32,071 80,249
Consumer 12,000 32 118 - 12,150
Agriculture 29,731 2,363 333 - 32,427
Other - - - - -
Total floating rate loans $ 102,867 $ 185,697 $ 99,457 $ 86,103 $ 474,124
Loan Portfolio by Risk Category - The Bank follows a loan grading program
designed to evaluate the credit risk in the loan portfolio. Through this loan
grading process, an internally classified watch list is maintained which helps
management assess the overall quality of the loan portfolio and the adequacy of
the allowance for loan losses. In establishing the appropriate risk rating for
loans, management considers, among other factors, the borrower's ability to
repay, the borrower's repayment history, the current delinquency status, the
estimated value of the underlying collateral, and the capacity and willingness
of a guarantor to satisfy the obligation. As a result of this process, loans are
categorized as pass, watch, special mention, substandard or doubtful.
Loans categorized as "watch" show warning elements where the present status
exhibits one or more deficiencies that require attention in the short-term or
where pertinent ratios of the loan account have weakened warranting more
frequent monitoring. These loans do not have all of the characteristics of a
classified loan (substandard or doubtful), but show weakened elements as
compared with those of a satisfactory credit.
Loans classified as "special mention" do not have all of the characteristics of
substandard or doubtful loans. They have one or more deficiencies that warrant
special attention and which corrective action, such as accelerated collection
practices, may remedy.
Loans classified as "substandard" are those loans with clear and defined
weaknesses such as a highly leveraged position, unfavorable financial ratios,
uncertain repayment sources or poor financial condition that may jeopardize the
repayment of the debt as contractually agreed. They are characterized by the
distinct possibility the Bank will sustain some losses if the deficiencies are
not corrected.
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Loans classified as "doubtful" are those loans which have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable.
The following table presents a summary of the loan portfolio at the dates indicated, by risk category.
As of December 31,
2022 2021 2020 2019 2018
(in thousands)
Pass $ 1,089,330 $ 977,962 $ 926,025 $ 888,707 $ 745,604
Watch 15,189 7,856 18,879 27,522 13,164
Special Mention - - - - 113
Substandard 7,335 16,022 17,177 10,042 6,363
Doubtful - - - - -
Total $ 1,111,854 $ 1,001,840 $ 962,081 $ 926,271 $ 765,244
Loans receivable increased $110.0 million , or 11.0%, during the year ended
December 31, 2022 . Since December 31, 2021 , the pass category increased
approximately $111.4 million , the watch category increased approximately $7.3
million , and the substandard category decreased approximately $8.7 million . The
increase in the watch category is primarily related to the downgrade of an $11.0
million commercial loan relationship. This downgrade was offset by $5.1 million
in commercial loan payoffs during 2022. The $8.7 million decrease in loans
classified as substandard was primarily driven by $8.2 million in principal
payments received, $2.1 million in loans upgraded from substandard, and $462,000
in charge-offs, offset by $2.1 million in loans moved to substandard during
2022. These trends were considered during the evaluation of qualitative trends
in the portfolio when establishing the general component of the allowance for
loan losses.
Loan Delinquency - The following table presents a summary of loan delinquencies
at the dates indicated.
As of December 31,
2022 2021 2020 2019 2018
(in thousands)
Past Due Loans:
30-59 Days $ 1,919 $ 556 $ 1,537 $ 1,747 $ 1,593
60-89 Days 268 210 372 670 331
90 Days and Over - - - - -Total Loans Past Due 30-90+ Days 2,187 766 1,909 2,417 1,924
Nonaccrual Loans 856 3,124 1,676
1,528 1,991
Total Past Due and Nonaccrual Loans
The trend in delinquency levels is considered during the evaluation of qualitative trends in the portfolio when establishing the general component of the Bank's allowance for loan losses.
Nonaccrual loans decreased$2.3 million fromDecember 31, 2021 toDecember 31, 2022 . This decrease was primarily driven by$2.9 million in paydowns,$245,000 in charge-offs, and$77,000 loans upgraded from non-accrual, offset by$924,000 in loans placed on non-accrual. The$2.9 million in paydowns of nonaccrual loans was driven by the payoff of a$2.0 million commercial real estate loan during the third quarter of 2022, which resulted in a recovery of$1.5 million . The$856,000 in nonaccrual loans atDecember 31, 2022 were generally secured by residential real estate loans. The$3.1 million in nonaccrual loans atDecember 31, 2021 were generally secured by commercial real estate loans. Management believes it has established adequate loan loss reserves for these credits. Troubled Debt Restructuring - A troubled debt restructuring (TDR) occurs when the Bank has agreed to a loan modification in the form of a concession to a borrower who is experiencing financial difficulty. The Bank's TDRs typically involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. TDRs are considered to be impaired loans, and the Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower. If the loan is considered collateral dependent, it is reported net of allocated reserves, at the fair value of the collateral less cost to sell. The Bank generally does not have a formal loan modification program. If a borrower is unable to make contractual payments, management reviews the particular circumstances of that borrower's situation and determines whether or not to negotiate a revised payment stream. The goal when restructuring a credit is to afford the borrower a reasonable period of time to remedy the issue causing cash flow shortfalls so that the credit may return to performing status over time. If a borrower fails to perform under the modified terms, the loan(s) are placed on nonaccrual status and collection actions are initiated. 37
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AtDecember 31, 2022 , the Bank had two restructured loans totaling$186,000 with borrowers who experienced deterioration in financial condition compared with three restructured loans totaling$405,000 atDecember 31, 2021 . In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. AtDecember 31, 2022 andDecember 31, 2021 , the Bank had no restructured loans that had been granted principal payment deferrals until maturity. There were no concessions made to forgive principal relative to these loans, although partial charge-offs have been recorded for certain restructured loans. In general, these loans are secured by commercial real estate properties or first liens on 1-4 residential properties. AtDecember 31, 2022 andDecember 31, 2021 , 72% and 84%, respectively, of the TDRs were performing according to their modified terms. No TDR modifications occurred during the year endedDecember 31, 2022 . There was one modification granted during 2021 that resulted in a loan being identified as a TDR. See "Note 4 - Loans," to the financial statements for additional disclosure related to troubled debt restructuring. Non-Performing Assets - Non-performing assets consist of certain restructured loans for which interest rate or other terms have been renegotiated, loans past due 90 days or more still on accrual, loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets. Loans, including impaired loans, are placed on nonaccrual status when they become past due 90 days or more as to principal or interest, unless they are adequately secured and in the process of collection. Loans are considered impaired if full principal or interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral less cost to sell if the loan is collateral dependent. Loans are reviewed on a regular basis and normal collection procedures are implemented when a borrower fails to make a required payment on a loan. If the delinquency on a mortgage loan exceeds 120 days and is not cured through normal collection procedures or an acceptable arrangement is not agreed to with the borrower, management institutes measures to remedy the default, including commencing a foreclosure action. Consumer loans generally are charged off when a loan is deemed uncollectible and often before any available collateral has been disposed. Commercial business and real estate loan delinquencies are handled on an individual basis, generally with the advice of legal counsel. Interest income on loans is recognized on the accrual basis except for those loans placed on nonaccrual status. The accrual of interest on impaired loans is discontinued when management believes, after consideration of economic and business conditions and collection efforts, that the borrowers' financial condition is such that collection of interest is doubtful, which typically occurs after the loan becomes 90 days delinquent. When interest accrual is discontinued, existing accrued interest is reversed and interest income is subsequently recognized only to the extent cash payments are received on well-secured loans. Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until such time as it is sold. New and used automobiles and other motor vehicles acquired as a result of foreclosure are classified as repossessed assets until they are sold. When such property is acquired it is recorded at its fair market value less cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. Subsequent gains and losses are included in non-interest expense. 38
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The following table sets forth information with respect to non-performing assets
as of the dates indicated:
As of December 31,
2022 2021 2020 2019 2018
(dollars in thousands)
Loans on nonaccrual status $ 856 3,124 1,676 1,528 1,991
Troubled debt restructurings on
accrual 133 340 480 475 910
Past due 90 days or more still
on accrual - - - - -
Total non-performing loans and
TDRs on accrual 989 3,464 2,156 2,003 2,901
Real estate acquired through
foreclosure - - 1,765 3,225 3,485
Other repossessed assets - - - - -
Total non-performing assets and
TDRs on accrual $ 989 $ 3,464 $ 3,921 Nonaccrual loans to total loans 0.08 % 0.31 % 0.17 %
0.17 % 0.26 %
Non-performing loans and TDRs
on accrual to total loans 0.09 % 0.35 % 0.22 % 0.22 % 0.38 %
Non-performing assets and TDRs
on accrual to total assets 0.07 % 0.24 % 0.30 % 0.42 % 0.60 %
Allowance for loan losses to
nonaccrual loans 1,522.20 % 369.11 % 742.42 % 548.17 % 446.01 %
Allowance for non-performing
loans $ 18 $ 12 $ 22 $ 48 $ 83
Allowance for non-performing
loans to non-performing loans
and TDRs on accrual 1.82 % 0.35 % 1.02 % 2.40 % 2.86 %
Interest income that would have been recorded if nonaccrual loans were on a
current basis in accordance with their original terms was $265,000 , $287,000 ,
and $288,000 for the years ended December 31, 2022 , 2021, and 2020,
respectively. Nonperforming loans at December 31, 2022 , were $989,000 , or 0.09%
of total loans, at December 31, 2022 , and $3.5 million , or 0.35% of total loans,
at December 31, 2021 .
Allowance for Loan Losses and Provision for Loan Losses - The allowance for loan
losses is established to provide for probable losses on loans that may not be
fully repaid. It is based on management's continuing review and evaluation of
individual loans, loss experience, current economic conditions, risk
characteristics of various categories of loans and such other factors that, in
management's judgment, require current recognition in estimating loan losses.
Based on its assessment of the loan portfolio, management presents a quarterly
review of the allowance for loan losses to the Bank's Board of Directors,
indicating any change in the allowance for loan losses since the last review and
any recommendations as to adjustments in the allowance for loan losses. The
allowance for loan losses is adjusted through charges to earnings in the form of
a provision for loan losses. This assessment is an estimate and is inherently
subjective as it requires estimates that are susceptible to significant revision
as more information becomes available or as events change.
Management utilizes loan grading procedures that result in specific allowance
allocations for the estimated risk of loss. For loans not individually
evaluated, a general allowance allocation is computed using factors developed
over time based on actual loss experience. The specific and general allocations
plus consideration of qualitative factors represent management's estimate of
probable losses contained in the loan portfolio at the evaluation date. Although
the allowance for loan losses is comprised of specific and general allocations,
the entire allowance is available to absorb any credit losses.
A significant portion of the portfolio is comprised of loans secured by real
estate. A decline in the value of the real estate serving as collateral for
loans may impact the Bank's ability to collect those loans. In general,
management obtains updated appraisals on property securing the Bank's loans when
circumstances are warranted such as at the time of renewal or when market
conditions have significantly changed. Management uses qualified licensed
appraisers approved by the Company's Board of Directors. These appraisers
possess prerequisite certifications and knowledge of the local and regional
marketplace.
General Reserve - A general reserve is maintained for each loan type in the loan
portfolio. In determining the amount of the general reserve portion of the
allowance for loan losses, management considers factors such as the Bank's
historical loan loss experience, the growth, composition and diversification of
its loan portfolio, current delinquency levels, loan quality grades, the results
of recent regulatory examinations, and general economic conditions. Based on
these factors, management applies estimated loss percentages to the various
categories of loans, not including any loan that has a specific allowance
allocated to it.
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Specific Reserve - A loan is considered impaired when, based on current
information, it is probable that the Bank will not receive all amounts due in
accordance with the contractual terms of the loan agreement. Once a loan has
been identified as impaired, management measures impairment in accordance with
ASC 310-10, "Impairment of a Loan." Generally, all loans identified as impaired
are reviewed individually on a quarterly basis in order to determine whether a
specific allowance is required. Additionally, specific reserves may be carried
for accruing TDRs in compliance with restructured terms. When management's
measured value of the impaired loan is less than the recorded investment in the
loan, the amount of the impairment is recorded as a specific reserve or
charged-off if the loan is deemed collateral dependent. Loans for which specific
reserves have been provided are excluded from the general reserve calculations
described above.
The following table sets forth an analysis of loan loss experience as of and for
the periods indicated:
As of December 31,
2022 2021 2020 2019 2018
(dollars in thousands)
Balances at beginning of
period $ 11,531 $ 12,443 $ 8,376 $ 8,880 $ 8,202
Loans charged-off:
Real estate 558 2,332 231 322 450
Commercial 31 19 32 37 50
Consumer 249 131 493 663 95
Agriculture - 44 46 266 13
Other - - - - 8
Total charge-offs 838 2,526 802 1,288 616
Recoveries:
Real estate 2,099 228 352 597 1,437
Commercial 38 172 29 106 261
Consumer 75 49 45 75 69
Agriculture 45 15 30 3 15
Other - - 13 3 12
Total recoveries 2,257 464 469 784 1,794
Net charge-offs (recoveries) (1,419 ) 2,062 333 504 (1,178 )
Provision (negative provision)
for loan losses 80 1,150 4,400 - (500 )
Balance at end of period $ 13,030 $ 11,531 $ 12,443 $ 8,376 $ 8,880
Allowance for loan losses to
period-end loans 1.17 % 1.15 % 1.29 % 0.90 % 1.16 %
Net charge-offs (recoveries)
to average loans (0.13 )% 0.22 % 0.03 % 0.06 % (0.16 %)
Allowance for loan losses to
non-performing loans and TDRs
on accrual 1,317.49 % 332.88 % 577.13 % 418.17 % 306.10 %
The loan loss reserve, as a percentage of total loans at December 31, 2022 , was
1.17% compared to 1.15% at December 31, 2021 . The allowance for loan losses to
non-performing loans was 1,317.49% at December 31, 2022 , compared with 332.88%
at December 31, 2021 .
A provision for loan losses of $80,000 was recorded for the year ended
December 31, 2022 , compared to a provision for loan losses of $1.2 million for
2021, and $4.4 million for 2020. The loan loss provision for the year ended
December 31, 2022 was primarily attributable to growth trends within the
portfolio, offset by a recovery of $1.5 million recognized during the third
quarter and its impact on the historical loss percentages. The 2021 loan loss
provisions were attributable to growth trends within the portfolio and net loan
charge-offs impacting historical loss percentages during the periods.
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The following table depicts management's allocation of the allowance for loan
losses by loan type based on the factors previously discussed. Since these
factors and management's assumptions are subject to change, the allocation is
not necessarily predictive of future portfolio performance. The allocation is
made for analytical purposes and is not necessarily indicative of the categories
in which future losses may occur. The total allowance is available to absorb
losses from any segment of loans.
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Allocation of Allowance for Credit Losses
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As of December 31,
2022 2021
Percent of Percent of
Amount of Loans to Total Amount of Loans to Total
Allowance Loans Allowance Loans
(dollars in thousands)
Commercial $ 2,827 20.71 % $ 2,888 22.04 %
Commercial Real Estate :
Construction 1,843 12.16 1,011 7.47
Farmland 782 5.87 840 6.83
Nonfarm nonresidential 4,981 35.23 4,328 34.53
Residential Real Estate :
Multi-family 360 4.07 381 5.01
1-4 Family 1,039 15.02 1,062 16.86
Consumer 591 3.17 538 3.64
Agriculture 604 3.73 480 3.59
Other 3 0.04 3 0.03
Total $ 13,030 100.0 % $ 11,531 100.0 %
Deposits - The Bank attracts both short-term and long-term deposits from the general public by offering a wide range of deposit accounts and interest rates.
The Bank primarily relies on its banking office network to attract and retain deposits in its local markets, as well as deposit listing services, brokered deposits, deposit gathering networks, and the online channel to attract both in and out-of-market deposits. Market interest rates and rates on deposit products offered by competing financial institutions can significantly affect the Bank's ability to attract and retain deposits. During 2022, total deposits decreased$7.9 million compared with 2021. The decrease in deposits for 2022 was primarily in money market and savings accounts, offset by increases in interest-bearing demand deposit accounts and certificate of deposits. AtDecember 31, 2022 , the Bank had$75.1 million in brokered deposits. The Bank had no brokered deposits as ofDecember 31, 2021 . During 2021, total deposits increased$89.1 million compared with 2020. The increase in deposits for 2021 was primarily in interest-bearing demand deposit account balances, as well as money market and non-interest demand deposit accounts. The Bank continues to offer attractively priced deposit products along its product line to allow it to retain deposit customers and reduce interest rate risk during various rising and falling interest rate cycles. The Bank offers savings accounts, interest checking accounts, money market accounts and fixed rate certificates with varying maturities. The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. Management adjusts interest rates, maturity terms, service fees and withdrawal penalties on the Bank's deposit products periodically. The variety of deposit products allows the Bank to compete more effectively in obtaining funds and to respond with more flexibility to the flow of funds away from depository institutions into outside investment alternatives. However, the ability to attract and maintain deposits at acceptable rates will continue to be significantly affected by market conditions. 41
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The following table sets forth the average daily balances and weighted average rates paid for deposits for the periods indicated:
For the Years Ended December 31,
2022 2021 2020
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
(dollars in thousands)
Demand $ 277,981 $ 271,994 $ 215,145
Interest Checking 288,480 0.54 % 233,844 0.27 % 169,808 0.32 %
Money Market 209,331 0.55 190,094 0.34 166,788 0.55
Savings 159,422 0.35 157,283 0.28 111,559 0.48
Certificates of Deposit 262,692 0.73 311,140 0.57 436,083 1.33
Total Deposits $ 1,197,906 $ 1,164,355 $ 1,099,383
Weighted Average Rate 0.43 % 0.30 % 0.71 %
The following table shows at
Maturity Period (in thousands) Three months or less$ 11,772 Three months through six months 69,705 Six months through twelve months 17,655 Over twelve months 7,391 Total$ 106,523 The Bank maintains competitive pricing on its deposit products, which management believes allows it to retain a substantial percentage of the Bank's customers when their time deposits mature. Borrowing - Deposits are the primary source of funds for lending activities, investment activities, and for general business purposes. The Bank also uses borrowings from the FHLB ofCincinnati to supplement the pool of lendable funds, meet deposit withdrawal requirements and manage the terms of liabilities. FHLB borrowings are secured by the Bank's stock in the FHLB, as well as the commercial real estate and first mortgage residential loans under a blanket lien arrangement. AtDecember 31, 2022 , the Bank had$70.0 million in outstanding borrowings from the FHLB and the capacity to increase borrowings by an additional$91.0 million . The FHLB ofCincinnati functions as a central reserve bank providing credit for member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to borrow on the security of such stock and certain of its home mortgages and other assets (principally, securities that are obligations of, or guaranteed by,the United States ) provided that it meets certain standards related to creditworthiness.
The following table sets forth information about the Bank's FHLB borrowings as of and for the periods indicated:
December 31,
2022 2021 2020
(dollars in thousands)
Average balance outstanding $ 50,274 $ 20,152 $ 34,101
Maximum amount outstanding at any month-end
during the period 90,000 20,620 71,376
End of period balance 70,000 20,000
20,623
Weighted average interest rate:
At end of period 4.25 % 0.77 % 0.75 %
During the period 2.31 % 0.76 % 1.09 %
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Junior Subordinated Debentures - At
Liquidation Junior
Amount Subordinated
Trust Debt and
Preferred Investment
Description Securities Issuance Date Interest Rate (1) in Trust Maturity Date
(dollars in thousands)
Statutory Trust I $ 3,000 2/13/2004 3-month LIBOR + 2.85% $ 3,093 2/13/2034
Statutory Trust II 5,000 2/13/2004 3-month LIBOR + 2.85% 5,155 2/13/2034
Statutory Trust III 3,000 4/15/2004 3-month LIBOR + 2.79% 3,093 4/15/2034
Statutory Trust IV 10,000 12/14/2006 3-month LIBOR + 1.67% 10,435 3/01/2037
$ 21,000 $ 21,776 --------------------------------------------------------------------------------
(1) As ofDecember 31, 2022 , 3-month LIBOR was 4.77%. The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debentures at maturity or their earlier redemption at the liquidation preference. The subordinated debentures are redeemable before the maturity date at the Company's option at their principal amount plus accrued interest. AtDecember 31, 2022 , the Company is current on all interest payments. TheFederal Reserve Board rules allow trust preferred securities issued prior toMay 19, 2010 to be included in Tier 1 capital, subject to quantitative and qualitative limits. Currently, no more than 25% of the Company's Tier 1 capital can consist of trust preferred securities and qualifying perpetual preferred stock. To the extent the amount of the Company's trust preferred securities exceeds the 25% limit, the excess would be includable in Tier 2 capital. As ofDecember 31, 2022 , all of the Company's trust preferred securities were included in and comprised 14% of Tier 1 capital. Each of the trusts issuing the trust preferred securities holds junior subordinated debentures issued with an original maturity of 30 years. In the last five years before the junior subordinated debentures mature, the associated trust preferred securities are excluded from Tier 1 capital and included in Tier 2 capital. In addition, the trust preferred securities during this five-year period are amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year before maturity. Subordinated Capital Notes - The Company's subordinated notes mature onJuly 31, 2029 with an optional prepayment date ofJuly 31, 2025 . The notes carry interest at a fixed rate of 5.75% untilJuly 30, 2024 and then convert to variable at three-month LIBOR plus 395 basis points until maturity. The subordinated capital notes qualify as Tier 2 regulatory capital. Capital Stockholders' equity increased$2.9 million to$133.9 million atDecember 31, 2022 , compared with$131.0 million atDecember 31, 2021 . The increase was due primarily to current year net income of$18.3 million , offset by the other comprehensive loss for the year of$14.6 million attributable to the fair value decline in the available for sale investment portfolio driven by rising interest rates and changing credit spreads, and$1.5 million in dividends paid to common shareholders. The following table shows the ratios of common equity Tier 1, Tier 1 capital, total capital to risk-adjusted assets, and Tier 1 leverage for the Bank atDecember 31, 2022 : Basel III Plus Regulatory Well-Capitalized Conservation Minimums Minimums Buffer Limestone Bank
Common equity Tier 1 capital 4.5 % 6.5 % 7.0 % 13.01 % Tier 1 capital 6.0 8.0 8.5 13.01 Total risk-based capital 8.0 10.0 10.5 14.01 Tier 1 leverage ratio 4.0 5.0 - 11.59
Failure to meet minimum capital requirements could result in discretionary actions by regulators that, if taken, could have a materially adverse effect on the Company's financial condition.
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The Basel III rules require a "capital conservation buffer" of 2.5% above the regulatory minimum risk-based capital ratios. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum Basel III levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions without prior regulatory approval.
Liquidity and Capital Resource Management
Liquidity risk arises from the possibility the Company may not be able to satisfy current or future financial commitments, or may become unduly reliant on alternative funding sources. The objective of liquidity risk management is to ensure that the Company meets the cash flow requirements of depositors and borrowers, as well as operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also involves ensuring that cash flow needs are met at a reasonable cost. Management maintains an investment and funds management policy, which identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. The Asset Liability Committee regularly monitors and reviews the Company's liquidity position. Funds are available to the Bank from a number of sources, including the sale of securities in the available for sale investment portfolio, principal pay-downs on loans and mortgage-backed securities, customer deposit inflows, and other wholesale funding. The Bank also borrows from the FHLB to supplement funding requirements. AtDecember 31, 2022 , the Bank had an unused borrowing capacity with the FHLB of$91.0 million . Advances are collateralized by commercial real estate and first mortgage residential loans under a blanket lien arrangement. Borrowing capacity is based on the underlying book value of eligible pledged loans. The Bank also has available on an unsecured basis federal funds borrowing line from a correspondent bank totaling$5.0 million . Management believes the sources of liquidity are adequate to meet expected cash needs for the foreseeable future. Additionally, the Bank may utilize brokered and wholesale deposits to supplement its funding strategy. The Company uses cash on hand to service the subordinated capital notes, junior subordinated debentures, pay dividends to common shareholders, and to provide for operating cash flow needs. The Company's primary source of funding to meet its obligations is dividends from the Bank. AtDecember 31, 2022 , the Bank was eligible to pay$20.4 million of dividends. The Bank paid the Company$7.5 million of dividends during 2022. Under the terms of the Merger Agreement, the Company is precluded from issuing additional common equity, preferred equity, or debt to support cash flow needs and liquidity requirements.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance withU.S. generally accepted accounting principles, which require the measurement of financial position and operating results in historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The Bank has an asset and liability structure that is essentially monetary in nature. As a result, interest rates have a more significant impact on performance than the effects of general levels of inflation. Periods of high inflation are often accompanied by relatively higher interest rates, and periods of low inflation are accompanied by relatively lower interest rates. As market interest rates rise or fall in relation to the rates earned on loans and investments, the value of these assets decreases or increases respectively. Inflation can also impact core non-interest expenses associated with delivering the Bank's services. 44
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Material Cash Requirements and Obligations
The following table summarizes key obligations by maturity date or scheduled payment date and other commitments to make future payments as ofDecember 31, 2022 : More than 1 3 years or One year year but less more but less 5 years or or less than 3 years than 5 years more Total (dollars in thousands) Time deposits$ 233,016 $ 51,132 $ 5,311$ 702 $ 290,161 FHLB borrowing (1) 70,000 - - - 70,000 Operating leases 457 899 873 8,434 10,660 Junior subordinated debentures - - - 21,000 21,000 Subordinated capital notes - - - 25,000 25,000 Total$ 303,473 $ 52,028 $ 6,184$ 55,136 $ 416,821
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(1) Fixed rate borrowings with rates ranging from 4.02% to 4.38%, and maturing in 2023.
Off-Balance Sheet Arrangements
In the normal course of business, the Bank enters into various transactions, which, in accordance with GAAP, are not included in the Company's consolidated balance sheets. The Bank enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The commitments associated with outstanding standby letters of credit and commitments to extend credit as ofDecember 31, 2022 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the Bank's actual future cash funding requirements: More than 1 3 years or One year year but less more but less 5 years or less than 3 years than 5 years or more Total (dollars in thousands)
Commitments to extend credit
30,369$ 48,679 $ 201,698 Standby letters of credit 1,087 4 - - 1,091 Total$ 60,719 $ 63,022 $ 30,369 $ 48,679 $ 202,789 Commitments to Extend Credit - The Bank enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Bank's commitments to extend credit are contingent upon borrowers maintaining specific credit standards at the time of loan funding. The Bank minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Standby Letters of Credit - Standby letters of credit are written conditional commitments the Bank issues to guarantee the performance of a borrower to a third party. If the borrower does not perform in accordance with the terms of the agreement with the third party, the Bank may be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Bank would be entitled to seek recovery from the borrower. The Bank's policies generally require that standby letter of credit arrangements be underwritten in a manner consistent with a loan of similar characteristics.
Risk Participation Agreements - In connection with the purchase of loan
participations, the Bank has entered into risk participation agreements, which
had notional amounts totaling
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