METROCITY BANKSHARES, INC. The purpose of this discussion and analysis is to focus on significant changes in the financial condition ofMetroCity Bancshares, Inc. and our wholly owned subsidiary,Metro City Bank , fromDecember 31, 2022 throughMarch 31, 2023 and on our results of operations for the three months endedMarch 31, 2023 and 2022. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto for the year endedDecember 31, 2022 included in our Annual Report on Form 10-K, and information presented elsewhere in this Quarterly Report on Form 10-Q, particularly the unaudited consolidated financial statements and related notes appearing in Item 1.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as "may," "might," "should," "could," "predict," "potential," "believe," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "strive," "projection," "goal," "target," "outlook," "aim," "would," "annualized" and "outlook," or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors discussed elsewhere in this quarterly report and the following:
The impact of current and future economic and market conditions generally
(including seasonality) and in the financial services industry, nationally and
within our primary market areas, including the effects of inflationary
? pressures, changes in interest rates, slowdowns in economic growth, and the
potential for high unemployment rates, as well as the financial stress on
borrowers and changes to customer and client behavior (including the velocity
of loan repayment) and credit risk as a result of the foregoing;
changes in interest rate environment (including changes to the federal funds
rate, the level and composition of deposits (as well as the cost of, and
competition for, deposits), loan demand, liquidity and the values of loan
? collateral, securities and market fluctuations, and interest rate sensitive
assets and liabilities), and competition in our markets may result in increased
funding costs or reduced earning assets yields, thus reducing our margins and
net interest income;
recent adverse developments in the banking industry highlighted by high-profile
bank failures and the potential impact of such developments on customer
? confidence, liquidity and regulatory responses to these developments (including
increases in the cost of our deposit insurance assessments), our ability to
effectively manage our liquidity risk and any growth plans and the availability
of capital and funding;
our ability to comply with applicable capital and liquidity requirements,
? including our ability to generate liquidity internally or raise capital on
favorable terms, including continued access to the debt and equity capital
markets; the risk that a future economic downturn and contraction, including a
recession, could have a material adverse effect on our capital, financial
? condition, credit quality, results of operations and future growth, including
the risk that the strength of the current economic environment could be
weakened by the continued impact of rising interest rates, supply chain
challenges and inflation;
33
Table of Contents
factors that can impact the performance of our loan portfolio, including real
? estate values and liquidity in our primary market areas, the financial health
of our borrowers and the success of various projects that we finance;
? concentration of our loan portfolio in real estate loans;
? changes in the prices, values and sales volumes of commercial and residential
real estate;
weakness in the real estate market, including the secondary residential
? mortgage market, which can affect, among other things, the value of collateral
securing mortgage loans, mortgage loan originations and delinquencies, profits
on sales of mortgage loans, and the value of mortgage servicing rights;
credit and lending risks associated with our construction and development,
? commercial real estate, commercial and industrial, residential real estate and
SBA loan portfolios;
negative impact in our mortgage banking services, including declines in our
mortgage originations or profitability due to rising interest rates and
? increased competition and regulation, the Bank's or third party's failure to
satisfy mortgage servicing obligations, loan modificaitons, the effects of
judicial or regulatory requirements or guidance, and the possibility of the
Bank being required to repurchase mortgage loans or indemnify buyers;
our ability to attract sufficient loans that meet prudent credit standards,
? including in our construction and development, commercial and industrial
and
owner-occupied commercial real estate loan categories;
our ability to attract and maintain business banking relationships with
? well-qualified businesses, real estate developers and investors with proven
track records in our market areas;
our ability to successfully manage our credit risk and the sufficiency of our
? allowance for credit losses ("ACL"), including the implementation of the
Current Expected Credit Losses ("CECL") model;
? the adequacy of our reserves (including ACL) and the appropriateness of our
methodology for calculating such reserves;
? our ability to successfully execute our business strategy to achieve profitable
growth;
? the concentration of our business within our geographic areas of operation and
to the general Asian-American population within our primary market areas;
? our focus on small and mid-sized businesses;
? our ability to manage our growth;
? our ability to increase our operating efficiency;
? significant turbulence or a disruption in the capital or financial markets and
the effect of a fall in stock market prices on our investment securities;
? risks that our cost of funding could increase, in the event we are unable to
continue to attract stable, low-cost deposits and reduce our cost of deposits;
inability of our risk management framework to effectively mitigate credit risk,
? interest rate risk, liquidity risk, price risk, compliance risk, operational
risk, strategic risk and reputational risk;
? our ability to maintain expenses in line with current projections;
34
Table of Contents
? the makeup of our asset mix and investments;
external economic, political and/or market factors, such as changes in monetary
and fiscal policies and laws, including the interest rate policies of the
?
obligations, inflation or deflation, changes in the demand for loans, and
fluctuations in consumer spending, borrowing and savings habits, which may have
an adverse impact on our financial condition;
? uncertainty related to the transition away from the London Inter-bank Offered
Rate ("LIBOR");
? the institution and outcome of litigation and other legal proceeding against us
or to which we may become subject to;
? the impact of recent and future legislative and regulatory changes;
? examinations by our regulatory authorities;
continued or increasing competition from other financial institutions, credit
? unions, and non-bank financial services companies (including fintech
companies), many of which are subject to different regulations than we are;
? challenges arising from unsuccessful attempts to expand into new geographic
markets, products, or services;
? restraints on the ability of the Bank to pay dividends to us, which could limit
our liquidity;
increased capital requirements imposed by banking regulators, which may require
? us to raise capital at a time when capital is not available on favorable terms
or at all;
? a failure in the internal controls we have implemented to address the risks
inherent to the business of banking;
inaccuracies in our assumptions about future events, which could result in
? material differences between our financial projections and actual financial
performance;
? changes in our management personnel or our inability to retain motivate and
hire qualified management personnel;
the dependence of our operating model on our ability to attract and retain
? experienced and talented bankers in each of our markets, which may be impacted
as a result of labor shortages;
? our ability to identify and address cyber-security risks, fraud and systems
errors;
? disruptions, security breaches, or other adverse events, failures or
interruptions in, or attacks on, our information technology systems;
? disruptions, security breaches, or other adverse events affecting the
third-party vendors who perform several of our critical processing functions;
? an inability to keep pace with the rate of technological advances due to a lack
of resources to invest in new technologies;
? fraudulent and negligent acts by our clients, employees or vendors and our
ability to identify and address such acts;
? risks related to potential acquisitions;
35
Table of Contents
? the impact of any claims or legal actions to which we may be subject, including
any effect on our reputation;
compliance with governmental and regulatory requirements, including the
? Dodd-Frank Act and others relating to banking, consumer protection, securities
and tax matters, and our ability to maintain licenses required in connection
with commercial mortgage origination, sale and servicing operations;
? changes in the scope and cost of
insurance and other coverage;
? changes in our accounting standards;
? changes in tariffs and trade barriers;
? changes in federal tax law or policy;
the effects of war or other conflicts (including
?
emergencies, epidemics or pandemics, climate changes, or other catastrophic
events that may affect general economic conditions;
risks related to environmental, social and governance ("ESG") strategies and
? initiatives, the scope and pace of which could alter the Company's reputation
and shareholder, associate, customer and third-party affiliations; and
other risks and factors identified in our Annual Report on Form 10-K for the
? year ended
"Risk Factors", and detailed from time to time in our other filings with the
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Quarterly Report on Form 10-Q. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this Quarterly Report on Form 10-Q. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
CECL Adoption
OnJanuary 1, 2023 , the Company adopted ASC Topic 326 which replaces the incurred loss approach for measuring credit losses with an expected loss model, referred to the current expected credit loss ("CECL") model. CECL applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance-sheet credit exposures, which include, but are not limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees. The adoption of this guidance resulted in an increase of the allowance for credit losses of$5.1 million , the creation of an allowance for unfunded commitments of$239,000 and a reduction of retained earnings of$3.9 million , net of the increase in deferred tax assets of$1.4 million . Going forward, the impact of utilizing the CECL approach to calculate the allowance for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the provision for credit losses, and therefore, greater volatility to our reported earnings. See Note 1 and Note 3 of our consolidated financial statements as ofMarch 31, 2023 , included elsewhere in this Form 10-Q, for additional information on the on the allowance for credit losses and the allowance for unfunded commitments. 36
Table of Contents
Critical Accounting Policies and Estimates
Our accounting and reporting estimates conform withU.S. GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We consider accounting estimates that can (1) be replaced by other reasonable estimates and/or (2) changes to an estimate from period to period that have a material impact on the presentation of our financial condition, changes in financial condition or results of operations as well as (3) those estimates that require significant and complex assumptions about matters that are highly uncertain to be critical accounting estimates. We consider our critical accounting policies to include the allowance for credit losses, servicing assets, fair value of financial instruments and income taxes. Critical accounting estimates include a high degree of uncertainty in the underlying assumptions. Management bases its estimates on historical experience, current information and other factors deemed relevant. The development, selection and disclosure of our critical accounting estimates are reviewed with the Audit Committee of the Company's Board of Directors. Actual results could differ from these estimates. For additional information regarding critical accounting policies, refer to "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" and Note 1 of our consolidated financial statements as ofDecember 31, 2022 in the Company's 2022 Form 10-K. Other than our methodology of estimating allowance for credit losses (mentioned below), there have been no significant changes in the Company's application of critical accounting policies sinceDecember 31, 2022 . Reserve for Credit Losses
A consequence of lending activities is that we may incur credit losses. The
amount of such losses will vary depending upon the risk characteristics of the
loan lease portfolio as affected by economic conditions such as rising interest
rates and the financial performance of borrowers.
The reserve for credit losses consists of the allowance for credit losses
("ACL") and the allowance for unfunded commitments. As a result of our January
1, 2023 adoption of ASU No. 2016-13, and its related amendments, our methodology
for estimating the reserve for credit losses changed significantly from December
31, 2022 . The standard replaced the "incurred loss" approach with an "expected
loss" approach known as the Current Expected Credit Losses ("CECL"). The CECL
approach requires an estimate of the credit losses expected over the life of an
exposure (or pool of exposures). It removes the incurred loss approach's
threshold that delayed the recognition of a credit loss until it was "probable"
a loss event was "incurred."
The estimate of expected credit losses under the CECL approach is based on
relevant information about past events, current conditions, and reasonable and
supportable forecasts that affect the collectability of the reported amounts.
Historical loss experience is generally the starting point for estimating
expected credit losses. We then consider whether the historical loss experience
should be adjusted for loan-specific risk characteristics or current conditions
at the reporting date that did not exist over the period from which historical
experience was used. Finally, we consider forecasts about future economic
conditions that are reasonable and supportable. The allowance for unfunded
commitments represents the expected credit losses on off-balance sheet
commitments such as unfunded commitments to extend credit. This allowance is
estimated by loan segment at each balance sheet date under the CECL model using
the same methodologies as portfolio loans, taking into consideration the
likelihood that funding will occur.
Management's evaluation of the appropriateness of the reserve for credit losses
is often the most critical of accounting estimates for a financial institution.
Our determination of the amount of the reserve for credit losses is a critical
accounting estimate as it requires significant reliance on the credit risk
rating we assign to individual borrowers, the use of estimates and significant
judgment as to the amount and timing of expected future cash flows, reliance on
historical loss rates on homogenous portfolios, consideration of our
quantitative and qualitative evaluation of economic factors, and the reliance on
our reasonable and supportable forecasts. The reserve for credit losses
attributable to each portfolio segment also includes an amount for inherent
risks not reflected in the historical analyses. Relevant factors include, but
are not limited to, concentrations of credit risk (geographic, large borrower,
and industry), local/regional economic trends and conditions,
37
Table of Contents
changes in underwriting standards, changes in collateral values, experience and depth of lending staff, trends in delinquencies, and the volume and terms of loans. OverviewMetroCity Bankshares, Inc. is a bank holding company headquartered in theAtlanta metropolitan area. We operate through our wholly-owned banking subsidiary,Metro City Bank , aGeorgia state-chartered commercial bank that was founded in 2006. We currently operate 19 full-service branch locations in multi-ethnic communities inAlabama ,Florida ,Georgia ,New York ,New Jersey ,Texas andVirginia . As ofMarch 31, 2023 , we had total assets of$3.42 billion , total loans of$3.01 billion , total deposits of$2.64 billion and total shareholders' equity of$353.0 million . We are a full-service commercial bank focused on delivering personalized service in an efficient and reliable manner to the small to medium-sized businesses and individuals in our markets, predominantly Asian-American communities in growing metropolitan markets in theEastern U.S. andTexas . We offer a suite of loan and deposit products tailored to meet the needs of the businesses and individuals already established in our communities, as well as first generation immigrants who desire to establish and grow their own businesses, purchase a home, or educate their children inthe United States . Through our diverse and experienced management team and talented employees, we are able to speak the language of our customers and provide them with services and products in a culturally competent manner. 38 Table of Contents Selected Financial Data The following table sets forth unaudited selected financial data for the most recent five quarters. This data should be read in conjunction with the unaudited consolidated financial statements and accompanying notes included in Item 1 and the information contained in this Item 2. As of or
for the Three Months Ended
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands, except per
share data) 2023 2022 2022 2022 2022
Selected income statement data:
Interest income $ 45,965 $ 43,945 $ 38,297 $ 33,025 $ 31,953
Interest expense 19,732 14,995 8,509 2,805 1,300
Net interest income 26,233 28,950 29,788 30,220 30,653Provision for credit losses - (1,168)
(1,703) - 104
Noninterest income 6,016 1,794 5,101 4,653 7,656
Noninterest expense 10,679 12,379 12,688 13,119 12,179
Income tax expense 5,840 9,383 7,011 5,654 6,597
Net income 15,730 10,180 16,893 16,100 19,429
Per share data:
Basic income per share $ 0.63 $ 0.40 $ 0.66 $ 0.63 $ 0.76
Diluted income per share $ 0.62 $ 0.40 $ 0.66 $ 0.63 $ 0.76
Dividends per share $ 0.18 $ 0.15 $ 0.15 $ 0.15 $ 0.15 Book value per share (at period end)
25,370,417 25,451,125 25,465,236
Weighted average diluted shares 25,405,855 25,560,138 25,702,023 25,729,156 25,719,035
Performance ratios:
Return on average assets 1.87 % 1.19 % 2.07 % 2.16 % 2.52 %
Return on average equity 18.09 11.57
20.56 20.65 26.94
Dividend payout ratio 28.98 37.55 22.75 23.85 19.76
Yield on total loans 5.85 5.50 5.11 4.95 5.00Yield on average earning assets 5.77 5.43 4.94 4.65 4.34 Cost of average interest bearing liabilities 3.30 2.49 1.51 0.56 0.24 Cost of deposits 3.48 2.61 1.48 0.55 0.27 Net interest margin 3.30 3.58 3.84 4.26 4.16 Efficiency ratio(1) 33.11 40.26 36.37 37.62 31.79 Asset quality data (at period end): Net charge-offs/(recoveries) to average loans held for investment (0.00) % (0.01) % (0.00) % (0.00) % 0.06 % Nonperforming assets to gross loans and OREO 0.64 0.80 1.09 1.22 0.63 ACL to nonperforming loans 101.22 68.88 53.25 54.79 134.39 ACL to loans held for investment 0.63 0.45 0.50 0.60 0.66 Balance sheet and capital ratios: Gross loans held for investment to deposits 114.27 % 114.94 % 116.21 % 115.86 % 105.72 % Noninterest bearing deposits to deposits 21.83 22.95 23.43 25.87 25.84 Investment securities to assets 0.87 0.86 0.91 1.02 1.11 Common equity to assets 10.32 10.20 10.42 10.20 9.88 Leverage ratio 9.72 9.57 9.90 10.31 9.46 Common equity tier 1 ratio 16.55 15.99 16.18 16.70 17.24 Tier 1 risk-based capital ratio 16.55 15.99 16.18 16.70 17.24 Total risk-based capital ratio 17.51 16.68 16.94 17.60 18.22 Mortgage and SBA loan data: Mortgage loans serviced for others$ 506,012 $ 526,719 $ 550,587 $ 589,500 $ 605,112 Mortgage loan production 43,335 88,045 255,662 326,973 162,933 Mortgage loan sales - - - 37,928 56,987 SBA loans serviced for others 485,663 465,120
489,120 504,894 528,227
SBA loan production 15,352 42,419 22,193 21,407 50,689
SBA loan sales 36,458 - 8,588 - 22,898
(1) Represents noninterest expense divided by total revenue (net interest income
and total noninterest income).
39
Table of Contents
Recent Industry Developments
During the first quarter of 2023, the banking industry experienced significant
volatility with multiple high-profile bank failures and industry wide concerns
related to liquidity, deposit outflows, uninsured deposit concentrations,
unrealized securities losses and eroding consumer confidence in the banking
system. Despite these negative industry developments, the Company's liquidity
position and balance sheet remains robust. The Company's total deposits only
decreased by 0.9% as compared to December 31, 2022 , to $2.64 billion at March
31, 2023 as we experienced minimal deposit outflow in the first quarter. The
Company's uninsured deposits represented 31.9% of total deposits at March 31,
2023 compared to 32.5% of total deposits at December 31, 2022 . The Company also
took a number of preemptive actions, which included proactive outreach to
clients and actions to maximize its funding sources in response to these recent
developments. Furthermore, the Company's capital remains strong with common
equity Tier 1 and total capital ratios of 16.55% and 17.51%, respectively,as ofMarch 31, 2023 . Results of Operations We recorded net income of$15.7 million for the three months endedMarch 31, 2023 compared to$19.4 million for the same period in 2022, a decrease of$3.7 million , or 19.0%. Basic and diluted earnings per common share for the three months endedMarch 31, 2023 was$0.63 and$0.62 compared to$0.76 for both the basic and diluted earnings per common share for the same period in 2022.
Interest Income
Interest income totaled$46.0 million for the three months endedMarch 31, 2023 , an increase of$14.0 million , or 43.9%, from the three months endedMarch 31, 2022 , primarily due to an increase in average loan balances of$498.0 million coupled with an 85 basis points increase in the loan yield. The increase in average loans is due to an increase of$8.5 million in average construction and development loans, an increase of$123.0 million in average commercial real estate loans and an increase of$384.9 million in average residential mortgage loans, offset by a decrease of$18.3 million in commercial and industrial loans. As compared to the three months endedMarch 31, 2022 , the yield on average interest-earning assets increased by 143 basis points to 5.77% from 4.34% with the yield on average loans increasing by 85 basis points and the yield on average total investments increasing by 405 basis points.
Interest Expense
Interest expense for the three months endedMarch 31, 2023 increased$18.4 million , or 1,417.8%, to$19.7 million compared to interest expense of$1.3 million for the three months endedMarch 31, 2022 , primarily due to a 321 basis points increase in deposit costs and a 223 basis points increase in borrowing costs coupled with a$308.5 million increase in average interest-bearing deposit balances. The 321 basis points increase in deposit costs included a 375 basis point increase in the yield on average money market deposits and a 290 basis points increase in the yield on average time deposits. Average time deposits increased by$435.6 million while average money market deposits decreased by$106.8 million .
Average borrowings outstanding for the three months ended
Net Interest Margin
The net interest margin for the three months endedMarch 31, 2023 decreased by 86 basis points to 3.30% from 4.16% for the three months endedMarch 31, 2022 , primarily due to a 306 basis point increase in the cost of average interest-bearing liabilities of$2.43 billion , offset by a 143 basis point increase in the yield on average interest-earning assets of$3.23 billion . Average earning assets for the three months endedMarch 31, 2023 increased by$240.0 million from the same period in 2022, primarily due to a$498.0 million increase in average loans, offset by a$254.3 million decrease in average interest-earning cash accounts. Average interest-bearing liabilities for the three months endedMarch 31, 2023 increased by$243.3 million from the same period in 2022, driven by an increase in average interest-bearing deposits of$308.5 million , offset by a decrease in average borrowings of$65.2 million . 40 Table of Contents
Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes on both volume and mix and pricing decisions, and external factors include changes in market interest rates, competition and the shape of the interest rate yield curve. The decline in our net interest margin is primarily the result of our increasing deposit costs.
Average Balances, Interest and Yields
The following tables present, for the three months endedMarch 31, 2023 and 2022, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Three Months Ended March 31, 2023 2022 Average Interest and Yield / Average Interest and Yield /
(Dollars in thousands) Balance Fees Rate Balance Fees Rate Earning Assets: Federal funds sold and other investments(1)$ 145,354 $ 1,805 5.04 %$ 399,642 $ 365 0.37 % Investment securities 32,952 178 2.19 36,842 129 1.42 Total investments 178,306 1,983 4.51 436,484 494 0.46 Construction and development 39,097 523 5.43 30,583 377 5.00 Commercial real estate 672,109 13,979 8.44 549,132 7,887 5.82 Commercial and industrial 47,105 1,030 8.87 65,450 1,076 6.67 Residential real estate 2,291,699 28,422 5.03 1,906,847 22,074 4.69 Consumer and other 166 28 68.41 206 45 88.59 Gross loans(2) 3,050,176 43,982 5.85 2,552,218 31,459 5.00 Total earning assets 3,228,482 45,965 5.77 2,988,702 31,953 4.34 Noninterest-earning assets 175,110 142,042 Total assets 3,403,592 3,130,744 Interest-bearing liabilities: NOW and savings deposits 166,962 648 1.57 187,259 75 0.16 Money market deposits 978,954 9,659 4.00 1,085,751 658 0.25 Time deposits 876,803 7,069 3.27 441,228 406 0.37 Total interest-bearing deposits 2,022,719 17,376 3.48 1,714,238 1,139 0.27 Borrowings 403,170 2,356 2.37 468,348 161 0.14 Total interest-bearing liabilities 2,425,889 19,732 3.30 2,182,586 1,300 0.24 Noninterest-bearing liabilities: Noninterest-bearing deposits 578,978 588,343 Other noninterest-bearing liabilities 46,138 67,301 Total noninterest-bearing liabilities 625,116 655,644 Shareholders' equity 352,587 292,514 Total liabilities and shareholders' equity$ 3,403,592 $ 3,130,744 Net interest income$ 26,233 $ 30,653 Net interest spread 2.47 4.10 Net interest margin 3.30 4.16
(1) Includes income and average balances for term federal funds, interest-earning
cash accounts, and other miscellaneous earning assets.
(2) Average loan balances include nonaccrual loans and loans held for sale.
41
Table of Contents
Rate/Volume Analysis
Increases and decreases in interest income and interest expense result from
changes in average balances (volume) of interest-earning assets and
interest-bearing liabilities, as well as changes in average interest rates. The
following table sets forth the effects of changing rates and volumes on our net
interest income during the period shown. Information is provided with respect to
(i) effects on interest income attributable to changes in volume (change in
volume multiplied by prior rate) and (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume).
Change applicable to both volumes and rate have been allocated to volume.
Three Months Ended March 31, 2023 Compared to Three Months
Ended March 31, 2022
Increase (Decrease) Due to Change in:
(Dollars in thousands) Volume Yield/Rate Total Change
Earning assets:
Federal funds sold and other investments(1) $ (47) $
1,528 $ 1,481
Investment securities (138) 146 8
Total investments (185) 1,674 1,489Construction and development 76
70 146
Commercial real estate 1,852 4,240 6,092
Commercial and industrial (359) 313 (46)
Residential real estate 4,661 1,687 6,348
Consumer and Other (17) - (17)
Gross loans(2) 6,213 6,310 12,523
Total earning assets 6,028 7,984 14,012
Interest-bearing liabilities:
NOW and savings deposits (13) 586 573
Money market deposits (116) 9,117 9,001
Time deposits 1,125 5,538 6,663Total interest-bearing deposits 996 15,241 16,237 Borrowings (305) 2,500 2,195 Total interest-bearing liabilities 691
17,741 18,432 Net interest income$ 5,337 $ (9,757) $ (4,420)
(1) Includes income and average balances for term federal funds, interest-earning
cash accounts, and other miscellaneous earning assets.
(2) Average loan balances include nonaccrual loans and loans held for sale.
Provision for Credit Losses
The provision for credit losses reflects our internal calculation and judgment of the appropriate amount of the allowance for credit losses. The adoption of ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" or "CECL" has significantly changed the methodology of how we measure credit losses (see Note 1 to the Consolidated Financial Statements for more information). We maintain the allowance for credit losses at levels we believe are appropriate to cover our estimate of expected credit losses over the life of loans in the portfolio as of the end of the reporting period. The allowance for credit losses is determined through detailed quarterly analyses of our loan portfolio. The allowance for credit losses is based on our loss experience, changes in the economic environment, reasonable and supportable forecasts, as well as an ongoing assessment of credit quality and environmental factors not reflective in historical loss rates. Additional qualititavive factors that are considered in determining the amount of the allowance for credit losses are concentrations of credit risk (geographic, large borrower, and industry), local/regional economic trends and conditions, changes in underwriting standards, changes in collateral value, experience and depth of lending staff, trends in delinquencies, and the volume and terms of loans. We recorded no provision for credit losses during the three months endedMarch 31, 2023 compared to provision expense of$104,000 during the same period in 2022. Our ACL forecast outlook was relatively stable between theJanuary 1, 2023 CECL implementation date and the period endedMarch 31, 2023 . This resulted in only a slight increase in estimated reserves; however, the increase was offset by the decline in loan balances so no provision for credit losses was 42
Table of Contents
needed. Our ACL as a percentage of gross loans for the periods endedMarch 31, 2023 and 2022 was 0.63% and 0.66%, respectively. Our ACL as a percentage of gross loans is relatively lower than our peers due to our high percentage of residential mortgage loans, which tend to have lower allowance for credit loss ratios compared to other commercial or consumer loans due to their low LTVs.
See the section captioned "Allowance for Credit Losses" elsewhere in this document for further analysis of our provision for credit losses.
Noninterest Income
Noninterest income for the three months endedMarch 31, 2023 was$6.0 million , a decrease of$1.6 million , or 21.4%, compared to$7.7 million for the three months endedMarch 31, 2022 . The following table sets forth the major components of our noninterest income for the three months endedMarch 31, 2023 and 2022: Three Months Ended March 31, (Dollars in thousands) 2023 2022 $ Change % Change Noninterest income: Service charges on deposit accounts$ 449 $ 481 $ (32) (6.7) % Other service charges, commissions and fees 874 2,159 (1,285) (59.5) Gain on sale of residential mortgage loans - 1,211 (1,211) 100.0 Mortgage servicing income, net (96) 101 (197) 195.0 Gain on sale of SBA loans 1,969 1,568 401 25.6 SBA servicing income, net 1,814 1,644 170 10.3 Other income 1,006 492 514 104.5 Total noninterest income$ 6,016 $ 7,656 $ (1,640) (21.4) %
Service charges on deposit accounts decreased
Other service charges, commissions and fees decreased$1.3 million , or 59.5%, to$874,000 for the three months endedMarch 31, 2023 compared to$2.2 million for the three months endedMarch 31, 2022 . This decrease was mainly attributable to lower application, processing, underwriting and origination fees earned from our origination of residential mortgage loans as mortgage volume declined during the three months endedMarch 31, 2023 compared to the same period in 2022. Mortgage loan originations totaled$43.3 million during the three months endedMarch 31, 2023 compared to$162.9 million during the same period in 2022. Total gain on sale of loans was$2.0 million for the three months endedMarch 31, 2023 compared to$2.8 million for the same period of 2022, a decrease of$810,000 , or 29.1%. We recorded no gain on sale of residential mortgage loans during the three months endedMarch 31, 2023 as no residential mortgage loans were sold during the period. Gain on sale of residential mortgage loans totaled$1.2 million for the three months endedMarch 31, 2022 as we sold$57.0 million in residential mortgage loans during the period with an average premium of 2.13%. Gain on sale of SBA loans totaled$2.0 million for the three months endedMarch 31, 2023 compared to$1.6 million for the same period in 2022. We sold$36.5 million in SBA loans during the three months endedMarch 31, 2023 with average premiums of 6.80%. We sold$22.9 million in SBA loans during the three months endedMarch 31, 2022 with average premiums of 9.00%. Mortgage loan servicing income, net of amortization, decreased by$197,000 , or 195.0%, to an expense balance of$96,000 during the three months endedMarch 31, 2023 compared to income of$101,000 for the same period of 2022. The changes in mortgage loan servicing income were primarily due to decreases in mortgage servicing fees and capitalized mortage servicing assets, offset by the decrease in mortgage servicing amortization. Included in mortgage loan servicing 43
Table of Contents
income for the three months endedMarch 31, 2023 were$672,000 in mortgage servicing fees compared to$923,000 for the same period in 2022 and capitalized mortgage servicing assets of$0 for the three months endedMarch 31, 2023 compared to$413,000 for the same period in 2022. These amounts were offset by mortgage loan servicing asset amortization of$768,000 for the three months endedMarch 31, 2023 compared to$1.3 million during the same period in 2022. During the three months endedMarch 31, 2023 , we did not record a fair value impairment on our mortgage servicing assets compared to a fair value impairment recovery of$75,000 recorded during the three months endedMarch 31, 2022 . Our total residential mortgage loan servicing portfolio was$506.0 million atMarch 31, 2023 compared to$605.1 million atMarch 31, 2022 . SBA servicing income net increased by$170,000 , or 10.3%, to$1.8 million for the three months endedMarch 31, 2023 compared to$1.6 million for the three months endedMarch 31, 2022 . Our total SBA loan servicing portfolio was$485.7 million as ofMarch 31, 2023 compared to$528.2 million as ofMarch 31, 2022 . Our SBA servicing rights are carried at fair value and the inputs used to calculate fair value change from period to period. During the three months endedMarch 31, 2023 we recorded a$708,000 fair value increase to our SBA servicing rights compared to a$323,000 increase to our SBA servicing rights during the three months endedMarch 31, 2022 . Other noninterest income increased by$514,000 , or 104.5%, to$1.0 million for the three months endedMarch 31, 2023 compared to$492,000 for the three months endedMarch 31, 2022 . The increase was mainly due to a gain on sale of foreclosed real estate of$547,000 recorded during the three months endedMarch 31, 2023 compared to a loss on sale of$15,000 recorded during the same period in 2022. The largest component of other noninterest income is the income on bank owned life insurance which totaled$435,000 and$404,000 for the three months endedMarch 31, 2023 and 2022, respectively.
Noninterest Expense
Noninterest expense for the three months endedMarch 31, 2023 was$10.7 million compared to$12.1 million for the three months endedMarch 31, 2022 , a decrease of$1.5 million , or 12.3%. The following table sets forth the major components of our noninterest expense for the three months endedMarch 31, 2023 and 2022: Three Months Ended March 31, (Dollars in thousands ) 2023 2022 $ Change % Change Noninterest Expense: Salaries and employee benefits$ 6,366 $ 7,096 $ (730) (10.3) % Occupancy and equipment 1,214 1,227 (13) (1.1) Data processing 275 277 (2) (0.7) Advertising 146 150 (4) (2.7) Other expenses 2,678 3,429 (751) (21.9) Total noninterest expense$ 10,679 $ 12,179 $ (1,500) (12.3) %
Salaries and employee benefits expense for the three months endedMarch 31, 2023 was$6.4 million compared to$7.1 million for the three months endedMarch 31, 2022 , a decrease of$730,000 , or 10.3%. This decrease was partially attributable to lower commissions paid to our loan officers as loan volume declined during the three months endedMarch 31, 2023 . Occupancy and equipment expense for the three months endedMarch 31, 2023 was$1.2 million compared to$1.2 million for the three months endedMarch 31, 2022 , a slight decrease of$13,000 , or 1.1%. This decrease was partially due to lower depreciation expense.
Data processing expenses for the three months ended
Advertising expenses for the three months ended
44
Table of Contents
Other expenses for the three months endedMarch 31, 2023 were$2.7 million compared to$3.4 million for the three months endedMarch 31, 2022 , a decrease of$751,000 , or 21.9%. This decrease was primarily due to lowerFDIC deposit insurance premiums and security expense, as well as fair value gains on our equity securities, partially offset by higher other real estate owned expenses. Included in other expenses for the three months endedMarch 31, 2023 and 2022 were directors' fees of approximately$137,000 and$139,000 , respectively.
Income Tax Expense
Income tax expense for the three months endedMarch 31, 2023 and 2022 was$5.8 million and$6.6 million , respectively. The Company's effective tax rates were 27.1% and 25.3% for the three months endedMarch 31, 2023 and 2022, respectively. InAugust 2022 , the Inflation Reduction Act of 2022 (the "IRA") was signed into law, creating a 15% corporate alternative minimum tax on profits of corporations based on average annual adjusted financial statement income effective for tax years beginningJanuary 1, 2023 . We do not anticipate a material impact on our financial position or results of operations from the IRA.
Financial Condition
Total assets decreased$8.2 million , or 0.2%, to$3.42 billion atMarch 31, 2023 as compared to$3.43 billion atDecember 31, 2022 . The decrease in total assets was primarily attributable to decreases in loans of$43.7 million , federal funds sold of$20.6 million , interest rate derivatives of$4.8 million and foreclosed real estate of$3.6 million , as well as an increase in the allowance for credit losses of$5.1 million , partially offset by increases in cash and due from banks of$65.2 million and other assests of$2.7 million .
Loans
Gross loans decreased$44.0 million , or 1.4%, to$3.02 billion as ofMarch 31, 2023 as compared to$3.07 billion as ofDecember 31, 2022 . Our loan decline during the three months endedMarch 31, 2023 was comprised of an increase of$1.4 million , or 3.0%, in construction and development loans, a decrease of$17.3 million , or 2.6%, in commercial real estate loans, a decrease of$7.0 million , or 13.1%, in commercial and industrial loans, a decrease of$21.0 million , or 0.9%, in residential real estate loans and a decrease of$166,000 , or 76.9%, in consumer and other loans. There were no loans classified as held for sale as ofMarch 31, 2023 orDecember 31, 2022 .
The following table presents the ending balance of each major category in our loan portfolio held for investment at the dates indicated.
March 31, 2023 December 31, 2022
(Dollars in thousands) Amount % of Total Amount % of Total
Construction and development $ 49,209 1.6 % $ 47,779 1.6 %
Commercial real estate 639,951 21.2 % 657,246 21.4 %
Commercial and industrial 46,208 1.5 % 53,173 1.7 %
Residential real estate 2,285,902 75.7 % 2,306,915 75.3 %
Consumer and other 50 - % 216 - %
Gross loans $ 3,021,320 100.0 % $ 3,065,329 100.0 %
Less unearned income (9,300) (9,640)Total loans held for investment$ 3,012,020
$ 3,055,689 SBA Loan Servicing
As ofMarch 31, 2023 andDecember 31, 2022 , we serviced$485.7 million and$465.1 million , respectively, in SBA loans for others. We carried a servicing asset of$7.8 million and$7.1 million atMarch 31, 2023 andDecember 31, 2022 , respectively. See Note 4 of our consolidated financial statements as ofMarch 31, 2023 , included elsewhere in this 45
Table of Contents
Form 10-Q, for additional information on the activity for SBA loan servicing
rights for the three months ended
Residential Mortgage Loan Servicing
As ofMarch 31, 2023 , we serviced$506.0 million in residential mortgage loans for others compared to$526.7 million as ofDecember 31, 2022 . We carried a servicing asset, net of amortization, of$3.2 million and$4.0 million atMarch 31, 2023 andDecember 31, 2022 , respectively. Amortization relating to the mortgage loan servicing asset was$768,000 for the three months endedMarch 31, 2023 compared to$1.3 million for the same period in 2022. During the three months endedMarch 31, 2023 , we did not record a fair value impairment on our mortgage servicing asset compared to a$75,000 fair value impairment recovery recorded for the same period in 2022. See Note 5 of our consolidated financial statements as ofMarch 31, 2023 , included elsewhere in this Form 10-Q, for additional information on the activity for mortgage loans servicing rights for the three months endedMarch 31, 2023 and 2022.
Asset Quality
Nonperforming Loans
Asset quality remained relatively strong during the first quarter of 2023 as our nonperforming loans to total loans remained low at 0.62% as ofMarch 31, 2023 . Nonperforming loans were$18.7 million atMarch 31, 2023 compared to$20.2 million atDecember 31, 2022 . The decrease fromDecember 31, 2022 toMarch 31, 2023 was attributable to a$1.0 million decrease in nonaccrual loans, a$180,000 decrease in loans past due 90 days or more and still accruing, and a$265,000 decrease in accruing restructured loans. We did not recognize any interest income on nonaccrual loans during the three months endedMarch 31, 2023 or the year endedDecember 31, 2022 . The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest, and accruing restructured loans. Nonaccrual loans atMarch 31, 2023 comprised of$1.6 million of commercial real estate loans,$218,000 in commercial and industrial loans and$7.3 million in residential real estate loans. Nonaccrual loans atDecember 31, 2022 comprised of$4.9 million in commercial real estate loans,$136,000 in commercial and industrial loans, and$5.0 million in residential real estate loans. (Dollars in thousands) March 31, 2023 December 31, 2022 Nonaccrual loans $ 9,064 $ 10,065 Past due loans 90 days or more and still accruing - 180 Accruing restructured loans 9,654 9,919 Total nonperforming loans 18,718 20,164 Foreclosed real estate 766 4,328 Total nonperforming assets$ 19,484 $ 24,492 Nonperforming loans to gross loans 0.62 % 0.66 % Nonperforming assets to total assets 0.57 % 0.71 % Allowance for credit losses to nonperforming loans 101.22
% 68.88 % Allowance for Credit Losses The allowance for credit losses was$19.0 million atMarch 31, 2023 compared to$13.9 million atDecember 31, 2022 , an increase of$5.1 million or 36.4%. The increase was entirely due to the CECL adoption during the first quarter of 2023. The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). It removes the incurred loss approach's threshold that delayed the recognition of a credit loss until it was probable a loss event was incurred. We maintain a reserve for credit losses that consist of two components, the allowance for credit losses and the allowance for unfunded commitments, The allowance for credit losses provides for the risk of credit losses expected in our loan portfolio and is based on loss estimates derived from a comprehensive quarterly evaluation. The evaluation 46
Table of Contents
reflects analyses of individual borrowers for impairment coupled with analysis of historical loss experience in various loan pools that have been grouped based on similar risk characteristics, supplemented as necessary by credit judgment that considers observable trends, conditions, reasonable and supportable forecasts, and other relevant environmental and economic factors. The level of the allowance for credit losses is adjusted by recording an expense or credit through the provision for credit losses. The level of the allowance for unfunded commitments is adjusted by recording an expense or credit in other noninterest expense. The allwance for unfunded commitments was created upon adoption of CECL onJanuary 1, 2023 and had a balance of$239,000 as ofMarch 31, 2023 . Going forward, the impact of utilizing the CECL approach to calculate the allowance for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the provision for credit losses, and therefore, greater volatility to our reported earnings. See Note 1 and Note 3 of our consolidated financial statements as ofMarch 31, 2023 , included elsewhere in this Form 10-Q, for additional information on the on the allowance for credit losses and the allowance for unfunded commitments. The following table provides an analysis of the allowance for credit losses, provision for credit losses and net charge-offs for the periods presented below: Three Months Ended March 31, (Dollars in thousands ) 2023 2022 Balance, beginning of period$ 13,888 $ 16,952 CECL adoption (Day 1) impact 5,055 - Charge-offs: Construction and development - - Commercial real estate - 390 Commercial and industrial - - Residential real estate - - Consumer and other - - Total charge-offs - 390 Recoveries: Construction and development - - Commercial real estate 2 2 Commercial and industrial 2 1 Residential real estate - - Consumer and other - 5 Total recoveries 4 8 Net (recoveries)/charge-offs (4) 382 Provision for credit losses - 104 Balance, end of period$ 18,947 $ 16,674 Total loans at end of period$ 3,021,320 $ 2,518,351 Average loans(1) 3,050,176 2,533,254
Net charge-offs to average loans 0.00 % 0.06 % Allowance for credit losses to total loans 0.63 %
0.66 %
(1) Excludes loans held for sale.
Management believes the allowance for credit losses is adequate to provide for
losses inherent in the loan portfolio as of
Deposits
Total deposits decreased$22.7 million , or 0.9%, to$2.64 billion atMarch 31, 2023 compared to$2.67 billion atDecember 31, 2022 . The decrease was primarily due to a$82.5 million decrease in money market accounts, a$34.7 million decrease in noninterest-bearing deposits and a$3.1 million decrease in savings accounts, offset by a$93.2 million increase 47
Table of Contents
in time deposits and a$4.4 million increase interest-bearing demand deposits. The decrease in money market accounts was partially due to the decrease of$64.8 million in brokered money market balances during the three months endedMarch 31, 2023 . As ofMarch 31, 2023 andDecember 31, 2022 , 21.8% and 22.9% of total deposits, respectively, were comprised of noninterest-bearing demand accounts and 78.2% and 77.1%, respectively, of interest-bearing deposit accounts. We had$461.6 million of brokered deposits, or 17.5% of total deposits, atMarch 31, 2023 compared to$523.7 million , or 19.6% of total deposits, atDecember 31, 2022 . We use brokered deposits, subject to certain limitations and requirements, as a source of funding to support our asset growth and augment the deposits generated from our branch network, which are our principal source of funding. Our level of brokered deposits varies from time to time depending on competitive interest rate conditions and other factors and tends to increase as a percentage of total deposits when the brokered deposits are less costly than issuing internet certificates of deposit or borrowing from theFederal Home Loan Bank . Uninsured deposits were 31.9% of total deposits atMarch 31, 2023 , compared to 32.5% and 27.4% atDecember 31, 2022 andMarch 31, 2022 , respectively. As ofMarch 31, 2023 , we had$1.13 billion of available borrowing capacity at theFederal Home Loan Bank ($657.0 million ), Federal Reserve Discount Window ($429.0 million ) and various other financial institutions (fed fund lines totaling$47.5 million ).
The following table summarizes our average deposit balances and weighted average
rates for the three months ended
Three Months Ended March 31,
2023 2022
Average Weighted Average Weighted
(Dollars in thousands ) Balance Average Rate Balance Average Rate
Noninterest-bearing demand $ 578,978 - % $ 588,343 - %Interest-bearing demand deposits 149,266 1.74 155,418 0.15 Savings and money market deposits 557,508 3.21 705,643 0.31 Brokered money market deposits 439,142 4.85 411,949 0.14 Time deposits 876,803 3.27 441,228 0.37 Total interest-bearing deposits 2,022,719 3.48 1,714,238 0.27 Total deposits$ 2,601,697 2.71$ 2,302,581 0.20 Borrowed Funds Other than deposits, we also utilized FHLB advances as a supplementary funding source to finance our operations. The advances from the FHLB are collateralized by residential real estate loans. AtMarch 31, 2023 andDecember 31, 2022 , we had available borrowing capacity from the FHLB of$657.0 million and$633.6 billion , respectively. AtMarch 31, 2023 andDecember 31, 2022 , we had$375.0 million of outstanding advances from the FHLB. In addition to our advances with the FHLB, we maintain federal funds agreements with our correspondent banks. Our available borrowings under these agreements were$47.5 million atMarch 31, 2023 andDecember 31, 2022 . We did not have any advances outstanding under these agreements as ofMarch 31, 2023 andDecember 31, 2022 .
Liquidity and Capital Resources
Liquidity
Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash
flow
needs of customers, while
48
Table of Contents
maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.
Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks, federal funds sold, and fair value of unpledged investment securities. Other available sources of liquidity include wholesale deposits, and additional borrowings from correspondent banks, FHLB advances, and theFederal Reserve discount window. Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis. As part of our liquidity management strategy, we open federal funds lines with our correspondent banks. As ofMarch 31, 2023 andDecember 31, 2022 , we had$47.5 million of unsecured federal funds lines with no amounts advanced. In addition, the Company had Federal Reserve Discount Window funds available of approximately$429.0 million atMarch 31, 2023 . The FRB discount window line is collateralized by a pool of construction and development, commercial real estate and commercial and industrial loans with carrying balances totaling$539.1 million as ofMarch 31, 2023 , as well as all of the Company's municipal and mortgage backed securities. There were no outstanding borrowings on this line as ofMarch 31, 2023 andDecember 31, 2022 . At bothMarch 31, 2023 andDecember 31, 2022 , we had$375.0 million of outstanding advances from the FHLB. Based on the values of loans pledged as collateral, we had$657.0 million and$633.6 million of additional borrowing availability with the FHLB as ofMarch 31, 2023 andDecember 31, 2022 , respectively. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.
Capital Requirements
The Company and the Bank are required under federal law to maintain certain minimum capital levels based on ratios of capital to total assets and capital to risk-weighted assets. The required capital ratios are minimums, and the federal banking agencies may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution's exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution's ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution's overall capital adequacy.
The table below summarizes the capital requirements applicable to the Company and the Bank in order to be considered "well-capitalized" from a regulatory
perspective, as well as the Company's and the Bank's capital ratios as ofMarch 31, 2023 andDecember 31, 2022 . The Bank exceeded all regulatory capital requirements and was considered to be "well-capitalized" as ofMarch 31, 2023 andDecember 31, 2022 . As ofDecember 31, 2022 , theFDIC categorized the Bank as well-capitalized under the prompt corrective action framework. There have been no conditions or events sinceDecember 31, 2022 that management believes would change this classification. While the Company believes that it has sufficient capital to withstand an extended economic recession, its reported and regulatory capital ratios could be adversely impacted in future periods. 49 Table of Contents Regulatory Capital Ratio Requirements Minimum including Requirement fully phased- for "Well in Capital Capitalized" Conservation Depository March 31, 2023 December 31, 2022 Buffer Institution Total capital (to risk-weighted assets) Consolidated 17.51 % 16.68 % 10.50 % N/A Bank 17.47 % 16.61 % 10.50 10.00 % Tier 1 capital (to risk-weighted assets) Consolidated 16.55 % 15.99 % 8.50 % N/A Bank 16.51 % 15.93 % 8.50 8.00 % CETI capital (to risk-weighted assets) Consolidated 16.55 % 15.99 % 7.00 % N/A Bank 16.51 % 15.93 % 7.00 6.50 % Tier 1 capital (to average assets) Consolidated 9.72 % 9.57 % 4.00 % N/A Bank 9.70 % 9.54 % 4.00 5.00 % Dividends
OnApril 19, 2023 , the Company declared a cash dividend of$0.18 per share, payable onMay 12, 2023 , to common shareholders of record as ofMay 3, 2023 . Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, contractual restrictions and any other factors that our board of directors may deem relevant.
Off-Balance Sheet Arrangements
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 and interest rate risk in excess of the amount recognized in our consolidated balance sheet. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments. 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 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 amount does not necessarily represent future cash requirements. We evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if we deem collateral is necessary upon extension of credit, is based on management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. They are intended to be disbursed, subject to certain condition, upon request of the borrower.
See Note 9 of our consolidated financial statements as of
50
Table of Contents
© Edgar Online, source
