PEOPLES FINANCIAL CORPORATION GENERAL
The Company is a one-bank holding company headquartered inBiloxi, Mississippi . The Company has two subsidiaries,PFC Service Corp. , an inactive company, andThe Peoples Bank ,Biloxi, Mississippi (the "Bank"). The Bank provides a full range of banking, financial and trust services to state, county and local government entities and individuals and small and commercial businesses operating in those portions ofMississippi ,Louisiana andAlabama which are within a fifty mile radius of theWaveland ,Wiggins and Gautier branches, the Bank's three most outlying locations (the "trade area"). The following presents Management's discussion and analysis of the consolidated financial condition and results of operations ofPeoples Financial Corporation and Subsidiaries. These comments should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report on Form 10-Q and the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Management's Discussion and Analysis included in the Company's Form 10-K for the year endedDecember 31, 2021 . Forward-Looking InformationCongress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company's anticipated future financial performance. This act provides a safe harbor for such disclosure which protects the companies from unwarranted litigation if actual results are different from management expectations. This report contains forward-looking statements and reflects industry conditions, company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties which could cause the Company's actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements. Such factors and uncertainties include, but are not limited to: the effects of the COVID-19 pandemic on the Company's business, customers, employees and third-party service providers, changes in interest rates and market prices, changes in local economic and business conditions, increased competition for deposits and loans, a deviation in actual experience from the underlying assumptions including the potential impact of the COVID-19 pandemic used to determine and establish the allowance for loan losses, changes in the availability of funds resulting from reduced liquidity, changes in statutes, government regulations or regulatory policies or practices in general and specifically as a result of the COVID-19 pandemic and acts of terrorism, weather or other events beyond the Company's control. 29 --------------------------------------------------------------------------------
Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America ("GAAP") requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Certain critical accounting policies affect the more significant estimates and assumptions used in the preparation of the consolidated financial statements. For a description of the Company's critical accounting estimates, refer to "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" in the Company's 2021 Annual Report. The Company considers its most significant accounting estimates to be those applied to the Allowance for Loan Losses and Income Taxes. There have been no material changes to the Company's critical accounting estimates sinceDecember 31, 2021 .
GAAP Reconciliation and Explanation
This Form 10-Q contains non-GAAP financial measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include taxable equivalent interest income and taxable equivalent net interest income. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures for the three months and nine months endedSeptember 30, 2022 and 2021 is included on the following page. 30 --------------------------------------------------------------------------------
RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES (In thousands)
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Interest income reconciliation:
Interest income - taxable equivalent $ 6,530 $
5,246
(66 ) (62 ) (191 ) (173 )
Interest income (GAAP) $ 6,464 $
5,184
Net interest income reconciliation: Net interest income - taxable equivalent $ 5,729 $
5,091
(66 ) (62 ) (191 ) (173 )
Net interest income (GAAP) $ 5,663 $ 5,029 $ 15,636 $ 14,272
OVERVIEW
The Company is a community bank serving the financial and trust needs of its
customers in our trade area, which is defined as those portions of Mississippi ,
Louisiana and Alabama which are within a fifty mile radius of the Waveland ,
Wiggins and Gautier branches, the bank subsidiary's three most outlying
locations. Maintaining a strong core deposit base and providing commercial and
real estate lending in our trade area are the traditional focuses of the
Company. Growth has largely been achieved through de novo branching activity,
and it is expected that these strategies will continue to be emphasized in the
future.
The Company reported net income of $1,749,000 for the third quarter of 2022
compared with net income of $1,107,000 for the third quarter of 2021. The
Company reported net income of $3,691,000 for the first nine months of 2022
compared with net income of $6,226,000 for the first nine months of 2021.
Results in the third quarter of 2022 included an increase in interest income on
securities and an increase in non-interest income and an increase in
non-interest expense as compared with the third quarter of 2021. Results for the
first three quarters of 2021 were significantly more than the first three
quarters of 2022 due to a large reduction in the provision for loan losses which
was partially offset by an increase in non-interest income and a decrease in
non-interest expense due to the settlement of a lawsuit.
Managing the net interest margin is a key component of the Company's earnings
strategy. In 2022 the Federal Reserve has increased rates and there are
expectations that rates will continue to rise. The Company adopted new
investment strategies in 2021 to improve yields on its securities while not
compromising duration or credit risk. As a result, total year to date interest
income increased $1,902,000 in 2022 as compared with 2021.
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Monitoring asset quality, estimating potential losses in our loan portfolio and
addressing non-performing loans continue to be a major focus of the Company. A
provision for the allowance for loan losses of $27,000 was recorded in the third
quarter of 2022 as compared with a reduction of $173,000 for the third quarter
of 2021. A provision for the allowance for loan losses of $80,000 was recorded
for the first three quarters of 2022 compared to a reduction in the allowance
for losses of $5,004,000 for the first three quarters of 2021. The Company is
working diligently to address and reduce its non-performing assets. The
Company's nonaccrual loans totaled $506,000 and $701,000 at September 30, 2022
and December 31, 2021 , respectively. Most of these loans are
collateral-dependent, and the Company has rigorously evaluated the value of its
collateral to determine potential losses.
Non-interest income increased $134,000 for the third quarter of 2022 as compared
with 2021 results. Non-interest income increased $141,000 for the first three
quarters of 2022 as compared with 2021 results. Results in 2022 included higher
other income of $129,000 along with an increase of $85,000 in service charge
fees and an increase of $39,000 in the cash surrender value on life insurance,
offset somewhat by lower trust department income and fees of $107,000 .
Non-interest expense increased $130,000 for the quarter ended September 30, 2022
as compared with 2021 results. This increase for the third quarter of 2022 was
primarily the result of the increase in salaries and employee benefits of
$385,000 in 2022 as compared with 2021. Non-interest expense decreased $840,000
for the three quarters ended September 30, 2022 as compared with 2021 results.
This decrease for the three quarters ended September 30, 2022 was primarily the
result of the settlement of a lawsuit in other expense of $1,125,000 in 2021
offset somewhat by higher ATM expenses and higher salary expenses.
Total assets at September 30, 2022 increased $65,359,000 as compared with
December 31, 2021 . Total deposits increased $103,684,000 primarily as
governmental entities' balances increased due to tax collections. This increase
in deposits funded an increase in available for sale securities of $34,501,000
and held to maturity securities of $68,689,000 .
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the amount by which interest income on loans, investments,
and other interest- earning assets exceeds interest expense on deposits and
other borrowed funds, is the single largest component of the Company's income.
Management's objective is to provide the largest possible amount of income while
balancing interest rate, credit, liquidity, and capital risk. Changes in the
volume and mix of interest-earning assets and interest-bearing liabilities
combined with changes in market rates of interest directly affect net interest
income.
Quarter Ended
The Company's average interest-earning assets increased approximately
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The Company's average balance sheet increased primarily as average investments
increased approximately $177,738,000 , partially offset by a decrease in average
loans of approximately $29,321,000 and a decrease in balances due from financial
institutions of approximately $27,711,000 for the third quarter of 2022 as
compared with the third quarter of 2021. Average loans decreased as principal
payments, and maturities on existing loans exceeded new loans. Funds available
from the decrease in average loans and the decrease in balances due from
financial institutions and the increase in average deposits were used to
increase the investments in securities.
The average yield on interest-earning assets increased by 20 basis points, from
2.81% for the third quarter of 2021 to 3.01% for the third quarter of 2022. This
increase is primarily due to interest rates starting to rise and new investments
purchased at higher rates earning higher yields.
Average interest-bearing liabilities increased approximately $153,206,000 or
31%, from approximately $495,097,000 for the third quarter of 2021 to
approximately $648,303,000 for the third quarter of 2022. Average savings and
interest bearing DDA deposits increased approximately $149,577,000 primarily as
several large public fund customers maintained higher balances with our bank
subsidiary in 2022 and some of the PPP loan proceeds were deposited into and
maintained in customers' accounts. Average time deposits decreased approximately
$4,475,000 .
The average rate paid on interest-bearing liabilities for the third quarter of
2021 was .13% as compared with .49% for the third quarter of 2022. The Federal
Reserve has increased rates, and the bank is starting to see an increase in its
cost of funds.
The Company's net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 2.73% for the third quarter of 2021 as compared with 2.64% for the third quarter of 2022.
Nine Months Ended
The Company's average interest-earning assets increased approximately$154,317,000 , or 22%, from approximately$710,035,000 for the first three quarters of 2021 to approximately$864,352,000 for the first three quarters of 2022. The Company's average balance sheet increased primarily as average held to maturity securities increased approximately$37,011,000 and average available for sale securities increased approximately$141,942,000 . These increases were funded by the increase in savings, interest-bearing DDA balances and time deposits during the same period. The average yield on earning assets decreased from 2.84% for the first three quarters of 2021 to 2.63% for the first three quarters of 2022. This decrease is primarily due to a decrease in loan volume along with a decrease in PPP loan fee income recognized in 2022. Average interest-bearing liabilities increased approximately$147,125,000 , or 31%, from approximately$468,686,000 for the first three quarters of 2021 to approximately$615,811,000 for the first three quarters of 2022. Average savings and interest bearing DDA balances increased approximately$124,145,000 primarily as several large public fund customers maintained higher balances with our bank subsidiary in the current year and some of the PPP loan proceeds were deposited into and maintained in customers' accounts. Average time deposits increased approximately$20,240,000 as some larger public fund customers invested their balances in large time deposits. 33 -------------------------------------------------------------------------------- The average rate paid on interest-bearing liabilities for the first three quarters of 2021 was .20% compared with .27% for the first three quarters of 2022. TheFederal Reserve has increased rates, and the bank is starting to see an increase in its cost of funds. The Company's net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 2.71% for the first three quarters of 2021 as compared with 2.44% for the first three quarters of 2022. The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters and nine months endedSeptember 30, 2022 and 2021. Analysis of Average Balances, Interest Earned/Paid and Yield (In Thousands) Quarter Ended September 30, 2022 Quarter Ended September 30, 2021 Interest Interest Average Balance Earned/Paid Rate
Average Balance Earned/Paid Rate
Loans (2)(3) $ 232,704 $ 2,786 4.79 % $ 262,025 $ 3,156 4.82 %
Balances due from
depository
institutions 31,592 162 2.05 % 59,303 28 0.19 %
HTM:
Taxable 128,180 844 2.63 % 72,261 461 2.55 %
Non taxable (1) 37,864 275 2.91 % 35,808 255 2.85 %
AFS:
Taxable 429,534 2,421 2.25 % 308,416 1,298 1.68 %
Non taxable (1) 4,374 35 3.20 % 5,729 43 3.00 %
Other 2,155 7 1.30 % 2,151 5 0.93 %
Total $ 866,403 $ 6,530 3.01 % $ 745,693 $ 5,246 2.81 %
Savings & interest-
bearing DDA $ 559,792 $ 566 0.40 % $ 410,215 $ 82 0.08 %
Time deposits 79,495 176 0.89 % 83,970 67 0.32 %
Borrowings from
FHLB 9,016 59 2.62 % 912 6 2.63 %
Total $ 648,303 $ 801 0.49 % $ 495,097 $ 155 0.13 %
Net tax-equivalent spread 2.52 % 2.69 %
Net tax-equivalent margin on earning assets 2.64 % 2.73 %
(1) All interest earned is reported on a taxable equivalent basis using a tax
rate of 21% in 2022 and 2021. See disclosure of Non-GAAP financial measures on
pages 30 and 31.
(2) Loan fees of $156 and $219 for 2022 and 2021, respectively, are included in
these figures. Loan fees related to PPP loans of $21 and $317 were recognized in
2022 and 2021, respectively.
(3) Average balance includes nonaccrual loans.
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Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)
Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021
Interest Interest
Average Balance Earned/Paid Rate
Average Balance Earned/Paid Rate
Loans (2)(3) $ 236,105 $ 8,156 4.61 % $ 269,518 $ 9,485 4.69 %
Balances due from
depository
institutions 89,657 317 0.47 % 80,883 84 0.14 %
HTM:
Taxable 94,527 1,825 2.57 % 64,060 1,244 2.59 %
Non taxable (1) 37,317 789 2.82 % 30,773 688 2.98 %
AFS:
Taxable 399,636 5,839 1.95 % 256,782 3,489 1.81 %
Non taxable (1) 4,957 118 3.17 % 5,869 136 3.09 %
Other 2,153 9 0.56 % 2,150 7 0.43 %
Total $ 864,352 $ 17,053 2.63 % $ 710,035 $ 15,133 2.84 %
Savings & interest-
bearing DDA $ 521,863 $ 848 0.22 % $ 397,718 $ 445 0.15 %
Time deposits 90,278 307 0.45 % 70,038 225 0.43 %
Borrowings from
FHLB 3,670 71 2.58 % 930 18 2.58 %
Total $ 615,811 $ 1,226 0.27 % $ 468,686 $ 688 0.20 %
Net tax-equivalent spread 2.36 % 2.64 %
Net tax-equivalent margin on earning assets 2.44 % 2.71 %
(1) All interest earned is reported on a taxable equivalent basis using a tax
rate of 21% in 2022 and 2021. See disclosure of Non-GAAP financial measures on
pages 29 and 30.
(2) Loan fees of
(3) Average balance includes nonaccrual loans.
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Analysis of Changes in Interest Income and Interest Expense
(In Thousands)
For the Quarter Ended
September 30, 2022
compared with
Volume Rate Rate/Volume Total
Interest earned on:
Loans $ (353 ) $ (19 ) $ 2 $ (370 )
Balances due from financial institutions (13 ) 274 (128 ) 133
Held to maturity securities:
Taxable 357 15 11 383
Non taxable 15 5 20
Available for sale securities:
Taxable 510 440 173 1,123
Non taxable (10 ) 3 (7 )
Other 2 2
Total $ 506 $ 720 $ 58 $ 1,284
Interest paid on:
Savings & interest-bearing DDA $ 30 $ 333 $ 121 $ 484
Time deposits (4 ) 120 (6 ) 110
Borrowings from FHLB 53 (1 ) 52
Total $ 79 $ 453 $ 114 $ 646
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Analysis of Changes in Interest Income and Interest Expense
(In Thousands)
For the Nine Months Ended
September 30, 2022
compared with
Volume Rate Rate/Volume Total
Interest earned on:
Loans $ (1,176 ) $ (175 ) $ 22 $ (1,329 )
Balances due from financial institutions 9 202 22 233
Held to maturity securities:
Taxable 592 (7 ) (3 ) 582
Non taxable 146 (38 ) (8 ) 100
Available for sale securities:
Taxable 1,941 263 146 2,350
Non taxable (21 ) 4 (1 ) (18 )
Other 2 2
Total $ 1,491 $ 251 $ 178 $ 1,920
Interest paid on:
Savings & interest-bearing DDA $ 139 $ 201 $ 63 $ 403
Time deposits 65 13 4 82
Borrowings from FHLB 53 53
Total $ 257 $ 214 $ 67 $ 538 Provision for the Allowance for Loan Losses
In the normal course of business, the Company assumes risk in extending credit
to its customers. This credit risk is managed through compliance with the loan
policy, which is approved by the Board of Directors. The policy establishes
guidelines relating to underwriting standards, including but not limited to
financial analysis, collateral valuation, lending limits, pricing considerations
and loan grading. The Company's Loan Review and Special Assets Departments play
key roles in monitoring the loan portfolio and managing problem loans. New loans
and, on a periodic basis, existing loans are reviewed to evaluate compliance
with the loan policy. Loan customers in concentrated industries such as gaming
and hotel/motel, as well as the exposure for out of area; residential and land
development; construction and commercial real estate loans, and their direct and
indirect impact on its operations are evaluated on a monthly basis. Loan
delinquencies and deposit overdrafts are closely monitored in order to identify
developing problems as early as possible. Lenders experienced in workout
scenarios consult with loan officers and customers to address non-performing
loans. A watch list of credits which pose a potential loss to the Company is
prepared based on the loan grading system. This list forms the foundation of the
Company's allowance for loan loss computation.
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Management relies on its guidelines and existing methodology to monitor the
performance of its loan portfolio and identify and estimate potential losses
based on the best available information. The potential effect of the continuing
decline in real estate values and actual losses incurred by the Company were key
factors in our analysis. Much of the Company's loan portfolio is
collateral-dependent, requiring careful consideration of changes in the value of
the collateral.
The Company's analysis includes evaluating the current values of collateral
securing all nonaccrual loans. Nonaccrual loans totaled $506,000 and $701,000
with specific reserves on these loans of $39,500 and $20,000 , at September 30,
2022 and December 31, 2021 , respectively. These specific reserves allocated to
nonaccrual loans are relatively low as collateral values appear sufficient to
cover loan losses or the loan balances have been charged down to their
realizable value.
The Company's on-going, systematic evaluation resulted in the Company recording
a provision for the allowance for loan losses of $27,000 and a reduction of
$173,000 for the third quarters of 2022 and 2021, respectively, and $80,000 for
the first three quarters of 2022. The Company recorded a reduction of the
allowance for loan losses of $5,004,000 for the first three quarters of 2021.
The negative provision in 2021 is primarily the result of a $4,510,000 recovery
realized during the first quarter on a loan in the real estate, mortgage
segment. The allowance for loan losses as a percentage of loans was 1.44% and
1.38% at September 30, 2022 and December 31, 2021 , respectively. The Company
believes that its allowance for loan losses is appropriate as of September 30,
2022 .
The allowance for loan losses is an estimate, and as such, events may occur in
the future which may affect its accuracy. The Company anticipates that it is
possible that additional information will be gathered in future quarters, on
loan performance, which may require an adjustment to the allowance for loan
losses. Management will continue to closely monitor its portfolio and take such
action as it deems appropriate to accurately report its financial condition and
results of operations.
Non-interest income
Quarter Ended
Non-interest income increased$134,000 for the third quarter of 2022 as compared with the third quarter of 2021. Results in 2022 included higher other income of$176,000 and an increase in the cash surrender value of life insurance by$20,000 offset somewhat by lower trust department income and fees of$67,000 .
Nine Months Ended
Non-interest income increased$141,000 for the first three quarters of 2022 as compared with the first three quarters of 2021. Results in 2022 included higher other income of$129,000 , higher service charge income of$85,000 along with an increase of$39,000 in the cash surrender value on life insurance offset somewhat by lower trust department income and fees of$107,000 . 38 --------------------------------------------------------------------------------
Non-interest expense
Quarter Ended
Total non-interest expense increased$130,000 for the third quarter of 2022 as compared with the third quarter of 2021. In 2022, salaries and employee benefits increased$385,000 offset somewhat by decreases of$157,000 and$126,000 in net occupancy and other expenses, respectively. Other real estate costs decreased$39,000 as a result of selling ORE in 2022 compared to 2021.
Nine Months Ended
Total non-interest expense decreased$840,000 for the first three quarters of 2022 as compared with the first three quarters of 2021. In 2022, ATM expenses increased$100,000 and other expense decreased$1,210,000 .
ATM expense increased as costs associated with debit card processing increased since conversion to a new provider.
Other expenses primarily decreased due to the settlement of a lawsuit for
Income Taxes AtDecember 31, 2014 , the Company established a full valuation allowance on its deferred tax assets. Until such time as the Company returns to sustained earnings, and it is determined that it is more likely than not that the deferred tax asset will be realized, no income tax benefit or expense will generally be recorded. The 2018 Tax Cuts and Jobs Act began limiting NOL usage to 80% of taxable income, which resulted in the Company recording income tax expense for 2021 in the amount of$204,000 . The full valuation allowance remained as ofSeptember 30, 2021 . The Company continues to evaluate its deferred tax asset position. 39
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FINANCIAL CONDITION
Cash and due from banks decreased
Available for sale securities increased$34,501,000 atSeptember 30, 2022 , compared withDecember 31, 2021 . During the first three quarters of 2022, there were$108,832,000 in purchases offset by an unrealized loss recorded of$45,142,000 and maturities of$29,129,000 . As discussed in Note 4, the Company evaluates securities for impairment on a monthly basis. This evaluation considers a number of factors including the cause of a decline in value. These unrealized losses resulted primarily from higher interest rates that have impacted the current market value of available for sale securities but they do not currently appear related to any credit deterioration within the portfolio. Even though these securities have been classified as available for sale, the Company has traditionally held these securities until maturity. Although these unrealized losses recorded in the first three quarters of 2022 were significant, management does not anticipate these losses to be other than temporary.
Held to maturity securities increased
Total deposits increased$103,684,000 atSeptember 30, 2022 , compared withDecember 31, 2021 . Typically, significant increases or decreases in total deposits and/or significant fluctuations among the different types of deposits from quarter to quarter are anticipated by Management as customers in the casino industry and county and municipal entities reallocate their resources periodically. Deposits from county and municipal entities increase significantly during the first two quarters of each year based on property tax collections and PPP loans.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
Strength, security and stability have been the hallmark of the Company since its founding in 1985 and of its bank subsidiary since its founding in 1896. A strong capital foundation is fundamental to the continuing prosperity of the Company and the security of its customers and shareholders. As ofSeptember 30, 2022 , the most recent notification from theFederal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must have a Total risk-based capital ratio of 10.00% or greater, a Common Equity Tier 1 Capital ratio of 6.50% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater and a Leverage capital ratio of 5.00% or greater. The Company must have a capital conservation buffer above these requirements of 2.50%. There are no conditions or events since that notification that Management believes have changed the bank subsidiary's category. 40
-------------------------------------------------------------------------------- The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as ofSeptember 30, 2022 andDecember 31, 2021 , are as follows (in thousands): For Capital Adequacy Actual Purposes To Be Well Capitalized Amount Ratio Amount Ratio Amount RatioSeptember 30, 2022 : Total Capital (to Risk Weighted Assets)$ 96,818 20.31 %$ 38,145 8.00 %$ 47,681 10.00 % Common Equity Tier 1 Capital (to Risk Weighted Assets) 93,456 19.60 % 21,456 4.50 % 30,992 6.50 % Tier 1 Capital (to Risk Weighted Assets) 93,456 19.60 % 28,608 6.00 % 38,145 8.00 % Tier 1 Capital (to Average Assets) 93,456 9.67 % 38,674 4.00 % 48,343 5.00 % December 31, 2021: Total Capital (to Risk Weighted Assets)$ 93,988 20.98 %$ 35,839 8.00 %$ 44,799 10.00 % Common Equity Tier 1 Capital (to Risk Weighted Assets) 90,677 20.24 % 20,160 4.50 % 29,119 6.50 % Tier 1 Capital (to Risk Weighted Assets) 90,677 20.24 % 26,879 6.00 % 35,839 8.00 % Tier 1 Capital (to Average Assets) 90,677 11.13 % 32,599 4.00 % 40,749 5.00 %
Management continues to emphasize the importance of maintaining the appropriate capital levels of the Company and has established the goal of being "well-capitalized" by the banking regulatory authorities.
LIQUIDITY Liquidity represents the Company's ability to adequately provide funds to satisfy demands from depositors, borrowers and other commitments by either converting assets to cash or accessing new or existing sources of funds. Management monitors these funds requirements in such a manner as to satisfy these demands and provide the maximum earnings on its earning assets. The Company manages and monitors its liquidity position through a number of methods, including through the computation of liquidity risk targets and the preparation of various analyses of its funding sources and utilization of those sources on a monthly basis. The Company also uses proforma liquidity projections which are updated on a monthly basis in the management of its liquidity needs and also conducts periodic contingency testing on its liquidity plan. Deposits, payments of principal and interest on loans, proceeds from maturities of investment securities and earnings on investment securities are the principal sources of funds for the Company. Borrowings from the FHLB, federal funds sold and federal funds purchased are utilized by the Company to manage its daily liquidity position. The Company has also been approved to participate in theFederal Reserve Bank's Discount Window Primary Credit Program, which it intends to use only as a contingency. 41
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