BANK OF SOUTH CAROLINA CORPORATION
Management's discussion and analysis is included to assist the reader in
understanding our financial condition, results of operations, and cash flow.
This discussion should be reviewed in conjunction with the audited consolidated
financial statements and accompanying notes presented in Item 8 of this report
and the supplemental financial data appearing throughout this report. Since the
primary asset of the Company is its wholly-owned subsidiary, most of the
discussion and analysis relates to the Bank.
OVERVIEW
The Company is a bank holding company headquartered in Charleston, South
Carolina , with $653.3 million in assets as of December 31, 2022 and net income
of $6.7 million for the year ended December 31, 2022 . The Company offers a broad
range of financial services through its wholly owned subsidiary, the Bank. The
Bank is a state-chartered commercial bank, which operates principally in the
Charleston , Dorchester , and Berkeley counties of South Carolina . The Bank's
original and current concept is to be a full service financial institution
specializing in personal service, responsiveness, and attention to detail to
foster long-standing relationships.
We derive most of our income from interest on loans and investment securities.
The primary source of funding for making these loans and purchasing investment
securities is our interest-bearing and non-interest-bearing deposits.
Consequently, one of the key measures of our success is the amount of net
interest income, or the difference between the income on our interest-earning
assets, such as loans and investments, and the expense on our interest-bearing
liabilities, such as deposits. Another key measure is the spread between the
yield we earn on these interest-earning assets and the rate we pay on our
interest-bearing liabilities.
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 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 loan losses (the "allowance") and a reserve for
unfunded commitments (the "unfunded reserve"). The allowance provides for
probable and estimable losses inherent in our loan portfolio while the unfunded
reserve provides for potential losses related to unfunded lending commitments.
For a detailed discussion on the allowance for loan losses, see "Allowancefor Loan Losses".
In addition to earning interest on loans and investment securities, we earn income through fees and other expenses we charge to the customer. The various components of other income and other expenses are described in the following discussion. The discussion and analysis also identifies significant factors that have affected our financial position and operating results as of and for the year endedDecember 31, 2022 as compared toDecember 31, 2021 and our operating results for 2021 compared to 2020, and should be read in conjunction with the consolidated financial statements and the related notes included in this report. In addition, a number of tables have been included to assist in the discussion. The following table sets forth certain summary financial information concerning the Company and its wholly-owned subsidiary for the last five years. The information was derived from the audited consolidated financial statements. The information should be read in conjunction with this section of the report, and the audited consolidated financial statements and notes, which are presented in Item 8 of this report. 12 2022 2021 2020 2019 2018 For December 31: Net income$ 6,655,140 $ 6,744,865
653,345,609 679,220,646 532,494,599 445,012,520 429,135,198
Total loans1 331,848,376 309,406,617 333,768,406 279,134,958 275,863,705 Investment securities available for sale
271,172,226 212,347,489 134,819,818 100,449,956 119,668,874
Interest-bearing deposits at the
Federal Reserve 12,999,135 128,971,429 42,348,085 39,320,526 25,506,784
Earning assets 616,019,737 650,725,535 510,936,309 418,905,440 421,039,363
Total deposits 598,670,258 609,191,576 462,197,631 379,191,655 382,378,388 Total shareholders' equity
38,811,387 53,917,633 54,980,356 51,168,032 45,462,561 Weighted Average Shares Outstanding - basic
5,550,078 5,531,518 5,526,948 5,522,025 5,500,027 Weighted Average Shares Outstanding - diluted
5,644,698 5,680,482 5,678,543 5,588,090 5,589,012
For the Year: Selected average balances: Total assets$ 656,833,125 $ 589,379,985 $ 502,628,318 $ 440,615,140 $ 430,495,412 Total loans1 320,826,946 324,078,445
313,303,363 281,508,711 277,223,600 Investment securities available for sale
266,432,504 167,250,568 112,970,054 106,421,507 123,347,669
Interest-bearing deposits at the
Federal Reserve 41,131,016 75,734,060 54,231,372 34,713,982 20,151,823
Earning assets 628,390,466 567,063,073 480,504,789 422,644,200 420,723,092
Total deposits 596,881,098 519,900,412 434,071,108 381,687,960 386,025,147 Total shareholders' equity
43,602,112 54,838,166 54,021,647 49,242,545 43,691,359
Performance Ratios: Return on average equity 15.26 % 12.30 % 11.96 % 14.86 % 15.85 % Return on average assets 1.01 % 1.14 % 1.29 % 1.66 % 1.61 % Average equity to average assets 6.64 % 9.30 % 10.75 % 11.18 % 10.15 % Net interest margin 3.01 % 3.06 % 3.52 % 4.28 % 4.15 % Net (recoveries) charge-offs to average loans 0.00 % -0.02 % 0.02 % 0.14 % -0.01 % Allowance for loan losses as a percentage of total loans2 1.30 % 1.43 % 1.30 % 1.46 % 1.53 % Per Share: Basic income per common share3$ 1.20 $ 1.22
$ 1.14 $ 1.31 $ 1.24 Year end book value3$ 6.99 $ 9.73
$ 0.68 $ 0.78 $ 0.66 $ 0.74 $ 0.58 Dividend payout ratio 56.73 % 63.98 % 56.44 % 55.88 % 54.68 % Full time employee equivalents 80 79
76 79 79
(1) Including mortgage loans to be sold.
(2) Excluding mortgage loans to be sold.
(3) Adjusted to retroactively reflect 10% stock dividend issued during the year
ended December 31, 2018 .
We have adopted various accounting policies that govern the application of accounting principles generally accepted inthe United States ("GAAP") and with general practices within the banking industry in the preparation of our consolidated financial statements. Our significant accounting policies are set forth in the notes to the consolidated financial statements in Item 8 of this report. Certain accounting policies involve significant judgments and assumptions made by the Company that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on factors that we believe to be reasonable under the circumstances. Because of the number of judgments and assumptions that we make, actual results could differ and have a material impact on the carrying values of our assets and liabilities and
our
results of operations.
We consider our policy regarding the allowance for loan losses to be our most
subjective accounting policy due to the significant degree of judgment. We have
developed what we believe to be appropriate policies and procedures for
assessing the adequacy of the allowance for loan losses, recognizing that this
process requires a number of assumptions and estimates with respect to our loan
portfolio. Our assessments may be impacted in future periods by changes in
economic conditions, the impact of regulatory examinations and the discovery of
information with respect to borrowers, which were not known at the time of the
issuance of the consolidated financial statements. For additional discussion
concerning our allowance for loan losses and related matters, see "Allowance for
Loan Losses".
COVID-19
OnMarch 11, 2020 , theWorld Health Organization ("WHO") declared COVID-19 a pandemic. Due to orders issued by the governor ofSouth Carolina and in an abundance of caution for the health of our customers and employees, inMarch 2020 the Bank closed lobbies to all 5 offices but remained fully operational. The Bank subsequently reopened all of the lobbies inJune 2021 . 13 As discussed elsewhere in the report (See "Part I - Paycheck Protection Program" and Note 4 to the Company's Notes to Consolidated Financial Statements included in Part II - Item 8 of this report), onMarch 27, 2020 , the PPP was established under the CARES Act in response to the COVID-19 pandemic. While the impacts of COVID-19 and its variants appeared to create less economic disruption during 2022 as compared to 2021 and 2020, COVID-19 continues to evolve, along with governmental support and/or restrictions in response to it. As ofDecember 31, 2021 , the Bank had received 391 PPP forgiveness applications, in the amount of$49.1 million in principal, and submitted 361 applications and decisions to the SBA, in the amount of$47.7 million in principal. Of the 391 PPP submissions, 351 loans, in the amount of$46.9 million , were forgiven as ofDecember 31, 2021 . The remaining 129 loans, in the amount of$8.4 million , were forgiven during the year endedDecember 31, 2022 . There were no PPP loans outstanding as ofDecember 31, 2022 . Upon forgiveness the Bank recognized the deferred fee income in accordance with ASC 310-20. The Bank received processing fees of$2.4 million and recognized$0.4 million and$1.3 million during the years endedDecember 31, 2022 and 2021, respectively. Regulatory agencies, as set forth in the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (initially issued onMarch 22, 2020 and revised onApril 7, 2020 ), encouraged financial institutions to work prudently with borrowerswho are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. In this statement, the regulatory agencies expressed their view of loan modification programs as positive actions that may mitigate adverse effects on borrowers due to COVID-19 and that the agencies will not criticize institutions for working with borrowers in a safe and sound manner. Moreover, the revised statement provides that eligible loan modifications related to COVID-19 may be accounted for under section 4013 of the CARES Act or in accordance with ASC 310-40. Under Section 4013 of the CARES Act, banks may elect not to categorize loan modifications as TDRs if the modifications are related to COVID-19, executed on a loan that was not more than 30 days past due as ofDecember 31, 2019 , and executed betweenMarch 1, 2020 and the earlier ofDecember 31, 2020 or 60 days after the date of termination of the National Emergency. All short- term loan modifications made on a good faith basis in response to COVID-19 to borrowerswho were current prior to any relief are not considered TDRs. Beginning inMarch 2020 , the Bank provided payment accommodations to customers, consisting of 60-day principal deferral to borrowers negatively impacted by COVID-19. During 2020, the Bank processed approximately$0.7 million in principal deferments to 84 customers, with an aggregate loan balance of$29.7 million . The principal deferments represented 0.24% of our total loan portfolio as ofDecember 31, 2020 . The Bank did not process any principal deferments during the years endedDecember 31, 2022 and 2021. The Bank has examined the payment accommodations granted to borrowers in response to COVID-19 and classified 9 loans, with an aggregate loan balance of$4.0 million , that were granted payment accommodations as TDRs given the continued financial difficulty of the customer, associated industry risk, and multiple deferral requests. All other borrowers were current prior to relief, were not experiencing financial difficulty prior to COVID-19, and the Bank determined they were not considered TDRs. As ofDecember 31, 2021 , 4 of the TDRs were removed from TDR status due to improvement in financial condition and sustained performance under the restructured terms, 2 TDRs were paid off through refinancing into new loans at market terms, and 1 TDR was paid off. Two loans with a balance of$0.5 million remained in TDR status as ofDecember 31, 2021 . Additionally, of the 75 customers that received payment accommodations that were not classified as TDRs, 41 customers, with an aggregate loan balance of$9.9 million , had paid their loan in full as ofDecember 31, 2021 . An additional loan was removed from TDR status during 2022. The remaining loan with a balance of$0.1 million is paying as agreed as ofDecember 31, 2022 . There are no loans that received payment accommodation past due greater than 30 days. The Bank will continue to examine payment accommodations as requested by borrowers. While the effects of COVID-19 have impacted all industries to varying degrees, during 2020 the Bank assessed the retail and/or service, food and beverage, and short-term rental industries in our geographic area as having a higher risk due to the possibility of the primary source of repayment not materializing. These industries are dependent upon the hospitality industry and were affected by the mandates issued by the Governor ofSouth Carolina to limit occupancy or close for a period of time. Our loans in these industries represented 3.96% of our loan portfolio atDecember 31, 2020 and were temporarily downgraded to our "Watch" category during 2020. InMay 2021 , due to improving economic conditions, increased vaccination rates and a continued reopening of theSouth Carolina economy, these loans were upgraded to our "Satisfactory" category. Effects of COVID-19 or its variants may still negatively impact management assumptions and estimates, such as the allowance for loan losses. However, it is difficult to assess or predict how, and to what extent, COVID-19 will affect the Bank in the future. COMPARISON OF THE YEAR ENDEDDECEMBER 31, 2022 TODECEMBER 31, 2021 Net income decreased$0.1 million or 1.3% to$6.66 million , or basic and diluted income per share of$1.20 and$1.18 , respectively, for the year endedDecember 31, 2022 from$6.74 million or basic and diluted income per share of$1.22 and$1.19 , respectively, for the year endedDecember 31, 2021 . This decrease was primarily due to lower mortgage banking income and gains on sales of securities largely offset by higher average earning asset balances coupled with increased asset yields in our investment securities and a reduction in the provision for loan losses. Our returns on average assets and average equity for the year endedDecember 31, 2022 were 1.01% and 15.26%, respectively, compared to 1.14% and 12.30%, respectively, for the year endedDecember 31, 2021 . Net interest income increased$1.5 million or 8.74% to$18.9 million for the year endedDecember 31, 2022 from$17.4 million for the year endedDecember 31, 2021 . This increase was primarily due to higher balances of average earning assets coupled with an increase in asset yields on our investment securities and increased interest rates on variable rate loans and new originations and renewals of fixed rate loans. 14
Average earning assets increased$61.3 million or 10.81% to$628.4 million for the year endedDecember 31, 2022 from$567.1 million for the year endedDecember 31, 2021 . This is primarily related to an increase in the average balance of investment securities and interest-bearing deposits at theFederal Reserve and, to a lesser extent, loans. The increase in investment securities and interest-bearing balances at theFederal Reserve reflect the deployment of excess funds resulting from a$77.0 million increase in average deposits during the year. We recorded a$75,000 reduction to the allowance for loan losses for the year endedDecember 31, 2022 compared to a provision for loan losses of$120,000 for the year endedDecember 31, 2021 . The decrease was primarily driven by the composition of our loan portfolio in accordance with our allowance for loan loss methodology and our analysis of the adequacy of the allowance for loan losses. The Board of Directors determined that this provision was appropriate based upon the adequacy of our reserve. Charge-offs of$42,644 and recoveries of$31,878 , together with the reduction in the allowance, resulted in an allowance for loan losses of$4.3 million or 1.30% of total loans as ofDecember 31, 2022 . Other income decreased$1.8 million or 46.62% to$2.1 million for the year endedDecember 31, 2022 , from$3.9 million for the year endedDecember 31, 2021 . Other income reflects lower mortgage banking income and decreases in gain on sales of securities of$0.2 million . Our mortgage banking income decreased$1.6 million or 71.17% to$0.7 million for the year endedDecember 31, 2022 from$2.3 million for the year endedDecember 31, 2021 due to decreased volume associated with the higher interest rate environment experienced in 2022. Mortgage banking income is highly influenced by mortgage interest rates and the housing market. Other expense increased$0.1 million or 0.77% to$12.4 million for the year endedDecember 31, 2022 , from$12.3 million for the year endedDecember 31, 2021 . Salaries and employee benefits increased approximately$0.1 million , or 1.47%, due to increased benefits, payroll taxes and other employee-related costs. Net occupancy expense increased approximately$0.1 million due to rent escalation provisions in certain of our leases. Other operating expenses decreased$0.1 million , or 0.77%.
For the year ended
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2021 TO DECEMBER 31, 2020
Net income increased $0.2 million or 4.40% to $6.7 million , or basic and diluted
income per share of $1.22 and $1.19 , respectively, for the year ended December
31, 2021 from $6.5 million or basic and diluted income per share of $1.17 and
$1.14 , respectively, for the year ended December 31, 2020 . This increase was
primarily due to higher average earning asset balances coupled with a decline in
our cost of funds. Our returns on average assets and average equity for the year
ended December 31, 2021 were 1.14% and 12.30%, respectively, compared to 1.29%
and 11.96%, respectively, for the year ended December 31, 2020 .
Net interest income increased $0.5 million or 2.61% to $17.4 million for the
year ended December 31, 2021 from $16.9 million for the year ended December 31,
2020 . This increase was primarily due to an increase in interest and fees on PPP
loans and investment securities. Interest and fees on loans and investment
securities increased $0.4 million or 2.35% to $17.1 million for the year ended
December 31, 2021 from $16.7 million for the year ended December 31, 2020 , as
the result of higher balances of average earning assets.
Average earning assets increased $86.6 million or 18.01% to $567.1 million for
the year ended December 31, 2021 from $480.5 million for the year ended December
31, 2020 . This is primarily related to an increase in the average balance of
investment securities and interest-bearing deposits at the Federal Reserve and,
to a lesser extent, loans. The increase in investment securities and
interest-bearing balances at the Federal Reserve reflect the deployment of
excess funds resulting from an $85.8 million increase in average deposits during
the year.
The provision to the allowance for loan losses for the year endedDecember 31, 2021 was$120,000 compared to$240,000 for the year endedDecember 31, 2020 . The decrease was primarily driven by the composition of our loan portfolio in accordance with our allowance for loan loss methodology. The Board of Directors determined that this provision was appropriate based upon the adequacy of our reserve. Charge-offs of$20,990 and recoveries of$92,283 , together with the provision to the allowance, resulted in an allowance for loan losses of$4.4 million or 1.43% of total loans as ofDecember 31, 2021 . The allowance for loan losses is 1.47% of total loans net of PPP loans. Other income increased$0.5 million or 13.61% to$3.9 million for the year endedDecember 31, 2021 , from$3.4 million for the year endedDecember 31, 2020 . Other income reflects increases in gain on sales of securities of$0.3 million and service charges and fees of$0.2 million . Our mortgage banking income increased$46,700 or 2.06% to$2.3 million for the year endedDecember 31, 2021 from$2.3 million for the year endedDecember 31, 2020 due to elevated volume associated with a continuation of the low interest rate environment. Mortgage banking income is highly influenced by mortgage interest rates and the housing market. Other expense increased$0.6 million or 5.45% to$12.3 million for the year endedDecember 31, 2021 , from$11.7 million for the year endedDecember 31, 2020 . Salaries and employee benefits increased approximately$0.2 million , or 3.03%, due to increased benefits, payroll taxes and other employee-related costs. Net occupancy expense increased approximately$0.2 million due to rent escalation provisions in certain of our leases. Other operating expense increased$0.2 million , or 14.45%, due to certain loan-related costs and higherFDIC insurance assessments resulting from an increase in deposit balances.
For the year ended
ASSET AND LIABILITY MANAGEMENT
We manage our assets and liabilities to ensure there is sufficient liquidity to
enable management to fund deposit withdrawals, loan demand, capital
expenditures, reserve requirements, operating expenses, and dividends; and to
manage daily operations on an ongoing basis. Funds are primarily provided by the
Bank through customer deposits, principal and interest payments on loans,
mortgage loan sales, the sale or maturity of securities, temporary investments
and earnings. The Asset Liability/Investment Committee ("ALCO") manages asset
and liability procedures though the ultimate responsibility rests with the
President/Chief Executive Officer. At December 31, 2022 , total assets decreased
3.81% to $653.3 million from $679.2 million as of December 31, 2021 and total
deposits decreased 1.73% to $598.7 million from $609.2 million as of December
31, 2021 .
15
As of December 31, 2022 , earning assets, which are composed of U.S. Treasury ,
Government Sponsored Enterprises and Municipal Securities in the amount of
$271.2 million , interest-bearing deposits at the Federal Reserve in the amount
of $13.0 million and total loans, including mortgage loans held for sale, in the
amount of $331.8 million , constituted approximately 94.29% of our total assets.
The yield on a majority of our earning assets adjusts in tandem with changes in the general level of interest rates. Some of the Company's liabilities are issued with fixed terms and can be repriced only at maturity.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest rates. Our risk consists primarily of interest rate risk in our lending
and investing activities as they relate to the funding by deposit and borrowing
activities.
Our policy is to minimize interest rate risk between interest-earning assets and
interest-bearing liabilities at various maturities and to attempt to maintain an
asset sensitive position over a one-year period. By adhering to this policy, we
anticipate that our net interest margins will not be materially affected, unless
there is an extraordinary and or precipitous change in interest rates. The
average net interest rate margin for 2022 decreased to 3.01% from 3.06% for
2021. At December 31, 2022 and 2021, our net cumulative gap was liability
sensitive for periods less than one year and asset sensitive for periods of one
year or more. The reason for the shift in sensitivity is the direct result of
management's strategic decision to invest excess funds held at the Federal
Reserve into fixed rate investment securities that match our investment policy
objectives. Management is aware of this departure from policy and will continue
to closely monitor our sensitivity position going forward.
Since the rates on most of our interest-bearing liabilities can vary on a daily
basis, we continue to maintain a loan portfolio priced predominately on a
variable rate basis. However, in an effort to protect future earnings in a
declining rate environment, we offer certain fixed rates, interest rate floors,
and terms primarily associated with real estate transactions. We seek stable,
long-term deposit relationships to fund our loan portfolio. Furthermore, we do
not have any brokered deposits or internet deposits.
At
We do not take foreign exchange or commodity risks. In addition, we do not own mortgage-backed securities, nor do we have any exposure to the sub-prime market or any other distressed debt instruments. The following table summarizes our interest sensitivity position as ofDecember 31, 2022 . Three months Six months to One year to Less than to less than less than one less than Five years Estimated One Day three months six months year five years or more Total Fair Value (in thousands) Interest-earning assets Loans1$ 73,798 $ 19,037 $ 13,451 $ 22,603 $ 167,122 $ 35,996 $ 332,007 $ 304,250 Investment securities available for sale2 - 7,462 9,919 25,341 212,327 41,948 296,997
271,172
Interest-bearing deposits at the Federal Reserve 12,999 - - - - - 12,999 12,999 Total$ 86,797 $ 26,499 $ 23,370 $ 47,944 $ 379,449 $ 77,944 $ 642,003 $ 588,421 Interest-bearing liabilities CD's and other time deposits less than$250,000 $ -$ 3,852 $ 2,269 $ 3,643 $ 1,502 $ -$ 11,266 $ 14,156 CD's and other time deposits$250,000 and over - 2,088 549 2,667 - - 5,304
7,272
Money Market and Interest Bearing Demand Accounts 296,235 -
- - - - 296,235 518,276 Savings 63,825 - - - - - 63,825 63,825 Total$ 360,060 $ 5,940 $ 2,818 $ 6,310 $ 1,502 $ -$ 376,630 $ 603,529 Net$ (276,263 ) $ 20,559 $ 20,552 $ 41,634 $ 377,947 $ 77,944 $ 265,373 Cumulative$ (252,704 ) $ (232,152 ) $ (190,518 ) $ 187,429 $ 265,374
(1) Including mortgage loans to be sold and deferred fees.
(2) At amortized cost based on the earlier of the call date or scheduled
maturity.
16
LIQUIDITY
Historically, we have maintained our liquidity at levels believed by management
to be adequate to meet requirements of normal operations, potential deposit
outflows and strong loan demand and still allow for optimal investment of funds
and return on assets.
The following table summarizes future contractual obligations as of December 31,
2022 .
Less than One to five After five
Total one year years years
Contractual Obligations
(in thousands)
Time deposits $ 16,569 $ 14,829 $ 1,740 $ -
Operating leases 18,223 1,183 5,914 11,126
Total contractual cash obligations
7,416$ 11,126 Proper liquidity management is crucial to ensure that we are able to take advantage of new business opportunities as well as meet the credit needs of our existing customers. Investment securities are an important tool in our liquidity management. Our primary liquid assets are cash and due from banks, investment securities available for sale, interest-bearing deposits at theFederal Reserve , and mortgage loans held for sale. Our primary liquid assets accounted for 45.89% and 52.30% of total assets atDecember 31, 2022 and 2021, respectively. Investment securities classified as available for sale, which are not pledged, may be sold in response to changes in interest rates and liquidity needs. All of the investment securities presently owned are classified as available for sale. Net cash provided by operations and deposits from customers have been the primary sources of liquidity. AtDecember 31, 2022 , we had unused short-term lines of credit totaling approximately$41 million (which can be withdrawn at the lender's option). Additional sources of funds available to us for liquidity include increasing deposits by raising interest rates paid and selling mortgage loans held for sale. We also established a Borrower-In-Custody arrangement with theFederal Reserve . This arrangement permits us to retain possession of assets pledged as collateral to secure advances from the Federal Reserve Discount Window. AtDecember 31, 2022 , we could borrow up to$78.3 million . Our core deposits consist of non-interest bearing demand accounts, NOW accounts, money market accounts, time deposits and savings accounts. We closely monitor our reliance on certificates of deposit greater than$250,000 and other large deposits. We maintain a Contingency Funding Plan ("CFP") that identifies liquidity needs and weighs alternate courses of action designed to address these needs in emergency situations. We perform a quarterly cash flow analysis and stress test the CFP to evaluate the expected funding needs and funding capacity during a liquidity stress event. We believe our liquidity sources are adequate to meet our operating needs and do not know of any trends, events or uncertainties that may result in a significant adverse effect on our liquidity position. AtDecember 31, 2022 and 2021, our liquidity ratio was 48.09% and 56.43%, respectively. The following table shows the composition of average assets over the past five fiscal years. 2022 2021 2020 2019 2018 Loans1$ 320,826,946 $ 324,078,445 $ 313,303,363 $ 277,395,432 $ 277,223,600 Investment securities available for sale 266,432,504 167,250,568 112,970,054 106,421,507 123,347,669 Interest-bearing deposits at the Federal Reserve 41,131,016 75,734,060 54,231,372 34,713,982 20,151,823 Non-earning assets 28,442,659 22,316,912 22,123,529 22,084,219 9,772,320 Total average assets$ 656,833,125 $ 589,379,985 $
502,628,318
1 Including mortgage loans to be sold and deferred fees.
17
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table shows changes in interest income and expense based upon changes in volume and changes in rates.
2022 vs. 2021 2021 vs. 2020 2020 vs. 2019
Net Dollar Net Dollar Net Dollar
Volume Rate Change1 Volume Rate Change1 Volume Rate Change1
Loans2 $ (153,327 ) $ 545,916 $ 392,589 $ 519,830 $ (290,799 ) $ 229,031 $ 1,798,561 $ (2,736,870 ) $ (938,309 )
Investment securities
available for sale 1,274,919 (320,851 ) 954,068 963,531 (800,492 ) 163,039 136,175 (324,518 ) (188,343 ) Interest-bearing deposits at the Federal Reserve (47,994 ) 348,709 300,715
72,342 (153,057 ) (80,715 ) 409,494 (955,338 ) (545,844 ) Interest income
$ 1,073,598 $ 573,774 $ 1,647,372 $ 1,555,703 $ (1,244,348 ) $ 311,355 $ 2,344,230 $ (4,016,726 ) $ (1,672,496 ) Interest-bearing transaction accounts$ 12,170 $ 121,959 $ 134,129 $
25,230
12,094 - 12,094 10,278 (21,710 ) (11,432 ) 23,542 (81,423 ) (57,881 ) Time deposits
(5,559 ) (12,871 ) (18,430 )
(2,531 ) (39,469 ) (42,000 ) (34,106 ) (31,504 ) (65,610 )
Interest expense
32,977 $ (164,391 ) $ (131,414 ) $ 46,353 $ (556,110 ) $ (509,757 )
Increase (decrease) in
net interest income $ 1,519,579 $ 442,769 $ (1,162,739 ) (1) Volume/rate changes have been allocated to each category based on the
percentage of each change to the total change.
(2) Including mortgage loans to be sold.
YIELDS ON AVERAGE EARNING ASSETS AND RATES ON AVERAGE INTEREST-BEARING
LIABILITIES
The following table shows the yields on average earning assets and average interest-bearing liabilities.
2022 2021 2020
Interest Average Interest Average Interest Average
Average Balance Paid/Earned Yield/Rate1 Average Balance Paid/Earned Yield/Rate1 Average Balance Paid/Earned Yield/Rate1 Interest-earning assets Loans2
$ 320,826,946 $ 15,677,601 4.89 %$ 324,078,445 $ 15,285,012 4.72 %$ 313,303,363 $ 15,055,981 4.81 %Investment Securities Available for Sale 266,432,504 3,116,858 1.17 % 167,250,568 2,162,790 1.29 % 112,970,054 1,999,751 1.77 % Federal Funds Sold & Interest bearing deposits 41,131,016 404,024 0.98 % 75,734,060 103,309 0.14 % 54,231,372 184,024 0.34 % Total earning assets$ 628,390,466 $ 19,198,483 3.06 %$ 567,063,073 $ 17,551,111 3.10 %$ 480,504,789 $ 17,239,756 3.59 % Interest-bearing liabilities Interest-bearing
transaction accounts$ 269,510,451 $ 222,493
0.08 %$ 242,617,530 $ 88,364 0.04 %$ 208,940,724 $ 166,346 0.08 % Savings 65,816,763 40,488 0.06 % 51,608,804 28,394 0.06 % 40,770,588 39,826 0.10 % Time Deposits 18,443,811 38,812 0.21 % 20,435,199 57,242 0.28 % 20,964,940 99,242 0.47 %$ 353,771,025 $ 301,793 0.09 %$ 314,661,533 $ 174,000 0.06 %$ 270,676,252 $ 305,414 0.11 %
Net interest spread 2.97 % 3.04 % 3.48 % Net interest margin 3.01 % 3.06 % 3.52 % Net interest income$ 18,896,690 $ 17,377,111 $ 16,934,342
(1) The effect of forgone interest income as a result of non-accrual loans was
not considered in the above analysis.
(2) Average balance includes non-accrual loans and mortgage loans to be sold.
18
INVESTMENT PORTFOLIO
The following tables summarize the carrying value of investment securities as of the indicated dates and the weighted-average yields of those securities atDecember 31, 2022 . Weighted-average yields are determined based on the amortized cost and book yield of the individual investment securities comprising each investment security type and maturity classification. Amortized Cost After Five After One Years Within One Year through through Ten After Ten Estimated Year Five Years Years Years Total Fair Value (in thousands) U.S. Treasury Notes$ 25,341 $ 154,957 $ - $ -$ 180,298 $ 168,187 Government-Sponsored Enterprises 4,998 20,000 42,387 - 67,385 57,075 Municipal Securities 12,383 15,613 11,609 9,710 49,315 45,910 Total$ 42,722 $ 190,570 $ 53,996 $ 9,710 $ 296,998 $ 271,172 Weighted average yields U.S. Treasury Notes 0.32 % 1.11 % 0.00 % 0.00 %
Government-Sponsored Enterprises 0.52 % 0.90 %
1.23 % 0.00 % Municipal Securities 1.85 % 1.62 % 1.76 % 2.05 % Total 0.79 % 1.13 % 1.34 % 2.05 % 1.17 %
The following tables present the amortized cost and estimated fair value of investment securities for the past three years.
Amortized Estimated Fair
December 31, 2022 Cost Value
(in thousands)
U.S. Treasury Notes $ 180,298 $ 168,187
Government-Sponsored Enterprises 67,385 57,075
Municipal Securities 49,315 45,910
Total $ 296,998 $ 271,172
Amortized Estimated Fair
December 31, 2021 Cost Value
(in thousands)
U.S. Treasury Notes $ 101,270 $ 100,062
Government-Sponsored Enterprises 76,356 74,721
Municipal Securities 37,422 37,564
Total $ 215,048 $ 212,347
Amortized Estimated Fair
December 31, 2020 Cost Value
(in thousands)
U.S. Treasury Notes $ 20,037 $ 20,411
Government-Sponsored Enterprises 96,614 97,853
Municipal Securities 16,055 16,556
Total $ 132,706 $ 134,820
As of December 31, 2022 , we had 25 U.S. Treasury Notes and 77 Municipal
Securities with an unrealized loss of $12.1 million and $3.4 million ,
respectively. As of December 31, 2021 , we had fifteen U.S. Treasury Notes and
nineteen Municipal Securities with an unrealized loss of $1.3 million and $0.2
million , respectively. As of December 31, 2020 , we had no U.S. Treasury Notes or
Municipal Securities with an unrealized loss. As of December 31, 2022 , we had 11
securities issued by Government-Sponsored Enterprises with an unrealized loss of
$10.3 million compared to nine Government-Sponsored Enterprises with an
unrealized loss of $1.9 million as of December 31, 2021 . The unrealized losses
on these securities are related to changes in the interest rate environment from
the date of purchase. The contractual terms of these investments do not permit
the issuer to settle the securities at a price less than the amortized cost of
the investment. Therefore, these investments are not considered
other-than-temporarily impaired. We have the ability to hold these investments
until market price recovery or maturity.
The primary purpose of the investment portfolio is to fund loan demand, manage
fluctuations in deposits and liquidity, satisfy pledging requirements and
generate a favorable return on investment. In doing these things, our main
objective is to adhere to sound investment practices. To that end, all purchases
and sales of investment securities are made through reputable securities dealers
that have been approved by the Board of Directors. The Board of Directors of the
Bank reviews the entire investment portfolio at each regular monthly meeting,
including any purchases, sales, calls, and maturities during the previous month.
Furthermore, the Credit Department conducts a financial underwriting assessment
of all municipal securities and their corresponding municipalities annually and
management reviews the assessments.
LOAN PORTFOLIO COMPOSITION
We focus our lending activities on small and middle market businesses,
professionals and individuals in our geographic market. At
19
The following table presents our loan portfolio, excluding both mortgage loans
to be sold and deferred loan fees, as of December 31, 2022 , compared to the
prior four years.
(in thousands) 2022 2021 2020 2019 2018
Commercial $ 45,072 $ 45,804 $ 51,041 $ 52,848 $ 54,829
Commercial real estate
construction 17,524 12,054 14,814 12,491 7,304
Commercial real estate
other 172,897 165,719 146,188 143,824 143,703
Consumer real estate 91,637 71,307 71,836 59,532 63,787
Consumer other 3,852 3,769 4,481 5,378 5,040Paycheck protection program - 7,979 32,443
- -
Total $ 330,982 $ 306,632 $ 320,803 $ 274,073 $ 274,663
During the year ended December 31, 2022 , total loans increased $24.3 million .
This is primarily due to growth in our consumer real estate and commercialreal estate portfolios.
We had no foreign loans or loans to fund leveraged buyouts at any time during
the years ended
The following table presents the contractual terms to maturity for loans
outstanding at
Selected Loan Maturity as of December 31, 2022
Over One
Year
but Less After 5 Years
Than 5 Through 15 Over 15
(in thousands) One Year or Less Years Years Years Total
Commercial $ 17,634 $ 25,142 $ 2,296 $ - $ 45,072
Commercial real estate
construction 3,734 13,790 - - 17,524
Commercial real estate
other 28,684 138,107 4,007 2,099 172,897
Consumer real estate 10,747 9,967 31,704 39,219 91,637
Consumer other 1,498 2,354 - - 3,852Paycheck protection program - -
- - -
Total $ 62,297 $ 189,360 $ 38,007 $ 41,318 $ 330,982
Loans maturing after one
year with:
Fixed interest rates $ 203,054
Floating interest rates -
Total $ 203,054
IMPAIRED LOANS
A loan is impaired when it is probable that we will be unable to collect all
amounts due according to the contractual terms of the loan agreement based on
current information and events. All loans with a principal balance over $50,000
placed on non-accrual status are classified as impaired. However, not all
impaired loans are on non-accrual status nor do they all represent a loss.Impairment loss is measured by:
a. The present value of the future cash flow discounted at the loan's effective
interest rate, or
b. The fair value of the collateral if the loan is collateral dependent.
The following is a schedule of our impaired loans and non-accrual loans as of
2022 2021 2020 2019 2018
Nonaccrual loans
Beginning inMarch 2020 , the Bank provided payment accommodations to customers, consisting of 60-day principal deferral to borrowers negatively impacted by COVID-19. During 2020, the Bank processed approximately$0.7 million in principal deferments to 84 customers, with an aggregate loan balance of$29.7 million . The Bank did not process any principal deferments during the years endedDecember 31, 2022 and 2021. The principal deferments represented 0.24% of our total loan portfolio as ofDecember 31, 2020 . 20 TROUBLED DEBT RESTRUCTURINGS According to GAAP, we are required to account for certain loan modifications or restructurings as a troubled debt restructuring ("TDR"), when appropriate. In general, the modification or restructuring of a debt is considered a TDR if we, for economic or legal reasons related to a borrower's financial difficulties, grant a concession to the borrower that we would not otherwise consider. Three factors must always be present:
1. An existing credit must formally be renewed, extended, or modified,
2. The borrower is experiencing financial difficulties, and
3. We grant a concession that we would not otherwise consider.
The following is a schedule of our TDR's including the number of loans
represented.
2022 2021 2020 2019 2018
Number of TDRs 5 5 14 3 -
Amount of TDRs $ 971,150 $ 1,039,909 $ 5,803,163 $ 573,473 $ -
The Financial Accounting Standards Board ("FASB") Accounting Standards
Codification ("ASC") 310-20-35-9 allows a loan to be removed from TDR status if
the terms of the loan reflect current market rates and the loan has been
performing under modified terms for an extended period of time or under certain
other circumstances.
Nine TDRs with a balance of$4.7 million atDecember 31, 2020 were removed from TDR status during the year endedDecember 31, 2021 . Five TDRs with a balance of$3.8 million were removed from TDR status due to improvement in financial condition and sustained performance under the restructured terms, two TDRs with a balance of$0.5 million were paid off, and two TDRs with a balance of$0.4 million were paid off through refinancing into new loans at market terms. One TDR with a balance of$33,300 atDecember 31, 2017 was removed from TDR status during the year endedDecember 31, 2018 since, at the most recent renewal, the loan was amortized at market rate and no concessions were granted. We do not know of any potential problem loans which will not meet their contractual obligations that are not otherwise discussed herein. Regulatory agencies, as set forth in the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (initially issued onMarch 22, 2020 and revised onApril 7, 2020 ), have encouraged financial institutions to work prudently with borrowerswho are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. In this statement, the regulatory agencies expressed their view of loan modification programs as positive actions that may mitigate adverse effects on borrowers due to COVID-19 and that the agencies will not criticize institutions for working with borrowers in a safe and sound manner. Moreover, the revised statement provides that eligible loan modifications related to COVID-19 may be accounted for under section 4013 of the CARES Act or in accordance with ASC 310-40. Under Section 4013 of the CARES Act, banks may elect not to categorize loan modifications as TDRs if the modifications are related to COVID-19, executed on a loan that was not more than 30 days past due as ofDecember 31, 2019 , and executed betweenMarch 1, 2020 and the earlier ofDecember 31, 2020 or 60 days after the date of termination of the National Emergency. All short- term loan modifications made on a good faith basis in response to COVID-19 to borrowerswho were current prior to any relief are not considered TDRs. Beginning inMarch 2020 , the Bank provided payment accommodations to customers, consisting of 60-day principal deferral to borrowers negatively impacted by COVID-19. The Bank has examined the payment accommodations granted to borrowers in response to COVID-19 and classified 9 loans, with an aggregate loan balance of$4.0 million , that were granted payment accommodations as TDRs given the continued financial difficulty of the customer, associated industry risk, and multiple deferral requests. As ofDecember 31, 2021 , 4 of the TDRs were removed from TDR status due to improvement in financial condition and sustained performance under the restructured terms, 2 TDRs were paid off through refinancing into new loans at market terms, and 1 TDR was paid off. Two loans with a balance of$0.5 million remained in TDR status as ofDecember 31, 2021 . An additional loan was removed from TDR status during 2022. The remaining loan with a balance of$0.1 million is paying as agreed as ofDecember 31, 2022 . The Bank will continue to examine payment accommodations as requested by the borrowers. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents our estimate of probable losses inherent in our loan portfolio. The adequacy of the allowance for loan losses (the "allowance") is reviewed by the Loan Committee and by the Board of Directors on a quarterly basis. For purposes of this analysis, adequacy is defined as a level sufficient to absorb estimated losses in the loan portfolio as of the balance sheet date presented. To remain consistent with GAAP, the methodology employed for this analysis has been modified over the years to reflect the economic environment and new accounting pronouncements.The Credit Department reviews this calculation on a quarterly basis. In addition, an independent third party validates the allowance calculation on a periodic basis. The methodology is based on a reserve model that is comprised of the three components listed below:
1) Specific reserve analysis for impaired loans based on FASB ASC 310-10-35,
Receivables - Overall
2) General reserve analysis applying historical loss rates based on FASB ASC
450-20, Contingencies: Loss Contingencies
3) Qualitative or environmental factors.
Loans greater than
1) The loan is on non-accrual
2) The loan is a troubled debt restructuring
3) The loan is over 60 days past due
4) The loan is rated substandard, doubtful, or loss
5) Excessive principal extensions are executed
6) If we are provided information that indicates we will not collect all
principal and interest as scheduled
Impairment is measured by the present value of the future cash flow discounted
at the loan's effective interest rate or the fair value of the collateral if the
loan is collateral dependent. An impaired loan may not represent an expected
loss.
21
A general reserve analysis is performed on all loans, excluding impaired loans.
This analysis includes a pool of loans that are reviewed for impairment but are
not found to be impaired. Loans are segregated into similar risk groups and a
historical loss ratio is determined for each group over a five-year period. The
five-year average loss ratio by loan type is then used to calculate the
estimated loss based on the current balance of each group.
Qualitative and environmental loss factors are also applied against the
portfolio, excluding impaired loans. These factors include external risk factors
that we believe are representative of our overall lending environment. We
believe that the following factors create a more comprehensive loss projection,
which we can use to monitor the quality of the loan portfolio.
1) Portfolio risk
a) Levels and trends in delinquencies and impaired loans and changes in loan
rating matrix
b) Trends in volume and terms of loans
c) Over-margined real estate lending risk
2) National and local economic trends and conditions
3) Effects of changes in risk selection and underwriting practices
4) Experience, ability and depth of lending management staff
5) Industry conditions
6) Effects of changes in credit concentrations
a) Loan concentration b) Geographic concentration c) Regulatory concentration
7) Loan and credit administration risk
a) Collateral documentation b) Insurance risk
c) Maintenance of financial information risk
Portfolio Risk Portfolio risk includes the levels and trends in delinquencies, impaired loans and changes in the loan rating matrix, trends in volume and terms of loans, and over- margined real estate lending. We are satisfied with the stability of the past due and non-performing loans and believe there has been no decline in the quality of our loan portfolio due to any trend in delinquent or adversely classified loans. Sizable unsecured principal balances on a non-amortizing basis are monitored. Although the vast majority of our real estate loans are underwritten on a cash flow basis, the secondary source of repayment is typically tied to our ability to realize the conversion of the collateral to cash. Accordingly, we closely monitor loan to value ratios. The maximum collateral advance rate is 80% on all real estate transactions, with the exception of raw land at 65% and land development at 70%. Occasionally, we extend credit beyond our normal collateral advance margins in real estate lending. We refer to these loans as over-margined real estate loans. These loans are monitored and the balances reported to the Board of Directors every quarter. An excessive level of this practice (as a percentage of capital) could result in additional regulatory scrutiny, competitive disadvantages and potential losses if forced to convert the collateral. The consideration of over-margined real estate loans directly relates to the capacity of the borrower to repay. We often request additional collateral to bring the loan to value ratio within the policy objectives and require a strong secondary source of repayment. Although significantly under our policy threshold of 100% of capital (currently approximately$38.8 million ), the amount of over-margined real estate loans currently totals approximately$2.9 million or approximately 0.88% of our loan portfolio atDecember 31, 2022 compared to$1.5 million or approximately 0.48% of the loan portfolio atDecember 31, 2021 . A credit rating matrix is used to rate all extensions of credit and to provide a more specific picture of the risk each loan poses to the quality of the loan portfolio. There are eight possible ratings used to determine the quality of each loan based on the following characteristics: cash flow, collateral quality, guarantor strength, financial condition, management quality, operating performance, the relevancy of the financial statements, historical loan performance, debt coverage ratio, and the borrower's leverage position. The matrix is designed to meet our standards and expectations of loan quality. It is based on experience with similarly graded loans, industry best practices, and regulatory guidance. Our loan portfolio is graded in its entirety, with the exception of PPP loans. Because PPP loans were 100% guaranteed by the SBA and did not undergo the Bank's typical underwriting process, they were not graded. There were no PPP loans outstanding atDecember 31, 2022 .
National and local economic trends and conditions
National and local economic trends and conditions are constantly changing and both positively and negatively impact borrowers. Most macroeconomic conditions are not controllable by us and are incorporated into the qualitative risk factors. Natural and environmental disasters, including the rise of sea levels, political uncertainty, increasing levels of consumer price inflation, supply-chain disruptions and international instability are a few of the trends and conditions that are currently affecting the national and local economies. Additionally, the national and local economy has been affected by COVID-19 during the years endedDecember 31, 2022 and 2021. These changes have impacted borrowers' ability, in many cases, to repay loans in a timely manner. On occasion, a loan's primary source of repayment (i.e. personal income, cash flow, or lease income) may be eroded as a result of unemployment, lack of revenues, or the inability of a tenant to make rent payments.
Effects of changes in risk selection and underwriting practices
The quality of our loan portfolio is contingent upon our risk selection and underwriting practices. All new loans (except for mortgage loans in the process of being sold to investors and loans secured by properly margined negotiable securities traded on an established market or other cash collateral) with exposure over$300,000 are reviewed by the Loan Committee on a monthly basis. The Board of Directors review credits over$750,000 monthly. Annual credit analyses are conducted on credits over$500,000 upon the receipt of updated financial information. Prior to extensions of credit, significant loan opportunities go through sound credit underwriting. OurCredit Department conducts a detailed cash flow analysis on each proposal using the most current financial information. 22
Experience, ability and depth of lending management staff
We have over 300 combined years of lending experience among our lending staff. We are aware of the many challenges currently facing the banking industry. As other banks look to increase earnings in the short term, we will continue to emphasize the need to maintain safe and sound lending practices and core deposit growth managed with a long-term perspective.
Industry conditions
There continues to be an influx of new banks and consolidation of existing banks in our geographic area, which creates pricing competition. We believe that our borrowing base is well established and therefore unsound price competition
is not necessary.
Effects of changes in credit concentrations
The risks associated with the effects of changes in credit concentration include loan, geographic and regulatory concentrations. As ofDecember 31, 2022 , two Standard Industrial Code groups, activities related to real estate and redi-mix concrete, comprised more than 2% of our total loans outstanding.
Effects of changes in geographic concentrations
We are located along the east coast ofthe United States and on an earthquake fault line, increasing the chances that a natural disaster may impact our borrowers and us. We have a Disaster Recovery Plan in place; however, the amount of time it would take for our customers to return to normal operations is unknown. Our plan is reviewed and tested annually.
Loan and credit administration risk
Loan and credit administration risk includes collateral documentation, insurance risk and maintaining financial information risk.
The majority of our loan portfolio is collateralized with a variety of our borrowers' assets. The execution and monitoring of the documentation to properly secure the loan is the responsibility of our lenders and loan department. We require insurance coverage naming us as the mortgagee or loss payee. Although insurance risk is also considered collateral documentation risk, the actual coverage, amounts of coverage and increased deductibles are important to management. Financial Information Risk includes a function of time during which the borrower's financial condition may change; therefore, keeping financial information up to date is important to us. Our policy requires all new loans (with a credit exposure of$10,000 or more), regardless of the customer's history with us, to have updated financial information. In addition, we monitor appraisals closely as real estate values are appreciating. Based on our analysis of the adequacy of the allowance for loan loss model, we recorded a reduction in the allowance for loan loss of$0.1 million for the year endedDecember 31, 2022 compared to a provision for loan loss of$0.1 million for the year endedDecember 31, 2021 . AtDecember 31, 2022 , the five-year average loss ratios were: 0.19% Commercial, 0.00%Commercial Real Estate Construction , -0.02% Commercial Real Estate Other, -0.03%Consumer Real Estate , and 0.46% Consumer Other. With regard to jumbo loans, we obtain peer data for use to calculate historical loss ratios. AtDecember 31, 2022 , the 5-year average loss for the jumbo loan portfolio was 0.01%. During the year endedDecember 31, 2022 , charge-offs of$42,644 and recoveries of$31,878 were recorded to the allowance for loan losses, resulting in an allowance for loan losses of$4.3 million or 1.30% of total loans atDecember 31, 2022 . During the year endedDecember 31, 2021 , charge-offs of$20,990 and recoveries of$0.1 million were recorded to the allowance for loan losses, resulting in an allowance for loan losses of$4.4 million or 1.43% of total loans atDecember 31, 2021 . During the year endedDecember 31, 2020 , charge-offs of$0.3 million and recoveries of$0.2 million were recorded to the allowance for loan losses, resulting in an allowance for loan losses of$4.2 million or 1.30% of total loans atDecember 31, 2020 . We believe loss exposure in the portfolio is identified, reserved against, and closely monitored to ensure that economic changes are promptly addressed in the analysis of reserve adequacy. The accrual of interest is generally discontinued on loans which become 90 days past due as to principal or interest. The accrual of interest on some loans may continue even though they are 90 days past due if the loans are well secured or in the process of collection and we deem it appropriate. If non-accrual loans decrease their past due status to less than 30 days for a period of six to nine months, they are reviewed individually to determine if they should be returned to accrual status. AtDecember 31, 2022 and 2021, there were no loans over 90 days past due still accruing interest. 23 The following table represents a summary of loan loss experience for the past five years. 2022 2021 2020 2019 2018 (in thousands) Balance of the allowance of loan losses at the beginning of the period$ 4,377 $ 4,186 $ 4,004
$ 4,214 $ 3,875 Charge-offs Commercial (41 ) - (172 ) (399 ) (31 )Commercial Real Estate Construction - - - - -Commercial Real Estate Other - - - - - Consumer Real Estate (2 ) - - - - Consumer Other - (11 ) (116 ) (8 ) (85 ) Paycheck Protection Program (0 ) (10 ) (2 )
- -
Total charge-offs (43 ) (21 ) (290 ) (407 ) (116 )
Recoveries
Commercial 1 21 89 12 14
Commercial Real Estate
Construction - - - - -
Commercial Real Estate
Other 18 - 100 - 57
Consumer Real Estate - 48 - - 45
Consumer Other 12 22 43 5 14Paycheck Protection Program 1 1 -
- -
Total recoveries 32 92 232 17 130
Net (charge-offs)
recoveries (11 ) 71 (58 ) (390 ) 14
Provision charged to
operations (75 ) 120 240 180 325
Balance of the allowance
for loan losses at the
end of the period $ 4,291 $ 4,377 $ 4,186 $ 4,004 $ 4,214
24
We believe the allowance for loan losses at December 31, 2022 is adequate to
cover estimated losses in the loan portfolio; however, assessing the adequacy of
the allowance is a process that requires considerable judgment. Our judgments
are based on numerous assumptions about current events that we believe to be
reasonable, but may or may not be valid. Thus, there can be no assurance that
loan losses in future periods will not exceed the current allowance amount or
that future increases in the allowance will not be required. No assurance can be
given that our ongoing evaluation of the loan portfolio in light of changing
economic conditions and other relevant circumstances will not require
significant future additions to the allowance, thus adversely affecting our
operating results.
The following table presents a breakdown of the allowance for loan losses for
the past five years.
2022 2021 2020 2019 2018
$ %(1) $ %(1) $ %(1) $ %(1) $ %(1)
(in thousands)
Commercial $ 736 14 % $ 796 15 % $ 1,030 16 % $ 1,430 19 % $ 1,665 20 %
Commercial Real
Estate
Construction 231 5 % 175 4 % 199 5 % 109 5 % 64 3 % Commercial Real Estate Other 2,216 52 % 2,376 54 % 1,909
46 % 1,271 52 % 1,292 52 %
Consumer Real
Estate 1,015 28 % 925 23 % 925
22 % 496 22 % 387 23 %
Consumer Other 94 1 % 105 1 % 123 1 % 698 2 % 806 2 %
Paycheck
Protection
Program - - % - 3 % - 10 % - - % - - %
Total $ 4,291 100 % $ 4,377 100 % $ 4,186 100 %$ 4,004 100 %$ 4,214 100 %
(1) Loan category as a percentage of total loans.
The allowance is also subject to examination testing by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions and other adequacy tests. In addition, such regulatory agencies could require us to adjust our allowance based on information available to them at the time of their examination. The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to the methodology used to determine the allowance for loan losses described above, adjusted for factors specific to binding commitments, including the probability of funding and historical loss ratio. During the years endedDecember 31, 2022 and 2021, no provisions were recorded. The balance for the reserve for unfunded lending commitments was$44,912 as ofDecember 31, 2022 and 2021. NONPERFORMING ASSETS Nonperforming assets include other real estate owned ("OREO"), nonaccrual loans and loans past due 90 days or more and still accruing interest. The following table summarizes nonperforming assets for the five years endedDecember 31 :
Nonperforming Assets (in thousands) 2022 2021 2020 2019 2018 Nonaccrual loans$ 631 $ 815 $ 1,156 $ 1,666 $ 824 Loans past due 90 days or more and still accruing interest - - - - - Total nonperforming loans 631 815 1,156 1,666 824 Other real estate owned - - - - - Total nonperforming assets$ 631 $ 815 $ 1,156 $ 1,666 $ 824 Allowance for loan losses to nonaccrual loans 679.60 % 537.36 % 362.11 % 240.34 % 511.41 %
Nonaccrual loans to total loans 0.19 % 0.27 % 0.36 % 0.61 % 0.30 %
Nonperforming loans to total
loans 0.19 % 0.27 % 0.36 % 0.61 % 0.30 %
Nonperforming assets to total
assets 0.10 % 0.12 % 0.22 % 0.37 % 0.19 %
25
DEPOSITS
The following table shows the contractual maturities of time deposits in
denominations of
Less than Three months Six months to One year to Five
three to less than less than one less than years or
One Day months six months year five years more Total
(in thousands)
CD's and other
time deposits less
than $100,000 $ - $ 1,875 $ 1,158 $ 1,486 $ 1,130 $ - $ 5,649
CD's and other
time deposits
$100,000 and over - 4,065 1,660 4,574 622 - 10,921
Total $ - $ 5,940 $ 2,818 $ 6,060 $ 1,752 $ - $ 16,570
CD's and other
time deposits in
excess of FDIC
insurance limit $ - $ 838 $ 299 $ 917 $ - $ - 2,054
Certificates of Deposit
The following table presents average deposits by category.
2022 2021 2020
Average
Average Average Rate Average Average Average Rate
(in thousands) Balance Paid Balance Rate Paid Balance Paid
Non-interest-bearing
demand $ 243,110 N/A $ 205,238 N/A $ 163,394 N/A
Interest-bearing
transaction accounts 269,510 0.08 % 242,618 0.04 % 208,941 0.08 %
Savings 65,817 0.06 % 51,609 0.06 % 40,771 0.10 %
Time deposits 18,444 0.21 % 20,435 0.28 % 20,965 0.47 %
$ 596,881 $ 519,900 $ 434,071 Deposits decreased$10.5 million or 1.73% to$598.7 million as ofDecember 31, 2022 , from$609.2 million as ofDecember 31, 2021 . Non-interest bearing deposits decreased$32.7 million to$223.1 million as ofDecember 31, 2022 . The higher balance in 2021 for these demand deposits was temporary in nature.
We fund growth through core deposits. We do not have, nor do we rely on, Brokered Deposits or Internet Deposits.
SHORT-TERM BORROWINGS
At December 31, 2022 and 2021, we had no outstanding federal funds purchased. We
have a Borrower-In-Custody arrangement with the Federal Reserve . This
arrangement permits the Company to retain possession of loans pledged as
collateral to secure advances from the Federal Reserve Discount Window. Under
this agreement, we may borrow up to $78.3 million . We established this
arrangement as an additional source of liquidity.
At
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of operations, we engage in a variety of financial
transactions that, in accordance with GAAP, are not recorded in the financial
statements, or are recorded in amounts that differ from the notional amounts.
These transactions involve, to varying degrees, elements of credit, interest
rate, and liquidity risk. We use such transactions for general corporate
purposes or customer needs. General corporate purpose transactions are used to
help manage credit, interest rate and liquidity risk or to optimize capital.
Customer transactions are used to manage customer requests for funding.
Our off-balance sheet arrangements consist principally of commitments to extend
credit described below. We estimate probable losses related to binding unfunded
lending commitments and record a reserve for unfunded lending commitments in
other liabilities on the consolidated balance sheet. At December 31, 2022 and
2021, the balance of this reserve was $44,912 . At December 31, 2022 and 2021, we
had no interests in non-consolidated special purpose entities.
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 amounts do not necessarily
represent future cash requirements. The amount of collateral obtained if deemed
necessary by the Company upon extension of credit is based on our credit
evaluation of the borrower. Collateral held varies but may include accounts
receivable, negotiable instruments, inventory, property, plant and equipment,
and real estate. Commitments to extend credit, including unused lines of credit,
amounted to $145.4 million and $117.5 million as of December 31, 2022 and 2021,
respectively.
26
Standby letters of credit represent our obligation to a third-party contingent
upon the failure of our customer to perform under the terms of an underlying
contract with the third party or obligates us to guarantee or stand as surety
for the benefit of the third party. The underlying contract may entail either
financial or nonfinancial obligations and may involve such things as the
shipment of goods, performance of a contract, or repayment of an obligation.
Under the terms of a standby letter, generally drafts will be drawn only when
the underlying event fails to occur as intended. We can seek recovery of the
amounts paid from the borrower. Commitments under standby letters of credit are
usually for one year or less. The maximum potential amount of undiscounted
future payments related to standby letters of credit at December 31, 2022 and
2021 was $2.5 million and $0.6 million , respectively.
We originate certain fixed rate residential loans and commit these loans for
sale. The commitments to originate fixed rate residential loans and the sales
commitments are freestanding derivative instruments. We had forward sales
commitments, totaling $0.9 million at December 31, 2022 , to sell loans held for
sale of $0.9 million , compared to forward sales commitments of $2.8 million at
December 31, 2021 , to sell loans held for sale of $2.8 million . The fair value
of these commitments was not significant at December 31, 2022 or 2021. We had no
embedded derivative instruments requiring separate accounting treatment.
Once we sell certain fixed rate residential loans, the loans are no longer
reportable on our balance sheet. With most of these sales, we have an obligation
to repurchase the loan in the event of a default of principal or interest on the
loan. This recourse period ranges from three to nine months. Misrepresentation
or fraud carries unlimited time for recourse. The unpaid principal balance of
loans sold with recourse was $8.9 million at December 31, 2022 and $30.8 million
at December 31, 2021 . For the years ended December 31, 2022 and December 31,
2021 , there were two loans and one loan repurchased, respectively.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance with GAAP, which require the measurement of financial position and results of operations in terms of historical dollars without consideration of changes in the relative purchasing power over time due to inflation.
Unlike most other industries, the assets and liabilities of financial institutions like the Company are primarily monetary in nature. As a result, interest rates generally have a more significant impact on our performance than the effects of general levels of inflation and changes in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. We strive to manage the relationship between interest rate sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting
from
inflation.
CAPITAL RESOURCES
Our capital needs have been met to date through the $10.6 million in capital
raised in our initial offering, the retention of earnings less dividends paid
and the exercise of options to purchase stock. Total shareholders' equity at
December 31, 2022 was $38.8 million . The rate of asset growth since our
inception has not negatively impacted our capital base.
On July 2, 2013 , the Federal Reserve Board approved the final rules implementing
the Basel Committee on Banking Supervision's ("BCBS") capital guidelines for
U.S. banks ("Basel III"). Following the actions by the Federal Reserve , the FDIC
also approved regulatory capital requirements on July 9, 2013 . The FDIC's rule
is identical in substance to the final rules issued by the Federal Reserve Bank .
The purpose of Basel III is to improve the quality and increase the quantity of
capital for all banking organizations. The minimum requirements for the quantity
and quality of capital were increased. The rule includes a new common equity
Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1
capital conservation buffer of 2.5% of risk-weighted assets. The rule also
raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6%
and requires a minimum leverage ratio of 4%. In addition, the rule implemented a
strict eligibility criteria for regulatory capital instruments and improved the
methodology for calculating risk-weighted assets to enhance risk sensitivity.
On November 4, 2019 , the federal banking agencies jointly issued a final rule on
an optional, simplified measure of capital adequacy for qualifying community
banking organizations called the community bank leverage ratio ("CBLR")
framework effective on January 1, 2020 . A qualifying community banking
organization is defined as having less than $10 billion in total consolidated
assets, a leverage ratio greater than 9%, off-balance sheet exposures of 25% or
less of total consolidated assets, and trading assets and liabilities of 5% or
less of total consolidated assets. Additionally, the qualifying community
banking institution must be a non-advanced approaches FDIC supervised
institution. The final rule adopts Tier 1 capital and existing leverage ratio
into the CBLR framework. The Bank adopted this rule as of September 30, 2020 and
is no longer subject to other capital and leverage requirements. A CBLR bank
meeting qualifying criterion is deemed to have met the "well capitalized" ratio
requirements and be in compliance with the generally applicable capital rule.
The Bank's CBLR as of December 31, 2022 was 9.03%. As of December 31, 2022 , the
Company and the Bank were categorized as "well capitalized." We believe, as of
December 31, 2022 , that the Company and the Bank meet all capital adequacy
requirements to which we are subject.
There are no current conditions or events that we are aware of that would change the Company's or the Bank's capital adequacy category.
Please see "Notes to Consolidated Financial Statements" for additional
information regarding the Company's and the Bank's capital ratios at
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, the Company is not required to provide the information required by this item.
See the Market Risk section in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of this report for a discussion of certain market risks we face, including interest rate risk.
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