Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion and analysis identifies significant
factors that have affected our financial position and operating results during the periods included in the accompanying financial statements.
We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other
statistical information also included in this Annual Report on Form 10-K.
OVERVIEW
Our business model continues
to be client-focused, utilizing relationship teams to provide our clients with a specific banker contact and support team responsible
for all of their banking needs. The purpose of this structure is to provide a consistent and superior level of professional service, and
we believe it provides us with a distinct competitive advantage. We consider exceptional client service to be a critical part of our culture,
which we refer to as “ClientFIRST.”
At December 31, 2023, we had total assets of $4.06
billion, a 9.9% increase from total assets of $3.69 billion at December 31, 2022. The largest components of our total assets are loans
which were $3.60 billion and $3.27 billion at December 31, 2023 and 2022, respectively. Our liabilities and shareholders’ equity
at December 31, 2023 totaled $3.74 billion and $312.5 million, respectively, compared to liabilities of $3.40 billion and shareholders’
equity of $294.5 million at December 31, 2022. The principal component of our liabilities is deposits which were $3.38 billion and $3.13
billion at December 31, 2023 and 2022, respectively.
Like most community banks, we derive the majority of
our income from interest received on our loans and investments. Our primary source of funds for making these loans and investments is
our deposits, on which we pay interest. Consequently, one of the key measures of our success is our 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 and borrowings. Another key measure is the difference between the yield we earn on these interest-earning
assets and the rate we pay on our interest-bearing liabilities, which is called our net interest spread. In addition to earning interest
on our loans and investments, we earn income through fees and other charges to our clients.
Our net income available to common shareholders for
the years ended December 31, 2023 and 2022 was $13.4 million and $29.1 million, or diluted earnings per share (“EPS”) of $1.66
and $3.61 for the years ended December 31, 2023 and 2022, respectively. The decrease in net income resulted primarily from a decrease
in net interest income and an increase in noninterest expenses, partially offset by a decrease in the provision for credit losses. In
addition, our net income available to shareholders was $46.7 million, or EPS of $5.85 for the year ended December 31, 2021.
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SELECTED FINANCIAL DATA
The following table
sets forth our selected historical consolidated financial information for the periods and as of the dates indicated. We derived our balance
sheet and income statement data for the years ended December 31, 2023, 2022, and 2021 from our audited consolidated financial statements.
You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our audited consolidated financial statements and the related notes thereto, which are included elsewhere in this
Annual Report on Form 10-K.
Years Ended December 31,
BALANCE SHEET DATA
Preferred stock - - -
SELECTED RESULTS OF OPERATIONS DATA
Preferred stock dividends - - -
PER COMMON SHARE DATA
Weighted average number of common shares outstanding:
SELECTED FINANCIAL RATIOS
Performance Ratios:
Net interest margin, tax equivalent(2) 2.07 % 3.19 % 3.45 %
Asset Quality Ratios:
Nonperforming assets to total loans (1) 0.11 % 0.08 % 0.20 %
Nonperforming assets to total assets 0.10 % 0.07 % 0.17 %
Net charge-offs to average total loans 0.00 % (0.05 %) 0.06 %
Allowance for credit losses to total loans 1.13 % 1.18 % 1.22 %
Holding Company Capital Ratios:
Growth Ratios:
Change in net income to common shareholders -53.89 % -37.67 % 154.86 %
Change in earnings per common share - diluted -54.02 % -38.29 % 150.00 %
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Footnotes to table:
(1) Excludes loans held for sale.
CRITICAL ACCOUNTING ESTIMATES
We have adopted various accounting policies that govern
the application of accounting principles generally accepted in the U.S. and with general practices within the banking industry in the
preparation of our financial statements. Our significant accounting policies are described in Note 1 to our Consolidated Financial Statements
as of December 31, 2023.
Certain accounting policies inherently involve a greater
reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be
materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities
and our results of operations. We consider these accounting policies and estimates to be critical accounting policies. We have identified
the determination of the allowance for credit losses, the fair valuation of financial instruments and income taxes to be the accounting
areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information
becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore,
management has reviewed and approved these critical accounting policies and estimates and has discussed these policies with the Company’s
Audit Committee.
Allowance for Credit Losses
The allowance for credit losses
(“ACL”) is management’s current estimate of expected credit losses that will result from the inability of our borrowers
to make required loan payments, with particular applicability on our balance sheet to loans and unfunded loan commitments. Estimating
the amount of the ACL requires significant judgment and the use of estimates related to historical experience, current conditions, reasonable
and supportable forecasts, and the value of collateral on collateral-dependent loans. Credit losses are charged against the allowance,
while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations
based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.
There are many factors affecting
the ACL; some are quantitative while others require qualitative judgment. Although management believes its process for determining the
allowance adequately considers all the potential factors that could potentially result in credit losses, the process includes subjective
elements and is susceptible to significant change. To the extent actual outcomes are worse than management estimates, additional provision
for credit losses could be required that could adversely affect our earnings or financial position in future periods.
See Note 1 – Summary
of Significant Accounting Policies and Activities for further detailed descriptions of our estimation process and methodology related
to the ACL. See also Note 4 – Loans and Allowance for Credit Losses and “Provision for Credit Losses” in this MD&A.
Fair Valuation of Financial Instruments
Certain assets and liabilities are measured at fair
value on a recurring basis, including securities and derivative instruments. Assets and liabilities carried at fair value inherently include
subjectivity and may require the use of significant assumptions, adjustments and judgment including, among others, discount rates, rates
of return on assets, cash flows, default rates, loss rates, terminal values and liquidation values. A significant change in assumptions
may result in a significant change in fair value, which in turn, may result in a higher degree of financial statement volatility and could
result in significant impact on our results of operations, financial condition or disclosures of fair value information.
The fair value hierarchy requires
use of observable inputs first and subsequently unobservable inputs when observable inputs are not available. Our fair value measurements
involve various valuation techniques and models, which involve inputs that are observable (Level 1 or Level 2 in fair value hierarchy),
when available. The level of judgment required to determine fair value is dependent on the methods or techniques used in the process.
Assets and liabilities that are measured at fair value using quoted prices in active markets (Level 1) do not require significant judgment
while the valuation of assets and liabilities
when quoted market prices are not available (Levels 2 and 3) may require significant
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judgment to assess whether observable or unobservable
inputs for those assets and liabilities provide reasonable determination of fair value. See Note 12 to the Consolidated Financial Statements
for additional information regarding the fair values measured at each level of the fair value hierarchy, additional discussion regarding
fair value measurements, and a brief description of how fair value is determined for categories that have unobservable inputs.
Income Taxes
The financial statements have been prepared on the
accrual basis. When income and expenses are recognized in different periods for financial reporting purposes versus for the purposes of
computing income taxes currently payable, deferred taxes are provided on such temporary differences. Deferred tax assets and liabilities
are recognized for the expected future tax consequences of events that have been recognized in the consolidated financial statements or
tax returns. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be realized or settled.
RESULTS OF OPERATIONS
Net Interest Income and Margin
Our level of net interest income is determined by the
level of earning assets and the management of our net interest margin. For the years ended December 31, 2023, 2022, and 2021, our net
interest income was $77.7 million, $97.6 million, and $87.7 million, respectively. The $20.0 million, or 20.5%, decrease in net interest
income during 2023, compared to 2022, was driven by a $79.9 million increase in interest expense, primarily related to our interest-bearing
deposits, partially offset by a $59.9 million increase in interest income. During 2022, our net interest income increased $9.9 million,
or 11.3%, compared to 2021, while average interest-earning assets increased $525.0 million and average interest-bearing liabilities increased
$401.0 million.
Interest income for the years ended December 31, 2023,
2022, and 2021 was $177.6 million, $117.7 million, and $93.2 million, respectively. A significant portion of our interest income relates
to our strategy to maintain a large portion of our assets in higher earning loans compared to lower yielding investments and federal funds
sold. As such, 93.5% of our interest income related to interest on loans during 2023, compared to 97.1% during 2022 and 98.3% during 2021.
Also, included in interest income on loans was $1.7 million related to the net amortization of loan fees and capitalized loan origination
costs for the year ended December 31, 2023, compared to $1.7 million and $1.4 million for the years ended December 31, 2022 and 2021,
respectively. The increase in interest income during 2023 was driven by an increase in average interest-earning assets, combined with
higher yields on those assets.
Interest expense was $99.9 million, $20.0 million,
and $5.4 million for the years ended December 31, 2023, 2022, and 2021, respectively. Interest expense on deposits for 2023 represented
91.4% of total interest expense, compared to 90.3% for 2022, and 71.9% for 2021, while interest expense on borrowings represented 8.6%
of total interest expense for 2023, compared to 9.7% for 2022, and 28.1% for 2021. The increase in interest expense on deposits during
2023 resulted primarily from an increase in the rate paid on deposit balances which relates to the Federal Reserve’s 525 basis point
increase in the federal funds rate over the past two years.
We have included a number of tables to assist in our
description of various measures of our financial performance. For example, the “Average Balances, Income and Expenses, Yields and
Rates” table shows the average balance of each category of our assets and liabilities as well as the yield we earned or the rate
we paid with respect to each category during 2023, 2022, and 2021. Similarly, the “Rate/Volume Analysis” table demonstrates
the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown.
We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables
to illustrate our interest rate sensitivity with respect to interest-earning and interest-bearing accounts.
The following table sets forth information related
to our average balance sheet, average yields on assets, and average costs of liabilities at December 31, 2023, 2022 and 2021. We derived
these yields or costs by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average
balances from the daily balances throughout the periods indicated. During the same periods, we had no securities purchased with agreements
to resell. All investments were owned at an original maturity of over one year. Nonaccrual loans are included in earning assets in the
following tables. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status. The net
of capitalized loan costs and fees are amortized into interest income on loans.
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Average Balances, Income and Expenses, Yields and
Rates
For the Year Ended December 31,
Interest-earning assets
Interest-bearing liabilities
Less: tax-equivalent adjustment (1) (50 ) (59 ) (67 )
(2) Includes loans held for sale and nonaccrual loans.
Our net interest margin,
on a tax-equivalent basis (TE), was 2.07%, 3.19% and 3.45% for the years ended December 31, 2023, 2022 and 2021, respectively. Our net
interest margin (TE) decreased 112 basis points in 2023, compared to 2022, driven by higher costs on our interest-bearing liabilities,
partially offset by an increase in yield on our interest-earning assets. During 2022, our net interest margin decreased 26 basis points,
compared to 2021, due to higher costs on our interest-bearing liabilities, partially offset by an increase in yield on our interest-earning
assets.
Our average interest-earning assets increased by $695.1
million during the year ended December 31, 2023, compared to 2022, while the related yield on our interest-earning assets increased by
88 basis points. The increase in average interest-earning assets was driven by a $626.9 million increase in average loan balances and
a $46.4 million increase in federal funds sold and interest-bearing deposits with banks. In addition, the increase in yield on our interest
earning assets was driven by a 357 basis point increase in the yield on our federal funds sold and other interest-bearing deposits which
repriced as the Federal Reserve increased the federal funds rate by 100 basis points during 2023.
Our average interest-bearing liabilities increased
by $749.3 million during 2023 while the cost of our interest-bearing liabilities increased by 255 basis points. The increase in average
interest-bearing liabilities was driven primarily by a $598.8 million increase in average interest-bearing deposits at an average rate
of 3.46%. During 2022, our average interest-bearing liabilities increased by $401.0 million, compared to 2021, while the cost of our interest-bearing
liabilities increased by 64 basis points.
During the year ended December 31, 2022, our average
interest-earning assets increased by $525.0 million, compared to 2021, while the yield on our interest-earning assets increased by 17
basis points. The increase in average interest-earning assets was driven primarily by a $556.5 million increase in average loan balances
combined with an $35.3 million decrease in federal funds sold and interest-bearing deposits with banks. In addition, the increase in yield
on our interest earning assets was driven by a 144 basis point increase in the yield on our federal funds sold and other interest-bearing
deposits which repriced as the Federal Reserve increased the federal funds rate by 425 basis points during 2022.
Our net interest spread was
1.21% for the year ended December 31, 2023, compared to 2.88% for the same period in 2022 and 3.35% for 2021. The net interest spread
is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The
255 basis point increase in the cost of our interest-
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bearing liabilities, partially
offset by an 88 basis point increase in yield on our interest-earning assets resulted in a 167 basis point decrease in our net interest
spread for the 2023 period. We anticipate continued pressure on our net interest spread and net interest margin in future periods
as our deposits continue to reprice immediately with increases in the fed funds rate, compared to our loan portfolio which reprices as
loans are originated or renewed.
Rate/Volume Analysis
Net interest income can be analyzed in terms of the
impact of changing interest rates and changing volume. The following tables set forth the effect which the varying levels of interest-earning
assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented.
Years Ended
Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in
Interest income
Interest expense
Net interest income, the largest component of our
income, was $77.7 million for the year ended December 31, 2023, a $20.0 million decrease from net interest income of $97.6 million for
the year ended December 31, 2022. The decrease in net interest income was driven by a $79.9 million increase in interest expense, partially
offset by a $59.9 million increase in interest income. The 257 basis point increase in deposit costs drove the increase in interest expense
while the $626.9 million increase in average loan balances combined with the 77 basis point increase in loan yield drove the increase
in interest income.
Net interest income was $97.6 million for the year
ended December 31, 2022, a $9.9 million increase from net interest income of $87.7 million for the year ended December 31, 2021. The increase
in net interest income was driven by a $24.5 million increase in interest income, partially offset by a $14.6 million increase in interest
expense. The $556.5 million increase in average loan balances was the primary driver of the increase in interest income, while the 65
basis point increase in deposit costs drove the increase in interest expense.
Provision for Credit Losses
The provision for credit losses, which includes a
provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses and reserve for unfunded
commitments at levels consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date.
On January 1, 2022, we adopted the Current Expected Credit Loss (CECL) methodology for estimating credit losses, which resulted in an
increase of $1.5 million in our allowance for credit losses and an increase of $2.0 million in our reserve for unfunded commitments. The
tax-effected impact of these two items amounted to $2.8 million and was recorded as an adjustment to our retained earnings as of January
1, 2022. We review the adequacy of the allowance for credit losses on a quarterly basis. Please see the discussion below under “Results
of Operations – Allowance for Credit Losses” for a description of the factors we consider in determining the amount of the
provision we expense each period to maintain this allowance.
There was a $1.3 million provision for credit losses
for the year ended December 31, 2023, compared to a provision of $6.2 million and a reversal of $12.4 million for the years ended December
31, 2022 and 2021, respectively. The $1.3 million provision during 2023 included a $2.2 million provision for credit losses and a reversal
of $949,000 for unfunded commitments. The $2.2 million provision was driven primarily by $329.3 million in loan growth during the year,
while the $949,000 reversal was driven by a $153.7 million decrease in unfunded commitments. The $6.2 million provision during 2022, which
included a $780,000 provision for unfunded commitments, was driven primarily by $783.5 million in loan growth during the year, combined
with a $259.6 million increase in unfunded commitments. In addition, to loan growth,
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the provision for credit losses was impacted by slightly
lower expected loss rates due to historically low charge-offs during the 12 months ended December 31, 2022 while minor adjustments to
two internal qualitative factors increased the qualitative component of the allowance and related provision expense. The $12.4 million
reversal of provision during 2021 related to a reduction in qualitative adjustment factors driven by the overall improvement in economic
conditions as well as improvement in the credit quality of our portfolio following the pandemic.
Following is a summary of the activity in the allowance
for credit losses.
December 31,
Adjustment for CECL - 1,500 -
As of December 31, 2023, the allowance for credit
losses totaled $40.7 million, or 1.13% of gross loans. In comparison, the allowance for credit losses totaled $38.6 million as of December
31, 2022, or 1.18% of gross loans, and $30.4 million as of December 31, 2021, or 1.22% of gross loans.
During the year ended December 31, 2023, we had net
charge-offs of $166,000, consisting of $761,000 of loans charged-off in the current year, partially offset by $595,000 of recoveries on
loans previously charged-off. Net charge-offs were 0.00% of the average outstanding loan portfolio for 2023. In addition, nonperforming
assets increased to 0.10% of total assets while our level of classified assets decreased to 4.25% at December 31, 2023.
We reported net recoveries of $1.4 million and net
charge-offs of $1.3 million for the years ended December 31, 2022 and 2021, respectively, including charge-offs of $485,000 and recoveries
of $825,000 in 2022 and 2021, respectively. The net recoveries of $1.4 million and charge-offs of $1.3 million during 2022 and 2021, respectively,
represented 0.05% and 0.06% of the average outstanding loan portfolios for 2022 and 2021, respectively. In addition, nonperforming assets
were 0.07% and 0.17% of total assets for 2022 and 2021, respectively, and classified assets were 4.72% and 12.61% at December 31, 2022
and 2021, respectively.
Noninterest Income
The following table sets forth information related
to our noninterest income.
Year ended December 31,
Net lender fees on PPP loan sale - - 268
Gain (loss) on disposal of fixed assets - (394 ) 10
Gain on sale of securities - 12 (3 )
Noninterest income was $9.9 million for the year ended
December 31, 2023, a $280,000, or 2.9%, increase compared to noninterest income of $9.6 million for the year ended December 31, 2022.
The increase in noninterest income during 2023, compared to 2022, resulted primarily from a loss on disposal of assets during the prior
year. Offsetting the increases in noninterest income were decreases in mortgage banking income and other income. Other income decreased
due to a decrease in loan fee income during 2023 as compared to 2022 due to fewer loan originations.
Noninterest income was $9.6 million for the year ended
December 31, 2022, a $7.5 million, or 44.0%, decrease compared to noninterest income of $17.1 million for the year ended December 31,
2021. The decrease in noninterest income during 2022, compared to 2021, resulted primarily from the following:
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Offsetting these decreases in noninterest income were
increases in service fees on deposit accounts and ATM and debit card income due to growth in our client base and transaction volume.
Noninterest Expenses
The following table sets forth information related
to our noninterest expenses.
Years ended December 31,
Other real estate owned expenses, net - - 385
Noninterest expenses were $68.8 million for the year
ended December 31, 2023, a $5.9 million, or 9.4%, increase from noninterest expense of $62.9 million for 2022.
The increase in total noninterest expenses during
2023, compared to 2022, resulted primarily from the following:
Partially offsetting the above increases was a decrease
in professional of $139,000, or 5.3% due to less legal fees and consulting expenses.
Noninterest expenses were $62.9 million for the year
ended December 31, 2022, a $6.5 million, or 11.5%, increase from noninterest expense of $56.4 million for 2021.
The increase in total noninterest expenses during
2022, compared to 2021, resulted primarily from the following:
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Partially offsetting the above increases was a decrease
in other real estate owned expenses of $385,000 due to the sale of one commercial property in 2021.
Our efficiency ratio was 78.7% for 2023 compared to
58.7% for 2022. The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full dollar
of revenue and is computed by dividing noninterest expense by the sum of net interest income and noninterest income. The increase during
the 2023 period relates primarily to the decrease in net interest income compared to the prior year.
Income Taxes
Income tax expense was $4.0 million, $9.0 million
and $14.1 million for the years ended December 31, 2023, 2022 and 2021, respectively. Our effective tax rate was 23.0% for the year ended
December 31, 2023, compared to 23.6% for 2022, and 23.2% for 2021. The fluctuation in the effective rate for each of the periods is driven
by to the impact of tax-exempt income and equity compensation transactions that occurred during the respective periods in relation to
pre-tax income.
Investment Securities
At December 31, 2023 and 2022, our investment securities
portfolio was $154.6 million and $104.2 million, respectively, and represented approximately 3.8% and 2.8% of our total assets, respectively.
Our available for sale investment portfolio included corporate bonds, US treasuries, US agency securities, SBA securities, state and political
subdivisions, asset-backed securities, and mortgage-backed securities with a fair value of $134.7 million and amortized cost of $149.1
million for an unrealized loss of $14.4 million at December 31, 2023 compared to a fair value of $93.3 million and amortized cost of $110.3
million for an unrealized loss of $17.0 million at December 31, 2022.
The amortized costs and the fair value of our investments
are as follows.
December 31,
Available for Sale
Contractual maturities and yields on our investments
are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.
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Less Than One Year One to Five Years Five to Ten Years Over Ten Years Total
Available for Sale
Other investments are comprised of the following and
are recorded at cost which approximates fair value.
December 31,
Investment in Trust Preferred subsidiaries 403 403
Loans
Since loans typically provide higher interest yields
than other types of interest-earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average
loans for the years ended December 31, 2023 and 2022 were $3.50 billion and $2.87 billion, respectively. Before allowance for credit losses,
total loans outstanding at December 31, 2023 and 2022 were $3.60 billion and $3.27 billion, respectively.
The principal component of our loan portfolio is loans
secured by real estate mortgages. As of December 31, 2023, our loan portfolio included $3.05 billion, or 84.8%, of real estate loans,
compared to $2.78 billion, or 84.8%, as of December 31, 2022. Most of our real estate loans are secured by residential or commercial property.
We obtain a security interest in real estate, in addition to any other available collateral, in order to increase the likelihood of the
ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines.
We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral
and business types. In addition to traditional residential mortgage loans, we issue second mortgage residential real estate loans and
home equity lines of credit. Home equity lines of credit totaled $183.0 million as of December 31, 2023, of which approximately 46% were
in a first lien position, while the remaining balance was second liens, compared to $179.3 million as of December 31, 2022, of which approximately
48% were in first lien positions and the remaining balance was in second liens. The average home equity loan had a balance of approximately
$85,000 and a loan to value of approximately 73% as of December 31, 2023, compared to an average loan balance of $84,000 and a loan to
value of approximately 73% as of December 31, 2022. Further, 0.8% and 0.6% of our total home equity lines of credit were over 30 days
past due as of December 31, 2023 and 2022, respectively.
Following is a summary of our loan composition for
each of the last three years ended December 31, 2023. Of the $329.3 million in loan growth in 2023, $171.7 million of growth was in commercial
related loans, while $157.6 million of growth was in consumer related loans, specifically consumer real estate mortgages which grew by
$151.2 million during 2023. The increase in consumer real estate loans is related to our focus to continue to originate high quality 1-4
family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $469,000, a term of 23 years,
and an average rate of 4.10%.
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December 31,
(dollars in thousands) Amount %of Total Amount %of Total Amount %of Total
Commercial
Consumer
Maturities and Sensitivity of Loans to Changes in
Interest Rates
The information in the following table is based on
the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal
of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may
differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties.
The following table summarizes the composition and
maturities of the loan portfolio.
Commercial
Consumer
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The following table summarizes the loans due after one
year by category.
Interest Rate
(dollars in thousands) Fixed Floating or Adjustable
Commercial
Consumer
Nonperforming Assets
Nonperforming assets include real estate acquired
through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. The following table shows the nonperforming assets
and the related percentage of nonperforming assets to total assets and gross loans for the five years ended December 31, 2023. Generally,
a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering
economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the
loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received.
Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with
the loan terms before that loan can be placed back on accrual status. Further, the borrower must show capacity to continue performing
into the future prior to restoration of accrual status.
December 31,
Commercial
Consumer
Nonaccruing troubled debt restructurings (TDRs) - 1,796 2,952
Total nonaccrual loans, including nonaccruing TDRs 3,963 2,627 4,864
Asset Quality Ratios:
Nonperforming assets/total assets 0.10 % 0.07 % 0.17 %
Nonaccrual loans/gross loans 0.11 % 0.08 % 0.20 %
Loans over 90 days past due and still accruing - - -
Accruing troubled debt restructurings - 4,503 3,299
(1) Loans over 90 days are included in nonaccrual loans
At December 31, 2023, nonperforming assets were $4.0
million, or 0.10% of total assets and 0.11% of gross loans, compared to $2.6 million, or 0.07% of total assets and 0.08% of gross loans
at December 31, 2022. Nonaccrual loans increased $1.3 million to $4.0 million at December 31, 2023 from $2.6 million at December 31, 2022.
During 2023, we added eight new loans totaling $2.0 million to nonaccrual, two loans totaling $283,000 were returned to accruing status,
one loan totaling $30,000 was charged off, while paydowns on nonaccrual loans totaled $388,000. The amount of foregone interest income
on the nonaccrual loans as of December 31, 2023 and 2022 was approximately $73,000 and $28,000, respectively, for the twelve-month periods.
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A significant portion, or 95.1%, of nonaccrual loans
at December 31, 2023 were secured by real estate. We have evaluated the underlying collateral on these loans and believe that the collateral
on these loans is sufficient to minimize future losses. As a result of this level of coverage on nonaccrual loans, we believe the allowance
for credit losses of $40.7 million for the year ended December 31, 2023 is adequate.
As a general practice, most of our commercial loans
and a portion of our consumer loans are originated with relatively short maturities of less than ten years. As a result, when a loan reaches
its maturity, we frequently renew the loan and thus extend its maturity using similar credit standards as those used when the loan was
first originated. Due to these loan practices, we may, at times, renew loans which are classified as nonaccrual after evaluating the loan’s
collateral value and financial strength of its guarantors. Nonaccrual loans are renewed at terms generally consistent with the ultimate
source of repayment and rarely at reduced rates. In these cases, we will generally seek additional credit enhancements, such as additional
collateral or additional guarantees to further protect the loan. When a loan is no longer performing in accordance with its stated terms,
we will typically seek performance under the guarantee.
In addition, approximately 85% of our loans are collateralized
by real estate and approximately 96% of our individually evaluated loans are secured by real estate. Individual loan evaluations are generally
performed for individually evaluated loans, which includes nonaccrual loans and certain loans not meeting the risk characteristics of
the pool, whether on accrual or nonaccrual status. We use third party appraisers to determine the fair value of collateral dependent loans.
Our current loan and appraisal policies require us to review individually evaluated loans at least annually and determine whether it is
necessary to obtain an updated appraisal, either through a new external appraisal or an internal appraisal evaluation. We review each
of our individually evaluated loans on a quarterly basis to determine the level of impairment. As of December 31, 2023, we do not have
any individually evaluated loans carried at a value in excess of the appraised value. We typically charge-off a portion or create a specific
reserve for individually evaluated loans when we do not expect repayment to occur as agreed upon under the original terms of the loan
agreement.
At December 31, 2023, individually evaluated loans
totaled approximately $4.8 million for which $3.7 million of these loans have a reserve of approximately $688,000 allocated in the allowance.
At December 31, 2022, individually evaluated loans totaled approximately $7.1 million for which $6.8 million of these loans had a reserve
of approximately $1.3 million allocated in the allowance.
We adopted Accounting Standards Update (“ASU”)
2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”)
effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measurement of troubled debt restructurings and
enhanced disclosures for loan modifications to borrowers experiencing financial difficulty. During the 12 months ended December 31, 2023,
we had two commercial business loans that were modified due to the borrowers experiencing financial difficulty. The amortized cost basis
of the two loans was $319,000 at December 31, 2023.
Prior to adopting ASU 2022-02,
we considered a loan to be a TDR when the debtor experienced financial difficulty and we provided concessions such that we would not collect
all principal and interest in accordance with the original terms of the loan agreement. Concessions related to the contractual interest
rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we restructured
loan terms to assist borrowers facing challenges in the economic environment. As of December 31, 2022, we had $6.3 million in loans that
we considered TDRs. As permitted by the CARES Act, we did not consider loan modifications to borrowers affected by COVID-19 to be TDRs
unless the borrower was 30 days or more past due as of December 31, 2019, (ii) the modifications were related to COVID-19, and (iii) the
modification occurred between March 1, 2020 and January 1, 2022. See Notes 1 and 4 to the Consolidated Financial Statements for additional
information on loan modifications and TDRs.
Allowance for Credit Losses
At December 31, 2023 and December 31, 2022, the allowance
for credit losses was $40.7 million and $38.6 million, respectively, or 1.13% and 1.18% of outstanding loans, respectively. The allowance
for credit losses as a percentage of our outstanding loan portfolio decreased from the prior year primarily due to historically low loan
charge-offs which factors into the expected loss rate on our current loan portfolio. In addition, our nonperforming assets increased to
0.10% compared to 0.07%, as a percentage of total assets, at December 31, 2023 and 2022, respectively. Our classified assets decreased
to 4.25% of capital as of December 31, 2023, compared to 4.72% of capital as of December 31, 2022. See Note 4 to the Consolidated Financial
Statements for more information on our allowance for credit losses.
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The following table summarizes the net charge-off
detail as a percentage of average loans by loan composition for the three years ended December 31, 2023.
Year ended December 31,
(dollars in thousands) Amount % Amount % Amount %
Net charge-offs:
Commercial
Owner occupied RE $ - - $ - - $ 94 0.00 %
Consumer
Net loan (charge-offs) recoveries $ (166 ) $ 1,356 $ (1,341 )
Net loan (charge-offs) recoveries as a % of average loans 0.00 % (0.05 %) 0.06 %
The following
table summarizes the allocation of the allowance for credit losses among the various loan categories.
Year ended December 31,
(dollars in thousands) Amount %(1) Amount %(1)
Commercial
Consumer
(1) Percentage of loans in each category to total loans
Deposits and Other Interest-Bearing Liabilities
Our primary source of funds for loans and investments
is our deposits and advances from the FHLB. In the past, we have chosen to obtain a portion of our certificates of deposits from areas
outside of our market in order to obtain longer term deposits than are readily available in our local market. Our internal guidelines
regarding the use of brokered CDs limit our brokered CDs to 30% of total deposits. These guidelines allow us to take advantage of the
attractive terms that wholesale funding can offer while mitigating the related inherent risk.
Our retail deposits represented $3.00 billion, or
88.8% of total deposits at December 31, 2023. At December 31, 2022, retail deposits represented $2.90 billion, or 92.5% of our total deposits.
Brokered deposits were $379.4 million, representing 11.2% of our total deposits at December 31, 2023 and are included in time deposits
greater than $250,000 in the following table. Our loan-to-deposit ratio was 107%, 104%, and 97% at December 31, 2023, 2022, and 2021,
respectively.
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The following table shows the average balance amounts
and the average rates paid on deposits held by us.
December 31,
(dollars in thousands) Amount Rate Amount Rate Amount Rate
During the 12 months ended December 31, 2023, our
average transaction account balances increased by $197.0 million, or 7.8%, while our average time deposit balances increased by $330.1
million, or 109.4%. Core deposits exclude out-of-market deposits and time deposits of $250,000 or more and provide a relatively stable
funding source for our loan portfolio and other earning assets. Our core deposits were $2.81 billion, $2.76 billion, and $2.48 billion
at December 31, 2023, 2022 and 2021, respectively.
All of our time deposits are certificates of deposits.
The maturity distribution of our time deposits of $250,000 or more is as follows:
December 31,
Time deposits that meet or exceed the FDIC insurance
limit of $250,000 at December 31, 2023 and December 31, 2022 were $568.1 million and $374.8 million, respectively, including wholesale
deposits.
At December 31, 2023 and
2022, the Company estimates that it has approximately $1.3 billion and $1.4 billion, respectively, in uninsured deposits including related
interest accrued and unpaid. Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts above
are estimates and are based on the same methodologies and assumptions used for the bank’s regulatory reporting requirements by the
FDIC for the Call Report.
Liquidity and Capital Resources
Liquidity is our ability to fund operations, to meet
depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity
principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits
and borrowings, and our ability to borrow funds. The bank failures in the first five months of 2023 exemplify the potential serious results
of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including
how quickly such requests can accelerate once uninsured depositors lose confidence in an institutions ability to satisfy its obligations
to depositors. We seek to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management.
Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing
profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management
control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control
at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the
same degree of control.
At December 31, 2023 and 2022, our cash and cash equivalents
amounted to $156.2 million and $170.9 million, or 3.9% and 4.6% of total assets, respectively. Our investment securities at December 31,
2023 and 2022 amounted to $154.6 million and $104.2 million, or 3.8% and 2.8% of total assets, respectively. Investment securities traditionally
provide a secondary source of liquidity since they can be converted into cash in a timely manner.
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Our ability to maintain and expand our deposit base
and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs through the liquidation of
temporary investments, the generation of deposits, and from additional borrowings. In addition, we will receive cash upon the maturity
and sale of loans and the maturity of investment securities. We maintain five federal funds purchased lines of credit with correspondent
banks totaling $108.5 million to meet short-term liquidity needs. There were no borrowings against the lines at December 31, 2023.Further,
in July 2023, we enrolled in the Federal Reserve’s Bank Term Funding Program which offers loans of up to one year in length if we
pledge collateral eligible for purchase by the Federal Reserve Banks in open market operations, such as U.S. Treasuries, U.S. agency securities,
and U.S. agency mortgage-backed securities. At December 31, 2023, we had $13.0 million of marketable investment securities pledged in
the Federal Reserve’s Bank Term Funding Program. At December 31, 2023, we had $227.1 million pledged and available with the Federal
Reserve Discount Window.
We are also a member of the FHLB of Atlanta, from
which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned
by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at December
31, 2023 was $542.8 million, based on the Bank’s $16.1 million investment in FHLB stock, as well as qualifying mortgages available
to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing
capacity. In addition, at December 31, 2023 we had $388.3 million of letters of credit outstanding with the FHLB to secure client deposits.
We have a relationship with IntraFi Promontory Network,
allowing us to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000. This gives us the ability,
as and when needed, to attract and retain large deposits from insurance conscious customers. With IntraFi, we have the option to keep
deposits on balance sheet or sell them to other members of the network. Additionally, subject to certain limits, the Bank can use IntraFi
to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB.
In this manner, IntraFi can provide us with another funding option. Thus, it serves as a deposit-gathering tool and an additional liquidity
management tool. Under the Economic Growth, Regulatory Relief, and Consumer Protection Act, a well capitalized bank with a CAMELS rating
of 1 or 2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated
as brokered deposits.
We also have a line of credit with another financial
institution for $15.0 million, which was unused at December 31, 2023. The line of credit was issued on December 28, 2023 at an interest
rate of the U.S. Prime Rate plus 0.25% and a maturity date of February 28, 2025.
We believe that our existing stable base of core deposits,
federal funds purchased lines of credit with correspondent banks, availability with the Federal Reserve’s Bank Term Funding Program
and Discount Window, and borrowings from the FHLB will enable us to successfully meet our long-term liquidity needs. However, as short-term
liquidity needs arise, we have the ability to sell a portion of our investment securities portfolio should we be required to meet those
needs.
Total shareholders’ equity was $312.5 million
at December 31, 2023 and $294.5 million at December 31, 2022. The $18.0 million increase during 2023 is due primarily to net income to
common shareholders of $13.4 million, stock option exercises and expenses of $2.5 million and $2.1 million gain in other comprehensive
income.
The following table shows the return on average assets
(net income divided by average total assets), return on average equity (net income divided by average equity), equity to assets ratio
(average equity divided by average assets), and tangible common equity ratio (total equity less preferred stock divided by total assets)
for the three years ended December 31, 2023. Since our inception, we have not paid cash dividends.
December 31,
Average equity to average assets ratio 7.71 % 8.85 % 9.39 %
Tangible common equity to assets ratio 7.70 % 7.98 % 9.50 %
Under the capital adequacy guidelines, regulatory
capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital
to risk-weighted assets. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities
available for sale, minus certain intangible assets. In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied
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by a risk-weight factor of 0% to 100% based on the
risks believed to be inherent in the type of asset. Tier 2 capital consists of Tier 1 capital plus the general reserve for credit losses,
subject to certain limitations. We are also required to maintain capital at a minimum level based on total average assets, which is known
as the Tier 1 leverage ratio.
Regulatory capital rules, which we refer to as Basel
III, impose minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks
and savings associations regardless of size and bank holding companies and savings and loan holding companies other than “small
bank holding companies,” generally holding companies with consolidated assets of less than $3 billion. In order to avoid restrictions
on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital
conservation buffer” on top of our minimum risk-based capital requirements. This buffer must consist solely of common equity Tier
1, but the buffer applies to all three measurements (common equity Tier 1, Tier 1 capital and total capital). The capital conservation
buffer consists of an additional amount of CET1 equal to 2.5% of risk-weighted assets.
To be considered “well-capitalized” for
purposes of certain rules and prompt corrective action requirements, the Bank must maintain a minimum total risked-based capital ratio
of at least 10%, a total Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a leverage ratio
of at least 5%. As of December 31, 2023, our capital ratios exceed these ratios and we remain “well capitalized.”
The following table summarizes the capital amounts and
ratios of the Bank and the regulatory minimum requirements. See Note 21 to the Consolidated Financial Statements for ratios of the Company.
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
(1) Ratios do not include the capital conservation buffer of 2.5%.
On September 30, 2019, the Company sold and issued $23.0
million in aggregate principal amount of its 4.75% Fixed-to-Floating Rate Subordinated Notes due 2029 to eligible purchasers in a
private offering. The Company used the proceeds from the offering, which were approximately $22.5 million, for general corporate
purposes, including providing capital to the Bank and supporting organic growth. The Notes rank junior in right to payment to the
Company’s current and future senior indebtedness. The Notes are intended to qualify as Tier 2 capital for regulatory capital
purposes for the Company and are subject to certain limitations. See Note 9 to the Consolidated Financial Statements for more information on
our subordinated debentures.
The ability of the
Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank. The dividends that may be paid
by the Bank to the Company are subject to legal limitations and regulatory capital requirements.
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Effect of Inflation and Changing Prices
The effect of relative purchasing power over time
due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been
prepared on an historical cost basis in accordance with generally accepted accounting principles.
Unlike most industrial companies, our assets and liabilities
are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on our performance
than will the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation
increases, although not necessarily in the same magnitude. As discussed previously, we seek to manage the relationships between interest