UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
(Mark One) | | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31,September 30, 2022
OR | | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______
Commission File Number: 001-36094
THE COMMUNITY FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter) | | | | | | | | |
| Maryland | | 52-1652138 |
| (State of Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
3035 Leonardtown Road, Waldorf, MD, 20601
(Address of Principal Executive Offices) (Zip Code)
(301) 645-5601
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of Act: | | | | | | | | | | | | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | | TCFC | | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| Large Accelerated Filer | ☐ | | Accelerated Filer | ☐ |
| Non-accelerated Filer | ☒ | | Smaller Reporting Company | ☒ |
| Emerging growth company | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 29,October 31, 2022, the registrant had 5,654,9715,645,749 shares of common stock outstanding.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report may not be based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements can generally be identified by the fact that they do not relate strictly to historical or current facts. They often include words likeor phrases such as “is optimistic”,optimistic,” “project,” “believe,” “expect,” “anticipate,” “estimate,” "assume"“assume” and “intend” or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.” Statements in this report that are not strictly historical are forward-looking and are based upon current expectations that may differ materially from actual results. These forward-looking statements include, without limitation: (i) those relating to the Company’s and Community Bank of the Chesapeake’s future growth and management’s outlook or expectations for revenue, assets, asset quality, profitability, business prospects, net interest margin, non-interest revenue, allowance for loancredit losses, the level of credit losses from lending, liquidity levels, capital levels, or other future financial or business performance strategies or expectations,expectations; (ii) any statements of the plans and objectives of management for future operations products or services, including the expected benefits from, and/or the execution of integration plans relating to any acquisition we have undertaken or that we undertake in the future; (iii) plans and cost savings regarding branch closings or consolidation; (iv) projections related to certain financial metrics;metrics, including with respect to the quarterly expense run rate; (v) expected benefits of programs we introduce, including residential mortgage programs and retail and commercial credit card programs; and (vi) any statement of expectation or belief, and any assumptions underlying the foregoing. These forward-looking statements express management’s current expectations or forecasts of future events, results and conditions, and by their nature are subject to and involve risks and uncertainties that could cause actual results to differ materially from those anticipated by the statements made herein.
Factors that might cause actual results to differ materially from those made in such statements include, but are not limited to: (i) risks, uncertainties and other factors relating to the COVID-19 pandemic (including the length of time that the pandemic continues, the ability of states and local governments to successfully implement the lifting of restrictions on movement and the potential imposition of further restrictions on movement and travel in the future, the effect of the pandemic on the general economy and on the businesses of our borrowers and their ability to make payments on their obligations; (ii) the remedial actions and stimulus measures adopted by federal, state and local governments, and the inability of employees to work due to illness, quarantine, or government mandates); (iii) the impacts related to or resulting from Russia’s military action in Ukraine, including the broader impacts to financial markets and the global macroeconomic and geopolitical environments; (iv) assumptions that interest-earning assets will reprice faster than interest-bearing liabilities and the Bank’s ability to maintain its current favorable funding mix; (v)the synergies and other expected financial benefits from any acquisition that we have undertaken or may undertake in the future may or may not be realized within the expected time frames; (vi) the impact of our adoption of the CECL standard; (vii) limitations on our ability to declare and pay dividends or engage in share repurchases; (viii) changes in the Company's or the Bank's strategy, costs or difficulties related to integration matters might be greater than expected; (vii)(ix) availability of and costs associated with obtaining adequate and timely sources of liquidity; (viii)(x) the ability to maintain credit quality; (ix)(xi) general economic trends and conditions, including inflation and its impacts; (xii) changes in interest rates; (xiii) loss of deposits and loan demand to other financial institutions; (xiii)(xiv) substantial changes in financial markets; (xiv)(xv) changes in real estate value and the real estate market; (xv)(xxi) regulatory changes; (xvi)(xvii) the impact of government shutdowns or sequestration; (xvii)(xviii) the possibility of unforeseen events affecting the industry generally; (xviii)(xix) the uncertainties associated with newly developed or acquired operations; (xix)(xx) the outcome of pending or threatened litigation, or of matters before regulatory agencies, whether currently existing or commencing in the future; (xx)(xxi) market disruptions and other effects of terrorist activities; and (xxi)(xxii) the matters described in “Item 1A Risk Factors” in the Company’s Annual Report on Form 10-K for the Year Ended December 31, 2021, and in its other Reports filed with the Securities and Exchange Commission (the “SEC”).
The Company’s forward-looking statements may also be subject to other risks and uncertainties, including those that it may discuss elsewhere in this Report or in its filings with the SEC, accessible on the SEC’s Web site at www.sec.gov. The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unforeseen events, except as required under the rules and regulations of the SEC.
You are cautioned not to place undue reliance on the forward-looking statements contained in this document in that actual results could differ materially from those indicated in such forward-looking statements, due to a variety of factors. Any forward-looking statement speaks only as of the date of this Report, and the Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of this Report.
PART 1 – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS | | | (Unaudited) | | | (Unaudited) | |
| (dollars in thousands, except per share amounts) | (dollars in thousands, except per share amounts) | | March 31, 2022 | | December 31, 2021 | (dollars in thousands, except per share amounts) | | September 30, 2022 | | December 31, 2021 |
| Assets | Assets | | | | | Assets | | | | |
| Cash and due from banks | Cash and due from banks | | $ | 80,702 | | | $ | 108,990 | | Cash and due from banks | | $ | 18,008 | | | $ | 108,990 | |
| | Federal funds sold | | Federal funds sold | | 20,325 | | | — | |
| Interest-bearing deposits with banks | Interest-bearing deposits with banks | | 32,460 | | | 30,664 | | Interest-bearing deposits with banks | | 14,970 | | | 30,664 | |
| Securities available for sale ("AFS"), at fair value | Securities available for sale ("AFS"), at fair value | | 507,527 | | | 497,839 | | Securities available for sale ("AFS"), at fair value | | 464,502 | | | 497,839 | |
| | Equity securities carried at fair value through income | Equity securities carried at fair value through income | | 4,562 | | | 4,772 | | Equity securities carried at fair value through income | | 4,254 | | | 4,772 | |
| Non-marketable equity securities held in other financial institutions | Non-marketable equity securities held in other financial institutions | | 207 | | | 207 | | Non-marketable equity securities held in other financial institutions | | 207 | | | 207 | |
| Federal Home Loan Bank ("FHLB") stock - at cost | Federal Home Loan Bank ("FHLB") stock - at cost | | 1,685 | | | 1,472 | | Federal Home Loan Bank ("FHLB") stock - at cost | | 1,226 | | | 1,472 | |
| Loans held for sale | | 373 | | | — | | |
| | Net U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") Loans | Net U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") Loans | | 15,279 | | | 26,398 | | Net U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") Loans | | 1,211 | | | 26,398 | |
| Portfolio Loans Receivable net of allowance for credit losses of $21,382 and $18,417 | | 1,608,156 | | | 1,560,393 | | |
| Portfolio loans receivable net of allowance for credit losses of $22,027 and $18,417 | | Portfolio loans receivable net of allowance for credit losses of $22,027 and $18,417 | | 1,721,250 | | | 1,560,393 | |
| Net loans | Net loans | | 1,623,435 | | | 1,586,791 | | Net loans | | 1,722,461 | | | 1,586,791 | |
| Goodwill | Goodwill | | 10,835 | | | 10,835 | | Goodwill | | 10,835 | | | 10,835 | |
| Premises and equipment, net | Premises and equipment, net | | 21,304 | | | 21,427 | | Premises and equipment, net | | 21,626 | | | 21,427 | |
| | Accrued interest receivable | Accrued interest receivable | | 5,389 | | | 5,588 | | Accrued interest receivable | | 6,791 | | | 5,588 | |
| Investment in bank owned life insurance | Investment in bank owned life insurance | | 39,145 | | | 38,932 | | Investment in bank owned life insurance | | 39,583 | | | 38,932 | |
| Core deposit intangible | Core deposit intangible | | 924 | | | 1,032 | | Core deposit intangible | | 725 | | | 1,032 | |
| Net deferred tax assets | Net deferred tax assets | | 15,523 | | | 9,033 | | Net deferred tax assets | | 24,755 | | | 9,033 | |
| Right of use assets - operating leases | Right of use assets - operating leases | | 6,033 | | | 6,124 | | Right of use assets - operating leases | | 6,022 | | | 6,124 | |
| Other assets | Other assets | | 1,819 | | | 3,600 | | Other assets | | 3,331 | | | 3,600 | |
| Total Assets | Total Assets | | $ | 2,351,923 | | | $ | 2,327,306 | | Total Assets | | $ | 2,359,621 | | | $ | 2,327,306 | |
| Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | | | | | Liabilities and Stockholders’ Equity | | | | |
| Deposits | Deposits | | Deposits | |
| Non-interest-bearing deposits | Non-interest-bearing deposits | | $ | 644,385 | | | $ | 445,778 | | Non-interest-bearing deposits | | $ | 647,432 | | | $ | 445,778 | |
| Interest-bearing deposits | Interest-bearing deposits | | 1,450,698 | | | 1,610,386 | | Interest-bearing deposits | | 1,479,125 | | | 1,610,386 | |
| Total deposits | Total deposits | | 2,095,083 | | | 2,056,164 | | Total deposits | | 2,126,557 | | | 2,056,164 | |
| | Long-term debt | Long-term debt | | 12,213 | | | 12,231 | | Long-term debt | | — | | | 12,231 | |
| | Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs") | Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs") | | 12,000 | | | 12,000 | | Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs") | | 12,000 | | | 12,000 | |
| Subordinated notes net of debt issuance costs - 4.75% | Subordinated notes net of debt issuance costs - 4.75% | | 19,524 | | | 19,510 | | Subordinated notes net of debt issuance costs - 4.75% | | 19,552 | | | 19,510 | |
| Lease liabilities - operating leases | Lease liabilities - operating leases | | 6,266 | | | 6,343 | | Lease liabilities - operating leases | | 6,288 | | | 6,343 | |
| Accrued expenses and other liabilities | Accrued expenses and other liabilities | | 13,697 | | | 12,925 | | Accrued expenses and other liabilities | | 16,070 | | | 12,925 | |
| Total Liabilities | Total Liabilities | | 2,158,783 | | | 2,119,173 | | Total Liabilities | | 2,180,467 | | | 2,119,173 | |
| | Stockholders’ Equity | Stockholders’ Equity | | Stockholders’ Equity | |
| Common stock - par value $0.01; authorized - 15,000,000 shares; issued 5,686,799 and 5,718,528 shares, respectively | | 57 | | | 57 | | |
| Common stock - par value $0.01; authorized - 15,000,000 shares; issued 5,644,186 and 5,718,528 shares, respectively | | Common stock - par value $0.01; authorized - 15,000,000 shares; issued 5,644,186 and 5,718,528 shares, respectively | | 56 | | | 57 | |
| Additional paid in capital | Additional paid in capital | | 97,189 | | | 96,896 | | Additional paid in capital | | 97,712 | | | 96,896 | |
| Retained earnings | Retained earnings | | 115,179 | | | 113,448 | | Retained earnings | | 125,608 | | | 113,448 | |
| Accumulated other comprehensive losses | Accumulated other comprehensive losses | | (18,969) | | | (1,952) | | Accumulated other comprehensive losses | | (43,906) | | | (1,952) | |
| Unearned ESOP shares | Unearned ESOP shares | | (316) | | | (316) | | Unearned ESOP shares | | (316) | | | (316) | |
| Total Stockholders’ Equity | Total Stockholders’ Equity | | 193,140 | | | 208,133 | | Total Stockholders’ Equity | | 179,154 | | | 208,133 | |
| Total Liabilities and Stockholders’ Equity | Total Liabilities and Stockholders’ Equity | | $ | 2,351,923 | | | $ | 2,327,306 | | Total Liabilities and Stockholders’ Equity | | $ | 2,359,621 | | | $ | 2,327,306 | |
See notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| (dollars in thousands, except per share amounts) | | 2022 | | 2021 | | | | |
| Interest and Dividend Income | | | | | | | | |
| Loans, including fees | | $ | 15,610 | | | $ | 16,592 | | | | | |
| Interest and dividends on investment securities | | 1,666 | | | 1,064 | | | | | |
| Interest on deposits with banks | | 60 | | | 22 | | | | | |
| Total Interest and Dividend Income | | 17,336 | | | 17,678 | | | | | |
| Interest Expense | | | | | | | | |
| Deposits | | 513 | | | 802 | | | | | |
| | | | | | | | |
| Long-term debt | | 354 | | | 367 | | | | | |
| Total Interest Expense | | 867 | | | 1,169 | | | | | |
| Net Interest Income | | 16,469 | | | 16,509 | | | | | |
| Provision for credit losses | | 450 | | | 295 | | | | | |
| Provision (recovery) for unfunded commitments | | (31) | | | — | | | | | |
| Net Interest Income After Provision For Credit Losses | | 16,050 | | | 16,214 | | | | | |
| Noninterest Income | | | | | | | | |
| Loan appraisal, credit, and miscellaneous charges | | 176 | | | 198 | | | | | |
| | | | | | | | |
| Net gains on sale of investment securities | | — | | | 586 | | | | | |
| Unrealized losses on equity securities | | (222) | | | (85) | | | | | |
| Income from bank owned life insurance | | 214 | | | 214 | | | | | |
| Service charges | | 926 | | | 1,187 | | | | | |
| Referral fee income | | 361 | | | 451 | | | | | |
| Net losses on sale of loans originated for sale | | (4) | | | — | | | | | |
| Loss on sale of loans | | — | | | (191) | | | | | |
| Total Noninterest Income | | 1,451 | | | 2,360 | | | | | |
| Noninterest Expense | | | | | | | | |
| Compensation and benefits | | 5,055 | | | 4,788 | | | | | |
| Occupancy expense | | 732 | | | 761 | | | | | |
| Advertising | | 64 | | | 79 | | | | | |
| Data processing expense | | 1,007 | | | 936 | | | | | |
| Professional fees | | 731 | | | 640 | | | | | |
| | | | | | | | |
| Depreciation of premises and equipment | | 149 | | | 147 | | | | | |
| | | | | | | | |
| | | | | | | | |
| FDIC Insurance | | 179 | | | 252 | | | | | |
| OREO valuation allowance and expenses | | 6 | | | 181 | | | | | |
| Core deposit intangible amortization | | 109 | | | 133 | | | | | |
| Fraud losses | | 40 | | | 1,329 | | | | | |
| Other expenses | | 1,008 | | | 902 | | | | | |
| Total Noninterest Expense | | 9,080 | | | 10,148 | | | | | |
| Income before income taxes | | 8,421 | | | 8,426 | | | | | |
| Income tax expense | | 2,133 | | | 2,127 | | | | | |
| Net Income | | $ | 6,288 | | | $ | 6,299 | | | | | |
| Earnings Per Common Share | | | | | | | | |
| Basic | | $ | 1.11 | | | $ | 1.07 | | | | | |
| Diluted | | $ | 1.10 | | | $ | 1.07 | | | | | |
| Cash dividends paid per common share | | $ | 0.175 | | | $ | 0.125 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (dollars in thousands, except per share amounts) | | 2022 | | 2021 | | 2022 | | 2021 |
| Interest and Dividend Income | | | | | | | | |
| Loans, including fees | | $ | 18,735 | | | $ | 16,342 | | | $ | 51,117 | | | $ | 49,254 | |
| Interest and dividends on investment securities | | 2,454 | | | 1,296 | | | 6,044 | | | 3,461 | |
| Interest on deposits with banks | | 156 | | | 21 | | | 294 | | | 66 | |
| Total Interest and Dividend Income | | 21,345 | | | 17,659 | | | 57,455 | | | 52,781 | |
| Interest Expense | | | | | | | | |
| Deposits | | 1,850 | | | 594 | | | 3,182 | | | 2,036 | |
| Short-term borrowings | | 52 | | | — | | | 68 | | | — | |
| Long-term debt | | 386 | | | 456 | | | 1,111 | | | 1,192 | |
| Total Interest Expense | | 2,288 | | | 1,050 | | | 4,361 | | | 3,228 | |
| Net Interest Income | | 19,057 | | | 16,609 | | | 53,094 | | | 49,553 | |
| Provision for credit losses | | 694 | | | — | | | 1,569 | | | 586 | |
| Provision for unfunded commitments | | 6 | | | — | | | 1 | | | — | |
| Net Interest Income After Provision For Credit Losses | | 18,357 | | | 16,609 | | | 51,524 | | | 48,967 | |
| Noninterest Income | | | | | | | | |
| Loan appraisal, credit, and miscellaneous charges | | 65 | | | 29 | | | 285 | | | 271 | |
| Gain on sale of assets | | — | | | | | — | | | 68 | |
| Net gains on sale of investment securities | | — | | | — | | | — | | | 586 | |
| Unrealized losses on equity securities | | (187) | | | (22) | | | (564) | | | (94) | |
| Income from bank owned life insurance | | 220 | | | 220 | | | 651 | | | 652 | |
| Service charges | | 1,130 | | | 987 | | | 3,164 | | | 3,066 | |
| Referral fee income | | — | | | 176 | | | 361 | | | 1,248 | |
| Net gains (losses) on sale of loans originated for sale | | 1 | | | 30 | | | (2) | | | 30 | |
| Gains (losses) on sale of loans | | — | | | — | | | 209 | | | (191) | |
| Total Noninterest Income | | 1,229 | | | 1,400 | | | 4,104 | | | 5,616 | |
| Noninterest Expense | | | | | | | | |
| Compensation and benefits | | 5,116 | | | 5,650 | | | 15,222 | | | 15,770 | |
| Occupancy expense | | 826 | | | 731 | | | 2,378 | | | 2,180 | |
| Advertising | | 149 | | | 145 | | | 372 | | | 372 | |
| Data processing expense | | 1,062 | | | 840 | | | 3,077 | | | 2,766 | |
| Professional fees | | 923 | | | 676 | | | 2,499 | | | 1,920 | |
| | | | | | | | |
| Depreciation of premises and equipment | | 177 | | | 137 | | | 476 | | | 419 | |
| | | | | | | | |
| | | | | | | | |
| FDIC Insurance | | 160 | | | 120 | | | 516 | | | 512 | |
| OREO valuation allowance and expenses | | — | | | 20 | | | 6 | | | 689 | |
| Core deposit intangible amortization | | 97 | | | 121 | | | 308 | | | 380 | |
| Fraud losses | | 37 | | | 132 | | | 107 | | | 1,243 | |
| Other expenses | | 1,079 | | | 875 | | | 3,083 | | | 2,722 | |
| Total Noninterest Expense | | 9,626 | | | 9,447 | | | 28,044 | | | 28,973 | |
| Income before income taxes | | 9,960 | | | 8,562 | | | 27,584 | | | 25,610 | |
| Income tax expense | | 2,380 | | | 2,158 | | | 6,882 | | | 6,475 | |
| Net Income | | $ | 7,580 | | | $ | 6,404 | | | $ | 20,702 | | | $ | 19,135 | |
| Earnings Per Common Share | | | | | | | | |
| Basic | | $ | 1.34 | | | $ | 1.12 | | | $ | 3.66 | | | $ | 3.29 | |
| Diluted | | $ | 1.34 | | | $ | 1.12 | | | $ | 3.65 | | | $ | 3.29 | |
| Cash dividends paid per common share | | $ | 0.175 | | | $ | 0.150 | | | $ | 0.525 | | | $ | 0.425 | |
See notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/LOSS
(Unaudited) | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| (dollars in thousands) | | 2022 | | 2021 | | | | |
| Net Income | | $ | 6,288 | | | $ | 6,299 | | | | | |
| Net unrealized holding loss arising during period, net of tax benefit of $(5,998) and $(1,147), respectively. | | (17,017) | | | (3,253) | | | | | |
| Reclassification adjustment for gains included in net income, net of tax expense of $0 and $153, respectively. | | — | | | 433 | | | | | |
| Comprehensive (Losses) Income | | $ | (10,729) | | | $ | 3,479 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (dollars in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Net Income | | $ | 7,580 | | | $ | 6,404 | | | $ | 20,702 | | | $ | 19,135 | |
| Net unrealized holding losses arising during period, net of tax benefits of $(4,250) and $(1,083), and $(14,787) and $(1,744), respectively. | | (12,059) | | | (3,072) | | | (41,954) | | | (4,946) | |
| Reclassification adjustment for gains included in net income, net of tax expense of $0 and $0, and $0 and $153, respectively. | | — | | | — | | | — | | | 433 | |
| Comprehensive (Loss) Income | | $ | (4,479) | | | $ | 3,332 | | | $ | (21,252) | | | $ | 14,622 | |
See notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
For the Three Months Ended March 31,September 30, 2022 and 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Unearned ESOP Shares | | Total |
| | | | | | | | | | | | |
| Balance at January 1, 2022 | | $ | 57 | | | $ | 96,896 | | | $ | 113,448 | | | $ | (1,952) | | | $ | (316) | | | $ | 208,133 | |
| Cumulative effect adjustment due to the adoption of ASC 326, net of tax | | — | | | — | | | (2,006) | | | — | | | — | | | (2,006) | |
| Net Income | | — | | | — | | | 6,288 | | | — | | | — | | | 6,288 | |
| Unrealized holding loss on investment securities, net of tax $(5,998) | | — | | | — | | | — | | | (17,017) | | | — | | | (17,017) | |
| Cash dividend at $0.175 per common share | | — | | | — | | | (949) | | | — | | | — | | | (949) | |
| Dividend reinvestment | | — | | | 52 | | | (52) | | | — | | | — | | | — | |
| Net change in fair market value below cost of leveraged ESOP shares released | | — | | | 6 | | | — | | | — | | | — | | | 6 | |
| | | | | | | | | | | | |
| Repurchase of common stock | | — | | | — | | | (1,550) | | | — | | | — | | | (1,550) | |
| Stock based compensation | | — | | | 235 | | | — | | | — | | | — | | | 235 | |
| Balance at March 31, 2022 | | $ | 57 | | | $ | 97,189 | | | $ | 115,179 | | | $ | (18,969) | | | $ | (316) | | | $ | 193,140 | |
| | (dollars in thousands) | (dollars in thousands) | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Unearned ESOP Shares | | Total | (dollars in thousands) | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Unearned ESOP Shares | | Total |
| Balance at June 30, 2022 | | Balance at June 30, 2022 | | $ | 56 | | | $ | 97,455 | | | $ | 119,523 | | | $ | (31,847) | | | $ | (316) | | | $ | 184,871 | |
| | Balance at January 1, 2021 | | $ | 59 | | | $ | 95,965 | | | $ | 97,944 | | | $ | 4,504 | | | $ | (459) | | | $ | 198,013 | | |
| Net Income | Net Income | | — | | | — | | | 6,299 | | | — | | | — | | | 6,299 | | Net Income | | — | | | — | | | 7,580 | | | — | | | — | | | 7,580 | |
| Unrealized holding gain on investment securities, net of tax $(994) | | — | | | — | | | — | | | (2,820) | | | — | | | (2,820) | | |
| | Cash dividend at $0.125 per common share | | — | | | — | | | (704) | | | — | | | — | | | (704) | | |
| Unrealized holding loss on investment securities, net of tax $(4,250) | | Unrealized holding loss on investment securities, net of tax $(4,250) | | — | | | — | | | — | | | (12,059) | | | — | | | (12,059) | |
| Cash dividend at $0.175 per common share | | Cash dividend at $0.175 per common share | | — | | | — | | | (935) | | | — | | | — | | | (935) | |
| Dividend reinvestment | Dividend reinvestment | | — | | | 35 | | | (35) | | | — | | | — | | | — | | Dividend reinvestment | | — | | | 54 | | | (54) | | | — | | | — | | | — | |
| Net change in fair market value below cost of leveraged ESOP shares released | | — | | | (5) | | | — | | | — | | | — | | | (5) | | |
| Net change in fair market value above cost of leveraged ESOP shares released | | Net change in fair market value above cost of leveraged ESOP shares released | | — | | | 2 | | | — | | | — | | | — | | | 2 | |
| | Repurchase of common stock | Repurchase of common stock | | — | | | — | | | (210) | | | — | | | — | | | (210) | | Repurchase of common stock | | — | | | (506) | | | — | | | — | | | (506) | |
| Stock based compensation | Stock based compensation | | — | | | 186 | | | — | | | — | | | — | | | 186 | | Stock based compensation | | — | | | 201 | | | — | | | — | | | — | | | 201 | |
| Balance at March 31, 2021 | | $ | 59 | | | $ | 96,181 | | | $ | 103,294 | | | $ | 1,684 | | | $ | (459) | | | $ | 200,759 | | |
| Balance at September 30, 2022 | | Balance at September 30, 2022 | | $ | 56 | | | $ | 97,712 | | | $ | 125,608 | | | $ | (43,906) | | | $ | (316) | | | $ | 179,154 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Unearned ESOP Shares | | Total |
| Balance at June 30, 2021 | | $ | 58 | | | $ | 96,411 | | | $ | 104,889 | | | $ | 3,063 | | | $ | (459) | | | $ | 203,962 | |
| Net Income | | — | | | — | | | 6,404 | | | — | | | — | | | 6,404 | |
| Unrealized holding loss on investment securities, net of tax $(1,083) | | — | | | — | | | — | | | (3,072) | | | — | | | (3,072) | |
| | | | | | | | | | | | |
| Cash dividend at $0.150 per common share | | — | | | — | | | (812) | | | — | | | — | | | (812) | |
| Dividend reinvestment | | — | | | 45 | | | (45) | | | — | | | — | | | — | |
| Net change in fair market value below cost of leveraged ESOP shares released | | — | | | 2 | | | — | | | — | | | — | | | 2 | |
| | | | | | | | | | | | |
| Repurchase of common stock | | (1) | | | — | | | (2,546) | | | — | | | — | | | (2,547) | |
| Stock based compensation | | — | | | 191 | | | — | | | — | | | — | | | 191 | |
| Balance at September 30, 2021 | | $ | 57 | | | $ | 96,649 | | | $ | 107,890 | | | $ | (9) | | | $ | (459) | | | $ | 204,128 | |
See notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
For the Nine Months Ended September 30, 2022 and 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Unearned ESOP Shares | | Total |
| Balance at January 1, 2022 | | $ | 57 | | | $ | 96,896 | | | $ | 113,448 | | | $ | (1,952) | | | $ | (316) | | | $ | 208,133 | |
| Cumulative effect adjustment due to the adoption of ASC 326, net of tax | | — | | | — | | | (2,006) | | | — | | | — | | | (2,006) | |
| Net Income | | — | | | — | | | 20,702 | | | — | | | — | | | 20,702 | |
| Unrealized holding loss on investment securities net of tax $(14,787) | | — | | | — | | | — | | | (41,954) | | | — | | | (41,954) | |
| Cash dividend at $0.525 per common share | | — | | | — | | | (2,823) | | | — | | | — | | | (2,823) | |
| Dividend reinvestment | | — | | | 159 | | | (159) | | | — | | | — | | | — | |
| Net change in fair market value above cost of leveraged ESOP shares released | | — | | | 11 | | | — | | | — | | | — | | | 11 | |
| | | | | | | | | | | | |
| Repurchase of common stock | | (1) | | | — | | | (3,554) | | | — | | | — | | | (3,555) | |
| Stock based compensation | | — | | | 646 | | | — | | | — | | | — | | | 646 | |
| Balance at September 30, 2022 | | $ | 56 | | | $ | 97,712 | | | $ | 125,608 | | | $ | (43,906) | | | $ | (316) | | | $ | 179,154 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Unearned ESOP Shares | | Total |
| Balance at January 1, 2021 | | $ | 59 | | | $ | 95,965 | | | $ | 97,944 | | | $ | 4,504 | | | $ | (459) | | | $ | 198,013 | |
| Net Income | | — | | | — | | | 19,135 | | | — | | | — | | | 19,135 | |
| Unrealized holding loss on investment securities net of tax $(1,591) | | — | | | — | | | — | | | (4,513) | | | — | | | (4,513) | |
| | | | | | | | | | | | |
| Cash dividend at $0.425 per common share | | — | | | — | | | (2,355) | | | — | | | — | | | (2,355) | |
| Dividend reinvestment | | — | | | 125 | | | (125) | | | — | | | — | | | — | |
| Net change in fair market value over cost of leveraged ESOP shares released | | — | | | (2) | | | — | | | — | | | — | | | (2) | |
| | | | | | | | | | | | |
| Repurchase of common stock | | (2) | | | — | | | (6,709) | | | — | | | — | | | (6,711) | |
| Stock based compensation | | — | | | 561 | | | — | | | | | | | 561 | |
| Balance at September 30, 2021 | | $ | 57 | | | $ | 96,649 | | | $ | 107,890 | | | $ | (9) | | | $ | (459) | | | $ | 204,128 | |
See notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | Three Months Ended March 31, | | Nine Months Ended September 30, |
| (dollars in thousands) | (dollars in thousands) | | 2022 | | 2021 | (dollars in thousands) | | 2022 | | 2021 |
| | Cash Flows from Operating Activities | Cash Flows from Operating Activities | | Cash Flows from Operating Activities | |
| Net income | Net income | | $ | 6,288 | | | $ | 6,299 | | Net income | | $ | 20,702 | | | $ | 19,135 | |
| Adjustments to reconcile net income to net cash provided by operating activities | Adjustments to reconcile net income to net cash provided by operating activities | | Adjustments to reconcile net income to net cash provided by operating activities | |
| Provision for credit losses | Provision for credit losses | | 450 | | | 295 | | Provision for credit losses | | 1,569 | | | 586 | |
| Provision (recovery) for unfunded commitments | | (31) | | | — | | |
| Provision for unfunded commitments | | Provision for unfunded commitments | | 1 | | | — | |
| Depreciation and amortization | Depreciation and amortization | | 373 | | | 399 | | Depreciation and amortization | | 1,165 | | | 1,150 | |
| | Provision for loss on premises held for sale | | Provision for loss on premises held for sale | | — | | | 20 | |
| Loans originated for resale | Loans originated for resale | | (1,606) | | | — | | Loans originated for resale | | (1,800) | | | (1,479) | |
| Proceeds from sale of loans originated for sale | Proceeds from sale of loans originated for sale | | 1,255 | | | — | | Proceeds from sale of loans originated for sale | | 1,838 | | | 1,514 | |
| Net loss on sale of loans held for sale | | 4 | | | — | | |
| Loss on sale of loans | | — | | | 191 | | |
| Net gain on the sale of OREO | | — | | | (22) | | |
| Net losses (gains) on sale of loans held for sale | | Net losses (gains) on sale of loans held for sale | | 2 | | | (30) | |
| (Gains) losses on sale of loans | | (Gains) losses on sale of loans | | (209) | | | 191 | |
| Net gains on the sale of OREO | | Net gains on the sale of OREO | | — | | | (16) | |
| Gains on sales of investment securities | Gains on sales of investment securities | | — | | | (586) | | Gains on sales of investment securities | | — | | | (586) | |
| Unrealized loss on equity securities | | 222 | | | 85 | | |
| | Unrealized losses on equity securities | | Unrealized losses on equity securities | | 564 | | | 94 | |
| Gains on sale of assets | | Gains on sale of assets | | — | | | (68) | |
| Net amortization of premium/discount on investment securities | Net amortization of premium/discount on investment securities | | 582 | | | 108 | | Net amortization of premium/discount on investment securities | | 2,148 | | | 636 | |
| Net accretion of merger accounting adjustments | Net accretion of merger accounting adjustments | | (62) | | | (90) | | Net accretion of merger accounting adjustments | | (168) | | | (256) | |
| Net amortization of debt issuance costs | Net amortization of debt issuance costs | | 14 | | | (58) | | Net amortization of debt issuance costs | | 42 | | | (30) | |
| Amortization of core deposit intangible | Amortization of core deposit intangible | | 109 | | | 133 | | Amortization of core deposit intangible | | 308 | | | 380 | |
| Amortization of right of use asset | Amortization of right of use asset | | 91 | | | 128 | | Amortization of right of use asset | | 288 | | | 304 | |
| Net change in right of use assets and lease liabilities | Net change in right of use assets and lease liabilities | | (77) | | | (161) | | Net change in right of use assets and lease liabilities | | (241) | | | (302) | |
| Increase in OREO valuation allowance | Increase in OREO valuation allowance | | — | | | 180 | | Increase in OREO valuation allowance | | — | | | 641 | |
| Increase in cash surrender value of bank owned life insurance | Increase in cash surrender value of bank owned life insurance | | (213) | | | (214) | | Increase in cash surrender value of bank owned life insurance | | (651) | | | (652) | |
| Increase in deferred income tax benefit | | 206 | | | 232 | | |
| Decrease in accrued interest receivable | | 199 | | | 1,380 | | |
| (Decrease) increase in deferred income tax benefit | | (Decrease) increase in deferred income tax benefit | | (237) | | | 710 | |
| (Increase) decrease in accrued interest receivable | | (Increase) decrease in accrued interest receivable | | (1,203) | | | 2,672 | |
| Stock based compensation | Stock based compensation | | 235 | | | 186 | | Stock based compensation | | 646 | | | 561 | |
| Net change in fair market value above (below) cost of leveraged ESOP shares released | Net change in fair market value above (below) cost of leveraged ESOP shares released | | 6 | | | (5) | | Net change in fair market value above (below) cost of leveraged ESOP shares released | | 11 | | | (2) | |
| Decrease in net deferred loan costs | | 283 | | | 1,240 | | |
| Increase (decrease) in accrued expenses and other liabilities | | 586 | | | (399) | | |
| (Increase) decrease in net deferred loan costs | | (Increase) decrease in net deferred loan costs | | (441) | | | 2,324 | |
| Increase in accrued expenses and other liabilities | | Increase in accrued expenses and other liabilities | | 2,927 | | | 3,886 | |
| Decrease (increase) in other assets | Decrease (increase) in other assets | | 1,781 | | | (158) | | Decrease (increase) in other assets | | 269 | | | (917) | |
| Net Cash Provided by Operating Activities | Net Cash Provided by Operating Activities | | 10,695 | | | 9,163 | | Net Cash Provided by Operating Activities | | 27,530 | | | 30,466 | |
| | Cash Flows from Investing Activities | Cash Flows from Investing Activities | | Cash Flows from Investing Activities | |
| Purchase of AFS investment securities | Purchase of AFS investment securities | | (46,404) | | | (35,557) | | Purchase of AFS investment securities | | (69,078) | | | (265,704) | |
| Proceeds from redemption or principal payments of AFS investment securities | Proceeds from redemption or principal payments of AFS investment securities | | 13,107 | | | 12,420 | | Proceeds from redemption or principal payments of AFS investment securities | | 43,480 | | | 36,408 | |
| | Proceeds from sale of AFS investment securities | Proceeds from sale of AFS investment securities | | — | | | 12,540 | | Proceeds from sale of AFS investment securities | | — | | | 12,540 | |
| Net decrease (increase) of FHLB stock | | (214) | | | 742 | | |
| Net decrease of FHLB stock | | Net decrease of FHLB stock | | 246 | | | 1,305 | |
| | Net change in loans | Net change in loans | | (39,828) | | | (18,710) | | Net change in loans | | (142,537) | | | 9,617 | |
| Purchase of premises and equipment | Purchase of premises and equipment | | (250) | | | (668) | | Purchase of premises and equipment | | (1,364) | | | (2,264) | |
| Proceeds from sale of OREO | Proceeds from sale of OREO | | — | | | 622 | | Proceeds from sale of OREO | | — | | | 947 | |
| | Proceeds from sale of loans | Proceeds from sale of loans | | — | | | 8,858 | | Proceeds from sale of loans | | 3,588 | | | 11,965 | |
| | Proceeds from disposal of asset | | Proceeds from disposal of asset | | — | | | 12 | |
| Net Cash Used in Investing Activities | Net Cash Used in Investing Activities | | (73,589) | | | (19,753) | | Net Cash Used in Investing Activities | | (165,665) | | | (195,174) | |
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Continued)
| | | Three Months Ended March 31, | | Nine Months Ended September 30, |
| (dollars in thousands) | (dollars in thousands) | | 2022 | | 2021 | (dollars in thousands) | | 2022 | | 2021 |
| Cash Flows from Financing Activities | Cash Flows from Financing Activities | | | | | Cash Flows from Financing Activities | | | | |
| Net increase in deposits | Net increase in deposits | | $ | 38,919 | | | $ | 122,294 | | Net increase in deposits | | $ | 70,393 | | | $ | 259,005 | |
| | Payments of long-term debt | Payments of long-term debt | | (18) | | | (17) | | Payments of long-term debt | | (12,231) | | | (15,053) | |
| | Dividends paid | Dividends paid | | (949) | | | (704) | | Dividends paid | | (2,823) | | | (2,355) | |
| | Repurchase of common stock | Repurchase of common stock | | (1,550) | | | (210) | | Repurchase of common stock | | (3,555) | | | (6,711) | |
| Net Cash Provided by Financing Activities | Net Cash Provided by Financing Activities | | 36,402 | | | 121,363 | | Net Cash Provided by Financing Activities | | 51,784 | | | 234,886 | |
| (Decrease) increase in Cash and Cash Equivalents | (Decrease) increase in Cash and Cash Equivalents | | (26,492) | | | 110,773 | | (Decrease) increase in Cash and Cash Equivalents | | (86,351) | | | 70,178 | |
| | Cash and Cash Equivalents - January 1 | Cash and Cash Equivalents - January 1 | | 139,654 | | | 77,065 | | Cash and Cash Equivalents - January 1 | | 139,654 | | | 77,065 | |
| Cash and Cash Equivalents - March 31 | | $ | 113,162 | | | $ | 187,838 | | |
| Cash and Cash Equivalents - September 30 | | Cash and Cash Equivalents - September 30 | | $ | 53,303 | | | $ | 147,243 | |
| | Supplemental Disclosures of Cash Flow Information | Supplemental Disclosures of Cash Flow Information | | Supplemental Disclosures of Cash Flow Information | |
| Cash paid during the period for | Cash paid during the period for | | Cash paid during the period for | |
| Interest | Interest | | $ | 637 | | | $ | 1,105 | | Interest | | $ | 4,138 | | | $ | 3,205 | |
| Income taxes | Income taxes | | $ | — | | | $ | — | | Income taxes | | $ | 6,239 | | | $ | 6,278 | |
| | Supplemental Schedule of Non-Cash Operating Activities | Supplemental Schedule of Non-Cash Operating Activities | | Supplemental Schedule of Non-Cash Operating Activities | |
| Issuance of common stock for payment of compensation | Issuance of common stock for payment of compensation | | $ | 130 | | | $ | — | | Issuance of common stock for payment of compensation | | $ | 355 | | | $ | 164 | |
| | | Supplemental Schedule of Non-Cash Investing and Financing Activities | Supplemental Schedule of Non-Cash Investing and Financing Activities | | Supplemental Schedule of Non-Cash Investing and Financing Activities | |
| Cumulative effect adjustment for adoption of ASU 2016-13 | Cumulative effect adjustment for adoption of ASU 2016-13 | | $ | 2,006 | | | $ | — | | Cumulative effect adjustment for adoption of ASU 2016-13 | | $ | 2,006 | | | $ | — | |
|
See notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND NATURE OF OPERATIONS
Basis of Presentation
The Consolidated Financial Statements include the accounts of The Community Financial Corporation and its wholly-owned subsidiary, Community Bank of the Chesapeake (the “Bank”), (collectively, the “Company”), included herein are unaudited.
The Consolidated Financial Statements reflect all adjustments consisting only of normal recurring accruals that, in the opinion of management, are necessary to present fairly the Company’s financial condition, results of operations, and cash flows for the periods presented. Certain information and note disclosures normally included in Consolidated Financial Statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to the rules and regulations of the SEC. Management believes that the included disclosures are adequate to make the information presented not misleading. The balances as of December 31, 2021 have been derived from audited Consolidated Financial Statements. The Company’s accounting policies are disclosed in Note 1 to the 2021 Annual Report included in NoteConsolidated Financial Statements. The adoption on January 1, as well as the adoption2022 of the new Current Expected Credit Loss ("CECL") accounting standard that is described below. The results of operations for the threenine months March 31,September 30, 2022 are not necessarily indicative of the results of operations to be expected for the remainder of the year or any other period.
These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes included in the Company’s 2021 Annual Report on Form 10-K.
Reclassification
Certain items in prior Consolidated Financial Statements have been reclassified to conform to the current presentation.
Nature of Operations
The Company provides financial services to individuals and businesses through its offices in Southern Maryland and Fredericksburg, Virginia. Its primary deposit products are demand, savings and time deposits, and its primary lending products are commercial and residential mortgage loans, commercial loans, construction and land development loans, home equity and second mortgages and commercial equipment loans.
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Consolidated Financial Statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses ("ACL"), real estate acquired in the settlement of loans ("OREO"), fair value of financial instruments, fair value of assets acquired, and liabilities assumed in a business combination, evaluating other-than-temporary-impairment ("OTTI")potential credit losses of investment securities and valuation of deferred tax assets.
New Accounting Policy
Allowance for Credit Losses
On January 1, 2022, the Company adopted ASU 2016-13 "Financial Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss methodology for determining the provision for credit losses and ACL with the CECL methodology. The measurement of expected credit losses under the CECL methodology applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. In addition, ASU 2016-13 made changes to the accounting for available-for-sale ("AFS") debt securities. Credit-related impairments of AFS debt securities are now recognized through an allowance for credit loss rather than a write-down of the securitiessecurities' amortized cost basis when management does not intend to sell or believes that it is not likely that they will be required to sell the securities prior to recovery of the securities amortized cost basis.
We adopted ASU 2016-13 using the modified retrospective method. Results for reporting periods beginning after January 1, 2022 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. At adoption, the Company did not hold Held to Maturity ("HTM") investment debt securities.
The following table shows the impact of the Company's adoption of ASC 326:
| | | | | | | | | | | | | | | | | | | | |
| | January 1, 2022 |
| (dollars in thousands) | | As Reported Under ASC 326 | | Pre-ASC 326 Adoption | | Impact of ASC 326 Adoption |
| Portfolio Loans: | | | | | | |
| Commercial real estate | | $ | 1,113,793 | | | $ | 1,115,485 | | | (1,692) | |
| Residential first mortgages | | 92,710 | | | 91,120 | | | 1,590 | |
| Residential rentals | | 194,911 | | | 195,035 | | | (124) | |
| Construction and land development | | 35,502 | | | 35,590 | | | (88) | |
| Home equity and second mortgages | | 25,661 | | | 25,638 | | | 23 | |
| Commercial loans | | 50,512 | | | 50,574 | | | (62) | |
| Consumer loans | | 3,015 | | | 3,002 | | | 13 | |
| Commercial equipment | | 62,706 | | | 62,499 | | | 207 | |
| Gross Portfolio Loans | | 1,578,810 | | | 1,578,943 | | | (133) | |
| Adjustments: | | | | | | |
| Net deferred costs | | — | | | (133) | | | 133 | |
| Allowance for credit losses | | (20,913) | | | (18,417) | | | (2,496) | |
| Net Portfolio Loans | | 1,557,897 | | | 1,560,393 | | | (2,496) | |
| | | | | | |
| U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans | | 26,398 | | | 27,276 | | | (878) | |
| Net deferred fees | | — | | | (878) | | | 878 | |
| Net U.S. SBA PPP Loans | | 26,398 | | | 26,398 | | | — | |
| Total Net Loans | | $ | 1,584,295 | | | $ | 1,586,791 | | | $ | (2,496) | |
| | | | | | |
| Liabilities: Reserve for Unfunded Commitments | | $ | 268 | | | $ | 51 | | | $ | 217 | |
Loans that the Company has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances, adjusted for the allowance for credit losses and any deferred fees or premiums. Interest income is accrued on the unpaid principal balance. Loan origination fees and premiums, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered credit deteriorated. Evidence of credit quality deterioration as of the purchase date may include statistics such as internal risk grade, past due and nonaccrual status, recent borrower credit scores and recent loan-to-value (“LTV”) percentages. At December 31, 2021, the Bank had purchased credit-deteriorated (“PCD”) loans from the County First acquisition PCD loans with an unpaid principal balances of $1.4 million and a carrying values of $1.1 million. At the adoption of ASC 326, management evaluated the remaining unamortized discount on the PCD loans and determined that approximately $8,000 of the discount was credit related and
related and reclassified into the ACL. The non-credit component of the discount will be recognized in interest income over the remaining life of the loan.loans.
The Company considers a loan to be past due or delinquent when the terms of the contractual obligation are not met by the borrower. Loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the collection of additional interest is doubtful. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Non-accrual loans include certain loans that are current with all loan payments and are placed on non-accrual status due to customer operating results and cash flows. Non-accrual loans are evaluated for impairment on a loan-by-loan basis in accordance with the Company’s impairment methodology.
Consumer loans, excluding credit card loans, are typically charged-off no later than 90 days past due. Credit card loans are typically charged-off no later than 180 days past due. Mortgage and commercial loans are fully or partially charged-off when in management’s judgment all reasonable efforts to return a loan to performing status have occurred. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected from loans that are placed on non-accrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.
TDRs are loans that have been modified to provide for a reduction or a delay in the payment of either interest or principal because of deterioration in the financial condition of the borrower. A loan extended or renewed at a stated interest rate equal to the current interest rate for new debt with similar risk is not considered a TDR. Once an obligation has been classified as a TDR it continues to be considered a TDR until paid in full or until the debt is refinanced and considered unimpaired. All TDRs are assessed on a loan-by-loan basis. The Company does not participate in any specific government or Company-sponsored loan modification programs. All restructured loan agreements are individual contracts negotiated with a borrower.
Allowance for Credit Losses - Loans
The ACL is an estimate of the expected credit losses for loans held for investment and off-balance sheet exposures. ASU 2016-13 replaced the incurred loss model that recognized lossesa loss when it became probable that a credit lossesloss had occurred, with a model that immediately recognizes athe credit loss expected to occur over the lifetime of a financial asset whether originated or purchased. Loan lossesCharge-offs are charged againstrecorded to the ACL when management believes the loan is uncollectible. Subsequent recoveries, if any, are credited to the ACL. Management believes the ACL is in accordance with U.S. GAAP and in compliance with appropriate regulatory guidelines.
The ACL includes quantitative estimates of losses for collectively and individually evaluated loans. As more fully described below, the model-based quantitative estimate for collectively evaluated loans is determined using the probability of default (PD) and loss given default (LGD) at the segment level and applied at the loan level against the expected exposure at default (EAD). Qualitative adjustments to the quantitative estimate may be made using information not considered in the quantitative model.
The Bank uses a range of data to estimate expected credit losses under CECL, including information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the cash flows of the loans. Historical loss experience serves as the foundation for our estimated credit losses. Adjustments to our historical loss experience are made for differences in current loan portfolio segment credit risk characteristics such as the impact of changing unemployment rates, changes in U.S. Treasury yields, portfolio concentrations, the volume of classified loans, inflation, and other prevailing economic conditions and factors that may affect the borrower’s ability to repay, or reduce the estimated value of underlying collateral. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
The ACL is measured on a collective basis when similar risk characteristics exist. Generally, collectively assessed loans are grouped by loan type code or product type codes and assigned to a corresponding portfolio segment. Portfolio segments may be further subdivided into similar risk profile groupings based on interest rate structure, types of collateral or other terms and characteristics.
The probability of default (“PD”) calculation analyzes the historical loan portfolio over the given look back period to identify, by segment, loans that have defaulted. A default is defined as a loan that has moved to past due 90 days and greater, nonaccrual status, or experienced a charge-off during the period. The model observes loans over a 12-month window, detecting any events previously defined. This information is then used by the model to calculate annual iterative count-based PD rates for each segment. This process is then repeated for all dates within the historical data range. These averaged PD’s are used for a 12-month straight-line reversion to the historical mean. The historical data used to calculate this input dates was captured from mid-2006 through the most recent quarter end.
The Company utilizes reasonable and supportable forecasts of future economic conditions when estimating the ACL on loans. The model’s calculation also includes a 12-month forecasted PD based on a regression model that comparedcompares the Company’s historical loan data to
various national economic metrics during the same periods. The results showedshow the Company’s past losses having a high rate of correlation to national unemployment rates for fixed rate loans and the 10-Year U.S. Treasury for adjustable rateadjustable-rate loans. The model uses this information, along with the most recently published Wall Street Journal survey of sixty economists’ forecasts predicting unemployment rates out over the next four quarters to estimate the PD for the forward-looking 12-month period. These data are also used to predict loancredit losses at different levels of stress, including a baseline, low, high and adverse economic conditions. After the forecast period, PD rates revert to the historical mean straight line over a 12-month period for the entire data set.
The loss given default (“LGD”) calculation is based on actual losses (charge-offs, net of recoveries) at a loan level experienced over the entire look-back period aggregated for each loan segment. The aggregate loss is divided by the exposure at default to determine an LGD rate. Defaults occurring during the look-back period are included in the denominator, whether or not a loss occurred or not and exposure at default is determined by the loan balance immediately preceding the default event. When the Company's data are insufficient. an industry index is used.
The exposure at default (“EAD”) calculation projects future expected balances from monthly cash flow schedules to apply PD and LGD assumptions through the creation of monthly cash flow schedules.assumptions. These are derived based on current contractual terms (balance, interest rate, payment structure), adjusted for expected voluntary prepayments. The contractual terms exclude expected extensions, renewals and modifications unless either of the following applies: management has the reasonable expectation that a loan will be restructured, or the extension or renewal option are included in the borrower contract.
On a quarterly basis, the Company uses internal portfolio credit data, such as levels of non-accrual loans, classified assets and concentrations of credit along with other external information not used in the quantitative calculation to determine qualitative adjustments.
Loans that do not share the same common risk characteristics with other loans are individually assessed.assessed. Such loans include non-accrual loans, TDRs, loans classified as substandard or worse, loans that are greater than 89 days delinquent and any other loan identified by management determines for individual assessment. Reserves on individually assessed loans are measured on a loan-by loanloan-by-loan basis. Generally, consumer loans, including credit cards, are not individually assessed as the Bank's policy is to charge-off credit card loans when they become 180 days delinquent and other consumer loans when they are more than 90 days delinquent.
The methodology used into estimate the estimation of the ACL which is performed at least quarterly, is designed to be responsive to changes in portfolio credit quality and forecasted economic conditions. Changes due to new information are reflected in the pool-based allowance and in reserves assigned on an individual basis as collectibility is updated with new information. Our portfoliobasis. Executive management closely monitors loss ratios, have been closely monitored. The review ofreviews the appropriateness of the ACL is performed by executive management and is presentedpresents conclusions to the Credit Risk Committee and the Audit Committee. The committees report to the Board as part of Board's quarterly review of our regulatory reporting and consolidated financial statements.
The calculation of the ACL excludes accrued interest receivable balances because these balances are reversed in a timely manner against previously recognized interest income when a loan is placed on non-accrual status.
Allowance for Credit Losses - AFS Debt securities
As described above, the Company does not presently hold any HTM debt securities and therefore is not presently required to apply a CECL methodology for an HTM investment portfolio.
The impairment model for AFS debt securities differs from the CECL approach utilized by HTM debt securities because AFS debt securities are measured atmeasures fair value rather than amortized cost.value. Although ASU No. 2016-13 replaced the legacy other-than-temporary impairment (“OTTI”) model with a credit loss model, it retained the fundamental nature of the legacy OTTI model for AFS securities. One notable change from the legacy OTTI model is when evaluating whether credit loss exists, an entity may no longer consider the length of time fair value has been less than amortized cost. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criterion is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.
In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and a corresponding allowance for credit losses is recorded. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment not recorded through an allowance for credit loss is recognized in other comprehensive income as a noncredit-related impairment. As of March 31,September 30, 2022, the Company determined that the unrealized loss
unrealized loss positions in AFS securities were not the result of credit losses, and therefore, an allowance for credit losses was not recorded. See Note 2 Investment Securities for more information.
Management has made a policy electionThe Bank elected as allowed under ASU No. 2016-13 to exclude accrued interest from the amortized cost basis of AFS debt securities and report accrued interest separately in accrued interest and other assets in the consolidated balance sheets. AFS debt securities are placed on non- accrualnon-accrual status when management no longer expects to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on non-accrual status. Accordingly, the Company does not recognize an allowance for credit loss against accrued interest receivable. The majority of AFS debt securities as of March 31,September 30, 2022 and December 31, 2021 were issued by Government Sponsored Enterprises (“GSEs”) and U.S. agencies. As such, an allowance for credit losses is not considered necessary.
Collateral Dependent Financial Assets
Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the NPVNet Present Value ("NPV") from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset. Subsequent changes to the fair value of collateral, for which an ACL was previously recognized, will be reported as a provision (recovery) for credit losses.
The Bank generally uses the practical expedient and usesof the fair value of the collateral, net of estimated selling costs, to determine the expected credit loss for most individually assessed collateral dependent loans .loans.
Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposure
Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company records a reserve for unfunded commitments (“RUC”) on off-balance sheet credit exposures through a charge to provision for credit loss expense in the Company’s consolidated statements of operations. The RUC on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in Other Liabilities on the Company’s consolidated balance sheets.
See Note 1 – Summary of Significant Accounting Policies included in the Company’s 2021 Annual Report on Form 10-K for a list of policies in effect as of December 31, 2021.
Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”)
Adopted New Accounting Standard
ASU 2016-13 – Financial Instruments – Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaced the existing “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, applies to (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, HTM securities, loan commitments, and financial guarantees. Credit losses relating to AFS debt securities will be recorded through an allowance for credit losses. The ASU also simplifies the accounting model for PurchasePurchased Credit Impaired (“PCI”) debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach).
In December 2019, the FASB issued ASU No 2019-10, Financial Instruments - Credit Losses (Topic 326). This update amends the effective date of ASU 2016-13 for certain entities, including smaller reporting companies until fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. Early adoption was permitted. The FASB has issued other ASUs that clarify items related to ASU 2016-13. The Company adopted this guidance effective January 1, 2022.
The Company's estimates are derived using one-year reasonable and supportable economic forecasts with subsequent one-year reversion to the historical mean loss rates. For loans that share similar risk characteristics and are collectively assessed, the Company uses a probability of default/loss given default cash flow method to determine the expected losses at the loan level. Loans that do not share similar risk characteristics are evaluated on an individual basis. Based on forecasted economic conditions and portfolio balances as of January 1, 2022, we recognized an increase to the opening allowance for credit losses of $2.5 million. The increase is primarily related to the change in methodology from estimating losses incurred as of the balance sheet date to estimating lifetime credit losses required by the CECL standard.
The impact of adoption was not significant to the Bank's regulatory capital. The Bank did not elect to phase-in, over a three-year period, the standard's initial impact on regulatory capital as permitted by the regulatory transition rules.
ASU 2019-05 -– Financial Instruments-Credit Losses (Topic 326). In May 2019, the FASB issued ASU No. 2019-05. This ASU allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to HTM debt securities. Entities are required to make this election on an instrument-by-instrument basis. The Company adopted ASU 2019-05 concurrently upon adoption of ASU 2016-13. The adoption of CECL did not have a material effect on available-for-sale securities, which are predominantly composed of mortgage-backed securities issued by government sponsored entities and U.S. agencies and U.S. government obligations.
Pending adoption
ASU 2020-04 -– Reference Rate Reform (Topic 848). In March 2020, the FASB issued guidance to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments are effective as of March 12, 2020 through December 31, 2022. The Company does not expect these amendments to have a material effect on its Consolidated Financial Statements.
ASU Update 2022-02 – Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU Update 2022-02 eliminates the TDR recognition and measurement guidance and, instead requiredrequires that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. In addition, ASU Update 2022-02 requires that an entity disclosure current-period gross write-offs by year of origination for financing receivables and net investment in leases. Entities have the option to apply a modified retrospective transition method for TDRs. The disclosure amendments in the Update 2022-02 will be applied prospectively. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its Consolidated Financial Statements.
NOTE 2 – INVESTMENT SECURITIES
Amortized cost and fair values of investment securities at March 31,September 30, 2022 and December 31, 2021 are summarized as follows:
| | | March 31, 2022 | | September 30, 2022 |
| (dollars in thousands) | (dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | (dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| AFS Securities | AFS Securities | | | | | | | | | AFS Securities | | | | | | | | |
| Asset-backed securities issued by GSEs and U.S. Agencies | Asset-backed securities issued by GSEs and U.S. Agencies | | Asset-backed securities issued by GSEs and U.S. Agencies | |
| Residential Mortgage Backed Securities ("MBS") | Residential Mortgage Backed Securities ("MBS") | | $ | 127,828 | | | $ | 172 | | | $ | 6,480 | | | $ | 121,520 | | Residential Mortgage Backed Securities ("MBS") | | $ | 128,493 | | | $ | 13 | | | $ | 13,770 | | | $ | 114,736 | |
| Residential Collateralized Mortgage Obligations ("CMOs") | Residential Collateralized Mortgage Obligations ("CMOs") | | 197,548 | | | 85 | | | 7,834 | | | 189,799 | | Residential Collateralized Mortgage Obligations ("CMOs") | | 181,433 | | | 13 | | | 16,579 | | | 164,867 | |
| U.S. Agency | U.S. Agency | | 14,488 | | | — | | | 1,078 | | | 13,410 | | U.S. Agency | | 14,601 | | | — | | | 2,375 | | | 12,226 | |
| Asset-backed securities ("ABSs") issued by Others: | Asset-backed securities ("ABSs") issued by Others: | | Asset-backed securities ("ABSs") issued by Others: | |
| Residential CMOs | Residential CMOs | | 199 | | | 3 | | | 3 | | | 199 | | Residential CMOs | | 9,363 | | | — | | | 260 | | | 9,103 | |
| Student Loan Trust ABSs | Student Loan Trust ABSs | | 54,425 | | | 147 | | | 1,103 | | | 53,469 | | Student Loan Trust ABSs | | 50,315 | | | 103 | | | 1,879 | | | 48,539 | |
| | Municipal bonds | Municipal bonds | | 98,889 | | | 16 | | | 8,078 | | | 90,827 | | Municipal bonds | | 99,846 | | | — | | | 20,982 | | | 78,864 | |
| Corporate bonds | Corporate bonds | | 3,000 | | | — | | | 40 | | | 2,960 | | Corporate bonds | | 3,000 | | | — | | | 391 | | | 2,609 | |
| U.S. government obligations | U.S. government obligations | | 36,805 | | | — | | | 1,462 | | | 35,343 | | U.S. government obligations | | 36,831 | | | — | | | 3,273 | | | 33,558 | |
| Total AFS Securities | Total AFS Securities | | $ | 533,182 | | | $ | 423 | | | $ | 26,078 | | | $ | 507,527 | | Total AFS Securities | | $ | 523,882 | | | $ | 129 | | | $ | 59,509 | | | $ | 464,502 | |
| | Equity securities carried at fair value through income | Equity securities carried at fair value through income | | Equity securities carried at fair value through income | |
| CRA investment fund | CRA investment fund | | $ | 4,562 | | | $ | — | | | $ | — | | | $ | 4,562 | | CRA investment fund | | $ | 4,254 | | | $ | — | | | $ | — | | | $ | 4,254 | |
| | Non-marketable equity securities | Non-marketable equity securities | | Non-marketable equity securities | |
| Other equity securities | Other equity securities | | $ | 207 | | | $ | — | | | $ | — | | | $ | 207 | | Other equity securities | | $ | 207 | | | $ | — | | | $ | — | | | $ | 207 | |
| | Total Investment Securities | Total Investment Securities | | $ | 537,951 | | | $ | 423 | | | $ | 26,078 | | | $ | 512,296 | | Total Investment Securities | | $ | 528,343 | | | $ | 129 | | | $ | 59,509 | | | $ | 468,963 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| (dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| AFS Securities | | | | | | | | |
| Asset-backed securities issued by GSEs and U.S. Agencies | | | | | | | | |
| Residential MBS | | $ | 121,125 | | | $ | 1,057 | | | $ | 2,266 | | | $ | 119,916 | |
| Residential CMOs | | 198,780 | | | 710 | | | 2,367 | | | 197,123 | |
| U.S. Agency | | 14,433 | | | 11 | | | 140 | | | 14,304 | |
| Asset-backed securities issued by Others: | | | | | | | | |
| Residential CMOs | | 220 | | | 5 | | | 4 | | | 221 | |
| Student Loan Trust ABSs | | 56,422 | | | 438 | | | 286 | | | 56,574 | |
| | | | | | | | |
| Municipal bonds | | 92,556 | | | 1,169 | | | 884 | | | 92,841 | |
| | | | | | | | |
| U.S. government obligations | | 16,942 | | | — | | | 82 | | | 16,860 | |
| Total AFS Securities | | $ | 500,478 | | | $ | 3,390 | | | $ | 6,029 | | | $ | 497,839 | |
| | | | | | | | |
| Equity securities carried at fair value through income | | | | | | | | |
| CRA investment fund | | $ | 4,772 | | | $ | — | | | $ | — | | | $ | 4,772 | |
| | | | | | | | |
| Non-marketable equity securities | | | | | | | | |
| Other equity securities | | $ | 207 | | | $ | — | | | $ | — | | | $ | 207 | |
| | | | | | | | |
| Total Investment Securities | | $ | 505,457 | | | $ | 3,390 | | | $ | 6,029 | | | $ | 502,818 | |
The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities disclosed throughout this footnote. AFS debt securities, AIR totaled $1.2$1.6 million and $1.1 million as of March 31,September 30, 2022, and December 31, 2021, respectively. AIR is included in the “accrued interest receivable” line item on the Company’s consolidated statements of condition.balance sheets.
At March 31,September 30, 2022 and December 31, 2021, securities with an amortized cost of $55.0$55.6 million and $50.9 million were pledged to secure certain customer deposits.
During the quarter ended March 31,September 30, 2022, the Company did not sell any securities. During the year ended December 31, 2021, the Company recognized net gains of $0.6 million on the sale of AFS securities with aggregate carrying values of $11.9 million.
The CompanyManagement does not believe that the AFS debt securities that were in an unrealized loss position as of March 31,September 30, 2022 which were comprised of 295 individual securities, represent ahave credit loss impairment. As of March 31,September 30, 2022, and December 31, 2021, the gross unrealized loss positions were primarily related to mortgage-backed securities issued by U.S. government agencies or U.S. government sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. The Company also performed credit reviewreviews on municipal bonds issued by States and Political Subdivisions and asset backed securities issued by Student Loan Trust. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell the investment securities that were in an unrealized loss position, and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity. Management believes that the securities will either recover in market value or be paid off as agreed.
AFS Securities
Gross unrealized losses and estimated fair value by length of time that individual AFS securities have been in a continuous unrealized loss position at March 31,September 30, 2022, and December 31, 2021 were as follows:
| | March 31, 2022 | | Less Than 12 Months | | More Than 12 Months | | Total | |
| September 30, 2022 | | September 30, 2022 | | Less Than 12 Months | | More Than 12 Months | | Total |
| (dollars in thousands) | (dollars in thousands) | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Losses | (dollars in thousands) | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Losses |
| Asset-backed securities issued by GSEs and U.S. Agencies | Asset-backed securities issued by GSEs and U.S. Agencies | | $ | 190,094 | | | $ | 10,820 | | | $ | 106,161 | | | $ | 4,572 | | | $ | 296,255 | | | $ | 15,392 | | Asset-backed securities issued by GSEs and U.S. Agencies | | $ | 69,403 | | | $ | 6,302 | | | $ | 220,175 | | | $ | 26,422 | | | $ | 289,578 | | | $ | 32,724 | |
| | Asset-backed securities issued by Others | Asset-backed securities issued by Others | | — | | | — | | | 44 | | | 3 | | | 44 | | | 3 | | Asset-backed securities issued by Others | | 5,937 | | | 244 | | | 149 | | | 16 | | | 6,086 | | | 260 | |
| Student Loan Trust ABSs | Student Loan Trust ABSs | | 17,882 | | | 716 | | | 24,890 | | | 387 | | | 42,772 | | | 1,103 | | Student Loan Trust ABSs | | 6,536 | | | 1,000 | | | 34,823 | | | 879 | | | 41,359 | | | 1,879 | |
| Municipal bonds | Municipal bonds | | 56,379 | | | 5,774 | | | 33,041 | | | 2,304 | | | 89,420 | | | 8,078 | | Municipal bonds | | 38,786 | | | 8,927 | | | 40,078 | | | 12,055 | | | 78,864 | | | 20,982 | |
| Corporate bonds | Corporate bonds | | 2,960 | | | 40 | | | — | | | — | | | 2,960 | | | 40 | | Corporate bonds | | 2,609 | | | 391 | | | — | | | — | | | 2,609 | | | 391 | |
| U.S. government obligations | U.S. government obligations | | 25,896 | | | 959 | | | 9,447 | | | 503 | | | 35,343 | | | 1,462 | | U.S. government obligations | | 18,656 | | | 1,232 | | | 14,902 | | | 2,041 | | | 33,558 | | | 3,273 | |
| | $ | 293,211 | | | $ | 18,309 | | | $ | 173,583 | | | $ | 7,769 | | | $ | 466,794 | | | $ | 26,078 | | | $ | 141,927 | | | $ | 18,096 | | | $ | 310,127 | | | $ | 41,413 | | | $ | 452,054 | | | $ | 59,509 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Less Than 12 Months | | More Than 12 Months | | Total |
| (dollars in thousands) | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Losses |
| Asset-backed securities issued by GSEs and U.S. Agencies | | $ | 205,891 | | | $ | 3,997 | | | $ | 41,327 | | | $ | 776 | | | $ | 247,218 | | | $ | 4,773 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Asset-backed securities issued by Others | | — | | | — | | | 57 | | | 4 | | | 57 | | | 4 | |
| Student Loan Trust ABSs | | 21,640 | | | 281 | | | 2,226 | | | 5 | | | 23,866 | | | 286 | |
| Municipal bonds | | 47,314 | | | 776 | | | 6,696 | | | 108 | | | 54,010 | | | 884 | |
| | | | | | | | | | | | |
| U.S. government obligations | | 14,860 | | | 82 | | | 1,999 | | | — | | | 16,859 | | | 82 | |
| | $ | 289,705 | | | $ | 5,136 | | | $ | 52,305 | | | $ | 893 | | | $ | 342,010 | | | $ | 6,029 | |
Maturities
The amortized cost and estimated fair value of debt securities at March 31,September 30, 2022, and December 31, 2021 by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call premiums or prepayment penalties.
| | | | March 31, 2022 | | December 31, 2021 | | | September 30, 2022 | | December 31, 2021 |
| (dollars in thousands) | (dollars in thousands) | | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value | (dollars in thousands) | | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| Within one year | Within one year | | $ | 36,359 | | | $ | 34,610 | | | $ | 36,859 | | | $ | 36,665 | | Within one year | | $ | 35,730 | | | $ | 31,680 | | | $ | 36,859 | | | $ | 36,665 | |
| Over one year through five years | Over one year through five years | | 146,286 | | | 139,247 | | | 121,308 | | | 120,668 | | Over one year through five years | | 137,433 | | | 121,856 | | | 121,308 | | | 120,668 | |
| Over five years through ten years | Over five years through ten years | | 196,631 | | | 187,170 | | | 191,166 | | | 190,158 | | Over five years through ten years | | 219,912 | | | 194,986 | | | 191,166 | | | 190,158 | |
| After ten years | After ten years | | 153,906 | | | 146,500 | | | 151,145 | | | 150,348 | | After ten years | | 130,807 | | | 115,980 | | | 151,145 | | | 150,348 | |
| Total AFS securities | Total AFS securities | | $ | 533,182 | | | $ | 507,527 | | | $ | 500,478 | | | $ | 497,839 | | Total AFS securities | | $ | 523,882 | | | $ | 464,502 | | | $ | 500,478 | | | $ | 497,839 | |
NOTE 3 – LOANS
Portfolio loans, net of deferred costs and fees, are summarized by type as follows at March 31,September 30, 2022:
| | | | | March 31, 2022 | | | September 30, 2022 |
| (dollars in thousands) | (dollars in thousands) | | Total | | % of Total Loans | (dollars in thousands) | | Total | | % of Total Loans |
| Portfolio Loans: | Portfolio Loans: | | | | | Portfolio Loans: | | | | |
| Commercial real estate | Commercial real estate | | $ | 1,177,761 | | | 72.28 | % | Commercial real estate | | $ | 1,202,660 | | | 68.98 | % |
| Residential first mortgages | Residential first mortgages | | 86,416 | | | 5.30 | % | Residential first mortgages | | 83,081 | | | 4.77 | % |
| Residential rentals | Residential rentals | | 191,065 | | | 11.73 | % | Residential rentals | | 282,365 | | | 16.20 | % |
| Construction and land development | Construction and land development | | 30,649 | | | 1.88 | % | Construction and land development | | 23,197 | | | 1.33 | % |
| Home equity and second mortgages | Home equity and second mortgages | | 26,445 | | | 1.62 | % | Home equity and second mortgages | | 26,054 | | | 1.49 | % |
| Commercial loans | Commercial loans | | 48,948 | | | 3.00 | % | Commercial loans | | 41,615 | | | 2.39 | % |
| Consumer loans | Consumer loans | | 3,592 | | | 0.22 | % | Consumer loans | | 5,754 | | | 0.33 | % |
| Commercial equipment | Commercial equipment | | 64,662 | | | 3.97 | % | Commercial equipment | | 78,551 | | | 4.51 | % |
| Total portfolio loans (1) | Total portfolio loans (1) | | 1,629,538 | | | 100.00 | % | Total portfolio loans (1) | | 1,743,277 | | | 100.00 | % |
| Less: Allowance for Credit Losses | Less: Allowance for Credit Losses | | (21,382) | | | (1.31) | % | Less: Allowance for Credit Losses | | (22,027) | | | (1.26) | % |
| Total net portfolio loans | Total net portfolio loans | | 1,608,156 | | | Total net portfolio loans | | 1,721,250 | | |
U.S. SBA PPP loans (1) | U.S. SBA PPP loans (1) | | 15,279 | | | U.S. SBA PPP loans (1) | | 1,211 | | |
| Total net loans | Total net loans | | $ | 1,623,435 | | | Total net loans | | $ | 1,722,461 | | |
| | Portfolio loans are summarized by type as follows at December 31, 2021: | Portfolio loans are summarized by type as follows at December 31, 2021: | | Portfolio loans are summarized by type as follows at December 31, 2021: | |
| Portfolio Loans: | Portfolio Loans: | | December 31, 2021 | Portfolio Loans: | | December 31, 2021 |
| Commercial real estate | Commercial real estate | | $ | 1,115,485 | | | 70.66 | % | Commercial real estate | | $ | 1,115,485 | | | 70.66 | % |
| Residential first mortgages | Residential first mortgages | | 91,120 | | | 5.77 | % | Residential first mortgages | | 91,120 | | | 5.77 | % |
| Residential rentals | Residential rentals | | 195,035 | | | 12.35 | % | Residential rentals | | 195,035 | | | 12.35 | % |
| Construction and land development | Construction and land development | | 35,590 | | | 2.25 | % | Construction and land development | | 35,590 | | | 2.25 | % |
| Home equity and second mortgages | Home equity and second mortgages | | 25,638 | | | 1.62 | % | Home equity and second mortgages | | 25,638 | | | 1.62 | % |
| Commercial loans | Commercial loans | | 50,574 | | | 3.20 | % | Commercial loans | | 50,574 | | | 3.20 | % |
| Consumer loans | Consumer loans | | 3,002 | | | 0.19 | % | Consumer loans | | 3,002 | | | 0.19 | % |
| Commercial equipment | Commercial equipment | | 62,499 | | | 3.96 | % | Commercial equipment | | 62,499 | | | 3.96 | % |
Gross portfolio loans (1) | Gross portfolio loans (1) | | 1,578,943 | | | 100.00 | % | Gross portfolio loans (1) | | 1,578,943 | | | 100.00 | % |
| Adjustments: | Adjustments: | | Adjustments: | |
| Net deferred costs | Net deferred costs | | (133) | | | (0.01) | % | Net deferred costs | | (133) | | | (0.01) | % |
| Allowance for loan losses | Allowance for loan losses | | (18,417) | | | (1.17) | % | Allowance for loan losses | | (18,417) | | | (1.17) | % |
| | (18,550) | | | | (18,550) | | |
| Net portfolio loans | Net portfolio loans | | 1,560,393 | | | Net portfolio loans | | 1,560,393 | | |
| Gross U.S. SBA PPP loans (1) | Gross U.S. SBA PPP loans (1) | | 27,276 | | | Gross U.S. SBA PPP loans (1) | | 27,276 | | |
| Net deferred fees | Net deferred fees | | (878) | | | Net deferred fees | | (878) | | |
| Net U.S. SBA PPP Loans | Net U.S. SBA PPP Loans | | 26,398 | | | Net U.S. SBA PPP Loans | | 26,398 | | |
| Total net loans | Total net loans | | $ | 1,586,791 | | | Total net loans | | $ | 1,586,791 | | |
| | Total gross loans | Total gross loans | | $ | 1,606,219 | | | Total gross loans | | $ | 1,606,219 | | |
(1)Excludes accrued interest receivable of $4.2$5.2 million and $4.5 million, at March 31,September 30, 2022 and December 31, 2021, respectively.
The Company has segregated its loans into portfolio loans and U.S. SBA PPP loans at December 31, 2021.
Deferred Costs/Fees
Portfolio net deferred costsfees of $0.2$1.4 million at March 31,September 30, 2022 included deferred fees paid by customers of $4.2$5.6 million offset by deferred costs of $4.0$4.2 million. Deferred loan costs include premiums paid for the purchase of residential first mortgages and deferred loan origination costs in accordance with ASC 310-20. Net deferred loan costsfees of $0.1 million at December 31, 2021 included deferred fees paid by customers of $4.1 million offset by deferred costs of $4.0 million.
U.S. SBA PPP loan net deferred fees of $0.5 million$41,000 at March 31,September 30, 2022 included deferred fees paid by the U.S. SBA of $0.5 million$44,000 partially offset by deferred costs of $41,000.$3,000. U.S. SBA PPP net deferred loan fees of $0.9$0.2 million at December 31, 2021 included deferred fees paid by the SBA of $1.0$0.2 million offset by deferred costs of $0.1 million.$18,000. The net deferred fees are being amortized as a component of interest income through the contractual maturity date of each U.S. SBA PPP loan. Net deferred fees include fees (deferred fees) paid toreceived by participant banks for each U.S. SBA PPP loan underwritten and funded net of costs incurred to underwrite the loans (deferred costs).loans. Net deferred fees will be recognized in income when the U.S. SBA PPP loan is forgiven or paid.
Risk Characteristics of Portfolio Segments
Concentrations of Credit - Loans are primarily made within the Company’s operating footprint of Southern Maryland and the greater Fredericksburg area of Virginia. Real estate loans can be affected by the condition of the local real estate market. Commercial and industrial loans can be affected by the local economic conditions. The commercial loan portfolio has business loans secured by real estate and real estate development loans. At March 31,September 30, 2022 and December 31, 2021, the Company had no loans outstanding with foreign entities.
The Company manages its credit products and exposure to credit losses (credit risk) by the following specific portfolio segments (classes), which are levels at which the Company develops and documents its allowance for loan loss methodology. These segments are:
Commercial Real Estate (“CRE”)
Commercial and other real estate projects include office, medical and professional buildings, retail locations, churches, other special purpose buildings and commercial construction. Commercial construction balances were 6.7%7.5% and 6.5% of the CRE portfolio at March 31,September 30, 2022 and December 31, 2021, respectively. The Bank offers both fixed-rate and adjustable-rate loans under these product lines. The primary security on a commercial real estate loan is the real property and the leases that produce income for the real property. Loans secured by commercial real estate are generally limited to 80% of the lower of the appraised value or sales price at origination and have an initial contractual loan payment period ranging from three to 20 years.
Because payments on loans secured by such properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy.
Residential First Mortgages
Residential first mortgage loans are generally long-term (10 to 30 years) amortizing loans. The Bank’s residential portfolio has both fixed-rate and adjustable-rate residential first mortgages.
The annual and lifetime limitations on interest rate adjustments may constrain interest rate increases on these loans. There are also credit risks resulting from potential increased costs to the borrower as a result of repricing of adjustable-rate mortgage loans. During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower. The Bank’s adjustable rate residential first mortgage portfolio was $15.1$13.4 million or 0.9%0.8% of total portfolio loans of $1.6$1.7 billion at March 31,September 30, 2022 compared to $18.9 million or 1.2% of total gross portfolio loans of $1.6 billion at December 31, 2021.
The Bank generally retains the right to service loans sold for a payment based upon a percentage (generally 0.25% of the outstanding loan balance). As of March 31,September 30, 2022 and December 31, 2021, the Bank serviced $21.4$20.0 million and $20.9 million, respectively, in residential mortgage loans for others.
Residential Rentals
Residential rental mortgage loans are amortizing long-term loans. Loans secured by residential rental properties are generally limited to 80% of the lower of the appraised value or sales price at origination and have an initial contractual loan payment period ranging from three to 20 years. During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower.
Loans secured by residential rental properties involve greater risks than 1-4 family residential mortgage loans. Although, there are similar risk characteristics shared with commercial real estate loans, the balances for the loans secured by residential rental properties are generally smaller. Payments on loans secured by residential rental properties are dependent on the successful operation of the properties; and repayment of these loans may be subject to adverse conditions in the rental real estate market or the economy than similar owner-occupied properties.
Construction and Land Development
The Bank offers loans for the construction of residential dwellings. These loans are secured by the real estate under construction as well as by guarantees of the principals involved. In addition, the Bank offers loans to acquire and develop land. Construction and Land Development loans are dependent on the successful completion of the underlying project, or the borrowers guarantee to repay the loan. As such, they are subject to the risks of the project including changing pricesthe borrower’s ability to successfully manage construction and interest rates.development activities. The repayment of these loans is also dependent on the borrower’s abilitysubject to successfully manage the constructioneconomic risks such as changing prices and development activities.interest rates.
Home Equity and Second Mortgage Loans
The Bank maintains a portfolio of home equity and second mortgage loans. These products contain a higher risk of default than residential first mortgages as in the event of foreclosure, the first mortgage would need to be paid off prior to collection of the second mortgage.
Commercial Loans
Commercial loans including lines of credit are short-term loans (5 years or less) that are secured by the equipment financed, the guarantees of the borrower, and other collateral. These loans are dependent on the success of the underlying business or the strength of the guarantor.
Consumer Loans
Consumer loans consist of loans secured by automobiles, boats, recreational vehicles and trucks. The Bank also makes home improvement loans and offers both secured and unsecured personal lines of credit and credit card loans. The repayment of these loans is dependent on the continued financial stability of the customer.
Commercial Equipment Loans
These loans consist primarily of fixed-rate, short-term loans collateralized by a commercial customer’s equipment or secured by real property, accounts receivable, or other security as determined by the Bank. Commercial loans are of higher risk and these loans are dependent on the success of the underlying business or the strength of the guarantor.
U.S. SBA PPP Loans
U.S. SBA PPP loans are fully guaranteed by the Small Business Administration and the Bank's ACL does not include an allowance for U.S. SBA PPP loans. Management believes all U.S. SBA PPP loans were underwritten in accordance with the program's guidelines.
Loans
Non-accrual loans as of March 31,September 30, 2022 and December 31, 2021 were as follows:
| | | March 31, 2022 | | | September 30, 2022 | |
| (dollars in thousands) | (dollars in thousands) | | Nonaccrual with No Allowance for Credit Losses | | Nonaccrual with
Allowance for Credit Losses | | Total Nonaccrual Loans | | (dollars in thousands) | | Nonaccrual with No Allowance for Credit Losses | | Nonaccrual with
Allowance for Credit Losses | | Total Nonaccrual Loans | |
| Commercial real estate | Commercial real estate | | $ | 4,899 | | | $ | 89 | | | $ | 4,988 | | | Commercial real estate | | $ | 4,577 | | | $ | 84 | | | $ | 4,661 | | |
| Residential first mortgages | | 736 | | | — | | | 736 | | | |
| | Residential rentals | Residential rentals | | 672 | | | — | | | 672 | | | Residential rentals | | 1,153 | | | — | | | 1,153 | | |
| | Home equity and second mortgages | Home equity and second mortgages | | 377 | | | — | | | 377 | | | Home equity and second mortgages | | 240 | | | — | | | 240 | | |
| Commercial loans | Commercial loans | | — | | | 25 | | | 25 | | | Commercial loans | | — | | | 25 | | | 25 | | |
| | Commercial equipment | Commercial equipment | | 500 | | | 166 | | | 666 | | | Commercial equipment | | 211 | | | — | | | 211 | | |
| | U.S. SBA PPP | | 1 | | | — | | | 1 | | | |
| | Total | Total | | $ | 7,185 | | | $ | 280 | | | $ | 7,465 | | | Total | | $ | 6,181 | | | $ | 109 | | | $ | 6,290 | | |
| | Interest Income on Nonaccrual Loans | Interest Income on Nonaccrual Loans | | $ | 40 | | | $ | — | | | $ | 40 | | | Interest Income on Nonaccrual Loans | | $ | 63 | | | $ | — | | | $ | 63 | | |
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 |
| (dollars in thousands) | | Non-accrual Delinquent Loans | | Non-accrual Current Loans | | Total Non-accrual Loans |
| Commercial real estate | | $ | — | | | $ | 4,661 | | | $ | 4,661 | |
| | | | | | |
| Residential rentals | | 454 | | | 699 | | | 1,153 | |
| | | | | | |
| Home equity and second mortgages | | 124 | | | 116 | | | 240 | |
| Commercial loans | | — | | | 25 | | | 25 | |
| | | | | | |
| Commercial equipment | | — | | | 211 | | | 211 | |
| | | | | | |
| | $ | 578 | | | $ | 5,712 | | | $ | 6,290 | |
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| (dollars in thousands) | | Non-accrual Delinquent Loans | | Non-accrual Current Loans | | Total Non-accrual Loans |
| Commercial real estate | | $ | — | | | $ | 4,890 | | | $ | 4,890 | |
| Residential first mortgages | | 450 | | | — | | | 450 | |
| Residential rentals | | 252 | | | 690 | | | 942 | |
| | | | | | |
| Home equity and second mortgages | | 202 | | | 399 | | | 601 | |
| | | | | | |
| | | | | | |
| Commercial equipment | | — | | | 691 | | | 691 | |
| U.S. SBA PPP loans | | 57 | | | — | | | 57 | |
| | $ | 961 | | | $ | 6,670 | | | $ | 7,631 | |
Non-accrual loans decreased $0.2$1.3 million from $7.6 million or 0.48% of total loans at December 31, 2021 to $7.5$6.3 million or 0.45%0.36% of total loans at March 31,September 30, 2022. Loans can be current but classified as non-accrual due to customer operating results or payment history. All interest accrued but not collected from loans that are placed on non-accrual or charged-off is reversed against interest income. In accordance with the Company’s policy, such interest income is recognized on a cash basis or cost-recovery method, until qualifying for return to accrual status.
At December 31, 2021, there were $6.7 million (87%) of non-accrual loans were current with all payments of principal and interest with 0no impairment and $1.0 million (13%) of non-accrual loans were delinquent with specific valuation reserves of $0.3 million.
Loan delinquency (total past due) increased $0.2 million from $1.4 million, or 0.09% of loans, at December 31, 2021 to $1.6 million, or 0.10% of loans, at March 31, 2022.
Non-accrual loans at March 31,September 30, 2022 and December 31, 2021 included no delinquent TDRs. Non-accrual loans on which the recognition of interest has been discontinued, which did not have a specific allowance for impairment, amounted to $7.2$6.2 million and $7.4 million at March 31,September 30, 2022 and December 31, 2021, respectively. Interest due but not recognized on these balances at March 31,September 30, 2022 and December 31, 2021 was $0.1 million$36,000 and $0.1 million, respectively. Non-accrual loans with a specific allowance for impairment amounted to $0.3$0.1 million and $0.3 million at March 31,September 30, 2022 and December 31, 2021, respectively. Interest due but not recognized on these balances at March 31,September 30, 2022 and December 31, 2021 was $2,000$1,000 and $1,000, respectively.
The Company considers a loan to be past due or delinquent when the terms of the contractual obligation are not met by the borrower. Regardless of payment status, as long as cash flows can be reasonably estimated, the associated discount on these loan pools results in income recognition. An analysis of days past due ("DPD") loans as of September 30, 2022 follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2022 |
| (dollars in thousands) | | 31-60 DPD | | 61-89 DPD | | 90 DPD and
Still Accruing | | 90 DPD and Not Accruing | | Total Past Due | | Current Non-Accrual Loans | | Current Accrual Loans | | Total Loans |
| Commercial real estate | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,661 | | | $ | 1,197,999 | | | $ | 1,202,660 | |
| Residential first mortgages | | — | | | — | | | — | | | — | | | — | | | — | | | 83,081 | | | 83,081 | |
| Residential rentals | | 32 | | | 181 | | | — | | | 273 | | | 486 | | | 699 | | | 281,180 | | | 282,365 | |
| Construction and land development | | — | | | — | | | — | | | — | | | — | | | — | | | 23,197 | | | 23,197 | |
| Home equity and second mortgages | | 204 | | | — | | | — | | | 124 | | | 328 | | | 116 | | | 25,610 | | | 26,054 | |
| Commercial loans | | — | | | — | | | — | | | — | | | — | | | 25 | | | 41,590 | | | 41,615 | |
| Consumer loans | | 19 | | | 5 | | | 31 | | | — | | | 55 | | | — | | | 5,699 | | | 5,754 | |
| Commercial equipment | | — | | | — | | | — | | | — | | | — | | | 211 | | | 78,340 | | | 78,551 | |
| | | | | | | | | | | | | | | | |
| U.S. SBA PPP | | 272 | | | — | | | — | | | — | | | 272 | | | — | | | 939 | | | 1,211 | |
| Total Loans | | $ | 527 | | | $ | 186 | | | $ | 31 | | | $ | 397 | | | $ | 1,141 | | | $ | 5,712 | | | $ | 1,737,635 | | | $ | 1,744,488 | |
Loan delinquency (total past due) decreased $0.3 million from $1.4 million, or 0.09% of loans, at December 31, 2021 to $1.1 million, or 0.07% of loans, at September 30, 2022.
PCI loans are included as a single category in the table below as management believes there is a lower likelihood of aggregate loss related to these loan pools. Additionally, PCI loans are discounted to allow for the accretion of income on a level yield basis over the life of the loan based on expected cash flows. Regardless of payment status, as long as cash flows can be reasonably estimated, the associated discount on these loan pools results in income recognition. An analysis of days past due ("DPD") loans as of March 31, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2022 |
| (dollars in thousands) | | 31-60 DPD | | 61-89 DPD | | 90 DPD and
Still Accruing | | Current | | Non-Accrual | | Total Loans | | Current Non-Accrual |
| Commercial real estate | | $ | — | | | $ | — | | | $ | — | | | $ | 1,172,773 | | | $ | 4,988 | | | $ | 1,177,761 | | | $ | 4,516 | |
| Residential first mortgages | | — | | | — | | | — | | | 85,680 | | | 736 | | | 86,416 | | | 276 | |
| Residential rentals | | 281 | | | — | | | — | | | 190,112 | | | 672 | | | 191,065 | | | 672 | |
| Construction and land development | | 51 | | | — | | | — | | | 30,598 | | | — | | | 30,649 | | | — | |
| Home equity and second mortgages | | — | | | — | | | — | | | 26,068 | | | 377 | | | 26,445 | | | 95 | |
| Commercial loans | | 30 | | | — | | | — | | | 48,893 | | | 25 | | | 48,948 | | | 25 | |
| Consumer loans | | 1 | | | 15 | | | 20 | | | 3,556 | | | — | | | 3,592 | | | — | |
| Commercial equipment | | — | | | — | | | — | | | 63,996 | | | 666 | | | 64,662 | | | 666 | |
| | | | | | | | | | | | | | |
| U.S. SBA PPP | | — | | | 8 | | | — | | | 15,270 | | | 1 | | | 15,279 | | | — | |
| Total Loans | | $ | 363 | | | $ | 23 | | | $ | 20 | | | $ | 1,636,946 | | | $ | 7,465 | | | $ | 1,644,817 | | | $ | 6,250 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| (dollars in thousands) | | 31-60 Days | | 61-89 Days | | 90 or Greater Days | | Total Past Due | | PCI Loans | | Current | | Total Loan Receivables |
| Commercial real estate | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,116 | | | $ | 1,114,369 | | | $ | 1,115,485 | |
| Residential first mortgages | | — | | | 277 | | | 450 | | | 727 | | | — | | | 90,393 | | | 91,120 | |
| Residential rentals | | — | | | 42 | | | 252 | | | 294 | | | — | | | 194,741 | | | 195,035 | |
| Construction and land development | | — | | | — | | | — | | | — | | | — | | | 35,590 | | | 35,590 | |
| Home equity and second mortgages | | 200 | | | — | | | 202 | | | 402 | | | — | | | 25,236 | | | 25,638 | |
| Commercial loans | | — | | | — | | | — | | | — | | | — | | | 50,574 | | | 50,574 | |
| Consumer loans | | — | | | — | | | — | | | — | | | — | | | 3,002 | | | 3,002 | |
| Commercial equipment | | — | | | — | | | — | | | — | | | — | | | 62,499 | | | 62,499 | |
| Total portfolio loans | | $ | 200 | | | $ | 319 | | | $ | 904 | | | $ | 1,423 | | | $ | 1,116 | | | $ | 1,576,404 | | | $ | 1,578,943 | |
| | | | | | | | | | | | | | |
| U.S. SBA PPP loans | | $ | 9 | | | $ | 40 | | | $ | 57 | | | $ | 106 | | | $ | — | | | $ | 27,170 | | | $ | 27,276 | |
There were 0no loans that were past due 90 days or greater accruing interest at December 31, 2021.
Allowance for Credit Losses ("ACL")
The following tables detail activity in the ACL at and for the three and nine months ended March 31,September 30, 2022 and 2021, respectively.2021. An allocation of the allowance to one category of loans does not prevent the Company from using that allowance to absorb losses in a different category.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | March 31, 2022 |
| (dollars in thousands) | | Beginning Balance | | Impact of ASC 326 Adoption | | Charge-offs | | Recoveries | | Provisions | | Ending Balance |
| Commercial real estate | | $ | 13,095 | | | $ | 3,734 | | | $ | — | | | $ | — | | | $ | 484 | | | $ | 17,313 | |
| Residential first mortgages | | 1,002 | | | (679) | | | — | | | — | | | (39) | | | 284 | |
| Residential rentals | | 2,175 | | | (586) | | | — | | | — | | | (43) | | | 1,546 | |
| Construction and land development | | 260 | | | (82) | | | — | | | — | | | (41) | | | 137 | |
| Home equity and second mortgages | | 274 | | | (86) | | | — | | | — | | | (10) | | | 178 | |
| Commercial loans | | 582 | | | (290) | | | — | | | 1 | | | 26 | | | 319 | |
| Consumer loans | | 58 | | | 2 | | | — | | | — | | | 13 | | | 73 | |
| Commercial equipment | | 971 | | | 483 | | | — | | | 18 | | | 60 | | | 1,532 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | $ | 18,417 | | | $ | 2,496 | | | $ | — | | | $ | 19 | | | $ | 450 | | | $ | 21,382 | |
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| Three Months Ended | | September 30, 2022 |
| (dollars in thousands) | | Beginning Balance | | | | Charge-offs | | Recoveries | | Provisions | | Ending Balance |
| Commercial real estate | | $ | 16,833 | | | | | $ | — | | | $ | — | | | $ | 203 | | | $ | 17,036 | |
| Residential first mortgages | | 255 | | | | | — | | | 14 | | | (32) | | | 237 | |
| Residential rentals | | 1,660 | | | | | — | | | — | | | 885 | | | 2,545 | |
| Construction and land development | | 166 | | | | | — | | | — | | | 31 | | | 197 | |
| Home equity and second mortgages | | 143 | | | | | — | | | — | | | (1) | | | 142 | |
| Commercial loans | | 238 | | | | | (49) | | | 1 | | | 64 | | | 254 | |
| Consumer loans | | 132 | | | | | (14) | | | — | | | 24 | | | 142 | |
| Commercial equipment | | 1,977 | | | | | (29) | | | 6 | | | (480) | | | 1,474 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | $ | 21,404 | | | | | $ | (92) | | | $ | 21 | | | $ | 694 | | | $ | 22,027 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | September 30, 2021 |
| (dollars in thousands) | | Beginning Balance | | Charge-offs | | Recoveries | | Provisions | | Ending Balance |
| Commercial real estate | | $ | 13,918 | | | $ | (491) | | | $ | 4 | | | $ | (12) | | | $ | 13,419 | |
| Residential first mortgages | | 847 | | | — | | | — | | | 65 | | | 912 | |
| Residential rentals | | 1,186 | | | — | | | — | | | 614 | | | 1,800 | |
| Construction and land development | | 332 | | | — | | | — | | | 36 | | | 368 | |
| Home equity and second mortgages | | 242 | | | — | | | 1 | | | 6 | | | 249 | |
| Commercial loans | | 1,113 | | | — | | | 529 | | | (733) | | | 909 | |
| Consumer loans | | 28 | | | — | | | — | | | 14 | | | 42 | |
| Commercial equipment | | 798 | | | — | | | 20 | | | 10 | | | 828 | |
| | $ | 18,464 | | | $ | (491) | | | $ | 554 | | | $ | — | | | $ | 18,527 | |
| | | | | | | | | | |
| Purchase Credit Impaired** | | $ | 52 | | | $ | — | | | $ | — | | | $ | — | | | $ | 52 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | September 30, 2022 |
| (dollars in thousands) | | Beginning Balance | | Impact of ASC
326 Adoption | | Charge-offs | | Recoveries | | Provisions | | Ending Balance |
| Commercial real estate | | $ | 13,095 | | | $ | 3,734 | | | $ | (280) | | | $ | — | | | $ | 487 | | | $ | 17,036 | |
| Residential first mortgages | | 1,002 | | | (679) | | | (111) | | | 14 | | | 11 | | | 237 | |
| Residential rentals | | 2,175 | | | (586) | | | — | | | — | | | 956 | | | 2,545 | |
| Construction and land development | | 260 | | | (82) | | | — | | | — | | | 19 | | | 197 | |
| Home equity and second mortgages | | 274 | | | (86) | | | — | | | 1 | | | (47) | | | 142 | |
| Commercial loans | | 582 | | | (290) | | | (99) | | | 2 | | | 59 | | | 254 | |
| Consumer loans | | 58 | | | 2 | | | (20) | | | — | | | 102 | | | 142 | |
| Commercial equipment | | 971 | | | 483 | | | (29) | | | 67 | | | (18) | | | 1,474 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | $ | 18,417 | | | $ | 2,496 | | | $ | (539) | | | $ | 84 | | | $ | 1,569 | | | $ | 22,027 | |
**There is no allowance for loancredit loss on the SBA PPP portfolios. A more detailed rollforwardroll forward schedule will be presented if an allowance is required.
| | Three Months Ended | | March 31, 2021 | |
| Nine Months Ended | | Nine Months Ended | | September 30, 2021 |
| (dollars in thousands) | (dollars in thousands) | | Beginning Balance | | Charge-offs | | Recoveries | | Provisions | | Ending Balance | (dollars in thousands) | | Beginning Balance | | Charge-offs | | Recoveries | | Provisions | | Ending Balance |
| Commercial real estate | Commercial real estate | | $ | 13,744 | | | $ | (1,247) | | | $ | 1 | | | $ | 787 | | | $ | 13,285 | | Commercial real estate | | $ | 13,744 | | | $ | (1,739) | | | $ | 6 | | | $ | 1,408 | | | $ | 13,419 | |
| Residential first mortgages | Residential first mortgages | | 1,305 | | | (142) | | | — | | | (139) | | | 1,024 | | Residential first mortgages | | 1,305 | | | (142) | | | — | | | (251) | | | 912 | |
| Residential rentals | Residential rentals | | 1,413 | | | (46) | | | — | | | (6) | | | 1,361 | | Residential rentals | | 1,413 | | | (46) | | | — | | | 433 | | | 1,800 | |
| Construction and land development | Construction and land development | | 401 | | | — | | | — | | | (36) | | | 365 | | Construction and land development | | 401 | | | — | | | — | | | (33) | | | 368 | |
| Home equity and second mortgages | Home equity and second mortgages | | 261 | | | — | | | 1 | | | 1 | | | 263 | | Home equity and second mortgages | | 261 | | | — | | | 4 | | | (16) | | | 249 | |
| Commercial loans | Commercial loans | | 1,222 | | | (50) | | | 5 | | | (165) | | | 1,012 | | Commercial loans | | 1,222 | | | (76) | | | 539 | | | (776) | | | 909 | |
| Consumer loans | Consumer loans | | 20 | | | — | | | — | | | 9 | | | 29 | | Consumer loans | | 20 | | | — | | | — | | | 22 | | | 42 | |
| Commercial equipment | Commercial equipment | | 1,058 | | | — | | | 15 | | | (156) | | | 917 | | Commercial equipment | | 1,058 | | | (34) | | | 57 | | | (253) | | | 828 | |
| | $ | 19,424 | | | $ | (1,485) | | | $ | 22 | | | $ | 295 | | | $ | 18,256 | | | $ | 19,424 | | | $ | (2,037) | | | $ | 606 | | | $ | 534 | | | $ | 18,527 | |
| | Purchase Credit Impaired** | Purchase Credit Impaired** | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Purchase Credit Impaired** | | $ | — | | | $ | — | | | $ | — | | | $ | 52 | | | $ | 52 | |
| | |
**There is no allowance for loan loss on the PCI or the SBA PPP portfolios. A more detailed rollforwardroll forward schedule will be presented if an allowance is required.
The following table presents the amortized cost basis of collateral-dependent loans by class of loans.
| | | March 31, 2022 | | | September 30, 2022 | |
| (dollars in thousands) | (dollars in thousands) | | Business/Other Assets | | Real Estate | | (dollars in thousands) | | Business/Other Assets | | Real Estate | |
| Commercial real estate | Commercial real estate | | $ | — | | | $ | 4,987 | | | Commercial real estate | | $ | — | | | $ | 4,660 | | |
| Residential first mortgages | Residential first mortgages | | — | | | 1,149 | | | Residential first mortgages | | — | | | — | | |
| Residential rentals | Residential rentals | | — | | | 672 | | | Residential rentals | | — | | | 972 | | |
| | Home equity and second mortgages | Home equity and second mortgages | | — | | | 376 | | | Home equity and second mortgages | | — | | | 240 | | |
| Commercial loans | Commercial loans | | 25 | | | — | | | Commercial loans | | 25 | | | — | | |
| | Commercial equipment | Commercial equipment | | 1,109 | | | — | | | Commercial equipment | | 645 | | | — | | |
| | Total | Total | | $ | 1,134 | | | $ | 7,184 | | | Total | | $ | 670 | | | $ | 5,872 | | |
Credit Quality Indicators
Credit quality indicators as of March 31,September 30, 2022 were as follows:
Credit Risk Profile by Internally Assigned Grade
The risk category of loans by class of loans is as follows:
| | | Term Loans by Origination Year | | | Term Loans by Origination Year | |
| (dollars in thousands) | (dollars in thousands) | | Prior | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Revolving Loans | | Total | (dollars in thousands) | | Prior | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Revolving Loans | | Total |
| | Commercial Real Estate | Commercial Real Estate | Commercial Real Estate |
| Pass | Pass | | $ | 367,685 | | | $ | 77,563 | | | $ | 122,999 | | | $ | 196,400 | | | $ | 281,702 | | | $ | 111,430 | | | $ | — | | | $ | 1,157,779 | | Pass | | $ | 335,465 | | | $ | 74,482 | | | $ | 107,720 | | | $ | 188,070 | | | $ | 282,781 | | | $ | 187,151 | | | $ | — | | | $ | 1,175,669 | |
| Watch | Watch | | — | | | 4,253 | | | — | | | 5,564 | | | — | | | 7,012 | | | — | | | 16,829 | | Watch | | 5,588 | | | 4,216 | | | — | | | 5,567 | | | — | | | 6,960 | | | — | | | 22,331 | |
| Special Mention | Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Substandard | Substandard | | 3,153 | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,153 | | Substandard | | 808 | | | — | | | 2,999 | | | — | | | 853 | | | — | | | — | | | 4,660 | |
| Total | Total | | $ | 370,838 | | | $ | 81,816 | | | $ | 122,999 | | | $ | 201,964 | | | $ | 281,702 | | | $ | 118,442 | | | $ | — | | | $ | 1,177,761 | | Total | | $ | 341,861 | | | $ | 78,698 | | | $ | 110,719 | | | $ | 193,637 | | | $ | 283,634 | | | $ | 194,111 | | | $ | — | | | $ | 1,202,660 | |
| | Residential Rentals | Residential Rentals | Residential Rentals |
| Pass | Pass | | $ | 47,557 | | | $ | 4,788 | | | $ | 23,584 | | | $ | 44,156 | | | $ | 67,567 | | | $ | 2,741 | | | $ | — | | | $ | 190,393 | | Pass | | $ | 45,188 | | | $ | 4,495 | | | $ | 21,141 | | | $ | 42,263 | | | $ | 65,468 | | | $ | 102,838 | | | $ | — | | | $ | 281,393 | |
| Watch | Watch | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Watch | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Special Mention | Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Substandard | Substandard | | 672 | | | — | | | — | | | — | | | — | | | — | | | — | | | 672 | | Substandard | | 972 | | | — | | | — | | | — | | | — | | | — | | | — | | | 972 | |
| Total | Total | | $ | 48,229 | | | $ | 4,788 | | | $ | 23,584 | | | $ | 44,156 | | | $ | 67,567 | | | $ | 2,741 | | | $ | — | | | $ | 191,065 | | Total | | $ | 46,160 | | | $ | 4,495 | | | $ | 21,141 | | | $ | 42,263 | | | $ | 65,468 | | | $ | 102,838 | | | $ | — | | | $ | 282,365 | |
| | Construction and Land Development | Construction and Land Development | Construction and Land Development |
| Pass | Pass | | $ | 8,560 | | | $ | 10,797 | | | $ | 6,642 | | | $ | 1,669 | | | $ | 2,968 | | | $ | 13 | | | $ | — | | | $ | 30,649 | | Pass | | $ | 4,550 | | | $ | 8,987 | | | $ | 5,094 | | | $ | 1,399 | | | $ | 2,529 | | | $ | 638 | | | $ | — | | | $ | 23,197 | |
| Watch | Watch | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Watch | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Special Mention | Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Substandard | Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | Total | | $ | 8,560 | | | $ | 10,797 | | | $ | 6,642 | | | $ | 1,669 | | | $ | 2,968 | | | $ | 13 | | | $ | — | | | $ | 30,649 | | Total | | $ | 4,550 | | | $ | 8,987 | | | $ | 5,094 | | | $ | 1,399 | | | $ | 2,529 | | | $ | 638 | | | $ | — | | | $ | 23,197 | |
| | Commercial Loans | Commercial Loans | Commercial Loans |
| Pass | Pass | | $ | 27,484 | | | $ | 6,331 | | | $ | 5,006 | | | $ | 1,848 | | | $ | 6,865 | | | $ | 1,414 | | | $ | — | | | $ | 48,948 | | Pass | | $ | 23,516 | | | $ | 2,628 | | | $ | 2,708 | | | $ | 1,868 | | | $ | 7,792 | | | $ | 3,078 | | | $ | — | | | $ | 41,590 | |
| Watch | Watch | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Watch | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Special Mention | Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Substandard | Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Substandard | | — | | | — | | | — | | | 25 | | | — | | | — | | | — | | | 25 | |
| Total | Total | | $ | 27,484 | | | $ | 6,331 | | | $ | 5,006 | | | $ | 1,848 | | | $ | 6,865 | | | $ | 1,414 | | | $ | — | | | $ | 48,948 | | Total | | $ | 23,516 | | | $ | 2,628 | | | $ | 2,708 | | | $ | 1,893 | | | $ | 7,792 | | | $ | 3,078 | | | $ | — | | | $ | 41,615 | |
| | Commercial Equipment | Commercial Equipment | Commercial Equipment |
| Pass | Pass | | $ | 10,247 | | | $ | 6,330 | | | $ | 18,746 | | | $ | 9,076 | | | $ | 15,259 | | | $ | 4,623 | | | $ | — | | | $ | 64,281 | | Pass | | $ | 8,737 | | | $ | 5,363 | | | $ | 15,519 | | | $ | 7,995 | | | $ | 13,290 | | | $ | 27,100 | | | $ | — | | | $ | 78,004 | |
| Watch | Watch | | 30 | | | 185 | | | — | | | — | | | — | | | — | | | — | | | 215 | | Watch | | — | | | 175 | | | — | | | — | | | — | | | — | | | — | | | 175 | |
| Special Mention | Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Special Mention | | — | | | — | | | 160 | | | — | | | — | | | — | | | — | | | 160 | |
| Substandard | Substandard | | — | | | — | | | 166 | | | — | | | — | | | — | | | — | | | 166 | | Substandard | | — | | | — | | | 212 | | | — | | | — | | | — | | | — | | | 212 | |
| Total | Total | | $ | 10,277 | | | $ | 6,515 | | | $ | 18,912 | | | $ | 9,076 | | | $ | 15,259 | | | $ | 4,623 | | | $ | — | | | $ | 64,662 | | Total | | $ | 8,737 | | | $ | 5,538 | | | $ | 15,891 | | | $ | 7,995 | | | $ | 13,290 | | | $ | 27,100 | | | $ | — | | | $ | 78,551 | |
| | | Total loans by risk category | Total loans by risk category | | $ | 465,388 | | | $ | 110,247 | | | $ | 177,143 | | | $ | 258,713 | | | $ | 374,361 | | | $ | 127,233 | | | $ | — | | | $ | 1,513,085 | | Total loans by risk category | | $ | 424,824 | | | $ | 100,346 | | | $ | 155,553 | | | $ | 247,187 | | | $ | 372,713 | | | $ | 327,765 | | | $ | — | | | $ | 1,628,388 | |
Loans evaluated by performance category are as follows:
| | | Term Loans by Origination Year | | | Term Loans by Origination Year | |
| (dollars in thousands) | (dollars in thousands) | | Prior | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Revolving Loans | | Total | (dollars in thousands) | | Prior | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Revolving Loans | | Total |
| | Residential First Mortgages | Residential First Mortgages | Residential First Mortgages |
| Performing | Performing | | $ | 44,141 | | | $ | 4,112 | | | $ | 20,427 | | | $ | 8,958 | | | $ | 6,052 | | | $ | 1,990 | | | $ | — | | | $ | 85,680 | | Performing | | $ | 39,498 | | | $ | 3,891 | | | $ | 19,542 | | | $ | 8,577 | | | $ | 5,279 | | | $ | 6,294 | | | $ | — | | | $ | 83,081 | |
| Non-performing | Non-performing | | 182 | | | — | | | 554 | | | — | | | — | | | — | | | — | | | 736 | | Non-performing | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | Total | | $ | 44,323 | | | $ | 4,112 | | | $ | 20,981 | | | $ | 8,958 | | | $ | 6,052 | | | $ | 1,990 | | | $ | — | | | $ | 86,416 | | Total | | $ | 39,498 | | | $ | 3,891 | | | $ | 19,542 | | | $ | 8,577 | | | $ | 5,279 | | | $ | 6,294 | | | $ | — | | | $ | 83,081 | |
| | Home Equity and Second Mortgages | Home Equity and Second Mortgages | Home Equity and Second Mortgages |
| Performing | Performing | | $ | 17,581 | | | $ | 1,295 | | | $ | 1,150 | | | $ | 2,120 | | | $ | 3,078 | | | $ | 844 | | | $ | — | | | $ | 26,068 | | Performing | | $ | 15,900 | | | $ | 1,383 | | | $ | 933 | | | $ | 1,384 | | | $ | 3,881 | | | $ | 2,474 | | | $ | — | | | $ | 25,955 | |
| Non-performing | Non-performing | | 377 | | | — | | | — | | | — | | | — | | | — | | | — | | | 377 | | Non-performing | | 99 | | | — | | | — | | | — | | | — | | | — | | | — | | | 99 | |
| Total | Total | | $ | 17,958 | | | $ | 1,295 | | | $ | 1,150 | | | $ | 2,120 | | | $ | 3,078 | | | $ | 844 | | | $ | — | | | $ | 26,445 | | Total | | $ | 15,999 | | | $ | 1,383 | | | $ | 933 | | | $ | 1,384 | | | $ | 3,881 | | | $ | 2,474 | | | $ | — | | | $ | 26,054 | |
| | Consumer Loans | Consumer Loans | Consumer Loans |
| Performing | Performing | | $ | 66 | | | $ | 4 | | | $ | 167 | | | $ | 183 | | | $ | 798 | | | $ | 291 | | | $ | 2,063 | | | $ | 3,572 | | Performing | | $ | 42 | | | $ | 3 | | | $ | 108 | | | $ | 139 | | | $ | 678 | | | $ | 850 | | | $ | 3,903 | | | $ | 5,723 | |
| Non-performing | Non-performing | | — | | | 0 | | — | | | 0 | | 0 | | 0 | | 20 | | | 20 | | Non-performing | | — | | | — | | | 31 | | | 31 | |
| Total | Total | | $ | 66 | | | $ | 4 | | | $ | 167 | | | $ | 183 | | | $ | 798 | | | $ | 291 | | | $ | 2,083 | | | $ | 3,592 | | Total | | $ | 42 | | | $ | 3 | | | $ | 108 | | | $ | 139 | | | $ | 678 | | | $ | 850 | | | $ | 3,934 | | | $ | 5,754 | |
| | U.S. SBA PPP Loans | U.S. SBA PPP Loans | U.S. SBA PPP Loans |
| Performing | Performing | | $ | — | | | $ | — | | | $ | — | | | $ | 1,137 | | | $ | 14,141 | | | $ | — | | | $ | — | | | $ | 15,278 | | Performing | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,211 | | | $ | — | | | $ | — | | | $ | 1,211 | |
| Non-performing | Non-performing | | — | | | — | | | — | | | 1 | | | — | | | — | | | — | | | 1 | | Non-performing | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | Total | | $ | — | | | $ | — | | | $ | — | | | $ | 1,138 | | | $ | 14,141 | | | $ | — | | | $ | — | | | $ | 15,279 | | Total | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,211 | | | $ | — | | | $ | — | | | $ | 1,211 | |
| | Total loans evaluated by performing status | Total loans evaluated by performing status | | $ | 62,347 | | | $ | 5,411 | | | $ | 22,298 | | | $ | 12,399 | | | $ | 24,069 | | | $ | 3,125 | | | $ | 2,083 | | | $ | 131,732 | | Total loans evaluated by performing status | | $ | 55,539 | | | $ | 5,277 | | | $ | 20,583 | | | $ | 10,100 | | | $ | 11,049 | | | $ | 9,618 | | | $ | 3,934 | | | $ | 116,100 | |
| | Total Recorded Investment | Total Recorded Investment | | $ | 527,735 | | | $ | 115,658 | | | $ | 199,441 | | | $ | 271,112 | | | $ | 398,430 | | | $ | 130,358 | | | $ | 2,083 | | | $ | 1,644,817 | | Total Recorded Investment | | $ | 480,363 | | | $ | 105,623 | | | $ | 176,136 | | | $ | 257,287 | | | $ | 383,762 | | | $ | 337,383 | | | $ | 3,934 | | | $ | 1,744,488 | |
Credit quality indicators as of December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Commercial Real Estate | | Construction and Land Development | | Residential Rentals |
| (dollars in thousands) | | 12/31/2021 | | 12/31/2021 | | 12/31/2021 |
| Unrated | | $ | — | | | $ | — | | | $ | — | |
| Pass | | 1,111,857 | | | 35,590 | | | 194,093 | |
| Special mention | | — | | | — | | | — | |
| Substandard | | 3,628 | | | — | | | 942 | |
| Doubtful | | — | | | — | | | — | |
| Loss | | — | | | — | | | — | |
| Total | | $ | 1,115,485 | | | $ | 35,590 | | | $ | 195,035 | |
| | | | | | | | | | | | | | | | | | | | |
| | | Commercial Loans | | Commercial Equipment | | Total Commercial Portfolios |
| (dollars in thousands) | | 12/31/2021 | | 12/31/2021 | | 12/31/2021 |
| Unrated | | $ | — | | | $ | — | | | $ | — | |
| Pass | | 50,574 | | | 62,326 | | | 1,454,440 | |
| Special mention | | — | | | — | | | — | |
| Substandard | | — | | | 173 | | | 4,743 | |
| Doubtful | | — | | | — | | | — | |
| Loss | | — | | | — | | | — | |
| Total | | $ | 50,574 | | | $ | 62,499 | | | $ | 1,459,183 | |
| | | | | | | | | | | | | | | | | | | | |
| | Non-Commercial Portfolios ** | | U.S. SBA PPP Loans | | Total Loans Portfolios |
| (dollars in thousands) | | 12/31/2021 | | 12/31/2021 | | 12/31/2021 |
| Unrated | | $ | 100,403 | | | $ | 27,276 | | | $ | 127,679 | |
| Pass | | 18,889 | | | — | | | 1,473,329 | |
| Special mention | | — | | | — | | | — | |
| Substandard | | 468 | | | — | | | 5,211 | |
| Doubtful | | — | | | — | | | — | |
| Loss | | — | | | — | | | — | |
| Total | | $ | 119,760 | | | $ | 27,276 | | | $ | 1,606,219 | |
**Non-commercial portfolios are generally evaluated based on payment activity but may be risk graded if part of a larger commercial relationship or are credit impaired (e.g. non-accrual loans, TDRs).
Credit Risk Profile Based on Payment Activity | | | | | | | | | | | | | | | | | | | | |
| | | Residential First Mortgages | | Home Equity and Second Mortgages | | Consumer Loans |
| (dollars in thousands) | | 12/31/2021 | | 12/31/2021 | | 12/31/2021 |
| Performing | | $ | 90,670 | | | $ | 25,436 | | | $ | 3,002 | |
| Nonperforming | | 450 | | | 202 | | | — | |
| Total | | $ | 91,120 | | | $ | 25,638 | | | $ | 3,002 | |
A risk-grading scale is used to assign grades to commercial relationships, which include commercial real estate, residential rentals, construction and land development, commercial loans and commercial equipment loans. Loans are graded at inception, annually thereafter when financial statements are received and at other times when there is an indication that a credit may have weakened or improved. At December 31, 2020 and prior, only commercial loan relationships with an aggregate exposure to the Bank of $1,000,000 or greater were subject to being risk rated. During the quarter ended March 31, 2021, the Bank's policy was amended to risk rate all commercial loan relationships.
Home equity and second mortgages and consumer loans are evaluated for creditworthiness in underwriting and are monitored based on borrower payment history. Residential first mortgages are evaluated for creditworthiness during credit due diligence before being purchased. Residential first mortgages, home equity and second mortgages and consumer loans are classified as unrated unless they are part of a larger commercial relationship that requires grading or are TDRs or nonperforming loans with an Other Assets Especially Mentioned ("OAEM") or higher risk rating due to a delinquency payment history.
The overall quality of the Bank’s loan portfolio is assessed using the Bank’s risk-grading scale, the level and trends of net charge-offs, nonperforming loans and delinquencies, the performance of TDRs and the general economic conditions in the Company’s geographical market. This review process is assisted by frequent internal reporting of loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Credit quality indicators and allowance factors are adjusted based on management’s judgment during the monthly and quarterly review process. Loans subject to risk ratings are graded on a scale of one to ten. The Company considers loans rated substandard, doubtful and loss as classified assets for regulatory and financial reporting.
Ratings 1 thru 6 - Pass
Ratings 1 thru 6 have asset risks ranging from excellent-low to adequate. The specific rating assigned considers customer history of earnings, cash flows, liquidity, leverage, capitalization, consistency of debt service coverage, the nature and extent of customer relationship and other relevant specific business factors such as the stability of the industry or market area, changes to management, litigation or unexpected events that could have an impact on risks.
Rating 7 - OAEM (Other Assets Especially Mentioned) – Special Mention
These credits, while protected by the financial strength of the borrowers, guarantors or collateral, have reduced quality due to economic conditions, less than adequate earnings performance or other factors which require the lending officer to direct more than normal attention to the credit. Financing alternatives may be limited and/or command higher risk interest rates. OAEM loans relationships are reviewed at least quarterly.
Rating 8 - Substandard
Substandard assets are assets that are inadequately protected by the sound worth or paying capacity of the borrower or of the collateral pledged. Substandard loans are the first adversely classified loans on the Bank's watchlist. These assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. The loans may have a delinquent history or combination of weak collateral, weak guarantor strength or operating losses. When a loan is assigned to this category the Bank may estimate a specific reserve in the loan loss allowance analysis. These assets listed may include assets with histories of repossessions or some that are non-performing bankruptcies. These relationships will be reviewed at least quarterly.
Rating 9 - Doubtful
Doubtful assets have many of the same characteristics of Substandard with the exception that the Bank has determined that loss is not only possible but is probable and the risk is close to certain that loss will occur. When a loan is assigned to this category the Bank will identify the probable loss and the loan will receive a specific reserve in the loan loss allowance analysis. These relationships will be reviewed at least quarterly.
Rating 10 – Loss
Once an asset is identified as a definite loss to the Bank, it will receive the classification of “loss.” There may be some future potential recovery; however, it is more practical to write off the loan at the time of classification. Losses will be taken in the period in which they are determined to be non-collectable.
TDRs included in the impaired loan schedules above, as of March 31,September 30, 2022 and December 31, 2021 were as follows:
| | | | | March 31, 2022 | | December 31, 2021 | | | September 30, 2022 | | December 31, 2021 |
| (dollars in thousands) | (dollars in thousands) | | Number of Loans | | Recorded Investments | | Number of Loans | | Recorded Investments | (dollars in thousands) | | Number of Loans | | Recorded Investments | | Number of Loans | | Recorded Investments |
| Commercial real estate | | — | | | $ | — | | | — | | | $ | — | | |
| | | Commercial equipment | Commercial equipment | | 1 | | | 442 | | | 1 | | | 447 | | Commercial equipment | | 1 | | $ | 433 | | | 1 | | $ | 447 | |
| | Total TDRs | Total TDRs | | 1 | | | $ | 442 | | | 1 | | | $ | 447 | | Total TDRs | | 1 | | $ | 433 | | | 1 | | $ | 447 | |
| Less: TDRs included in non-accrual loans | Less: TDRs included in non-accrual loans | | — | | | — | | | — | | | — | | Less: TDRs included in non-accrual loans | | — | | — | | | — | | — | |
| Total accrual TDR loans | Total accrual TDR loans | | 1 | | | $ | 442 | | | 1 | | | $ | 447 | | Total accrual TDR loans | | 1 | | $ | 433 | | | 1 | | $ | 447 | |
The Company had 0no specific reserves on TDRs at March 31,September 30, 2022 and at December 31, 2021. During the year ended December 31, 2021, TDR disposals, which included payoffs and refinancing, included 3three loans totaling $0.1 million. TDR loan principal curtailment wascurtailments were $5,000 and $12,000 for the quarterthree and nine months ended March 31,September 30, 2022, respectively and $19,000 for the year ended December 31, 2021. There were 0no TDRs added during the three months ended March 31,September 30, 2022 or the year ended December 31, 2021.
Prior to adoption of CECL
Impaired Loans and Troubled Debt Restructures (“TDRs”)
Impaired loans, including TDRs at MarchDecember 31, 2021 and at December 31,September 30, 2021, were as follows:
| | | | | March 31, 2021 | | | December 31, 2021 |
| (dollars in thousands) | (dollars in thousands) | | Unpaid Contractual Principal Balance | | Recorded Investment With No Allowance | | Recorded Investment With Allowance | | Total Recorded Investment | | Related Allowance | | Quarter Average Recorded Investment | | Quarter Interest Income Recognized | | YTD Average Recorded Investment | | YTD Interest Income Recognized | (dollars in thousands) | | Unpaid Contractual Principal Balance | | Recorded Investment With No Allowance | | Recorded Investment With Allowance | | Total Recorded Investment | | Related Allowance | | YTD Average Recorded Investment | | YTD Interest Income Recognized |
| Commercial real estate | Commercial real estate | | $ | 12,029 | | | $ | 5,641 | | | $ | 6,290 | | | $ | 11,931 | | | $ | 854 | | | $ | 11,937 | | | $ | 110 | | | $ | 11,937 | | | $ | 110 | | Commercial real estate | | $ | 4,994 | | | $ | 4,797 | | | $ | 93 | | | $ | 4,890 | | | $ | 93 | | | $ | 4,866 | | | $ | 254 | |
| Residential first mortgages | Residential first mortgages | | 794 | | | 751 | | | — | | | 751 | | | — | | | 756 | | | 11 | | | 756 | | | 11 | | Residential first mortgages | | 879 | | | 866 | | | — | | | 866 | | | — | | | 874 | | | 32 | |
| Residential rentals | Residential rentals | | 741 | | | 736 | | | — | | | 736 | | | — | | | 744 | | | 10 | | | 744 | | | 10 | | Residential rentals | | 982 | | | 942 | | | — | | | 942 | | | — | | | 959 | | | 48 | |
| | Home equity and second mortgages | Home equity and second mortgages | | 666 | | | 651 | | | — | | | 651 | | | — | | | 657 | | | 4 | | | 657 | | | 4 | | Home equity and second mortgages | | 626 | | | 601 | | | — | | | 601 | | | — | | | 604 | | | 14 | |
| Commercial loans | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
| | | Commercial equipment | Commercial equipment | | 559 | | | 507 | | | 37 | | | 544 | | | 37 | | | 565 | | | 12 | | | 565 | | | 12 | | Commercial equipment | | 1,200 | | | 1,022 | | | 173 | | | 1,195 | | | 173 | | | 2,184 | | | 99 | |
| Total | Total | | $ | 14,789 | | | $ | 8,286 | | | $ | 6,327 | | | $ | 14,613 | | | $ | 891 | | | $ | 14,659 | | | $ | 147 | | | $ | 14,659 | | | $ | 147 | | Total | | $ | 8,681 | | | $ | 8,228 | | | $ | 266 | | | $ | 8,494 | | | $ | 266 | | | $ | 9,487 | | | $ | 447 | |
| | | | | December 31, 2021 | | | September 30, 2021 |
| (dollars in thousands) | (dollars in thousands) | | Unpaid Contractual Principal Balance | | Recorded Investment With No Allowance | | Recorded Investment With Allowance | | Total Recorded Investment | | Related Allowance | | YTD Average Recorded Investment | | YTD Interest Income Recognized | (dollars in thousands) | | Unpaid Contractual Principal Balance | | Recorded Investment With No Allowance | | Recorded Investment With Allowance | | Total Recorded Investment | | Related Allowance | | Quarter Average Recorded Investment | | Quarter Interest Income Recognized | | YTD Average Recorded Investment | | YTD Interest Income Recognized |
| Commercial real estate | Commercial real estate | | $ | 4,994 | | | $ | 4,797 | | | $ | 93 | | | $ | 4,890 | | | $ | 93 | | | $ | 4,866 | | | $ | 254 | | Commercial real estate | | $ | 3,205 | | | $ | 2,377 | | | $ | 759 | | | $ | 3,136 | | | $ | 291 | | | $ | 3,146 | | | $ | 25 | | | $ | 3,177 | | | $ | 80 | |
| Residential first mortgages | Residential first mortgages | | 879 | | | 866 | | | — | | | 866 | | | — | | | 874 | | | 32 | | Residential first mortgages | | 884 | | | 872 | | | — | | | 872 | | | — | | | 873 | | | 7 | | | 878 | | | 25 | |
| Residential rentals | Residential rentals | | 982 | | | 942 | | | — | | | 942 | | | — | | | 959 | | | 48 | | Residential rentals | | 990 | | | 961 | | | — | | | 961 | | | — | | | 961 | | | 13 | | | 956 | | | 38 | |
| | Home equity and second mortgages | Home equity and second mortgages | | 626 | | | 601 | | | — | | | 601 | | | — | | | 604 | | | 14 | | Home equity and second mortgages | | 602 | | | 580 | | | — | | | 580 | | | — | | | 581 | | | 3 | | | 583 | | | 10 | |
| Commercial loans | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
| | | Commercial equipment | Commercial equipment | | 1,200 | | | 1,022 | | | 173 | | | 1,195 | | | 173 | | | 2,184 | | | 99 | | Commercial equipment | | 490 | | | 455 | | | 32 | | | 487 | | | 32 | | | 489 | | | 5 | | | 493 | | | 16 | |
| Total | Total | | $ | 8,681 | | | $ | 8,228 | | | $ | 266 | | | $ | 8,494 | | | $ | 266 | | | $ | 9,487 | | | $ | 447 | | Total | | $ | 6,171 | | | $ | 5,245 | | | $ | 791 | | | $ | 6,036 | | | $ | 323 | | | $ | 6,050 | | | $ | 53 | | | $ | 6,087 | | | $ | 169 | |
The following tables detail loan receivable and allowance balances disaggregated on the basis of the Company’s impairment methodology at March 31,September 30, 2021 and December 31, 2021.
| | | | | December 31, 2021 | | March 31, 2021 | | | December 31, 2021 | | September 30, 2021 |
| (dollars in thousands) | (dollars in thousands) | | Ending balance: individually evaluated for impairment | | Ending balance: collectively evaluated for impairment | | Purchase Credit Impaired | | Total | | Ending balance: individually evaluated for impairment | | Ending balance: collectively evaluated for impairment | | Purchase Credit Impaired | | Total | (dollars in thousands) | | Ending balance: individually evaluated for impairment | | Ending balance: collectively evaluated for impairment | | Purchased Credit Impaired | | Total | | Ending balance: individually evaluated for impairment | | Ending balance: collectively evaluated for impairment | | Purchased Credit Impaired | | Total |
| Loan Receivables: | Loan Receivables: | | | | | | | | | | | | | | | | | Loan Receivables: | | | | | | | | | | | | | | | | |
| Commercial real estate | Commercial real estate | | $ | 4,890 | | | $ | 1,109,479 | | | $ | 1,116 | | | $ | 1,115,485 | | | $ | 11,931 | | | $ | 1,067,630 | | | $ | 1,550 | | | $ | 1,081,111 | | Commercial real estate | | $ | 4,890 | | | $ | 1,109,479 | | | $ | 1,116 | | | $ | 1,115,485 | | | $ | 3,136 | | | $ | 1,084,356 | | | $ | 1,144 | | | $ | 1,088,636 | |
| Residential first mortgages | Residential first mortgages | | 866 | | | 90,254 | | | — | | | 91,120 | | | 751 | | | 115,052 | | | — | | | 115,803 | | Residential first mortgages | | 866 | | | 90,254 | | | — | | | 91,120 | | | 872 | | | 95,963 | | | — | | | 96,835 | |
| Residential rentals | Residential rentals | | 942 | | | 194,093 | | | — | | | 195,035 | | | 736 | | | 136,786 | | | — | | | 137,522 | | Residential rentals | | 942 | | | 194,093 | | | — | | | 195,035 | | | 961 | | | 171,121 | | | — | | | 172,082 | |
| Construction and land development | Construction and land development | | — | | | 35,590 | | | — | | | 35,590 | | | — | | | 38,446 | | | — | | | 38,446 | | Construction and land development | | — | | | 35,590 | | | — | | | 35,590 | | | — | | | 37,139 | | | — | | | 37,139 | |
| Home equity and second mortgages | Home equity and second mortgages | | 601 | | | 25,037 | | | — | | | 25,638 | | | 651 | | | 28,309 | | | 403 | | | 29,363 | | Home equity and second mortgages | | 601 | | | 25,037 | | | — | | | 25,638 | | | 580 | | | 25,938 | | | — | | | 26,518 | |
| Commercial loans | Commercial loans | | — | | | 50,574 | | | — | | | 50,574 | | | — | | | 42,689 | | | — | | | 42,689 | | Commercial loans | | — | | | 50,574 | | | — | | | 50,574 | | | — | | | 48,327 | | | — | | | 48,327 | |
| Consumer loans | Consumer loans | | — | | | 3,002 | | | — | | | 3,002 | | | — | | | 1,415 | | | — | | | 1,415 | | Consumer loans | | — | | | 3,002 | | | — | | | 3,002 | | | — | | | 2,168 | | | — | | | 2,168 | |
| Commercial equipment | Commercial equipment | | 1,195 | | | 61,304 | | | — | | | 62,499 | | | 544 | | | 60,290 | | | — | | | 60,834 | | Commercial equipment | | 1,195 | | | 61,304 | | | — | | | 62,499 | | | 487 | | | 60,859 | | | — | | | 61,346 | |
| | $ | 8,494 | | | $ | 1,569,333 | | | $ | 1,116 | | | $ | 1,578,943 | | | $ | 14,613 | | | $ | 1,490,617 | | | $ | 1,953 | | | $ | 1,507,183 | | | $ | 8,494 | | | $ | 1,569,333 | | | $ | 1,116 | | | $ | 1,578,943 | | | $ | 6,036 | | | $ | 1,525,871 | | | $ | 1,144 | | | $ | 1,533,051 | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | |
| Allowance for credit losses: | | Allowance for credit losses: | | | | | | | | | | | | | | | | |
| Commercial real estate | Commercial real estate | | $ | 93 | | | $ | 13,002 | | | $ | — | | | $ | 13,095 | | | $ | 854 | | | $ | 12,431 | | | $ | — | | | $ | 13,285 | | Commercial real estate | | $ | 93 | | | $ | 13,002 | | | $ | — | | | $ | 13,095 | | | $ | 291 | | | $ | 13,128 | | | $ | 52 | | | $ | 13,471 | |
| Residential first mortgages | Residential first mortgages | | — | | | 1,002 | | | — | | | 1,002 | | | — | | | 1,024 | | | — | | | 1,024 | | Residential first mortgages | | — | | | 1,002 | | | — | | | 1,002 | | | — | | | 912 | | | — | | | 912 | |
| Residential rentals | Residential rentals | | — | | | 2,175 | | | — | | | 2,175 | | | — | | | 1,361 | | | — | | | 1,361 | | Residential rentals | | — | | | 2,175 | | | — | | | 2,175 | | | — | | | 1,800 | | | — | | | 1,800 | |
| Construction and land development | Construction and land development | | — | | | 260 | | | — | | | 260 | | | — | | | 365 | | | — | | | 365 | | Construction and land development | | — | | | 260 | | | — | | | 260 | | | — | | | 368 | | | — | | | 368 | |
| Home equity and second mortgages | Home equity and second mortgages | | — | | | 274 | | | — | | | 274 | | | — | | | 263 | | | — | | | 263 | | Home equity and second mortgages | | — | | | 274 | | | — | | | 274 | | | — | | | 249 | | | — | | | 249 | |
| Commercial loans | Commercial loans | | — | | | 582 | | | — | | | 582 | | | — | | | 1,012 | | | — | | | 1,012 | | Commercial loans | | — | | | 582 | | | — | | | 582 | | | — | | | 909 | | | — | | | 909 | |
| Consumer loans | Consumer loans | | — | | | 58 | | | — | | | 58 | | | — | | | 29 | | | — | | | 29 | | Consumer loans | | — | | | 58 | | | — | | | 58 | | | — | | | 42 | | | — | | | 42 | |
| Commercial equipment | Commercial equipment | | 173 | | | 798 | | | — | | | 971 | | | 37 | | | 880 | | | — | | | 917 | | Commercial equipment | | 173 | | | 798 | | | — | | | 971 | | | 32 | | | 796 | | | — | | | 828 | |
| | $ | 266 | | | $ | 18,151 | | | $ | — | | | $ | 18,417 | | | $ | 891 | | | $ | 17,365 | | | $ | — | | | $ | 18,256 | | | $ | 266 | | | $ | 18,151 | | | $ | — | | | $ | 18,417 | | | $ | 323 | | | $ | 18,204 | | | $ | 52 | | | $ | 18,579 | |
Purchased Credit-Impaired Loans and Acquired Loans ("PCI")
Determining the fair value of the PCI loans at the time of acquisition required the Company to estimate cash flows expected to result from those loans considering prepayment assumptions and to discount those cash flows at appropriate rates of interest considering prepayment assumptions.interest. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP upon the adoption of CECL, there was no carryover of a previously established allowance for loancredit losses from acquisition.
A summary of changes in the accretable yield for PCI loans for the three and nine months ended March 31,September 30, 2021 and the year ended December 31, 2021 follows:
| | | | | Three Months Ended March 31, | | | Year Ended | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Year Ended |
| (dollars in thousands) | (dollars in thousands) | | 2021 | | | December 31, 2021 | (dollars in thousands) | | 2021 | | 2021 | | December 31, 2021 |
| Accretable yield, beginning of period | Accretable yield, beginning of period | | $ | 342 | | | | $ | 342 | | Accretable yield, beginning of period | | $ | 324 | | | $ | 342 | | | $ | 342 | |
| Additions | Additions | | — | | | | — | | Additions | | — | | | — | | | — | |
| Accretion | Accretion | | (31) | | | | (117) | | Accretion | | (31) | | | (92) | | | (117) | |
| Reclassification from nonaccretable difference | Reclassification from nonaccretable difference | | — | | | | 43 | | Reclassification from nonaccretable difference | | 15 | | | 29 | | | 43 | |
| Other changes, net | Other changes, net | | — | | | | 55 | | Other changes, net | | (15) | | | 14 | | | 55 | |
| Accretable yield, end of period | Accretable yield, end of period | | $ | 311 | | | | $ | 323 | | Accretable yield, end of period | | $ | 293 | | | $ | 293 | | | $ | 323 | |
At December 31, 2021 acquired performing loans, which totaled $41.1 million, included a $0.8 million net acquisition accounting fair market value adjustment, representing a 1.25% discount; and PCI loans which totaled $1.1 million, included a $0.3 million adjustment, representing a 14.95% discount.
During the three months ended March 31,September 30, 2021 there was $0.1 million of accretion interest.
Accounting standards require a periodic recast of the expected cash flows on the PCI loan portfolio. The recast was performed during the fourth quarter of 2021 which resulted in a reclassification of $0.5 million, from the credit (nonaccretable) portion of the discount to the liquidity (accretable) portion of the discount.
The following is a summary of acquired and non-acquired loans as of December 31, 2021:
| | BY ACQUIRED AND NON-ACQUIRED | BY ACQUIRED AND NON-ACQUIRED | | December 31, 2021 | | % | BY ACQUIRED AND NON-ACQUIRED | | December 31, 2021 | | % |
| Acquired loans - performing | Acquired loans - performing | | $ | 41,066 | | | 2.56 | % | Acquired loans - performing | | $ | 41,066 | | | 2.56 | % |
| Acquired loans - purchase credit impaired ("PCI") | Acquired loans - purchase credit impaired ("PCI") | | 1,116 | | | 0.07 | % | Acquired loans - purchase credit impaired ("PCI") | | 1,116 | | | 0.07 | % |
| Total acquired loans | Total acquired loans | | 42,182 | | | 2.63 | % | Total acquired loans | | 42,182 | | | 2.63 | % |
| U.S. SBA PPP loans | U.S. SBA PPP loans | | 27,276 | | | 1.70 | % | U.S. SBA PPP loans | | 27,276 | | | 1.70 | % |
| Non-acquired loans** | Non-acquired loans** | | 1,536,761 | | | 95.67 | % | Non-acquired loans** | | 1,536,761 | | | 95.68 | % |
| Gross loans | Gross loans | | 1,606,219 | | | Gross loans | | 1,606,219 | | |
| Net deferred fees | Net deferred fees | | (1,011) | | | (0.06) | % | Net deferred fees | | (1,011) | | | (0.06) | % |
| Total loans, net of deferred fees | Total loans, net of deferred fees | | $ | 1,605,208 | | | Total loans, net of deferred fees | | $ | 1,605,208 | | |
**Non-acquired loans include loans transferred from acquired pools following release of acquisition accounting FMV adjustments.
NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are presented in the tables below.
| | (dollars in thousands) | (dollars in thousands) | | As of March 31, 2022 | | As of December 31, 2021 | (dollars in thousands) | | As of September 30, 2022 | | As of December 31, 2021 |
| | Goodwill | Goodwill | | $ | 10,835 | | | $ | 10,835 | | Goodwill | | $ | 10,835 | | | $ | 10,835 | |
| | | As of March 31, 2022 | | As of December 31, 2021 | | As of September 30, 2022 | | As of December 31, 2021 |
| (dollars in thousands) | (dollars in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Intangible Assets | | Gross Carrying Amount | | Accumulated Amortization | | Net Intangible Assets | (dollars in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Intangible Assets | | Gross Carrying Amount | | Accumulated Amortization | | Net Intangible Assets |
| | Core deposit intangible | | $ | 3,590 | | | $ | (2,666) | | | $ | 924 | | | $ | 3,590 | | | $ | (2,558) | | | $ | 1,032 | | |
| Core deposit intangible ("CDI") | | Core deposit intangible ("CDI") | | $ | 3,590 | | | $ | (2,865) | | | $ | 725 | | | $ | 3,590 | | | $ | (2,558) | | | $ | 1,032 | |
The estimated aggregate future amortization expense for intangible assets remaining as of March 31,September 30, 2022 is as follows:
| | (dollars in thousands) | (dollars in thousands) | | (dollars in thousands) | |
| | Remainder of 2022 | Remainder of 2022 | | $ | 290 | | Remainder of 2022 | | $ | 91 | |
| 2023 | 2023 | | 302 | | 2023 | | 302 | |
| 2024 | 2024 | | 205 | | 2024 | | 205 | |
| 2025 | 2025 | | 109 | | 2025 | | 109 | |
| 2026 | 2026 | | 18 | | 2026 | | 18 | |
| | | $ | 924 | | | $ | 725 | |
As of March 31, 2022, the Company did not have impairment to goodwill or core deposit intangibles ("CDI"). At March 31,September 30, 2022 the Company had goodwill of $10.8 million or 5.61%6.05% of equity and CDI of $0.9$0.7 million or 0.48%0.40% of equity.
Management performed its annual analysis of goodwill and CDI during the fourth quarter of 2021 and concluded that there was no impairment at December 31, 2021. At March 31,September 30, 2022, management's analysis concluded that there were 0no changes in the Company's financial statements or operations subsequent to the fourth quarter 2021 annual analyses that would indicate that it was more likely than not that goodwill or CDI was impaired.
NOTE 5 – OTHER REAL ESTATE OWNED (“OREO”)
OREO assets are presented net of the valuation allowance. The Company considers OREO as classified assets for regulatory and financial reporting. OREO carrying amounts reflect management’s estimate of the realizable value of these properties incorporating current appraised values, local real estate market conditions and related costs. An analysis of activity follows.
| | | Three Months Ended March 31, | | Years Ended December 31, | | Nine Months Ended September 30, | | Years Ended December 31, |
| (dollars in thousands) | (dollars in thousands) | | 2022 | | 2021 | | 2021 | (dollars in thousands) | | 2022 | | 2021 | | 2021 |
| Balance at beginning of year | Balance at beginning of year | | $ | — | | | $ | 3,109 | | | $ | 3,109 | | Balance at beginning of year | | $ | — | | | $ | 3,109 | | | $ | 3,109 | |
| Additions of underlying property | Additions of underlying property | | — | | | — | | | — | | Additions of underlying property | | — | | | — | | | — | |
| Disposals of underlying property | Disposals of underlying property | | — | | | (600) | | | (1,722) | | Disposals of underlying property | | — | | | (932) | | | (1,722) | |
| Valuation allowance | Valuation allowance | | — | | | (180) | | | (1,387) | | Valuation allowance | | — | | | (641) | | | (1,387) | |
| Balance at end of period | Balance at end of period | | $ | — | | | $ | 2,329 | | | $ | — | | Balance at end of period | | $ | — | | | $ | 1,536 | | | $ | — | |
Expenses applicable to OREO assets included the following.
| | | Three Months Ended March 31, | | Nine Months Ended September 30, |
| (dollars in thousands) | (dollars in thousands) | | 2022 | | 2021 | (dollars in thousands) | | 2022 | | 2021 |
| | Valuation allowance | Valuation allowance | | $ | — | | | $ | 180 | | Valuation allowance | | $ | — | | | $ | 641 | |
| Losses (gains) on dispositions | Losses (gains) on dispositions | | — | | | (22) | | Losses (gains) on dispositions | | — | | | (16) | |
| Operating expenses | Operating expenses | | 6 | | | 23 | | Operating expenses | | 6 | | | 64 | |
| | $ | 6 | | | $ | 181 | | | $ | 6 | | | $ | 689 | |
The Company had $0.4$0.1 million impairedin loans secured by residential real estate for which formal foreclosure proceedings were in process as of March 31, 2022 andSeptember 30, 2022. There were no loans secured by residential real estate for which formal foreclosure proceedings were in the process as of December 31, 2021.
NOTE 6 – DEPOSITS
Deposits consist of the following:
| | (dollars in thousands) | | March 31, 2022 | | December 31, 2021 | |
| | September 30, 2022 | | December 31, 2021 |
| (dollars in thousands) | (dollars in thousands) | | Balance | | % | | Balance | | % | (dollars in thousands) | | Balance | | % | | Balance | | % |
| $ | 644,385 | | | 30.75 | % | | $ | 445,778 | | | 21.68 | % | Noninterest-bearing demand | | $ | 647,432 | | | 30.45 | % | | $ | 445,778 | | | 21.68 | % |
| Interest-bearing: | Interest-bearing: | | Interest-bearing: | |
| Demand | Demand | | 618,869 | | | 29.54 | % | | 790,481 | | | 38.45 | % | Demand | | 691,987 | | | 32.54 | % | | 790,481 | | | 38.45 | % |
| Money market deposits | Money market deposits | | 387,700 | | | 18.51 | % | | 372,717 | | | 18.13 | % | Money market deposits | | 371,175 | | | 17.45 | % | | 372,717 | | | 18.13 | % |
| Savings | Savings | | 124,038 | | | 5.92 | % | | 119,767 | | | 5.82 | % | Savings | | 123,564 | | | 5.81 | % | | 119,767 | | | 5.82 | % |
| Certificates of deposit | Certificates of deposit | | 320,091 | | | 15.28 | % | | 327,421 | | | 15.92 | % | Certificates of deposit | | 292,399 | | | 13.75 | % | | 327,421 | | | 15.92 | % |
| Total interest-bearing | Total interest-bearing | | 1,450,698 | | | 69.25 | % | | 1,610,386 | | | 78.32 | % | Total interest-bearing | | 1,479,125 | | | 69.55 | % | | 1,610,386 | | | 78.32 | % |
| | Total Deposits | Total Deposits | | $ | 2,095,083 | | | 100.00 | % | | $ | 2,056,164 | | | 100.00 | % | Total Deposits | | $ | 2,126,557 | | | 100.00 | % | | $ | 2,056,164 | | | 100.00 | % |
The aggregate amount of certificates of deposit that exceed the FDIC insurance limit of $250,000 at March 31,September 30, 2022 and December 31, 2021 was $56.6$55.1 million and $57.6 million, respectively.
The Company monitors all customer deposit concentrations at or above 2% of total deposits. At March 31,September 30, 2022, the Bank had 2two customer deposit relationships that exceeded 2% of total deposits, totaling $308.7$427.7 million which represented 14.7%20.1% of total deposits. At December 31, 2021, the Bank had 2two customer deposit relationships that exceeded 2% of total deposits, totaling $335.6 million which represented 16.3% of total deposits. These concentrations were with local municipal agencies.
NOTE 7 – LEASE COMMITMENTS & CONTINGENCIES
Operating Leases
The Company's, operating lease agreements are primarily for leases of branches and office space. All of these leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheet. Topic 842 requires operating lease agreements to be recognized on the consolidated balance sheet as a right-of-use-asset with a corresponding lease liability.
The table below details the Right of Use asset (net of accumulated amortization), lease liability and other information related to the Company's operating leases:
| | (dollars in thousands) | (dollars in thousands) | | March 31, 2022 | | December 31, 2021 | (dollars in thousands) | | September 30, 2022 | | December 31, 2021 |
| Operating Leases | Operating Leases | | | | | Operating Leases | | | | |
| Operating lease right of use asset, net | Operating lease right of use asset, net | | $ | 6,033 | | | $ | 6,124 | | Operating lease right of use asset, net | | $ | 6,022 | | | $ | 6,124 | |
| Operating lease liability | Operating lease liability | | $ | 6,266 | | | $ | 6,343 | | Operating lease liability | | $ | 6,288 | | | $ | 6,343 | |
| Weighted average remaining lease term | Weighted average remaining lease term | | 16.53 years | | 17.21 years | Weighted average remaining lease term | | 15.84 years | | 17.21 years |
| Weighted average discount rate | Weighted average discount rate | | 3.51 | % | | 3.51 | % | Weighted average discount rate | | 3.50 | % | | 3.51 | % |
| Remaining lease term - min | Remaining lease term - min | | 5.5 years | | 6.3 years | Remaining lease term - min | | 4.8 years | | 6.3 years |
| Remaining lease term - max | Remaining lease term - max | | 22.0 years | | 23.0 years | Remaining lease term - max | | 22.0 years | | 23.0 years |
The table below details the Company's lease cost, which is included in occupancy expense in the Unaudited Consolidated Statements of Income.
| | | Three Months Ended March 31, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (dollars in thousands) | (dollars in thousands) | | 2022 | | 2021 | | (dollars in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| | Operating lease cost | Operating lease cost | | $ | 146 | | | $ | 197 | | | Operating lease cost | | $ | 157 | | | $ | 146 | | | $ | 454 | | | $ | 489 | |
| | Cash paid for lease liability | Cash paid for lease liability | | $ | 131 | | | $ | 176 | | | Cash paid for lease liability | | $ | 140 | | | $ | 150 | | | $ | 406 | | | $ | 485 | |
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:
| | | | | | | | |
| (dollars in thousands) | | As of March 31,September 30, 2022 |
| | |
| Lease payments due: | | |
| Within one year | | $ | 532569 | |
| After one but within two years | | 539584 | |
| After two but within three years | | 547611 | |
| After three but within four years | | 588637 | |
| After four but within five years | | 595629 | |
| After five years | | 5,6775,375 | |
| Total undiscounted cash flows | | $ | 8,4788,405 | |
| Discount on cash flows | | 2,2122,117 | |
| Total lease liability | | $ | 6,2666,288 | |
NOTE 8 – GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED DEBENTURES (“TRUPs”)
On June 15, 2005, Tri-County Capital Trust II (“Capital Trust II”), a Delaware business trust formed, funded and wholly-owned by the Company, issued $5.0 million of variable-rate capital securities in a private pooled transaction. The variable rate is based on the 90-day LIBOR rate plus 1.70%. The Trust used the proceeds from this issuance, along with the $0.2 million for Capital Trust II’s common securities, to purchase $5.2 million of the Company’s junior subordinated debentures. The interest rate on the debentures and the trust preferred securities is variable and adjusts quarterly. These capital securities qualify as Tier I capital and are presented in the Consolidated Balance Sheets as “Guaranteed Preferred Beneficial Interests in Junior Subordinated Debentures.” Both the capital securities of Capital Trust II and the junior subordinated debentures are scheduled to mature on June 15, 2035, unless called by the Company.
On July 22, 2004, Tri-County Capital Trust I (“Capital Trust I”), a Delaware business trust formed, funded and wholly owned by the Company, issued $7.0 million of variable-rate capital securities in a private pooled transaction. The variable rate is based on the 90-day LIBOR rate plus 2.60%. The Trust used the proceeds from this issuance, along with the Company’s $0.2 million capital contribution for Capital Trust I’s common securities, to purchase $7.2 million of the Company’s junior subordinated debentures. The interest rate on the debentures and the trust preferred securities is variable and adjusts quarterly. These debentures qualify as Tier I capital and are presented in the Consolidated Balance Sheets as “Guaranteed Preferred Beneficial Interests in Junior Subordinated Debentures.” Both the capital securities of Capital Trust I and the junior subordinated debentures are scheduled to mature on July 22, 2034, unless called by the Company.
NOTE 9 – SUBORDINATED NOTES
On October 14, 2020, the Company issued and sold $20.0 million in aggregate principal amount of its 4.75% Fixed to Floating Rate Subordinated Notes due 2030 (the "Notes"). The Notes were sold by the Company in a private offering. The Notes mature on October 15, 2030 and bear interest at a fixed rate of 4.75% to October 14, 2025. From October 15, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly to the three-month Secured Overnight Financing Rate ("SOFR") plus 458 basis points. The Company may redeem the Notes at any time after October 14, 2025, and at any time in whole, but not in part, upon the occurrence of certain events. Any redemption of the Notes will be subject to prior regulatory approval. The Company incurred debt issuance costs for placement fees, legal and other out-of-pocket expenses of approximately $0.6 million, which are being amortized over the life of the Notes. The Company recognized amortization expense of $14,000$42,000 and $58,000$42,000 for the quartersnine months ended March 31,September 30, 2022 and 2021, respectively.
NOTE 10 – REGULATORY CAPITAL
The Bank’s primary regulator is the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to regulation, supervision and regular examination by the Maryland Commissioner of Financial Regulation (the “Commissioner”) and the FDIC. The Company is subject to regulation, examination and supervision by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the “BHCA”).
The Company and Bank are subject to the Basel III Capital Rules which establish a comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s “Basel III” framework for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios.
The rules include a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.50%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio (“Min. Ratio”) of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer (“CCB”) is also established above the regulatory minimum capital requirements. The rules revised the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets.
As of March 31,September 30, 2022 and December 31, 2021, the Company and Bank were well-capitalized under the regulatory framework for prompt corrective action ("PCA") under the new Basel III Capital Rules. Management believes, as of March 31,September 30, 2022 and December 31, 2021, that the Company and the Bank met all capital adequacy requirements to which they were subject. The Company’s and the Bank’s actual regulatory capital amounts and ratios are presented in the following table.
| | Regulatory Capital and Ratios | Regulatory Capital and Ratios | | The Company | | The Bank | Regulatory Capital and Ratios | | Regulatory Minimum Ratio + CCB(1) | | The Company | | The Bank |
| (dollars in thousands) | (dollars in thousands) | | March 31, 2022 | | December 31, 2021 | | March 31, 2022 | | December 31, 2021 | (dollars in thousands) | | September 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
| Common equity | Common equity | | | | $ | 193,140 | | | $ | 208,133 | | | $ | 222,753 | | | $ | 236,561 | | Common equity | | | | $ | 179,154 | | | $ | 208,133 | | | $ | 207,146 | | | $ | 236,561 | |
| Goodwill | Goodwill | | (10,835) | | | (10,835) | | | (10,835) | | | (10,835) | | Goodwill | | (10,835) | | | (10,835) | | | (10,835) | | | (10,835) | |
| Core deposit intangible (net of deferred tax liability) | Core deposit intangible (net of deferred tax liability) | | (685) | | | (766) | | | (685) | | | (766) | | Core deposit intangible (net of deferred tax liability) | | (537) | | | (766) | | | (537) | | | (766) | |
| AOCI losses | AOCI losses | | 18,969 | | | 1,952 | | | 18,969 | | | 1,952 | | AOCI losses | | 43,906 | | | 1,952 | | | 43,906 | | | 1,952 | |
| Common Equity Tier 1 Capital | Common Equity Tier 1 Capital | | 200,589 | | | 198,484 | | | 230,202 | | | 226,912 | | Common Equity Tier 1 Capital | | 211,688 | | | 198,484 | | | 239,680 | | | 226,912 | |
| TRUPs | TRUPs | | 12,000 | | | 12,000 | | | — | | | — | | TRUPs | | 12,000 | | | 12,000 | | | — | | | — | |
| Tier 1 Capital | Tier 1 Capital | | 212,589 | | | 210,484 | | | 230,202 | | | 226,912 | | Tier 1 Capital | | 223,688 | | | 210,484 | | | 239,680 | | | 226,912 | |
| Allowable reserve for credit losses and other Tier 2 adjustments | Allowable reserve for credit losses and other Tier 2 adjustments | | 21,619 | | | 18,468 | | | 21,619 | | | 18,468 | | Allowable reserve for credit losses and other Tier 2 adjustments | | 22,295 | | | 18,468 | | | 22,295 | | | 18,468 | |
| Subordinated notes | Subordinated notes | | 19,524 | | | 19,510 | | | — | | | — | | Subordinated notes | | 19,552 | | | 19,510 | | | — | | | — | |
| Tier 2 Capital | Tier 2 Capital | | $ | 253,732 | | | $ | 248,462 | | | $ | 251,821 | | | $ | 245,380 | | Tier 2 Capital | | $ | 265,535 | | | $ | 248,462 | | | $ | 261,975 | | | $ | 245,380 | |
| | Risk-Weighted Assets ("RWA") | Risk-Weighted Assets ("RWA") | | $ | 1,731,539 | | | $ | 1,665,296 | | | $ | 1,729,914 | | | $ | 1,663,831 | | Risk-Weighted Assets ("RWA") | | $ | 1,856,827 | | | $ | 1,665,296 | | | $ | 1,855,483 | | | $ | 1,663,831 | |
| Average Assets ("AA") | Average Assets ("AA") | | $ | 2,319,531 | | | $ | 2,281,210 | | | $ | 2,317,923 | | | $ | 2,279,835 | | Average Assets ("AA") | | $ | 2,340,703 | | | $ | 2,281,210 | | | $ | 2,338,751 | | | $ | 2,279,835 | |
Regulatory Minimum Ratio + CCB (1) | | |
| | Common Tier 1 Capital to RWA | Common Tier 1 Capital to RWA | | 7.00 | % | | 11.58 | % | | 11.92 | % | | 13.31 | % | | 13.64 | % | Common Tier 1 Capital to RWA | | 7.00% | | 11.40 | % | | 11.92 | % | | 12.92 | % | | 13.64 | % |
| Tier 1 Capital to RWA | Tier 1 Capital to RWA | | 8.50 | | | 12.28 | | | 12.64 | | | 13.31 | | | 13.64 | | Tier 1 Capital to RWA | | 8.50% | | 12.05 | | | 12.64 | | | 12.92 | | | 13.64 | |
| Tier 2 Capital to RWA | Tier 2 Capital to RWA | | 10.50 | | | 14.65 | | | 14.92 | | | 14.56 | | | 14.75 | | Tier 2 Capital to RWA | | 10.50% | | 14.30 | | | 14.92 | | | 14.12 | | | 14.75 | |
Tier 1 Capital to AA (Leverage) (2) | Tier 1 Capital to AA (Leverage) (2) | | n/a | | 9.17 | | | 9.23 | | | 9.93 | | | 9.95 | | Tier 1 Capital to AA (Leverage) (2) | | n/a | | 9.56 | | | 9.23 | | | 10.25 | | | 9.95 | |
(1)The regulatory minimum capital ratio ("Min. Ratio") + the capital conservation buffer ("CCB").
(2)Tier 1 Capital to AA (Leverage) has no capital conservation buffer defined. The PCA well capitalized is defined as 5.00%.
Dividends paid by the Company are substantially funded from dividends received from the Bank. Federal and holding company regulations, as well as Maryland law, impose certain restrictions on capital distributions, including dividend payments and share repurchases. These restrictions generally require advanced approval from the Bank's regulator for payment of dividends in excess of the sum of net income for the current calendar year and the retained net income of the prior two calendar years.
NOTE 11 – FAIR VALUE MEASUREMENTS
The Company adopted FASB ASC Topic 820, “Fair Value Measurements” and FASB ASC Topic 825, “The Fair Value Option for Financial Assets and Financial Liabilities”, which provides a framework for measuring and disclosing fair value under U.S. GAAP. FASB ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, AFS investment securities) or on a nonrecurring basis (for example, impaired loans).
FASB ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC Topic 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. AFS securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis such as loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
Under FASB ASC Topic 820, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine the fair value. These hierarchy levels are:
Level 1 inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s quarterly valuation process. Intra-quarter transfers in and out of level 3 assets and liabilities recorded at fair value on a recurring basis are disclosed. There were no such transfers during the quarter ended March 31,September 30, 2022 or the year ended December 31, 2021.
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value:
Securities Available for Sale
AFS investment securities are recorded at fair value on a recurring basis. Standard inputs include quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities (“GSEs”), municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Equity Securities Carried at Fair Value Through Income
Equity securities carried at fair value through income are recorded at fair value on a recurring basis. Standard inputs include quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 equity securities include those traded on an active exchange, such as the New York Stock Exchange. Level 2 equity securities include mutual funds with asset-backed securities issued by government sponsored entities (“GSEs”) as the underlying investment supporting the fund. Equity securities classified as Level 3 include mutual funds with asset-backed securities in less liquid markets.
Loans held for sale
The Company has elected to carry loans held for sale at fair value. This election reduces certain timing differences in the Consolidated Statement of Income and better aligns with the management of the portfolio from a business perspective. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of residential mortgage loans are recorded as a component of noninterest income in the Consolidated Statements of Income. As such, loans subjected to fair value adjustments are classified as Level 2 valuationvaluation.
Loans Receivable
The Company does not record loans at fair value on a recurring basis; however, from time to time, a loan is considered impairedindividually evaluated and an allowance for loan lossACL is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired.segregated individually. Management estimates the fair value of impairedindividually evaluated loans using one of several methods, including the collateral value, market value of similar debt, or discounted cash flows. ImpairedIndividually evaluated loans not requiring a specifican allowance are those for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At March 31,September 30, 2022 and December 31, 2021, substantially all of the impairedindividually evaluated loans were evaluated based upon the fair value of the collateral.
In accordance with FASB ASC 820, impaired loans where an allowance is established based on the fair value of collateral (loans with impairment) require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price (e.g., contracted sales price), the Company records the loan as nonrecurring Level 2. When the fair value of the impaired loan is derived from an appraisal, the Company records the loan as nonrecurring Level 3. Fair value is re-assessed at least quarterly or more frequently when circumstances occur that indicate a change in the fair value. The fair values of impaired loans that are not measured based on collateral values are measured using discounted cash flows and considered to be Level 3 inputs.
Other Real Estate Owned ("OREO")
OREO is adjusted for fair value upon transfer of the loans to foreclosed assets. Subsequently, OREO is reported at the lower of carrying value or fair value. Fair value is based on independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price (e.g., contracted sales price), the Company records the foreclosed asset as nonrecurring Level 2. When the fair value is derived from an appraisal, the Company records the foreclosed asset at nonrecurring Level 3.
Mortgage Banking Derivatives
The mortgage banking derivative comprises interest rate lock commitments for residential loans to be sold on a best-efforts basis. The significant unobservable input used in the fair value measurement of the Bank's interest rate lock commitments is the pull-through rate, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The pull-through rate is estimated based on mortgage banking activity in 2021. All interest rate lock commitments are considered to be Level 3.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The tables below present the recorded amount of assets as of March 31,September 30, 2022 and December 31, 2021 measured at fair value on a recurring basis.
| | (dollars in thousands) | (dollars in thousands) | | March 31, 2022 | (dollars in thousands) | | September 30, 2022 |
| Description of Asset | Description of Asset | | Fair Value | | Level 1 | | Level 2 | | Level 3 | Description of Asset | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| AFS securities | AFS securities | | | | | | | | | AFS securities | | | | | | | | |
| Asset-backed securities issued by GSEs and U.S. Agencies | Asset-backed securities issued by GSEs and U.S. Agencies | | Asset-backed securities issued by GSEs and U.S. Agencies | |
| MBS | MBS | | $ | 121,520 | | | $ | — | | | $ | 121,520 | | | $ | — | | MBS | | $ | 114,736 | | | $ | — | | | $ | 114,736 | | | $ | — | |
| CMOs | CMOs | | 189,799 | | | — | | | 189,799 | | | — | | CMOs | | 164,867 | | | — | | | 164,867 | | | — | |
| U.S. Agency | U.S. Agency | | 13,410 | | | — | | | 13,410 | | | — | | U.S. Agency | | 12,226 | | | — | | | 12,226 | | | — | |
| Asset-backed securities issued by Others: | Asset-backed securities issued by Others: | | Asset-backed securities issued by Others: | |
| Residential CMOs | Residential CMOs | | 199 | | | — | | | 199 | | | — | | Residential CMOs | | 9,103 | | | — | | | 9,103 | | | — | |
| Student Loan Trust ABSs | Student Loan Trust ABSs | | 53,469 | | | — | | | 53,469 | | | — | | Student Loan Trust ABSs | | 48,539 | | | — | | | 48,539 | | | — | |
| | Municipal bonds | Municipal bonds | | 90,827 | | | — | | | 90,827 | | | — | | Municipal bonds | | 78,864 | | | — | | | 78,864 | | | — | |
| Corporate bonds | Corporate bonds | | 2,960 | | | — | | | 2,960 | | | — | | Corporate bonds | | 2,609 | | | — | | | 2,609 | | | — | |
| U.S. government obligations | U.S. government obligations | | 35,343 | | | — | | | 35,343 | | | — | | U.S. government obligations | | 33,558 | | | — | | | 33,558 | | | — | |
| Total AFS securities | Total AFS securities | | $ | 507,527 | | | $ | — | | | $ | 507,527 | | | $ | — | | Total AFS securities | | $ | 464,502 | | | $ | — | | | $ | 464,502 | | | $ | — | |
| | Equity securities carried at fair value through income | Equity securities carried at fair value through income | | Equity securities carried at fair value through income | |
| CRA investment fund | CRA investment fund | | $ | 4,562 | | | $ | — | | | $ | 4,562 | | | $ | — | | CRA investment fund | | $ | 4,254 | | | $ | — | | | $ | 4,254 | | | $ | — | |
| | Non-marketable equity securities | Non-marketable equity securities | | Non-marketable equity securities | |
| Other equity securities | Other equity securities | | $ | 207 | | | $ | — | | | $ | 207 | | | $ | — | | Other equity securities | | $ | 207 | | | $ | — | | | $ | 207 | | | $ | — | |
| | Loans held for sale | | $ | 373 | | | $ | — | | | $ | 373 | | | $ | — | | |
| | Mortgage banking derivative | | |
| Interest rate lock commitments | | $ | — | | | $ | — | | | $ | — | | | $ | — | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | December 31, 2021 |
| Description of Asset | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| AFS securities | | | | | | | | |
| Asset-backed securities issued by GSEs and U.S. Agencies | | | | | | | | |
| MBS | | $ | 119,916 | | | $ | — | | | $ | 119,916 | | | $ | — | |
| CMOs | | 197,123 | | | — | | | 197,123 | | | — | |
| U.S. Agency | | 14,304 | | | — | | | 14,304 | | | — | |
| Asset-backed securities issued by others: | | | | | | | | |
| Residential CMOs | | 221 | | | — | | | 221 | | | — | |
| Student Loan Trust ABSs | | 56,574 | | | — | | | 56,574 | | | — | |
| | | | | | | | |
| Municipal bonds | | 92,841 | | | — | | | 92,841 | | | — | |
| | | | | | | | |
| U.S. government obligations | | 16,860 | | | — | | | 16,860 | | | — | |
| Total AFS securities | | $ | 497,839 | | | $ | — | | | $ | 497,839 | | | $ | — | |
| | | | | | | | |
| Equity securities carried at fair value through income | | | | | | | | |
| CRA investment fund | | $ | 4,772 | | | $ | — | | | $ | 4,772 | | | $ | — | |
| | | | | | | | |
| Non-marketable equity securities | | | | | | | | |
| Other equity securities | | $ | 207 | | | $ | — | | | $ | 207 | | | $ | — | |
| | | | | | | | |
| Mortgage banking derivative | | | | | | | | |
| Interest rate lock commitments | | $ | 28 | | | $ | — | | | $ | — | | | $ | 28 | |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company may be required to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. AssetsLoans with an allowance had unpaid principal balances of $0.1 million and $0.3 million at September 30, 2022 and December 31, 2021, respectively. The fair values of these loans were zero for both periods. There were no other assets measured at fair value on a nonrecurring basis as of March 31, 2022 and December 31, 2021 were included in the tables below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | March 31, 2022 |
| Description of Asset | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Individually assessed loans | | | | | | | | |
| Commercial real estate | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Commercial loans | | — | | | — | | | — | | | — | |
| Commercial equipment | | 427 | | | — | | | — | | | 427 | |
| Total loans with impairment | | $ | 427 | | | $ | — | | | $ | — | | | $ | 427 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | December 31, 2021 |
Description of Asset | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Loans with impairment | | | | | | | | |
Commercial real estate | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Commercial loans | | — | | | — | | | — | | | — | |
Commercial equipment | | — | | | — | | | — | | | — | |
Total loans with impairment | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Premises and equipment held for sale | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Other real estate owned | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Loans with impairment had unpaid principal balances of $0.7 million and $0.3 million at March 31, 2022 and December 31, 2021, respectively.
The following tables provide information describing the unobservable inputs used in Level 3 fair value measurements at March 31,September 30, 2022 and December 31, 2021.
The following tables provide information describing the unobservable inputs used in Level 3 fair value measurements at September 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31,September 30, 2022 | | Fair Value | | Valuation Technique | | Unobservable Inputs | | Range (Weighted Average) |
| (dollars in thousands) |
| Description of Asset |
Loans with impairmentindividually assessed loans | | $ | 427— | | | Third party appraisals and in-house real estateequipment evaluations of fair value | | Management discount for propertyequipment type selling costs and current market conditions | | 0% - 50% - 40%100% |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Fair Value | | Valuation Technique | | Unobservable Inputs | | Range (Weighted Average) |
| (dollars in thousands) |
| Description of Asset |
| | | | | | | | |
| Interest rate lock commitments | | $ | 28 | | | Freddie Mac pricing of loans with comparable terms | | Pull-through rate | | 0% - 100% - 75% |
| | | | | | | | |
| | | | | | | | |
NOTE 12 – FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the financial instrument fair value disclosure requirements, including the Company’s common stock, OREO, premises and equipment and other assets and liabilities.
The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Therefore, any aggregate unrealized gains or losses should not be interpreted as a forecast of future earnings or cash flows. Furthermore, the fair values disclosed should not be interpreted as the aggregate current value of the Company.
The Company’s estimated fair values of financial instruments are presented in the following tables.
| | March 31, 2022 | | Carrying Amount | | Fair Value | | Fair Value Measurements | |
| September 30, 2022 | | September 30, 2022 | | Carrying Amount | | Fair Value | | Fair Value Measurements |
Description of Asset (dollars in thousands) | Description of Asset (dollars in thousands) | | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 | Description of Asset (dollars in thousands) | | Level 1 | | Level 2 | | Level 3 |
| Assets | Assets | | | | | | | Assets | | | | | | | | | | |
| Investment securities - AFS | Investment securities - AFS | | $ | 507,527 | | | $ | 507,527 | | | $ | — | | | $ | 507,527 | | | $ | — | | Investment securities - AFS | | $ | 464,502 | | | $ | 464,502 | | | $ | — | | | $ | 464,502 | | | $ | — | |
| | Equity securities carried at fair value through income | Equity securities carried at fair value through income | | 4,562 | | | 4,562 | | | — | | | 4,562 | | | — | | Equity securities carried at fair value through income | | 4,254 | | | 4,254 | | | — | | | 4,254 | | | — | |
| Non-marketable equity securities in other financial institutions | Non-marketable equity securities in other financial institutions | | 207 | | | 207 | | | — | | | 207 | | | — | | Non-marketable equity securities in other financial institutions | | 207 | | | 207 | | | — | | | 207 | | | — | |
| FHLB Stock | FHLB Stock | | 1,685 | | | 1,685 | | | — | | | 1,685 | | | — | | FHLB Stock | | 1,226 | | | 1,226 | | | — | | | 1,226 | | | — | |
| Loans held for sale | | 373 | | | 373 | | | — | | | 373 | | | — | | |
| | Net loans receivable | Net loans receivable | | 1,623,435 | | | 1,581,251 | | | — | | | — | | | 1,581,251 | | Net loans receivable | | 1,722,461 | | | 1,654,640 | | | — | | | — | | | 1,654,640 | |
| Accrued interest receivable | Accrued interest receivable | | 5,389 | | | 5,389 | | | — | | | 5,389 | | | — | | Accrued interest receivable | | 6,791 | | | 6,791 | | | — | | | 6,791 | | | — | |
| Investment in BOLI | Investment in BOLI | | 39,145 | | | 39,145 | | | — | | | 39,145 | | | — | | Investment in BOLI | | 39,583 | | | 39,583 | | | — | | | 39,583 | | | — | |
| Mortgage banking derivatives | | — | | | — | | | — | | | — | | | — | | |
| | | Liabilities | Liabilities | | Liabilities | |
| Savings, NOW and money market accounts | Savings, NOW and money market accounts | | $ | 1,774,992 | | | $ | 1,774,992 | | | $ | — | | | $ | 1,774,992 | | | $ | — | | Savings, NOW and money market accounts | | $ | 1,834,158 | | | $ | 1,834,158 | | | $ | — | | | $ | 1,834,158 | | | $ | — | |
| Time deposits | Time deposits | | 320,091 | | | 320,447 | | | — | | | 320,447 | | | — | | Time deposits | | 292,399 | | | 292,034 | | | — | | | 292,034 | | | — | |
| | Long-term debt | | 12,213 | | | 12,235 | | | — | | | 12,235 | | | — | | |
| | TRUPs | TRUPs | | 12,000 | | | 12,049 | | | — | | | 12,049 | | | — | | TRUPs | | 12,000 | | | 10,159 | | | — | | | 10,159 | | | — | |
| Subordinated notes | Subordinated notes | | 19,524 | | | 20,478 | | | — | | | 20,478 | | | — | | Subordinated notes | | 19,552 | | | 18,610 | | | — | | | 18,610 | | | — | |
See the Company’s methodologies disclosed in Note 21 of the Company’s 2021 Form 10-K for the fair value methodologies used as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Carrying Amount | | Fair Value | | Fair Value Measurements |
Description of Asset (dollars in thousands) | | | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | | | |
| Investment securities - AFS | | $ | 497,839 | | | $ | 497,839 | | | $ | — | | | $ | 497,839 | | | $ | — | |
| | | | | | | | | | |
| Equity securities carried at fair value through income | | 4,772 | | | 4,772 | | | — | | | 4,772 | | | — | |
| Non-marketable equity securities in other financial institutions | | 207 | | | 207 | | | — | | | 207 | | | — | |
| FHLB Stock | | 1,472 | | | 1,472 | | | — | | | 1,472 | | | — | |
| | | | | | | | | | |
| Net loans receivable | | 1,586,791 | | | 1,578,032 | | | — | | | — | | | 1,578,032 | |
| Accrued interest receivable | | 5,588 | | | 5,588 | | | — | | | 5,588 | | | — | |
| Investment in BOLI | | 38,932 | | | 38,932 | | | — | | | 38,932 | | | — | |
| Mortgage ranking derivatives | | 28 | | | 28 | | | — | | | — | | | 28 | |
| | | | | | | | | | |
| Liabilities | | | | | | | | | | |
| Savings, NOW and money market accounts | | $ | 1,728,743 | | | $ | 1,728,743 | | | $ | — | | | $ | 1,728,743 | | | $ | — | |
| Time deposits | | 327,421 | | | 328,083 | | | — | | | 328,083 | | | — | |
| | | | | | | | | | |
| Long-term debt | | 12,231 | | | 12,391 | | | — | | | 12,391 | | | — | |
| TRUPs | | 12,000 | | | 11,589 | | | — | | | 11,589 | | | — | |
| Subordinated notes | | 19,510 | | | 20,979 | | | — | | | 20,979 | | | — | |
At March 31,September 30, 2022 and December 31, 2021, the Company had outstanding loan commitments and standby letters of credit with customers of $68.8$59.1 million and $64.4 million, respectively, and $23.7$23.0 million and $22.0 million, respectively. Additionally, at March 31,September 30, 2022 and December 31, 2021, customers had $222.6$261.1 million and $241.7 million, respectively, available and unused on lines of credit, which include lines of credit for commercial customers, home equity loans as well as builder and construction lines. Based on the short-term lives of these instruments, the Company does not believe that the fair value of these instruments differs significantly from their carrying values.
The fair value estimates presented herein are based on pertinent information available to management as of March 31,September 30, 2022 and December 31, 2021. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these Consolidated Financial Statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
NOTE 13 – ACCUMULATED OTHER COMPREHENSIVE INCOME/LOSS ("AOCI"/"AOCL")
The following table presents the changes in each component of accumulated other comprehensive gain, net of tax, for the three and nine months ended March 31,September 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 | | | | |
| (dollars in thousands) | Net Unrealized Gains And Losses | | Net Unrealized Gains And Losses | | | | |
| Beginning of period | | $ | (1,952) | | | $ | 4,504 | | | | | |
| Other comprehensive losses, net of tax before reclassifications | | (17,017) | | | (3,253) | | | | | |
| Amounts reclassified from accumulated other comprehensive gain | | — | | | 433 | | | | | |
| Net other comprehensive losses | | (17,017) | | | (2,820) | | | | | |
| | | | | | | | |
| End of period | | $ | (18,969) | | | $ | 1,684 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
| (dollars in thousands) | Net Unrealized Gains And Losses | | Net Unrealized Gains And Losses | | Net Unrealized Gains And Losses | | Net Unrealized Gains And Losses |
| Beginning of period | | $ | (31,847) | | | $ | 3,063 | | | $ | (1,952) | | | $ | 4,504 | |
| Other comprehensive losses, net of tax before reclassifications | | (12,059) | | | (3,072) | | | (41,954) | | | (4,946) | |
| Amounts reclassified from accumulated other comprehensive gain | | — | | | — | | | — | | | 433 | |
| Net other comprehensive losses | | (12,059) | | | (3,072) | | | (41,954) | | | (4,513) | |
| | | | | | | | |
| End of period | | $ | (43,906) | | | $ | (9) | | | $ | (43,906) | | | $ | (9) | |
As of the threenine months ended March 31, 2022 and March 31,September 30, 2021, reclassification adjustments wereadjustment was due to the gain on sale of AFS investment securities of $0.0 million and $0.6 million, respectively.million.
NOTE 14 – EARNINGS PER SHARE (“EPS”)
Basic earnings per common share represent income available to common shareholders, divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may have been issued by the Company related to outstanding unvested restricted stock unit and performance stock unit awards were determined using the treasury stock method
and included in the calculation of dilutive common stock equivalents. The Company has not granted any stock options since 2007 and all outstanding options expired on July 17, 2017.
As of March 31,three and nine months ended September 30, 2022, and 2021, there were no1,034 and 587, respectively of unvested restricted stock and performance stock unit awards which were excluded from the calculation as their effect would be anti-dilutive. There were 40 and 3,355 antidilutive awards that were excluded from the calculation for the three and nine months ended September 30, 2021. Basic and diluted earnings per share have been computed based on weighted-average common and common equivalent shares outstanding as follows:
| | (dollars in thousands, except per share amounts) | (dollars in thousands, except per share amounts) | | Three Months Ended March 31, | | (dollars in thousands, except per share amounts) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | (dollars in thousands, except per share amounts) | | 2022 | | 2021 | | 2022 | | 2021 |
| | Net Income | Net Income | | $ | 6,288 | | | $ | 6,299 | | | Net Income | | $ | 7,580 | | | $ | 6,404 | | | $ | 20,702 | | | $ | 19,135 | |
| | Average number of common shares outstanding | Average number of common shares outstanding | | 5,688,221 | | | 5,888,250 | | | Average number of common shares outstanding | | 5,636,640 | | | 5,709,814 | | | 5,656,950 | | | 5,813,704 | |
| Dilutive effect of common stock equivalents | Dilutive effect of common stock equivalents | | 10,817 | | | 9,448 | | | Dilutive effect of common stock equivalents | | 8,182 | | | 10,187 | | | 9,000 | | | 9,514 | |
| Average number of shares used to calculate diluted EPS | Average number of shares used to calculate diluted EPS | | 5,699,038 | | | 5,897,698 | | | Average number of shares used to calculate diluted EPS | | 5,644,822 | | | 5,720,001 | | | 5,665,950 | | | 5,823,218 | |
| | Anti-dilutive shares | Anti-dilutive shares | | — | | | — | | | Anti-dilutive shares | | 1,034 | | | 40 | | | 587 | | | 3,355 | |
| | Earnings Per Common Share | Earnings Per Common Share | | | Earnings Per Common Share | |
| Basic | Basic | | $ | 1.11 | | | $ | 1.07 | | | Basic | | $ | 1.34 | | | $ | 1.12 | | | $ | 3.66 | | | $ | 3.29 | |
| Diluted | Diluted | | $ | 1.10 | | | $ | 1.07 | | | Diluted | | $ | 1.34 | | | $ | 1.12 | | | $ | 3.65 | | | $ | 3.29 | |
NOTE 15 – INCOME TAXES
The Company files a consolidated federal income tax return with its subsidiaries. Deferred tax assets and liabilities are determined using the liability (or balance sheet) method which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. If it is more likely than not that some portion or the entire deferred tax asset will not be realized, deferred tax assets will be reduced by a valuation allowance. It is the Company’s policy to recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense.
| | (dollars in thousands) | (dollars in thousands) | | Three Months Ended March 31, | | (dollars in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | (dollars in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Current income tax expense | Current income tax expense | | $ | 1,927 | | | $ | 1,895 | | | $ | 2,572 | | | $ | 1,448 | | | $ | 7,119 | | | $ | 6,048 | |
| Deferred income tax expense | | 206 | | | 232 | | | |
| Deferred income tax (benefit) expense | | Deferred income tax (benefit) expense | | (192) | | | 710 | | | (237) | | | 427 | |
| Income tax expense as reported | Income tax expense as reported | | $ | 2,133 | | | $ | 2,127 | | | Income tax expense as reported | | $ | 2,380 | | | $ | 2,158 | | | $ | 6,882 | | | $ | 6,475 | |
| | Effective tax rate | Effective tax rate | | 25.3 | % | | 25.2 | % | | Effective tax rate | | 23.9 | % | | 25.2 | % | | 24.9 | % | | 25.3 | % |
Net deferred tax assets totaled $15.5$24.8 million at March 31,September 30, 2022 and $9.0 million at December 31, 2021. No valuation allowance for deferred tax assets was recorded at March 31,September 30, 2022 as management believes it is more likely than not that deferred tax assets will be realized against deferred tax liabilities and projected future taxable income.
The effective tax rate differed from the statutory federal and state income rates during 2022 and 2021 primarily due to the effect of tax-exempt loans, life insurance policies, the income tax effects associated with stock-based compensation and certain non-deductible expenses for state income taxes. The Company’s consolidated effective tax rate is expected to be between 25.00% and 26.06% in 2022.
ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS (“MD&A”) OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that involve significant judgments and uncertainties and could result in materially different results under different assumptions and conditions. The Company considers its determination of the allowance for credit losses ("ACL"), goodwill impairment, and the valuation of deferred tax assets to be critical accounting policies. The Company believes that the most critical accounting policies upon which its financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled "Critical Accounting Policies" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC.
For additional information regarding the ACL, Goodwill, and the valuation of deferred taxes, refer to Notes 1, 3, 4, and 14 in the Consolidated Financial Statements as presented in the Company’s Form 10-K for the year ended December 31, 2021.
On January 1, 2022, the Company adopted FASB ASU 2016-13, which changes the accounting for the allowance for credit losses. For a discussion of this new accounting policy, refer to Note 1 "Basis of Presentation" to the Consolidated Financial Statements.
OVERVIEW
Community Bank of the Chesapeake (the “Bank”) is headquartered in Southern Maryland with 1112 branches located in Maryland and Virginia. The Bank is a wholly-owned subsidiary of The Community Financial Corporation (the “Company”). The Company provides financial services to individuals and businesses through its offices in Southern Maryland and Fredericksburg, Virginia. Its primary deposit products are demand, savings and time deposits, and its primary lending products are commercial and residential mortgage loans, commercial loans, construction and land development loans, home equity and second mortgages and commercial equipment loans.
Our customer focus is to serve small and medium sized commercial businesses as well as local municipal agencies and not-for-profits. Relationship teams provide customers with specific banker contacts and a support team to address product and service demands. The Bank believes that its ability to offer fast, flexible, local decision-making will continue to attract significant new business relationships. Our structure provides a consistent and superior level of professional service and excelling at customer service is a critical part of our culture. The Bank’s marketing is directed towards increasing its balances of transactional deposit accounts. The Bank believes that increases in these account types will lessen the Bank’s dependence on higher-cost funding, such as certificates of deposit and borrowings.
The Company’s income is primarily earned from interest received on its loans and investments. The Company's primary source of funds for making these loans and investments is its deposits. One of the key measures of the Company's success is its net interest income, or the difference between the income on its interest-earning assets, such as loans and investments, and the expense on its interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield the Company earns on these interest-earning assets and the rate the Company pays on interest-bearing liabilities, which is called net interest spread. In addition to earning interest on loans and investments, the Company earns income through fees and other charges for services to clients.
Management will continue to focus on deliveringgrowth and operating efficiency to deliver strong results during 2022 to drive profitability and operating efficiency.2022. During the first quarternine months of 2022, we had robust portfolio loan growth, and strong non-interest bearing and transaction deposit growth, and continuedwhile continuing to optimize our branch and virtual banking operations.
•NetThe Company reported record net income totaled $6.3 million for the quarterthree months ended March 31,September 30, 2022 of $7.6 million, or $1.10$1.34 per diluted common share compared to net income of $6.3$6.4 million or $1.07$1.12 per diluted common share for the quarter ended March 31, 2021 and $6.8September 30, 2021. The Company also reported record net income for the nine months ended September 30, 2022 of $20.7 million or $1.18diluted earnings per diluted common share of $3.65 compared to net income for the quarter ended December 31, 2021.
•Total portfolio loans increased to $1,629.5 million, an increasecomparable 2021 period of $50.7$19.1 million or 12.9% annualized, compared to the prior quarter, and $121.5 million or 8.1% from March 31, 2021. The loan pipeline at March 31, 2022 was $193.0 million compared to $160.0 million at December 31, 2021.
•Non-interest-bearing accounts increased $198.6 million to $644.4 million or 30.75%diluted earnings per share of deposits at March 31, 2022 from 21.68% of deposits at December 31, 2021. In January 2022, the Bank provided customers with required regulatory notifications to change the terms of certain transaction deposit accounts from low interest-bearing to non-interest bearing accounts. Transaction deposits increased $46.2 million, or 10.7% annualized, to $1,775.0 million in the first quarter of 2022.$3.29.
•During the first quarter of 2022, total common equity decreased $15.0 million or 7.2% to $193.1 million, and tangible common equity ("TCE") decreased $14.9 million or 7.6% to $181.4 million at March 31, 2022. The decreases were primarily due to an increase of $17.0 million in accumulated other comprehensive losses ("AOCL") in the Bank's available for sale ("AFS") securities portfolio due to changes in interest rates.
•Portfolio loan end of period contractual rates increased by one57 basis pointpoints to 3.85%4.41% at March 31, 2021September 30, 2022 compared to December 31, 2021. The loan portfolio is positioned for rising rates with $517.7$467.8 million or 32%27% of net loans, excluding the allowance for credit losses, scheduled to reprice monthly or in the next three months and an additional $50.0$76.6 million or 3%4% repricing within the following nine months. The Bank's effective duration on the loan portfolio was 2.1 years at MarchSeptember 30, 2022.
•Total portfolio loans increased $164.5 million or 13.9% annualized to $1,743.3 million from December 31, 2021, as the Company maintained its market dominance in Southern Maryland and continued to gain market share in Virginia. The loan pipeline at September 2022 was $153.0 million, which is expected to provide solid loan growth in the fourth quarter.
•Non-interest-bearing accounts increased $201.7 million to $647.4 million or 30.45% of deposits at September 30, 2022, from 21.68% of deposits at December 31, 2021. Transaction deposits increased $105.4 million, or 8.13% annualized, to $1,834.2 million in the first nine months of 2022. The Company's change in funding mix has well positioned the balance sheet for a rising rate environment. In addition, increased non-interest bearing accounts of 30.45% as a percentage of deposits also better positions the Company for a rising rate environment.
•In March 2021, we improvedAs of September 30, 2022, the FOMC had increased the federal funds target rate range to between 3.00%-3.25%. As a result of the Company's balance sheet being asset quality withsensitive, net interest margin increased 22 basis points to 3.47% for the salethree months ended September 30, 2022 compared to the second quarter of impaired non-accrual and classified commercial real estate and residential mortgage loans with an amortized cost of $9.1 million, net of charge-offs of $1.4 million.2022.
•On April 21,Total stockholders’ equity decreased $29.0 million during the nine months ended September 30, 2022. The decrease in equity was primarily due to an increase of $42.0 million in accumulated other comprehensive loss ("AOCL") related to unrealized losses in the Bank's AFS securities portfolio due to changes in market interest rates, partially offset by net income of $20.7 million. Management intends and has the ability to hold its AFS securities until maturity. See discussion in Liquidity and Capital Resources section of this MD&A.
•The Company's common equity to assets ratio decreased to 7.59% at September 30, 2022 from 8.94% at December 31, 2021. The Company’s ratio of tangible common equity ("TCE") to tangible assets decreased to 7.14% at September 30, 2022 from 8.48% at December 31, 2021 (see Non-GAAP reconciliation schedules) due primarily to increases in AOCL. Regulatory capital was not impacted by the increase in AOCL and Tier 1 capital to average asset ratios at the Bank purchasedand the Company remain strong.
•Asset quality continues to improve as non-accrual loans, OREO and TDRs were $6.7 million or 0.28% of total assets at September 2022 compared to $8.1 million or 0.35% of total assets at December 31, 2021.
•The Bankopened its second Virginia branch location in May 2022 in Fredericksburg. Additionally, with our Virginia at 5831 Plank Road, Spotsylvania. The full-service branch is expectedlending team managing over 40% of the Bank's loans, the Bank intends to open a loan production office in secondCharlottesville in the fourth quarter of 2022 and will provide banking, lending and wealth management services with a focus on digital banking. At March 31, 2022, loans in the greater Fredericksburg, Virginia area accounted for almost 50% of the Bank's outstanding portfolio loans, and Fredericksburg branch deposits were $101 million with an average cost of deposits of three basis points.to support our existing efforts. Management believes the greater Fredericksburg area provides significant opportunities for continued organic growth supported by our efficient operating model and ability to leverage technology.
The Company is addressing COVID-19 credit concerns by maintaining an adequate allowance for credit losses. We believe current market disruptions in the banking industry caused by both the COVID-19 pandemic as well as industry consolidation will provide opportunities for continued organic growth in 2022.
For additional information regarding the Company's COVID-19 programs, including risk factors and accounting treatment, refer to Item 1A, "Risk Factors" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC. The following summarizes major activities we remain engaged in related to the pandemic at and for the three months ended March 31, 2022:
•The Company offered payment deferral programs for its business and individual customers. Generally, depending on the demonstrated need of the client, the Company deferred either the full loan payment or the principal component of the loan payment between 90 and 180 days. Management closely monitors previously COVID-19 deferred loans in reviews of credit quality indicators as part of individual loan and relationship reviews and changes classification ratings as needed.
•The Company actively assisted customers and community businesses with applications for resources through the U.S. SBA PPP program. As of March 31, 2022, the Company had 114 U.S. SBA PPP loans with balances of $15.3 million.
Subsequent events
The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q were issued.
USE OF NON-GAAP FINANCIAL MEASURES
Statements included in management’s discussion and analysis include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. The Company’s management uses these non-GAAP financial measures and believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under GAAP. See Non-GAAP reconciliation schedules that immediately follow:
RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)
Reconciliation of U.S. GAAP total assets, common equity, common equity to assets and book value to Non-GAAP tangible assets, tangible common equity, tangible common equity to tangible assets and tangible book value.
This Form 10-Q, including the accompanying financial statement tables, contains financial information determined by methods other than in accordance with GAAP. This financial information includes certain performance measures, which exclude intangible assets. These non-GAAP measures are included because the Company believes they may provide useful supplemental information for evaluating the underlying performance trends of the Company.
| | (dollars in thousands, except per share amounts) | (dollars in thousands, except per share amounts) | | March 31, 2022 | | December 31, 2021 | | March 31, 2021 | (dollars in thousands, except per share amounts) | | September 30, 2022 | | December 31, 2021 | | September 30, 2021 |
| Total assets | Total assets | | $ | 2,351,923 | | | $ | 2,327,306 | | | $ | 2,149,531 | | Total assets | | $ | 2,359,621 | | | $ | 2,327,306 | | | $ | 2,278,692 | |
| Less: intangible assets | Less: intangible assets | | Less: intangible assets | |
| Goodwill | Goodwill | | 10,835 | | | 10,835 | | | 10,835 | | Goodwill | | 10,835 | | | 10,835 | | | 10,835 | |
| Core deposit intangible | Core deposit intangible | | 924 | | | 1,032 | | | 1,394 | | Core deposit intangible | | 725 | | | 1,032 | | | 1,147 | |
| Total intangible assets | Total intangible assets | | 11,759 | | | 11,867 | | | 12,229 | | Total intangible assets | | 11,560 | | | 11,867 | | | 11,982 | |
| Tangible assets | Tangible assets | | $ | 2,340,164 | | | $ | 2,315,439 | | | $ | 2,137,302 | | Tangible assets | | $ | 2,348,061 | | | $ | 2,315,439 | | | $ | 2,266,710 | |
| | Total common equity | Total common equity | | $ | 193,140 | | | $ | 208,133 | | | $ | 200,759 | | Total common equity | | $ | 179,154 | | | $ | 208,133 | | | $ | 204,128 | |
| Less: intangible assets | Less: intangible assets | | 11,759 | | | 11,867 | | | 12,229 | | Less: intangible assets | | 11,560 | | | 11,867 | | | 11,982 | |
| Tangible common equity | Tangible common equity | | $ | 181,381 | | | $ | 196,266 | | | $ | 188,530 | | Tangible common equity | | $ | 167,594 | | | $ | 196,266 | | | $ | 192,146 | |
| | Common shares outstanding at end of period | Common shares outstanding at end of period | | 5,686,799 | | | 5,718,528 | | | 5,897,685 | | Common shares outstanding at end of period | | 5,644,186 | | | 5,718,528 | | | 5,724,011 | |
| | GAAP common equity to assets | GAAP common equity to assets | | 8.21 | % | | 8.94 | % | | 9.34 | % | GAAP common equity to assets | | 7.59 | % | | 8.94 | % | | 8.96 | % |
| Non-GAAP tangible common equity to tangible assets | Non-GAAP tangible common equity to tangible assets | | 7.75 | % | | 8.48 | % | | 8.82 | % | Non-GAAP tangible common equity to tangible assets | | 7.14 | % | | 8.48 | % | | 8.48 | % |
| | GAAP common book value per share | GAAP common book value per share | | $ | 33.96 | | | $ | 36.40 | | | $ | 34.04 | | GAAP common book value per share | | $ | 31.74 | | | $ | 36.40 | | | $ | 35.66 | |
| Non-GAAP tangible common book value per share | Non-GAAP tangible common book value per share | | $ | 31.90 | | | $ | 34.32 | | | $ | 31.97 | | Non-GAAP tangible common book value per share | | $ | 29.69 | | | $ | 34.32 | | | $ | 33.57 | |
RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)
Return on Average Common Equity ("ROACE")
The ROACE is a financial ratio that measures the profitability of a company in relation to the average shareholders' equity. This financial metric is expressed in the form of a percentage which is equal to net income after tax divided by the average shareholders' equity for a specific period of time.
| | | Three Months Ended March 31, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (dollars in thousands) | (dollars in thousands) | | 2022 | | 2021 | | (dollars in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| | Net income (as reported) | Net income (as reported) | | $ | 6,288 | | | $ | 6,299 | | | Net income (as reported) | | $ | 7,580 | | | $ | 6,404 | | | $ | 20,702 | | | $ | 19,135 | |
| | ROACE | ROACE | | 12.30 | % | | 12.53 | % | | ROACE | | 15.97 | % | | 12.45 | % | | 14.17 | % | | 12.53 | % |
| | Average equity | Average equity | | $ | 204,554 | | | $ | 201,124 | | | Average equity | | $ | 189,838 | | | $ | 205,723 | | | $ | 194,741 | | | $ | 203,597 | |
Return on Average Tangible Common Equity ("ROATCE")
ROATCE is computed by dividing net earnings applicable to common shareholders by average tangible common shareholders' equity. Management believes that ROATCE is meaningful because it measures the performance of a business consistently, whether acquired or internally developed. ROATCE is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.
| | | Three Months Ended March 31, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (dollars in thousands) | (dollars in thousands) | | 2022 | | 2021 | | (dollars in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| | Net income (as reported) | Net income (as reported) | | $ | 6,288 | | | $ | 6,299 | | | Net income (as reported) | | $ | 7,580 | | | $ | 6,404 | | | $ | 20,702 | | | $ | 19,135 | |
| Core deposit intangible amortization (net of tax) | Core deposit intangible amortization (net of tax) | | 81 | | | 99 | | | Core deposit intangible amortization (net of tax) | | 74 | | | 91 | | | 231 | | | 284 | |
| Net earnings applicable to common shareholders | Net earnings applicable to common shareholders | | $ | 6,369 | | | $ | 6,398 | | | Net earnings applicable to common shareholders | | $ | 7,654 | | | $ | 6,495 | | | $ | 20,933 | | | $ | 19,419 | |
| | ROATCE | ROATCE | | 13.22 | % | | 13.56 | % | | ROATCE | | 17.18 | % | | 13.41 | % | | 15.25 | % | | 13.53 | % |
| | Average tangible common equity | Average tangible common equity | | $ | 192,725 | | | $ | 188,808 | | | Average tangible common equity | | $ | 178,215 | | | $ | 193,662 | | | $ | 183,017 | | | $ | 191,411 | |
COMPARISONSUMMARY OF OPERATING RESULTS OF OPERATIONS
A comparison of the results of operations for the quarterthree and nine months ended March 31,September 30, 2022 and March 31,September 30, 2021 is presented below.
| | | (Unaudited) | | | (Unaudited) | | (Unaudited) |
| | Three Months Ended March 31, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (dollars in thousands, except per share amounts) | (dollars in thousands, except per share amounts) | | 2022 | | 2021 | | (dollars in thousands, except per share amounts) | | 2022 | | 2021 | | 2022 | | 2021 |
| OPERATING DATA | OPERATING DATA | | | | | | OPERATING DATA | | | | | | | | |
| Interest and dividend income | Interest and dividend income | | $ | 17,336 | | | $ | 17,678 | | | Interest and dividend income | | $ | 21,345 | | | $ | 17,659 | | | $ | 57,455 | | | $ | 52,781 | |
| Interest expenses | Interest expenses | | 867 | | | 1,169 | | | Interest expenses | | 2,288 | | | 1,050 | | | 4,361 | | | 3,228 | |
| Net interest income ("NII") | Net interest income ("NII") | | 16,469 | | | 16,509 | | | Net interest income ("NII") | | 19,057 | | | 16,609 | | | 53,094 | | | 49,553 | |
| Provision for credit losses | Provision for credit losses | | 450 | | | 295 | | | Provision for credit losses | | 694 | | | — | | | 1,569 | | | 586 | |
| Provision (recovery) for unfunded commitments | | (31) | | | — | | | |
| Provision for unfunded commitments | | Provision for unfunded commitments | | 6 | | | — | | | 1 | | | — | |
| NII after provision for credit losses and unfunded commitments | NII after provision for credit losses and unfunded commitments | | 16,050 | | | 16,214 | | | NII after provision for credit losses and unfunded commitments | | 18,357 | | | 16,609 | | | 51,524 | | | 48,967 | |
| Noninterest income | Noninterest income | | 1,451 | | | 2,360 | | | Noninterest income | | 1,229 | | | 1,400 | | | 4,104 | | | 5,616 | |
| Noninterest expenses | Noninterest expenses | | 9,080 | | | 10,148 | | | Noninterest expenses | | 9,626 | | | 9,447 | | | 28,044 | | | 28,973 | |
| Income before income taxes | Income before income taxes | | 8,421 | | | 8,426 | | | Income before income taxes | | 9,960 | | | 8,562 | | | 27,584 | | | 25,610 | |
| Income taxes | Income taxes | | 2,133 | | | 2,127 | | | Income taxes | | 2,380 | | | 2,158 | | | 6,882 | | | 6,475 | |
| Net income | Net income | | 6,288 | | | 6,299 | | | Net income | | 7,580 | | | 6,404 | | | 20,702 | | | 19,135 | |
| | Income available to common shares | Income available to common shares | | $ | 6,288 | | | $ | 6,299 | | | Income available to common shares | | $ | 7,580 | | | $ | 6,404 | | | $ | 20,702 | | | $ | 19,135 | |
| | | (Unaudited) | | | (Unaudited) | | (Unaudited) |
| | Three Months Ended March 31, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | | 2022 | | 2021 | | 2022 | | 2021 |
| KEY OPERATING RATIOS | KEY OPERATING RATIOS | | | | | | KEY OPERATING RATIOS | | | | | | | | |
| Return on average assets ("ROAA") | Return on average assets ("ROAA") | | 1.08 | % | | 1.22 | % | | Return on average assets ("ROAA") | | 1.31 | % | | 1.17 | % | | 1.19 | % | | 1.20 | % |
| Return on average common equity ("ROACE") | Return on average common equity ("ROACE") | | 12.30 | | | 12.53 | | | Return on average common equity ("ROACE") | | 15.97 | | | 12.45 | | | 14.17 | | | 12.53 | |
| Return on Average Tangible Common Equity ("ROATCE") | Return on Average Tangible Common Equity ("ROATCE") | | 13.22 | | | 13.56 | | | Return on Average Tangible Common Equity ("ROATCE") | | 17.18 | | | 13.41 | | | 15.25 | | | 13.53 | |
| Average total equity to average total assets | Average total equity to average total assets | | 8.79 | | | 9.71 | | | Average total equity to average total assets | | 8.17 | | | 9.40 | | | 8.42 | | | 9.58 | |
| Interest rate spread | Interest rate spread | | 3.05 | | | 3.43 | | | Interest rate spread | | 3.26 | | | 3.22 | | | 3.15 | | | 3.31 | |
| Net interest margin | Net interest margin | | 3.12 | | | 3.50 | | | Net interest margin | | 3.47 | | | 3.28 | | | 3.28 | | | 3.38 | |
Efficiency ratio (1) | Efficiency ratio (1) | | 50.67 | | | 53.78 | | | Efficiency ratio(1) | | 47.45 | | | 52.46 | | | 49.03 | | | 52.52 | |
| Non-interest income to average assets | | Non-interest income to average assets | | 0.21 | | | 0.26 | | | 0.24 | | | 0.35 | |
| Non-interest expense to average assets | Non-interest expense to average assets | | 1.56 | | | 1.96 | | | Non-interest expense to average assets | | 1.66 | | | 1.73 | | | 1.62 | | | 1.82 | |
Net operating expense to average assets (2) | Net operating expense to average assets (2) | | 1.31 | | | 1.50 | | | Net operating expense to average assets(2) | | 1.45 | | | 1.47 | | | 1.38 | | | 1.47 | |
| | COMMON SHARE DATA | | COMMON SHARE DATA | |
| Basic net income per common share | | Basic net income per common share | | $ | 1.34 | | | $ | 1.12 | | | $ | 3.66 | | | $ | 3.29 | |
| Diluted net income per common share | | Diluted net income per common share | | $ | 1.34 | | | $ | 1.12 | | | $ | 3.65 | | | $ | 3.29 | |
| Cash dividends paid per common share | | Cash dividends paid per common share | | $ | 0.175 | | | $ | 0.150 | | | $ | 0.525 | | | $ | 0.425 | |
| Common dividend payout ratio | | Common dividend payout ratio | | 13.06 | % | | 13.37 | % | | 14.35 | % | | 12.91 | % |
(1) Efficiency ratio is noninterest expense divided by the sum of net interest income and noninterest income.
(2) Net operating expense is the sum of non-interest expense offset by non-interest income.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
Summary of Financial Results
The Company reported net income for the three months ended March 31,September 30, 2022 of $6.3$7.6 million or diluted earnings per share of $1.10$1.34 compared to net income of $6.3$6.4 million or $1.07$1.12 per diluted earnings per share for the three months ended March 31,September 30, 2021. The Company’s ROAA and ROACE were 1.08%1.31% and 12.30%15.97% for the three months ended March 31,September 30, 2022 compared to 1.22%1.17% and 12.53%12.45% in March 31,September 30, 2021.
Net income in the firstthird quarter of 2022 remained relatively flat asincreased 18.4% compared to the same quarter in 2021. In the quarter ended March 31, 2021, we recorded a $1.3 million charge relatedprimarily due to an isolated wire transfer fraud incident, there was no comparable loss during the three months ended March 31, 2022. The decrease in other expenses wasincreased net interest income partially offset by decreasedlower noninterest income, increased provision for credit losses and decreased net interest income.
| | | Three Months Ended March 31, | | | Three Months Ended September 30, | |
| (dollars in thousands) | (dollars in thousands) | | 2022 | | 2021 | | $ Change | | % Change | (dollars in thousands) | | 2022 | | 2021 | | $ Change | | % Change |
| | Interest and dividend income | Interest and dividend income | | $ | 17,336 | | | $ | 17,678 | | | $ | (342) | | | (1.9) | % | Interest and dividend income | | $ | 21,345 | | | $ | 17,659 | | | $ | 3,686 | | | 20.9 | % |
| Interest expense | Interest expense | | 867 | | | 1,169 | | | (302) | | | (25.8) | % | Interest expense | | 2,288 | | | 1,050 | | | 1,238 | | | 117.9 | % |
| Net interest income | Net interest income | | 16,469 | | | 16,509 | | | (40) | | | (0.2) | % | Net interest income | | 19,057 | | | 16,609 | | | 2,448 | | | 14.7 | % |
| Provision for credit losses | Provision for credit losses | | 450 | | | 295 | | | 155 | | | 52.5 | % | Provision for credit losses | | 694 | | | — | | | 694 | | | 0.0 | % |
| Provision (recovery) for unfunded commitments | | (31) | | | — | | | (31) | | | — | % | |
| Provision for unfunded commitments | | Provision for unfunded commitments | | 6 | | | — | | | 6 | | | 0.0 | % |
| Noninterest income | Noninterest income | | 1,451 | | | 2,360 | | | (909) | | | (38.5) | % | Noninterest income | | 1,229 | | | 1,400 | | | (171) | | | (12.2) | % |
| Noninterest expense | Noninterest expense | | 9,080 | | | 10,148 | | | (1,068) | | | (10.5) | % | Noninterest expense | | 9,626 | | | 9,447 | | | 179 | | | 1.9 | % |
| Income before income taxes | Income before income taxes | | 8,421 | | | 8,426 | | | (5) | | | (0.1) | % | Income before income taxes | | 9,960 | | | 8,562 | | | 1,398 | | | 16.3 | % |
| Income tax (income) expense | | 2,133 | | | 2,127 | | | 6 | | | 0.3 | % | |
| Income tax expense | | Income tax expense | | 2,380 | | | 2,158 | | | 222 | | | 10.3 | % |
| Net income | Net income | | $ | 6,288 | | | $ | 6,299 | | | $ | (11) | | | (0.2) | % | Net income | | $ | 7,580 | | | $ | 6,404 | | | $ | 1,176 | | | 18.4 | % |
Net Interest Income
Net interest income is the difference between income earned on assets and interest paid on the deposits and borrowings used to fund them. Net interest income is affected by the difference between the yields earned on the Company’s interest-earning assets and the rates paid on interest-bearing liabilities, as well as the relative amounts of such assets and liabilities. Net interest income, divided by average interest-earning assets, represents the Company’s net interest margin. The following table shows the components of net interest income and the dollar and percentage changes for the periods presented.
| | | Three Months Ended March 31, | | | Three Months Ended September 30, | |
| (dollars in thousands) | (dollars in thousands) | | 2022 | | 2021 | | $ Change | | % Change | (dollars in thousands) | | 2022 | | 2021 | | $ Change | | % Change |
| Interest and Dividend Income | Interest and Dividend Income | | | | | | | | | Interest and Dividend Income | | | | | | | | |
| Loans, including fees | Loans, including fees | | $ | 15,610 | | | $ | 16,592 | | | $ | (982) | | | (5.9) | % | Loans, including fees | | $ | 18,735 | | | $ | 16,342 | | | $ | 2,393 | | | 14.6 | % |
| Taxable interest and dividends on investment securities | Taxable interest and dividends on investment securities | | 1,666 | | | 1,064 | | | 602 | | | 56.6 | % | Taxable interest and dividends on investment securities | | 2,454 | | | 1,296 | | | 1,158 | | | 89.4 | % |
| Interest on deposits with banks | Interest on deposits with banks | | 60 | | | 22 | | | 38 | | | 172.7 | % | Interest on deposits with banks | | 156 | | | 21 | | | 135 | | | 642.9 | % |
| Total Interest and Dividend Income | Total Interest and Dividend Income | | 17,336 | | | 17,678 | | | (342) | | | (1.9) | % | Total Interest and Dividend Income | | 21,345 | | | 17,659 | | | 3,686 | | | 20.9 | % |
| | Interest Expenses | Interest Expenses | | Interest Expenses | |
| Deposits | Deposits | | 513 | | | 802 | | | (289) | | | (36.0) | % | Deposits | | 1,850 | | | 594 | | | 1,256 | | | 211.4 | % |
| | Short-term borrowings | | Short-term borrowings | | 52 | | | — | | | 52 | | | — | % |
| Long-term debt | Long-term debt | | 354 | | | 367 | | | (13) | | | (3.5) | % | Long-term debt | | 386 | | | 456 | | | (70) | | | (15.4) | % |
| Total Interest Expenses | Total Interest Expenses | | 867 | | | 1,169 | | | (302) | | | (25.8) | % | Total Interest Expenses | | 2,288 | | | 1,050 | | | 1,238 | | | 117.9 | % |
| | Net Interest Income (NII) | Net Interest Income (NII) | | $ | 16,469 | | | $ | 16,509 | | | $ | (40) | | | (0.2) | % | Net Interest Income (NII) | | $ | 19,057 | | | $ | 16,609 | | | $ | 2,448 | | | 14.7 | % |
Average Balances and Yields
The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
| | | Three Months Ended March 31, | | Three Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) | (dollars in thousands) | | Average Balance | | Interest | | Average Yield/Cost | | Average Balance | | Interest | | Average Yield/Cost | (dollars in thousands) | | Average Balance | | Interest | | Average Yield/Cost | | Average Balance | | Interest | | Average Yield/Cost |
| Assets | Assets | | | | | | | | | | | | | Assets | | | | | | | | | | | | |
| Commercial real estate | Commercial real estate | | $ | 1,112,108 | | | $ | 10,737 | | | 3.86 | % | | $ | 1,059,803 | | | $ | 10,696 | | | 4.04 | % | Commercial real estate | | $ | 1,205,675 | | | $ | 13,117 | | | 4.35 | % | | $ | 1,094,089 | | | $ | 10,977 | | | 4.01 | % |
| Residential first mortgages | Residential first mortgages | | 86,805 | | | 713 | | | 3.29 | % | | 124,984 | | | 914 | | | 2.93 | % | Residential first mortgages | | 82,336 | | | 715 | | | 3.47 | % | | 100,195 | | | 742 | | | 2.96 | % |
| Residential rentals | Residential rentals | | 197,312 | | | 1,831 | | | 3.71 | % | | 139,220 | | | 1,445 | | | 4.15 | % | Residential rentals | | 223,532 | | | 2,286 | | | 4.09 | % | | 154,481 | | | 1,565 | | | 4.05 | % |
| Construction and land development | Construction and land development | | 33,669 | | | 407 | | | 4.84 | % | | 36,091 | | | 402 | | | 4.46 | % | Construction and land development | | 27,770 | | | 386 | | | 5.56 | % | | 34,810 | | | 399 | | | 4.58 | % |
| Home equity and second mortgages | Home equity and second mortgages | | 25,946 | | | 245 | | | 3.78 | % | | 29,272 | | | 248 | | | 3.39 | % | Home equity and second mortgages | | 25,612 | | | 352 | | | 5.50 | % | | 27,751 | | | 246 | | | 3.55 | % |
| Commercial loans | Commercial loans | | 46,668 | | | 550 | | | 4.71 | % | | 44,740 | | | 551 | | | 4.93 | % | Commercial loans | | 52,280 | | | 865 | | | 6.62 | % | | 44,881 | | | 547 | | | 4.88 | % |
| Commercial equipment loans | Commercial equipment loans | | 61,715 | | | 642 | | | 4.16 | % | | 60,544 | | | 519 | | | 3.43 | % | Commercial equipment loans | | 76,392 | | | 781 | | | 4.09 | % | | 59,964 | | | 614 | | | 4.10 | % |
| U.S. SBA PPP loans | U.S. SBA PPP loans | | 20,444 | | | 452 | | | 8.84 | % | | 116,003 | | | 1,802 | | | 6.21 | % | U.S. SBA PPP loans | | 2,595 | | | 160 | | | 24.66 | % | | 71,751 | | | 1,236 | | | 6.89 | % |
| Consumer loans | Consumer loans | | 3,213 | | | 33 | | | 4.11 | % | | 1,320 | | | 15 | | | 4.55 | % | Consumer loans | | 5,082 | | | 73 | | | 5.75 | % | | 1,742 | | | 16 | | | 3.67 | % |
| Allowance for loan losses | | (21,043) | | | — | | | — | | | (19,614) | | | — | | | 0.00 | % | |
| Allowance for credit losses | | Allowance for credit losses | | (21,667) | | | — | | | — | % | | (18,852) | | | — | | | — | % |
Loan portfolio (1) | Loan portfolio (1) | | 1,566,837 | | | 15,610 | | | 3.99 | % | | 1,592,363 | | | 16,592 | | | 4.17 | % | Loan portfolio (1) | | 1,679,607 | | | 18,735 | | | 4.46 | % | | 1,570,812 | | | 16,342 | | | 4.16 | % |
| Taxable investment securities | Taxable investment securities | | 484,157 | | | 1,572 | | | 1.30 | % | | 229,810 | | | 951 | | | 1.66 | % | Taxable investment securities | | 464,560 | | | 2,338 | | | 2.01 | % | | 370,498 | | | 1,212 | | | 1.31 | % |
| Nontaxable investment securities | Nontaxable investment securities | | 17,513 | | | 94 | | | 2.15 | % | | 20,841 | | | 114 | | | 2.19 | % | Nontaxable investment securities | | 21,225 | | | 116 | | | 2.19 | % | | 16,204 | | | 84 | | | 2.07 | % |
| Interest-bearing deposits in other banks | Interest-bearing deposits in other banks | | 42,608 | | | 60 | | | 0.56 | % | | 25,064 | | | 14 | | | 0.22 | % | Interest-bearing deposits in other banks | | 18,930 | | | 85 | | | 1.80 | % | | 36,516 | | | 16 | | | 0.18 | % |
| Federal funds sold | Federal funds sold | | — | | | — | | | — | % | | 18,721 | | | 7 | | | 0.15 | % | Federal funds sold | | 11,163 | | | 71 | | | 2.54 | % | | 30,266 | | | 5 | | | 0.07 | % |
| Interest-Earning Assets ("IEAs") | Interest-Earning Assets ("IEAs") | | 2,111,115 | | | 17,336 | | | 3.28 | % | | 1,886,799 | | | 17,678 | | | 3.75 | % | Interest-Earning Assets ("IEAs") | | 2,195,485 | | | 21,345 | | | 3.89 | % | | 2,024,296 | | | 17,659 | | | 3.49 | % |
| Cash and cash equivalents | Cash and cash equivalents | | 116,560 | | | | | 82,669 | | | | | Cash and cash equivalents | | 18,975 | | | | | 66,292 | | | | |
| Goodwill | Goodwill | | 10,835 | | | 10,835 | | | Goodwill | | 10,835 | | | 10,835 | | |
| Core deposit intangible | Core deposit intangible | | 994 | | | 1,481 | | | Core deposit intangible | | 788 | | | 1,226 | | |
| Other assets | Other assets | | 86,488 | | | 88,791 | | | Other assets | | 96,232 | | | 85,340 | | |
| Total Assets | Total Assets | | $ | 2,325,992 | | | $ | 2,070,575 | | | Total Assets | | $ | 2,322,315 | | | $ | 2,187,989 | | |
| | Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | | Liabilities and Stockholders’ Equity | |
| Noninterest-bearing demand deposits | Noninterest-bearing demand deposits | | $ | 609,945 | | | $ | — | | | — | % | | $ | 381,059 | | | $ | — | | | — | % | Noninterest-bearing demand deposits | | $ | 644,606 | | | $ | — | | | — | % | | $ | 434,316 | | | $ | — | | | — | % |
| Interest-bearing demand deposits | Interest-bearing demand deposits | | Interest-bearing demand deposits | |
| Savings | Savings | | 121,236 | | | 15 | | | 0.05 | % | | 101,782 | | | 13 | | | 0.05 | % | Savings | | 121,450 | | | 15 | | | 0.05 | % | | 110,873 | | | 14 | | | 0.05 | % |
| Demand deposits | Demand deposits | | 625,241 | | | 103 | | | 0.07 | % | | 602,836 | | | 97 | | | 0.06 | % | Demand deposits | | 620,109 | | | 1,499 | | | 0.97 | % | | 659,628 | | | 75 | | | 0.05 | % |
| Money market deposits | Money market deposits | | 378,781 | | | 100 | | | 0.11 | % | | 349,718 | | | 98 | | | 0.11 | % | Money market deposits | | 378,251 | | | 99 | | | 0.10 | % | | 358,017 | | | 100 | | | 0.11 | % |
| Certificates of deposit | Certificates of deposit | | 322,346 | | | 295 | | | 0.37 | % | | 351,365 | | | 594 | | | 0.68 | % | Certificates of deposit | | 304,361 | | | 237 | | | 0.31 | % | | 341,672 | | | 405 | | | 0.47 | % |
| Total interest-bearing deposits | Total interest-bearing deposits | | 1,447,604 | | | 513 | | | 0.14 | % | | 1,405,701 | | | 802 | | | 0.23 | % | Total interest-bearing deposits | | 1,424,171 | | | 1,850 | | | 0.52 | % | | 1,470,190 | | | 594 | | | 0.16 | % |
| Total Deposits | Total Deposits | | 2,057,549 | | | 513 | | | 0.10 | % | | 1,786,760 | | | 802 | | | 0.18 | % | Total Deposits | | 2,068,777 | | | 1,850 | | | 0.36 | % | | 1,904,506 | | | 594 | | | 0.12 | % |
| Long-term debt | Long-term debt | | 12,219 | | | 25 | | | 0.82 | % | | 27,291 | | | 41 | | | 0.60 | % | Long-term debt | | — | | | — | | | — | % | | 25,625 | | | 131 | | | 2.04 | % |
| | Short-term borrowings | | Short-term borrowings | | 8,310 | | | 52 | | | 2.50 | % | | — | | | — | | | — | % |
| | Subordinated Notes | Subordinated Notes | | 19,515 | | | 251 | | | 5.14 | % | | 19,490 | | | 251 | | | 5.15 | % | Subordinated Notes | | 19,543 | | | 252 | | | 5.16 | % | | 19,487 | | | 251 | | | 5.15 | % |
| Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs") | Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs") | | 12,000 | | | 78 | | | 2.60 | % | | 12,000 | | | 75 | | | 2.50 | % | Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs") | | 12,000 | | | 134 | | | 4.47 | % | | 12,000 | | | 74 | | | 2.47 | % |
| Total Debt | Total Debt | | 43,734 | | | 354 | | | 3.24 | % | | 58,781 | | | 367 | | | 2.50 | % | Total Debt | | 39,853 | | | 438 | | | 4.40 | % | | 57,112 | | | 456 | | | 3.19 | % |
| | | Three Months Ended March 31, | | Three Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) | (dollars in thousands) | | Average Balance | | Interest | | Average Yield/Cost | | Average Balance | | Interest | | Average Yield/Cost | (dollars in thousands) | | Average Balance | | Interest | | Average Yield/Cost | | Average Balance | | Interest | | Average Yield/Cost |
| Interest-Bearing Liabilities ("IBLs") | Interest-Bearing Liabilities ("IBLs") | | 1,491,338 | | | 867 | | | 0.23 | % | | 1,464,482 | | | 1,169 | | | 0.32 | % | Interest-Bearing Liabilities ("IBLs") | | 1,464,024 | | | 2,288 | | | 0.63 | % | | 1,527,302 | | | 1,050 | | | 0.27 | % |
| Total Funds | Total Funds | | 2,101,283 | | | 867 | | | 0.17 | % | | 1,845,541 | | | 1,169 | | | 0.25 | % | Total Funds | | 2,108,630 | | | 2,288 | | | 0.43 | % | | 1,961,618 | | | 1,050 | | | 0.21 | % |
| Other liabilities | Other liabilities | | 20,155 | | | 23,910 | | | Other liabilities | | 23,847 | | | 20,648 | | |
| Stockholders’ equity | Stockholders’ equity | | 204,554 | | | 201,124 | | | Stockholders’ equity | | 189,838 | | | 205,723 | | |
| Total Liabilities and Stockholders’ Equity | Total Liabilities and Stockholders’ Equity | | $ | 2,325,992 | | | $ | 2,070,575 | | | Total Liabilities and Stockholders’ Equity | | $ | 2,322,315 | | | $ | 2,187,989 | | |
| | Net interest income | Net interest income | | $ | 16,469 | | | $ | 16,509 | | | Net interest income | | $ | 19,057 | | | $ | 16,609 | | |
| | Interest rate spread | Interest rate spread | | 3.05 | % | | 3.43 | % | Interest rate spread | | 3.26 | % | | 3.22 | % |
| Net yield on interest-earning assets | Net yield on interest-earning assets | | 3.12 | % | | 3.50 | % | Net yield on interest-earning assets | | 3.47 | % | | 3.28 | % |
| Avg. loans to avg. deposits | | 76.15 | % | | 89.12 | % | |
| Avg. transaction deposits to total avg. deposits ** | | 84.33 | % | | 80.34 | % | |
| Average loans to average deposits | | Average loans to average deposits | | 81.19 | % | | 82.48 | % |
| Average transaction deposits to total average deposits ** | | Average transaction deposits to total average deposits ** | | 85.29 | % | | 82.06 | % |
| Ratio of average IEAs to average IBLs | Ratio of average IEAs to average IBLs | | 141.56 | % | | 128.84 | % | Ratio of average IEAs to average IBLs | | 149.96 | % | | 132.54 | % |
__________________________
(1)Average balance includes non-accrual loans. There are no tax equivalent adjustments. There was $50,000$62,000 and $90,000$91,000 of accretion interest during the three months ended March 31,September 30, 2022 and 2021, respectively.
**Transaction deposits exclude time deposits
The following table presents changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate); and (2) changes in rate (changes in rate multiplied by old volume). Changes in rate-volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume.
| | For the Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021 | |
| For the Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021 | | For the Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021 |
| (dollars in thousands) | (dollars in thousands) | | Volume | | Due to Rate | | Total | (dollars in thousands) | | Volume | | Due to Rate | | Total |
| Interest income: | Interest income: | | | | | | | Interest income: | | | | | | |
Loan portfolio (1) | Loan portfolio (1) | | Loan portfolio (1) | |
| Commercial real estate | Commercial real estate | | $ | 505 | | | $ | (464) | | | $ | 41 | | Commercial real estate | | $ | 1,214 | | | $ | 926 | | | $ | 2,140 | |
| Residential first mortgages | Residential first mortgages | | (314) | | | 113 | | | (201) | | Residential first mortgages | | (155) | | | 128 | | | (27) | |
| Residential rentals | Residential rentals | | 539 | | | (153) | | | 386 | | Residential rentals | | 706 | | | 15 | | | 721 | |
| Construction and land development | Construction and land development | | (29) | | | 34 | | | 5 | | Construction and land development | | (98) | | | 85 | | | (13) | |
| Home equity and second mortgages | Home equity and second mortgages | | (31) | | | 28 | | | (3) | | Home equity and second mortgages | | (29) | | | 135 | | | 106 | |
| Commercial loans | Commercial loans | | 23 | | | (24) | | | (1) | | Commercial loans | | 122 | | | 196 | | | 318 | |
| Commercial equipment loans | Commercial equipment loans | | 12 | | | 111 | | | 123 | | Commercial equipment loans | | 168 | | | (1) | | | 167 | |
| SBA PPP loans | SBA PPP loans | | (2,113) | | | 763 | | | (1,350) | | SBA PPP loans | | (4,264) | | | 3,188 | | | (1,076) | |
| Consumer loans | Consumer loans | | 19 | | | (1) | | | 18 | | Consumer loans | | 48 | | | 9 | | | 57 | |
| Taxable investment securities | Taxable investment securities | | 826 | | | (205) | | | 621 | | Taxable investment securities | | 473 | | | 653 | | | 1,126 | |
| Nontaxable investment securities | Nontaxable investment securities | | (18) | | | (2) | | | (20) | | Nontaxable investment securities | | 27 | | | 5 | | | 32 | |
| Interest-bearing deposits in other banks | Interest-bearing deposits in other banks | | 25 | | | 21 | | | 46 | | Interest-bearing deposits in other banks | | (79) | | | 148 | | | 69 | |
| Federal funds sold | Federal funds sold | | — | | | (7) | | | (7) | | Federal funds sold | | (122) | | | 188 | | | 66 | |
| Total interest-earning assets | Total interest-earning assets | | $ | (556) | | | $ | 214 | | | $ | (342) | | Total interest-earning assets | | $ | (1,989) | | | $ | 5,675 | | | $ | 3,686 | |
| | Interest-bearing liabilities: | Interest-bearing liabilities: | | Interest-bearing liabilities: | |
| Savings | Savings | | $ | 2 | | | $ | — | | | $ | 2 | | Savings | | $ | 1 | | | $ | — | | | $ | 1 | |
| Demand deposits | Demand deposits | | 4 | | | 2 | | | 6 | | Demand deposits | | (96) | | | 1,520 | | | 1,424 | |
| Money market deposits | Money market deposits | | 8 | | | (6) | | | 2 | | Money market deposits | | 5 | | | (6) | | | (1) | |
| Certificates of deposit | Certificates of deposit | | (27) | | | (272) | | | (299) | | Certificates of deposit | | (29) | | | (139) | | | (168) | |
| Long-term debt | Long-term debt | | (31) | | | 15 | | | (16) | | Long-term debt | | — | | | (131) | | | (131) | |
| Short-term borrowings | | Short-term borrowings | | 52 | | | — | | | 52 | |
| | Subordinated Notes | | Subordinated Notes | | 1 | | | — | | | 1 | |
| Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs") | Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs") | | — | | | 3 | | | 3 | | Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs") | | — | | | 60 | | | 60 | |
| Total interest-bearing liabilities | Total interest-bearing liabilities | | $ | (43) | | | $ | (259) | | | $ | (302) | | Total interest-bearing liabilities | | $ | (66) | | | $ | 1,304 | | | $ | 1,238 | |
| Net change in net interest income | Net change in net interest income | | $ | (513) | | | $ | 473 | | | $ | (40) | | Net change in net interest income | | $ | (1,923) | | | $ | 4,371 | | | $ | 2,448 | |
(1)Average balance includes non-accrual loans. There are no tax equivalent adjustments. There was $50,000$62,000 and $0.1 million$91,000 of accretion interest during the three months ended March 31,September 30, 2022 and 2021, respectively.
Fluctuations in net interest income can result from the combination of changes in the average balances of asset and liability categories and changes in interest rates. Interest rates earned and paid are affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies and actions of regulatory authorities. In response to the inflation effects on the economy, the Federal Reserve Open Market Committee ("FOMC") has increased the federal funds interest rate by 25300 basis points from a target range of 0.00% to 0.25% in January 2022 to a target range of 0.25%3.00% to 0.50%.3.25% at September 30, 2022. The federal funds interestSeptember 22, 2022, the Federal Reserve Bank commentary indicates that it is probable that the next scheduled meeting will result in additional rate increase did not have a significant impact on ourhikes of at least 75 basis points.
The growth in net interest income for the quarter ended March 31, 2022.
The stabilitycomparable quarters resulted from increases in net interest income resulted primarily from decreases in interest expense from lower funding costs substantially offsetting lower interest income. Interest income decreased due to lowerinterest-earning asset yields and lower U.S. SBA PPP income due to loan payoffsgrowth in loans and investments partially offset by increased interest expense from higher funding rates. Interest income increased as portfolio loan growth coupled with higher yields more than replaced the run-off of U.S. SBA PPP income for the comparable quarters. Loan interest income increased $2.4 million for the comparable periods. Excluding U.S. SBA PPP loan interest portfolio loan interest income increased $3.5 million from larger$15.1 million for the three months ended September 30, 2021 to $18.6 million for the three months ended September 30,
2022. Average investment and interest-earning cash balances increased $62.4 million for the comparable periods and contributed $1.3 million in additional interest income.
Net interest margin of 3.47% for the three months ended September 30, 2022 increased 19 basis points from 3.28% for the three months ended September 30, 2021. Net interest margin expanded from the third quarter of 2021 primarily from the Company’s increased average commercial real estateyield on loans and residential rental loan portfolios and taxable investment securities balance.(not including interest-bearing deposits) increasing to 4.46% and 2.02% in the third quarter of 2022 from 4.16% and 1.34% for the three months ended September 30, 2021, while overall interest earning asset yields increased to 3.89% for the three months ended September 30, 2022 from 3.49% for the three months ended September 30, 2021. Interest income from the Company's participation in the U.S. SBA PPP program was $0.5$0.2 million and $1.8$1.2 million for the three months ended March 31,September 30, 2022 and March 31,September 30, 2021, respectively.
Net interest marginThe Company’s cost of 3.12%funds was 0.43% during the third quarter of 2022, an increase from 0.21% for the three months ended March 31,September 30, 2021. The Bank's interest rate asset sensitivity improved as average non-interest bearing deposit accounts increased to 31.2% of total average deposits for the third quarter of 2022 was 38 basis points lower thancompared to 22.8% for the 3.50%comparable period in 2021. Management is optimistic that improvements in the Bank's funding composition will benefit margins and profitability in an increasing interest-rate environment.
Net interest margins continued to increase in the third quarter of 2022 as FOMC rate increases continued to impact the Bank's asset sensitive balance sheet. Average yields on loans and investments increased to 4.46% and 2.02% for the three months ended March 31, 2021.
The decrease in net interest marginSeptember 30, 2022 from the first quarter of 2021 resulted primarily from the Company’s overall interest earning asset yields decreasing at a faster rate than funding costs. The Company’s cost of funds decreased nine basis points from 0.25%4.13% and 1.52% for the three months ended March 31, 2021 to 0.17%June 30, 2022. Net interest margin increased 22 basis points from 3.25% for the three months ended March 31, 2022. The repricing of time deposits, the increase in non-interest bearing accounts as a percentage of total deposits and lower costs for transaction deposit accounts all contributedJune 30, 2022 to lowering the Bank's cost of funds in 2022 and 2021. Interest earning asset yields decreased 46 basis points from 3.75%3.47% for the three months ended March 31, 2021 to 3.28% for the three months ended March 31,September 30, 2022.
For the three months ended March 31, 2022 and March 31, 2021, net interest margin increased six basis point and 18 basis points as a result of net U.S. SBA PPP loan interest income and accelerated loan fee recognition. Loan yields decreased from 4.17% for the three months ended March 31, 2021 to 3.99% for the three months ended March 31, 2022. Loan yields, excluding U.S. SBA PPP loan interest income, were 3.92% and 4.01% for the three months ended March 31, 2022 and March 31, 2021.
Excluding the acceleration of interest income with U.S. SBA PPP loan forgiveness,Management is optimistic that a stable to increasing net interest margin is possible during the balance of 2022 assuming interest-earning assets continue to reprice faster than interest-bearing liabilities and the Bank maintains its current favorable funding mix. We expect U.S. SBA PPP loan forgiveness to modestly improve margins and net interest income in the second and third quarters of 2022 with the recognition of remaining net deferred fees.
Provision for LoanCredit Losses
The following table shows the dollar and percentage changes for the provision for loancredit losses for the periods presented.
| | | Three Months Ended March 31, | | | | | | Three Months Ended September 30, | | | | |
| (dollars in thousands) | (dollars in thousands) | | 2022 | | 2021 | | $ Change | | % Change | (dollars in thousands) | | 2022 | | 2021 | | $ Change | | % Change |
| | Provision for credit losses | Provision for credit losses | | $ | 450 | | | $ | 295 | | | $ | 155 | | | 52.54 | % | Provision for credit losses | | $ | 694 | | | $ | — | | | $ | 694 | | | — | % |
The provision for loancredit losses is a function of the calculation of the allowance for credit losslosses on the Company's end of period loan portfolios. See further discussion of the provision and the allowance under the caption “Asset Quality” in the Comparison of Financial Condition section of this MD&A.
Noninterest Income
The following table shows the components of noninterest income and the dollar and percentage changes for the periods presented.
| | | Three Months Ended March 31, | | | Three Months Ended September 30, | |
| (dollars in thousands) | (dollars in thousands) | | 2022 | | 2021 | | $ Change | | % Change | (dollars in thousands) | | 2022 | | 2021 | | $ Change | | % Change |
| Noninterest Income | Noninterest Income | | | | | | | | | Noninterest Income | | | | | | | | |
| Loan appraisal, credit, and miscellaneous charges | Loan appraisal, credit, and miscellaneous charges | | $ | 176 | | | $ | 198 | | | $ | (22) | | | (11.1) | % | Loan appraisal, credit, and miscellaneous charges | | $ | 65 | | | $ | 29 | | | $ | 36 | | | 124.1 | % |
| | Net gains on sale of investment securities | | — | | | 586 | | | (586) | | | (100.0) | % | |
| Unrealized (losses) gain on equity securities | | (222) | | | (85) | | | (137) | | | 161 | % | |
| | Unrealized losses on equity securities | | Unrealized losses on equity securities | | (187) | | | (22) | | | (165) | | | 750.0 | % |
| Loss on premises and equipment held for sale | | Loss on premises and equipment held for sale | | — | | | (20) | | | 20 | | | (100.0) | % |
| Income from bank owned life insurance | Income from bank owned life insurance | | 214 | | | 214 | | | — | | | — | % | Income from bank owned life insurance | | 220 | | | 220 | | | — | | | — | % |
| Service charges | Service charges | | 926 | | | 1,187 | | | (261) | | | (22.0) | % | Service charges | | 1,130 | | | 987 | | | 143 | | | 14.5 | % |
| Referral fee income | Referral fee income | | 361 | | | 451 | | | (90) | | | (20.0) | % | Referral fee income | | — | | | 176 | | | (176) | | | (100.0) | % |
| Net (losses) gain on sale of loans originated for sale | | (4) | | | — | | | (4) | | | — | % | |
| Loss on sale of loans | | — | | | (191) | | | 191 | | | (100.0) | % | |
| Net gains on sale of loans originated for sale | | Net gains on sale of loans originated for sale | | 1 | | | 30 | | | (29) | | | (96.7) | % |
| | Total Noninterest Income | Total Noninterest Income | | $ | 1,451 | | | $ | 2,360 | | | $ | (909) | | | (38.5) | % | Total Noninterest Income | | $ | 1,229 | | | $ | 1,400 | | | $ | (171) | | | (12.2) | % |
Noninterest income for the three months ended March 31,September 30, 2022 decreased from$0.2 million compared to the three months ended March 31, 2021. The decreaseSeptember 30, 2021, principally due to no interest rate protection referral fee income for the current quarter. In addition, changes in interest rates resulted in unrealized losses on securities invested in a Community Reinvestment Act mutual fund. These reductions in noninterest income for the comparable periods was primarily due to decreased gains on the sale of investment securities, decreased service charge income and increased unrealized losses on equity securities,quarters were partially offset by a loss on the sale of impaired loansincreases in the first quarter of 2021. During the quarter ended March 31, 2021, the Bank sold classified and non-accrual commercial real estate and residential loans with an aggregate amortized cost, net of charge-offs, of $9.1 million and recognized a $0.2 million loss on the sale.service charges due to increased interchange fees. Noninterest income as a percentage of average assets was 0.25%0.21% and 0.46%, respectively,0.26% for the three months ended March 31,September 30, 2022 and 2021.2021, respectively.
Noninterest Expense
The following tables show the components of noninterest expense and the dollar and percentage changes for the periods presented.
| | | Three Months Ended March 31, | | | Three Months Ended September 30, | |
| (dollars in thousands) | (dollars in thousands) | | 2022 | | 2021 | | $ Change | | % Change | (dollars in thousands) | | 2022 | | 2021 | | $ Change | | % Change |
| Noninterest Expense | Noninterest Expense | | | | | | | | | Noninterest Expense | | | | | | | | |
| Compensation and benefits | Compensation and benefits | | $ | 5,055 | | | $ | 4,788 | | | $ | 267 | | | 5.6 | % | Compensation and benefits | | $ | 5,116 | | | $ | 5,650 | | | $ | (534) | | | (9.5) | % |
| OREO valuation allowance and expenses | OREO valuation allowance and expenses | | 6 | | | 181 | | | (175) | | | (96.7) | % | OREO valuation allowance and expenses | | — | | | 20 | | | (20) | | | (100.0) | % |
| | Sub-total | Sub-total | | 5,061 | | | 4,969 | | | 92 | | | 1.9 | % | Sub-total | | 5,116 | | | 5,670 | | | (554) | | | (9.8) | % |
| Operating Expenses | Operating Expenses | | Operating Expenses | |
| Occupancy expense | Occupancy expense | | 732 | | | 761 | | | (29) | | | (3.8) | % | Occupancy expense | | 826 | | | 731 | | | 95 | | | 13.0 | % |
| Advertising | Advertising | | 64 | | | 79 | | | (15) | | | (19.0) | % | Advertising | | 149 | | | 145 | | | 4 | | | 2.8 | % |
| Data processing expense | Data processing expense | | 1,007 | | | 936 | | | 71 | | | 7.6 | % | Data processing expense | | 1,062 | | | 840 | | | 222 | | | 26.4 | % |
| Professional fees | Professional fees | | 731 | | | 640 | | | 91 | | | 14.2 | % | Professional fees | | 923 | | | 676 | | | 247 | | | 36.5 | % |
| Depreciation of premises and equipment | Depreciation of premises and equipment | | 149 | | | 147 | | | 2 | | | 1.4 | % | Depreciation of premises and equipment | | 177 | | | 137 | | | 40 | | | 29.2 | % |
| | FDIC Insurance | FDIC Insurance | | 179 | | | 252 | | | (73) | | | (29.0) | % | FDIC Insurance | | 160 | | | 120 | | | 40 | | | 33.3 | % |
| Core deposit intangible amortization | Core deposit intangible amortization | | 109 | | | 133 | | | (24) | | | (18.0) | % | Core deposit intangible amortization | | 97 | | | 121 | | | (24) | | | (19.8) | % |
| Fraud losses | Fraud losses | | 40 | | | 1,329 | | | (1,289) | | | (97.0) | % | Fraud losses | | 37 | | | 132 | | | (95) | | | (72.0) | % |
| Other expenses | Other expenses | | 1,008 | | | 902 | | | 106 | | | 11.8 | % | Other expenses | | 1,079 | | | 875 | | | 204 | | | 23.3 | % |
| Total Operating Expenses | Total Operating Expenses | | $ | 4,019 | | | $ | 5,179 | | | $ | (1,160) | | | (22.4) | % | Total Operating Expenses | | $ | 4,510 | | | $ | 3,777 | | | $ | 733 | | | 19.4 | % |
| Total Noninterest Expense | Total Noninterest Expense | | $ | 9,080 | | | $ | 10,148 | | | $ | (1,068) | | | (10.5) | % | Total Noninterest Expense | | $ | 9,626 | | | $ | 9,447 | | | $ | 179 | | | 1.9 | % |
The 10.5% decrease in noninterestflat overall expense run rates for the comparable periods waswere primarily due to decreasesincreases of $0.2 million in fraud lossesdata processing expenses and OREO$0.2 million in professional fees as well as other operating expenses of $0.2 million, partially offset by increasesa decrease of $0.5 million in compensation and benefits,benefits. Professional fees, occupancy and professional fees. Duringdata processing have increased substantially compared to the firstsame quarter in the prior year due in large part to increased cost of 2021, the Bank incurred a $1.3 million charge related to an isolated wire transfer fraud incident. Our investigation determined that no information systems of the Bank were compromised,labor and no employee fraud was involved. No additional expense is expected to be incurred relating to this incident and the Company submitted an insurance claim. Data processing costs are comparable to average 2020 quarterly expense and include the Bank's continued investment in technology. The Company's investments in technology have improved efficiency as the asset size of the Bank has increased. Decreased OREO expenses reflect management's actions in 2021 to reduce non-performing assets. Compensation and benefits increased 5.6% or $0.3 million to $4.8 million primarilymaterials due to the deferral of $0.3 million of costs for U.S. SBA PPP loans originated during the first quarter of 2021, lower health care claims and incentive accruals.inflation.
Noninterest expense in the first quarter of 2022 at $9.1 million, was lower than anticipated due primarily to lower compensation and benefits and no credit related costs for OREO. Lower than anticipated health care costs and a lower average full-time equivalent headcount than anticipated and lower benefit and incentive accruals all contributed to a lower compensation and benefits run rate in the third quarter of 2022. In addition, compensation and benefits expense run rate.has benefited from the Company's increased use of technology. In the second quarter, the Bank increased base compensation by 4% and its minimum starting wage to $20.00 per hour for non-executive employees to address local wage pressures caused by inflation and to attract and retain our employees. Management's projected quarterly normalized expense run rate for the secondfourth quarter of 2022 is estimated between $9.4 million and $9.6 million and includes the base compensation increases given to select employee groups in January 2022 to address local wage competitive pressure.$9.8 million.
The Company’s efficiency ratio was 50.67%47.45% for the three months ended March 31,September 30, 2022 compared to 53.78%52.46% for the three months ended March 31,September 30, 2021. The Company’s net operating expense ratio was 1.31%1.45% for the three months ended March 31,September 30, 2022 compared to 1.50%1.47% for the three months ended March 31,September 30, 2021. The efficiency and net operating expense ratios have improved (decreased) as the Company has been able to improve asset quality and generate more operating revenues while controlling expense growth.
Income Tax Expense
The effective tax rate for the three months ended March 31,September 30, 2022 was 25.33%23.90% compared to an effective tax rate of 25.24%25.20% for the three months ended March 31,September 30, 2021.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
Summary of Financial Results
The Company reported net income for the nine months ended September 30, 2022 of $20.7 million or diluted earnings per share of $3.65 compared to net income of $19.1 million or $3.29 per diluted share for the nine months ended September 30, 2021. The Company’s ROAA and ROACE were 1.19% and 14.17% for the nine months ended September 30, 2022 compared to 1.20% and 12.53% for the nine months ended September 30, 2021.
The increase to net income in the first nine months of 2022 compared to the same period in 2021 was due to increased net interest income and decreased noninterest expense partially offset by an increase in provision for credit losses and a decrease in non-interest income.
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| | Nine Months Ended September 30, | | | | |
| (dollars in thousands) | | 2022 | | 2021 | | $ Change | | % Change |
| Interest and dividend income | | $ | 57,455 | | | $ | 52,781 | | | $ | 4,674 | | | 8.9 | % |
| Interest expense | | 4,361 | | | 3,228 | | | 1,133 | | | 35.1 | % |
| Net interest income | | 53,094 | | | 49,553 | | | 3,541 | | | 7.1 | % |
| Provision for credit losses | | 1,569 | | | 586 | | | 983 | | | 167.7 | % |
| Provision for unfunded commitments | | 1 | | | — | | | 1 | | | — | % |
| Noninterest income | | 4,104 | | | 5,616 | | | (1,512) | | | (26.9) | % |
| Noninterest expense | | 28,044 | | | 28,973 | | | (929) | | | (3.2) | % |
| Income before income taxes | | 27,584 | | | 25,610 | | | 1,974 | | | 7.7 | % |
| Income tax expense | | 6,882 | | | 6,475 | | | 407 | | | 6.3 | % |
| Net income | | $ | 20,702 | | | $ | 19,135 | | | $ | 1,567 | | | 8.2 | % |
Net Interest Income
The following table shows the components of net interest income and the dollar and percentage changes for the periods presented.
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| | Nine Months Ended September 30, | | | | |
| (dollars in thousands) | | 2022 | | 2021 | | $ Change | | % Change |
| Interest and Dividend Income | | | | | | | | |
| Loans, including fees | | $ | 51,117 | | | $ | 49,254 | | | $ | 1,863 | | | 3.8 | % |
| Taxable interest and dividends on investment securities | | 6,044 | | | 3,461 | | | 2,583 | | | 74.6 | % |
| Interest on deposits with banks | | 294 | | | 66 | | | 228 | | | 345.5 | % |
| Total Interest and Dividend Income | | 57,455 | | | 52,781 | | | 4,674 | | | 8.9 | % |
| | | | | | | | |
| Interest Expenses | | | | | | | | |
| Deposits | | 3,182 | | | 2,036 | | | 1,146 | | | 56.3 | % |
| Short-term borrowings | | 68 | | | — | | | 68 | | | — | % |
| Long-term debt | | 1,111 | | | 1,192 | | | (81) | | | (6.8) | % |
| Total Interest Expenses | | 4,361 | | | 3,228 | | | 1,133 | | | 35.1 | % |
| | | | | | | | |
| Net Interest Income (NII) | | $ | 53,094 | | | $ | 49,553 | | | $ | 3,541 | | | 7.1 | % |
Average Balances and Yields
The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. The following table presents information on the average balances of the Company’s interest-earning assets and interest-bearing liabilities and interest earned or paid for the nine months ended September 30, 2022 and 2021, respectively.
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| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
| (dollars in thousands) | | Average Balance | | Interest | | Average Yield/Cost | | Average Balance | | Interest | | Average Yield/Cost |
| Assets | | | | | | | | | | | | |
| Commercial real estate | | $ | 1,166,898 | | | $ | 35,697 | | | 4.08 | % | | $ | 1,081,350 | | | $ | 32,625 | | | 4.02 | % |
| Residential first mortgages | | 84,707 | | | 2,157 | | | 3.40 | % | | 111,401 | | | 2,494 | | | 2.99 | % |
| Residential rentals | | 205,368 | | | 6,116 | | | 3.97 | % | | 144,316 | | | 4,421 | | | 4.08 | % |
| Construction and land development | | 30,559 | | | 1,154 | | | 5.04 | % | | 36,401 | | | 1,226 | | | 4.49 | % |
| Home equity and second mortgages | | 25,885 | | | 871 | | | 4.49 | % | | 28,689 | | | 745 | | | 3.46 | % |
| Commercial loans | | 47,252 | | | 1,932 | | | 5.45 | % | | 44,241 | | | 1,614 | | | 4.86 | % |
| Commercial equipment loans | | 68,872 | | | 2,122 | | | 4.11 | % | | 60,506 | | | 1,725 | | | 3.80 | % |
| U.S. SBA PPP loans | | 11,563 | | | 927 | | | 10.69 | % | | 97,231 | | | 4,356 | | | 5.97 | % |
| Consumer loans | | 4,119 | | | 141 | | | 4.56 | % | | 1,497 | | | 48 | | | 4.28 | % |
| Allowance for credit losses | | (21,364) | | | — | | | — | % | | (18,908) | | | — | | | — | % |
Loan portfolio (1) | | 1,623,859 | | | 51,117 | | | 4.20 | % | | 1,586,724 | | | 49,254 | | | 4.14 | % |
| Taxable investment securities | | 477,527 | | | 5,717 | | | 1.60 | % | | 292,625 | | | 3,182 | | | 1.45 | % |
| Non-taxable investment securities | | 20,028 | | | 327 | | | 2.18 | % | | 17,517 | | | 279 | | | 2.12 | % |
| Interest bearing deposits in other banks | | 28,412 | | | 209 | | | 0.98 | % | | 30,183 | | | 44 | | | 0.19 | % |
| Federal funds sold | | 5,821 | | | 85 | | | 1.95 | % | | 27,964 | | | 22 | | | 0.10 | % |
| Interest-Earning Assets ("IEAs") | | 2,155,647 | | | 57,455 | | | 3.55 | % | | 1,955,013 | | | 52,781 | | | 3.60 | % |
| Cash and cash equivalents | | 54,369 | | | | | | | 71,559 | | | | | |
| Goodwill | | 10,835 | | | | | | | 10,835 | | | | | |
| Core deposit intangible | | 889 | | | | | | | 1,351 | | | | | |
| Other assets | | 92,147 | | | | | | | 86,838 | | | | | |
| Total Assets | | $ | 2,313,887 | | | | | | | $ | 2,125,596 | | | | | |
| | | | | | | | | | | | |
| Liabilities and Stockholders’ Equity | | | | | | | | | | | | |
| Noninterest-bearing demand deposits | | $ | 635,013 | | | $ | — | | | — | % | | $ | 407,375 | | | $ | — | | | — | % |
| Interest-bearing liabilities: | | | | | | | | | | | | |
| Savings | | 121,111 | | | 46 | | | 0.05 | % | | 106,190 | | | 40 | | | 0.05 | % |
| Demand deposits | | 605,590 | | | 2,033 | | | 0.45 | % | | 628,543 | | | 258 | | | 0.05 | % |
| Money market deposits | | 380,873 | | | 302 | | | 0.11 | % | | 354,161 | | | 297 | | | 0.11 | % |
| Certificates of deposit | | 314,813 | | | 801 | | | 0.34 | % | | 345,821 | | | 1,441 | | | 0.56 | % |
| Total Interest-bearing deposits | | 1,422,387 | | | 3,182 | | | 0.30 | % | | 1,434,715 | | | 2,036 | | | 0.19 | % |
| Total Deposits | | 2,057,400 | | | 3,182 | | | 0.21 | % | | 1,842,090 | | | 2,036 | | | 0.15 | % |
| Long-term debt | | 5,145 | | | 47 | | | 1.22 | % | | 26,723 | | | 213 | | | 1.06 | % |
| Short-term borrowings | | 4,731 | | | 68 | | | 1.92 | % | | — | | | — | | | — | % |
| | | | | | | | | | | | |
| Subordinated Notes | | 19,529 | | | 755 | | | 5.15 | % | | 19,483 | | | 754 | | | 5.16 | % |
| Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs") | | 12,000 | | | 309 | | | 3.43 | % | | 12,000 | | | 225 | | | 2.50 | % |
| Total debt | | 41,405 | | | 1,179 | | | 3.80 | % | | 58,206 | | | 1,192 | | | 2.73 | % |
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| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
| (dollars in thousands) | | Average Balance | | Interest | | Average Yield/Cost | | Average Balance | | Interest | | Average Yield/Cost |
| Total Interest-Bearing Liabilities ("IBLs") | | 1,463,792 | | | 4,361 | | | 0.40 | % | | 1,492,921 | | | 3,228 | | | 0.29 | % |
| Total funds | | 2,098,805 | | | 4,361 | | | 0.28 | % | | 1,900,296 | | | 3,228 | | | 0.23 | % |
| Other liabilities | | 20,341 | | | | | | | 21,703 | | | | | |
| Stockholders’ equity | | 194,741 | | | | | | | 203,597 | | | | | |
| Total Liabilities and Stockholders’ Equity | | $ | 2,313,887 | | | | | | | $ | 2,125,596 | | | | | |
| | | | | | | | | | | | |
| Net interest income | | | | $ | 53,094 | | | | | | | $ | 49,553 | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Interest rate spread | | | | | | 3.15 | % | | | | | | 3.31 | % |
| Net yield on interest-earning assets | | | | | | 3.28 | % | | | | | | 3.38 | % |
| Average loans to avg. deposits | | | | | | 78.93 | % | | | | | | 86.14 | % |
| Average transaction deposits to total average deposits ** | | | | | | 84.70 | % | | | | | | 81.23 | % |
| Ratio of average IEAs to average IBLs | | | | | | 147.26 | % | | | | | | 130.95 | % |
| | | | | | | | | | | | |
| Cost of funds | | | | | | 0.28 | % | | | | | | 0.23 | % |
| Cost of deposits | | | | | | 0.21 | % | | | | | | 0.15 | % |
| Cost of debt | | | | | | 3.80 | % | | | | | | 2.73 | % |
__________________________
(1)Average balance includes non-accrual loans. There are no tax equivalent adjustments. There was $0.2 million and $0.3 million of accretion interest during the nine months ended September 30, 2022 and 2021, respectively.
**Transaction deposits excluded time deposits
The following table presents changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate); and (2) changes in rate (changes in rate multiplied by old volume). Changes in rate-volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume.
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| For the Nine Months Ended September 30, 2022 compared to the Nine Months Ended September 30, 2021 |
| (dollars in thousands) | | Volume | | Due to Rate | | Total |
| Interest income: | | | | | | |
Loan portfolio (1) | | | | | | |
| Commercial real estate | | $ | 2,617 | | | $ | 455 | | | $ | 3,072 | |
| Residential first mortgages | | (680) | | | 343 | | | (337) | |
| Residential rentals | | 1,818 | | | (123) | | | 1,695 | |
| Construction and land development | | (221) | | | 149 | | | (72) | |
| Home equity and second mortgages | | (94) | | | 220 | | | 126 | |
| Commercial loans | | 123 | | | 195 | | | 318 | |
| Commercial equipment loans | | 258 | | | 139 | | | 397 | |
| SBA PPP loans | | (6,868) | | | 3,439 | | | (3,429) | |
| Consumer loans | | 90 | | | 3 | | | 93 | |
| Taxable investment securities | | 2,214 | | | 321 | | | 2,535 | |
| Nontaxable investment securities | | 41 | | | 7 | | | 48 | |
| Interest-bearing deposits in other banks | | (13) | | | 178 | | | 165 | |
| Federal funds sold | | (323) | | | 386 | | | 63 | |
| Total interest-earning assets | | $ | (1,038) | | | $ | 5,712 | | | $ | 4,674 | |
| | | | | | |
| Interest-bearing liabilities: | | | | | | |
| Savings | | $ | 6 | | | $ | — | | | $ | 6 | |
| Demand deposits | | (77) | | | 1,852 | | | 1,775 | |
| Money market deposits | | 21 | | | (16) | | | 5 | |
| Certificates of deposit | | (79) | | | (561) | | | (640) | |
| Long-term debt | | (197) | | | 31 | | | (166) | |
| Short-term borrowings | | 68 | | | — | | | 68 | |
| | | | | | |
| Subordinated notes | | 2 | | | (1) | | | 1 | |
| Guaranteed preferred beneficial interest in junior subordinated debentures | | — | | | 84 | | | 84 | |
| Total interest-bearing liabilities | | $ | (256) | | | $ | 1,389 | | | $ | 1,133 | |
| Net change in net interest income | | $ | (782) | | | $ | 4,323 | | | $ | 3,541 | |
(1)Average balance includes non-accrual loans. There are no tax equivalent adjustments. There was $0.2 million and $0.3 million of accretion interest during the nine months ended September 30, 2022 and 2021, respectively.
Net interest income increased $3.5 million or 7.1% for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021 with interest income increasing $4.7 million and interest expense increasing of $1.1 million. Increased interest income was primarily due to growth in investment balances and yields and increases in loan yields from the re-pricing of the Bank's adjustable rate portfolios as well as a change in the mix of loans from lower yielding U.S. PPP loans to higher yielding commercial real estate loans. Overall loan interest income increased $1.9 million to $51.1 million for the nine months ended September 30, 2022 from $49.3 million for the nine months ended September 30, 2021. Excluding U.S. SBA PPP loans, interest income for the same comparable periods increased $5.1 million. Interest expense increased due to higher funding costs.
Net interest margin of 3.28% for the nine months ended September 30, 2022 was 10 basis points lower than the 3.38% for the nine months ended September 30, 2021. Loan yields increased from 4.14% for the nine months ended September 30, 2021 to 4.20% for the nine months ended September 30, 2022. U.S. SBA PPP loan interest positively impacted margins by four basis points for the nine months ended September 30, 2022 and 14 basis points for the nine months ended September 30, 2021.
As a result of organic growth, average total earning assets increased $200.6 million, or 10.3%, for the nine months ended September 30, 2022 to $2,155.6 million compared to $1,955.0 million for the nine months ended September 30, 2021. The increase in average total earning assets for the nine months ended September 30, 2022 from the comparable period in 2021 resulted primarily from a $37.1 million, or 2.34%, increase in average loans, average portfolio loans increasing $122.8 million that substantially offset the decrease in average U.S. SBA PPP loans, and an increase of $163.5 million, or 44.4%, increase in average investments, federal funds sold, and interest-bearing deposits.
The Company’s cost of funds was 0.28% during the first nine months of 2022 compared to 0.23% for the nine months ended September 30, 2021. Average total interest-bearing liabilities decreased $29.1 million, or 2.0%, for the nine months ended September 30, 2022 to $1,463.8 million compared to $1,492.9 million for the nine months ended September 30, 2021. During the same time, the Company increased balance sheet asset sensitivity with average noninterest-bearing demand deposits increasing $227.6 million, or 55.9%, to $635.0 million, or 30.9% of average deposits compared to $407.4 million, or 22.1% of average deposits.
Provision for Credit Losses
The following table shows the dollar and percentage changes for the provision for credit losses for the periods presented.
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| | Nine Months Ended September 30, | | | | |
| (dollars in thousands) | | 2022 | | 2021 | | $ Change | | % Change |
| | | | | | | | |
| Provision for credit losses | | $ | 1,569 | | | $ | 586 | | | $ | 983 | | | 167.7 | % |
See further discussion of the provision and the allowance under the caption “Asset Quality” in the Comparison of Financial Condition section of this MD&A.
Noninterest Income
The following table shows the components of noninterest income and the dollar and percentage changes for the periods presented.
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| | Nine Months Ended September 30, | | | | |
| (dollars in thousands) | | 2022 | | 2021 | | $ Change | | % Change |
| Noninterest Income | | | | | | | | |
| Loan appraisal, credit, and miscellaneous charges | | $ | 285 | | | $ | 271 | | | $ | 14 | | | 5.2 | % |
| Gain on sale of assets | | — | | | 68 | | | (68) | | | (100.0) | % |
| Net gains on sale of investment securities | | — | | | 586 | | | (586) | | | (100.0) | % |
| Unrealized losses on equity securities | | (564) | | | (94) | | | (470) | | | 500.0 | % |
| Loss on premises and equipment held for sale | | — | | | (20) | | | 20 | | | (100.0) | % |
| Income from bank owned life insurance | | 651 | | | 652 | | | (1) | | | (0.2) | % |
| Service charges | | 3,164 | | | 3,066 | | | 98 | | | 3.2 | % |
| Referral fee income | | 361 | | | 1,248 | | | (887) | | | (71.1) | % |
| Net (losses) gains on sale of loans originated for sale | | (2) | | | 30 | | | (32) | | | (106.7) | % |
| Gains (losses) on sale of loans | | 209 | | | (191) | | | 400 | | | (209.4) | % |
| Total Noninterest Income | | $ | 4,104 | | | $ | 5,616 | | | $ | (1,512) | | | (26.9) | % |
Noninterest income for the nine months ended September 30, 2022 decreased compared to the nine months ended September 30, 2021. The decreases were primarily due to decreased referral fee income in the first nine months of 2022, and unrealized losses on securities invested in a Community Reinvestment Act mutual fund that was impacted by increases in interest rates. These reductions for the comparable periods were partially offset by $0.4 million related to the sale of impaired loans. In the first quarter of 2021, the Bank sold non-accrual and classified commercial real estate and residential mortgage loans and recognized a loss on the sale of $0.2 million and in the second quarter of 2022, impaired loan sales resulted in a gain of $0.2 million. Noninterest income as a percentage of assets was 0.24% and 0.35%, respectively, for the nine months ended September 30, 2022 and 2021.
Noninterest Expense
The following tables show the components of noninterest expense and the dollar and percentage changes for the periods presented.
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| | Nine Months Ended September 30, | | | | |
| (dollars in thousands) | | 2022 | | 2021 | | $ Change | | % Change |
| Noninterest Expense | | | | | | | | |
| Compensation and benefits | | $ | 15,222 | | | $ | 15,770 | | | $ | (548) | | | (3.5) | % |
| OREO valuation allowance and expenses | | 6 | | | 689 | | | (683) | | | (99.1) | % |
| | | | | | | | |
| Sub-total | | 15,228 | | | 16,459 | | | (1,231) | | | (7.5) | % |
| Operating Expense | | | | | | | | |
| Occupancy expense | | 2,378 | | | 2,180 | | | 198 | | | 9.1 | % |
| Advertising | | 372 | | | 372 | | | — | | | — | % |
| Data processing expense | | 3,077 | | | 2,766 | | | 311 | | | 11.2 | % |
| Professional fees | | 2,499 | | | 1,920 | | | 579 | | | 30.2 | % |
| | | | | | | | |
| Depreciation of premises and equipment | | 476 | | | 419 | | | 57 | | | 13.6 | % |
| | | | | | | | |
| | | | | | | | |
| FDIC Insurance | | 516 | | | 512 | | | 4 | | | 0.8 | % |
| Core deposit intangible amortization | | 308 | | | 380 | | | (72) | | | (18.9) | % |
| Fraud losses | | 107 | | | 1,243 | | | (1,136) | | | (91.4) | % |
| Other expenses | | 3,083 | | | 2,722 | | | 361 | | | 13.3 | % |
| Total Operating Expense | | 12,816 | | | 12,514 | | | 302 | | | 2.4 | % |
| Total Noninterest Expense | | $ | 28,044 | | | $ | 28,973 | | | $ | (929) | | | (3.2) | % |
The decrease in noninterest expense for the comparable periods was primarily due to decreased compensation and benefits, fraud losses and OREO expenses, partially offset by increased professional fees, data processing, occupancy, and other expenses.
Compensation expenses were lower for the comparative periods due to lower health insurance claims, a lower average full time equivalent count than the prior year and lower deferred compensation accruals. In addition, compensation and benefits expense has benefited from the Company's increased use of technology. Deferred costs for U.S. SBA PPP loans originated were $0.3 million for the nine months ended September 30, 2021. Compensation and benefits would have increased overall 2021 noninterest expense if U.S. SBA PPP loans deferred costs were not included in loan origination costs.
Noninterest expense in the first nine months of 2021 included a $1.3 million initial expense and subsequent recovery of $0.2 million related to an isolated wire transfer fraud incident. Our investigation determined that no information systems of the Bank were compromised, and no employee fraud was involved.
OREO expenses have moderated as the Bank reduced foreclosed assets from $1.5 million at September 30, 2021 to no OREO assets at September 30, 2022.
Expenses applicable to OREO assets included the following.
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (dollars in thousands) | | 2022 | | 2021 |
| | | | |
| Valuation allowance | | $ | — | | | $ | 641 | |
| Losses (gains) on dispositions | | — | | | (16) | |
| Operating expenses | | 6 | | | 64 | |
| | $ | 6 | | | $ | 689 | |
To adjust properties to current appraised values, additions to the valuation allowance were taken for the nine months ended September 30, 2021. OREO carrying amounts reflect management’s estimate of the realizable value of these properties incorporating current appraised values, local real estate market conditions and related costs. At September 30, 2022 and December 31, 2021, the carrying value of OREO assets was zero.
These decreases to noninterest expense were partially offset by increases of $0.6 million in professional fees, $0.3 million in data processing expenses, and $0.2 million in occupancy expense. As noted above, inflationary pressures have increased the cost of labor and materials affecting these financial line items.
The Company’s efficiency ratio was 49.03% for the nine months ended September 30, 2022 compared to 52.52% for the nine months ended September 30, 2021. The Company’s net operating expense ratio was 1.38% at September 30, 2022 compared to 1.47% at September 30, 2021. The efficiency and net operating expense ratios have improved (decreased) as the Company has been able to generate more noninterest income while controlling expense growth.
Income Tax Expense
The Company’s consolidated effective tax rate for the nine months ended September 30, 2022 and September 30, 2021 was 24.9% and 25.3%, respectively.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31,SEPTEMBER 30, 2022 AND DECEMBER 31, 2021
The following table shows selected historical consolidated financial data for the Company, which has been derived from our audited consolidated financial statements. You should read this table together with our consolidated financial statements and related notes included in this Quarterly Report for Form 10-Q and in the Annual Report on Form 10-K report.for the year ended December 31, 2021.
| | | (Unaudited) | | | (Unaudited) | |
| (dollars in thousands, except per share amounts) | (dollars in thousands, except per share amounts) | | March 31, 2022 | | December 31, 2021 | (dollars in thousands, except per share amounts) | | September 30, 2022 | | December 31, 2021 |
| FINANCIAL CONDITION DATA | FINANCIAL CONDITION DATA | | | | | FINANCIAL CONDITION DATA | | | | |
| Total assets | Total assets | | $ | 2,351,923 | | | $ | 2,327,306 | | Total assets | | $ | 2,359,621 | | | $ | 2,327,306 | |
| Loans receivable, net | Loans receivable, net | | 1,623,435 | | | 1,586,791 | | Loans receivable, net | | 1,722,461 | | | 1,586,791 | |
| Investment securities | Investment securities | | 512,296 | | | 502,818 | | Investment securities | | 468,963 | | | 502,818 | |
| Goodwill | Goodwill | | 10,835 | | | 10,835 | | Goodwill | | 10,835 | | | 10,835 | |
| Core deposit intangible | Core deposit intangible | | 924 | | | 1,032 | | Core deposit intangible | | 725 | | | 1,032 | |
| Deposits | Deposits | | 2,095,083 | | | 2,056,164 | | Deposits | | 2,126,557 | | | 2,056,164 | |
| Borrowings | Borrowings | | 12,213 | | | 12,231 | | Borrowings | | — | | | 12,231 | |
| Junior subordinated debentures | Junior subordinated debentures | | 12,000 | | | 12,000 | | Junior subordinated debentures | | 12,000 | | | 12,000 | |
| Subordinated notes - 4.75% ** | | 19,524 | | | 19,510 | | |
| Subordinated notes - 4.75% | | Subordinated notes - 4.75% | | 19,552 | | | 19,510 | |
| | Stockholders’ equity - common | Stockholders’ equity - common | | 193,140 | | | 208,133 | | Stockholders’ equity - common | | 179,154 | | | 208,133 | |
| | | | | | | | | | | | | | |
| | | (Unaudited) | | |
| (dollars in thousands, except per share amounts) | | September 30, 2022 | | December 31, 2021 |
| COMMON SHARE DATA | | | | |
| Book value per common share | | $ | 31.74 | | | $ | 36.40 | |
| Tangible book value per common share** | | $ | 29.69 | | | $ | 34.32 | |
| Common shares outstanding at end of period | | 5,644,186 | | | 5,718,528 | |
| | | | |
| OTHER DATA | | | | |
| Full-time equivalent employees | | 199 | | | 186 | |
| Branches | | 12 | | | 11 | |
| Loan Production Offices | | 4 | | | 4 | |
| | | | |
| CAPITAL RATIOS | | | | |
| Tier 1 capital to average assets (Leverage) | | 9.56 | % | | 9.23 | % |
| Tier 1 common capital to risk-weighted assets | | 11.40 | | | 11.92 | |
| Tier 1 capital to risk-weighted assets | | 12.05 | | | 12.64 | |
| Total risk-based capital to risk-weighted assets | | 14.30 | | | 14.92 | |
| Common equity to total assets | | 7.59 | | | 8.94 | |
| Tangible common equity to tangible assets** | | 7.14 | | | 8.48 | |
____________________________________**Company issued $20.0 millionNon-GAAP financial measure. See reconciliation of 4.75% subordinated notes due 2030 on October 14, 2020.GAAP and NON-GAAP measures.
| | | | | | | | | | | | | | |
| | | (Unaudited) | | |
| (dollars in thousands, except per share amounts) | | March 31, 2022 | | December 31, 2021 |
| COMMON SHARE DATA | | | | |
| Basic earnings per common share | | $ | 1.11 | | | $ | 4.47 | |
| Diluted earnings per common share | | 1.10 | | | 4.47 | |
| Dividends declared per common share | | 0.18 | | | 0.58 | |
| Common dividend payout ratio | | 0.16 | | | 0.13 | |
| Book value per common share | | 33.96 | | | 36.40 | |
| Tangible book value per common share | | 31.90 | | | 34.32 | |
| Common shares outstanding at end of period | | 5,686,799 | | | 5,718,528 | |
| Basic weighted average common shares | | 5,688,221 | | | 5,788,003 | |
| Diluted weighted average common shares | | 5,699,038 | | | 5,797,525 | |
| | | | |
| OTHER DATA | | | | |
| Full-time equivalent employees | | 191 | | | 186 | |
| Branches | | 11 | | | 11 | |
| Loan Production Offices | | 4 | | | 4 | |
| | | | |
| CAPITAL RATIOS | | | | |
| Tier 1 capital to average assets (Leverage) | | 9.17 | % | | 9.23 | % |
| Tier 1 common capital to risk-weighted assets | | 11.58 | | | 11.92 | |
| Tier 1 capital to risk-weighted assets | | 12.28 | | | 12.64 | |
| Total risk-based capital to risk-weighted assets | | 14.65 | | | 14.92 | |
| Common equity to assets | | 8.21 | | | 8.94 | |
| Tangible common equity to tangible assets | | 7.75 | | | 8.48 | |
Assets
Total assets at September 30, 2022 were comparable to December 31, 2021 as cash balances decreased to fund loan growth. In addition, net deferred tax assets increased primarily due to growthincreases in net loans,unrealized losses of the Bank's AFS investment securities and net deferred tax assets.portfolio related to changes in interest rates as well as increases in the ACL for the adoption of the current expected credit losses ("CECL") accounting standard on January 1, 2022. The differences in allocations between the cash and investment categories reflect operational needs. Total assets and on-balance sheet liquidity increased in the first three months of 2021 from organic loan and deposit growth.
The following table shows the Company’s assets and the dollar and percentage changes for the periods presented.
| | (dollars in thousands) | (dollars in thousands) | | March 31, 2022 | | December 31, 2021 | | $ Change | | % Change | (dollars in thousands) | | September 30, 2022 | | December 31, 2021 | | $ Change | | % Change |
| Cash and due from banks | Cash and due from banks | | $ | 80,702 | | | $ | 108,990 | | | $ | (28,288) | | | (26.0) | % | Cash and due from banks | | $ | 18,008 | | | $ | 108,990 | | | $ | (90,982) | | | (83.5) | % |
| | Federal funds sold | | Federal funds sold | | 20,325 | | | — | | | 20,325 | | | — | % |
| Interest-bearing deposits with banks | Interest-bearing deposits with banks | | 32,460 | | | 30,664 | | | 1,796 | | | 5.9 | % | Interest-bearing deposits with banks | | 14,970 | | | 30,664 | | | (15,694) | | | (51.2) | % |
| Securities available for sale ("AFS"), at fair value | Securities available for sale ("AFS"), at fair value | | 507,527 | | | 497,839 | | | 9,688 | | | 1.9 | % | Securities available for sale ("AFS"), at fair value | | 464,502 | | | 497,839 | | | (33,337) | | | (6.7) | % |
| | Equity securities carried at fair value through income | Equity securities carried at fair value through income | | 4,562 | | | 4,772 | | | (210) | | | (4.4) | % | Equity securities carried at fair value through income | | 4,254 | | | 4,772 | | | (518) | | | (10.9) | % |
| Non-marketable equity securities held in other financial institutions | Non-marketable equity securities held in other financial institutions | | 207 | | | 207 | | | — | | | — | % | Non-marketable equity securities held in other financial institutions | | 207 | | | 207 | | | — | | | — | % |
| FHLB stock - at cost | FHLB stock - at cost | | 1,685 | | | 1,472 | | | 213 | | | 14.5 | % | FHLB stock - at cost | | 1,226 | | | 1,472 | | | (246) | | | (16.7) | % |
| Loans held for sale | | 373 | | | — | | | 373 | | | — | % | |
| | Net Loans | Net Loans | | 1,623,435 | | | 1,586,791 | | | 36,644 | | | 2.3 | % | Net Loans | | 1,722,461 | | | 1,586,791 | | | 135,670 | | | 8.5 | % |
| Goodwill | Goodwill | | 10,835 | | | 10,835 | | | — | | | — | % | Goodwill | | 10,835 | | | 10,835 | | | — | | | — | % |
| Premises and equipment, net | Premises and equipment, net | | 21,304 | | | 21,427 | | | (123) | | | (0.6) | % | Premises and equipment, net | | 21,626 | | | 21,427 | | | 199 | | | 0.9 | % |
| | Accrued interest receivable | Accrued interest receivable | | 5,389 | | | 5,588 | | | (199) | | | (3.6) | % | Accrued interest receivable | | 6,791 | | | 5,588 | | | 1,203 | | | 21.5 | % |
| Investment in bank owned life insurance | Investment in bank owned life insurance | | 39,145 | | | 38,932 | | | 213 | | | 0.5 | % | Investment in bank owned life insurance | | 39,583 | | | 38,932 | | | 651 | | | 1.7 | % |
| Core deposit intangible | Core deposit intangible | | 924 | | | 1,032 | | | (108) | | | (10.5) | % | Core deposit intangible | | 725 | | | 1,032 | | | (307) | | | (29.7) | % |
| Net deferred tax assets | Net deferred tax assets | | 15,523 | | | 9,033 | | | 6,490 | | | 71.8 | % | Net deferred tax assets | | 24,755 | | | 9,033 | | | 15,722 | | | 174.1 | % |
| Right of use assets, net operating leases | Right of use assets, net operating leases | | 6,033 | | | 6,124 | | | (91) | | | (1.5) | % | Right of use assets, net operating leases | | 6,022 | | | 6,124 | | | (102) | | | (1.7) | % |
| Other assets | Other assets | | 1,819 | | | 3,600 | | | (1,781) | | | (49.5) | % | Other assets | | 3,331 | | | 3,600 | | | (269) | | | (7.5) | % |
| Total Assets | Total Assets | | $ | 2,351,923 | | | $ | 2,327,306 | | | $ | 24,617 | | | 1.1 | % | Total Assets | | $ | 2,359,621 | | | $ | 2,327,306 | | | $ | 32,315 | | | 1.4 | % |
Cash and Cash Equivalents
Cash and cash equivalents totaled $113.2$53.3 million at March 31,September 30, 2022, compared to $139.7 million at December 31, 2021. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity demands. Management believes liquidity needs are satisfied by the current balance of cash and cash equivalents, access to traditional and wholesale funding sources, and the portions of the investment and loan portfolios that mature within one year. Deferred tax assets increased $6.5 million to $15.5 million primarily due to the day one CECL adjustment and increases in unrealized losses of the Bank's AFS investment portfolio related to changes in interest rates. Other assets decreased $1.8 million or 49.47% due to a decrease in income tax receivables.
Investment Securities and Credit Quality of Investment Securities
Investment securities and FHLB stock at March 31,September 30, 2022 and December 31, 2021, had estimated fair values were $514.0of $470.2 million, and $504.3 million, respectively.
Management monitors and manages investment portfolio performance and liquidity through monthly reporting including analyses of expected cash inflows and outflows from investment securities. Management believes the risk characteristics inherent in the investment portfolio are acceptable. The Company did not hold any noninvestment grade securities at March 31,September 30, 2022 and December 31, 2021. AFS securities are evaluated quarterly to determine whether a decline in their value is the result of a deterioration in credit quality. A reserve for credit losses was not recorded for the periods reported.
At March 31,September 30, 2022, approximately 92%, or $466.3$429.4 million, of the carrying value of AFS securities were rated AAA by Standard & Poor’s or the equivalent credit rating from another major rating agency compared to approximately 92%, or $456.2 million, at December 31, 2021.
Gross unrealized losses at March 31,September 30, 2022 and December 31, 2021 for AFS securities were $26.1$59.5 million and $6.0 million, respectively, of amortized cost of $533.2$523.9 million and $500.5 million, respectively (see Note 2 in Consolidated Financial Statements). The change in unrealized losses was the result of changes in interest rates and other non-credit related factors, while credit risks remained stable. The Company intends to, and has the ability to, hold investment securities with unrealized losses until they mature, at which time the Company will receive full value for the securities. Management believes that the investment securities with unrealized losses will either recover in market value or be paid off as agreed.
The Bank holds 70.7%69.0% or $376.7$361.4 million of its AFS investment securities at amortized cost, as asset-backed securities issued by GSEs or U.S. Agencies, GSE agency bonds or U.S. government obligations. In addition, the Company's amortized cost investment of $54.4$50.3 million in student loan trusts, which represent 10.2%9.6% of the AFS investment portfolio, are 97% U.S. government guaranteed. At March 31,September 30, 2022, the Company also had $98.9$99.8 million or 18.6%19.1% of AFS investments in municipal bonds.
The average effective duration of the Company's AFS investment portfolio at MarchSeptember 30, 2022 and December 31, 2022 was estimated between 3.62021, were 4.10 years and 4.0 years.3.90 years, respectively.
At March 31,September 30, 2022 and December 31, 2021, AFS asset-backed securities issued and guaranteed by GSEs and U.S. Agencies had an average life of 6.616.24 years and 6.91 years and an average duration of 5.975.26 years and 6.41 years, respectively. At March 31,September 30, 2022 and December 31, 2021, AFS asset-backed securities issued by student loan trusts and others had an average life of 6.156.29 years and 6.24 years and an average duration of 5.765.33 years and 6.03 years, respectively. At March 31,September 30, 2022 and December 31, 2021, AFS municipal bonds issued by states, political subdivisions or agencies had average life of 9.9110.96 years and 8.75 years and an average duration of 8.579.01 years and 7.83 years, respectively.
The amortized cost of AFS investment securities by contractual maturity at March 31,September 30, 2022 are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. The maturities and weighted average yields at March 31,September 30, 2022 are shown below.
| | | One year or Less | | After One Through Five Years | | After Five Through Ten Years | | After Ten Years | | Total Investment Securities | | One year or Less | | After One Through Five Years | | After Five Through Ten Years | | After Ten Years | | Total Investment Securities |
| (dollars in thousands) | (dollars in thousands) | | Amortized Cost | | Average Yield | | Amortized Cost | | Average Yield | | Amortized Cost | | Average Yield | | Amortized Cost | | Average Yield | | Amortized Cost | | Fair Value | (dollars in thousands) | | Amortized Cost | | Average Yield | | Amortized Cost | | Average Yield | | Amortized Cost | | Average Yield | | Amortized Cost | | Average Yield | | Amortized Cost | | Fair Value |
| AFS Investment securities: | AFS Investment securities: | | | | | | | | | | | | | | | | | | | | | AFS Investment securities: | | | | | | | | | | | | | | | | | | | | |
| Asset-backed securities issued by GSEs and U.S. Agencies | Asset-backed securities issued by GSEs and U.S. Agencies | | $ | 23,176 | | | 1.93 | % | | $ | 93,246 | | | 1.93 | % | | $ | 125,338 | | | 1.90 | % | | $ | 98,104 | | | 2.18 | % | | $ | 339,864 | | | $ | 324,729 | | Asset-backed securities issued by GSEs and U.S. Agencies | | $ | 22,133 | | | 2.91 | % | | $ | 85,135 | | | 2.89 | % | | $ | 136,228 | | | 2.81 | % | | $ | 81,031 | | | 2.88 | % | | $ | 324,527 | | | $ | 291,829 | |
| Asset-backed securities issued by Others | Asset-backed securities issued by Others | | 3,725 | | | 0.96 | % | | 14,987 | | | 0.97 | % | | 20,145 | | | 1.02 | % | | 15,767 | | | 1.15 | % | | 54,624 | | | 53,668 | | Asset-backed securities issued by Others | | 4,070 | | | 3.28 | % | | 15,656 | | | 3.28 | % | | 25,051 | | | 3.27 | % | | 14,901 | | | 3.27 | % | | 59,678 | | | 57,642 | |
| Municipal securities | Municipal securities | | 6,744 | | | 2.47 | % | | 27,132 | | | 2.47 | % | | 36,469 | | | 2.47 | % | | 28,544 | | | 2.66 | % | | 98,889 | | | 90,827 | | Municipal securities | | 6,810 | | | 2.50 | % | | 26,193 | | | 2.50 | % | | 41,913 | | | 2.50 | % | | 24,930 | | | 2.84 | % | | 99,846 | | | 78,864 | |
| Corporate bonds | Corporate bonds | | 204 | | | 3.88 | % | | 823 | | | 3.88 | % | | 1,106 | | | 3.88 | % | | 867 | | | — | % | | 3,000 | | | 2,960 | | Corporate bonds | | 205 | | | 3.88 | % | | 787 | | | 3.88 | % | | 1,259 | | | 3.88 | % | | 749 | | | — | % | | 3,000 | | | 2,609 | |
| U.S. Treasury bonds | U.S. Treasury bonds | | 2,510 | | | 1.18 | % | | 10,098 | | | 1.24 | % | | 13,573 | | | 1.23 | % | | 10,624 | | | — | % | | 36,805 | | | 35,343 | | U.S. Treasury bonds | | 2,512 | | | 1.17 | % | | 9,662 | | | 1.24 | % | | 15,461 | | | 1.23 | % | | 9,196 | | | — | % | | 36,831 | | | 33,558 | |
| Total AFS investment securities | Total AFS investment securities | | $ | 36,359 | | | 1.89 | % | | $ | 146,286 | | | 1.90 | % | | $ | 196,631 | | | 1.96 | % | | $ | 153,906 | | | 2.26 | % | | $ | 533,182 | | | $ | 507,527 | | Total AFS investment securities | | $ | 35,730 | | | 2.75 | % | | $ | 137,433 | | | 2.74 | % | | $ | 219,912 | | | 2.71 | % | | $ | 130,807 | | | 2.93 | % | | $ | 523,882 | | | $ | 464,502 | |
The tables below present the Standard & Poor’s (“S&P”) or equivalent credit rating from other major rating agencies for AFS securities at March 31,September 30, 2022 and December 31, 2021 by carrying value. The Company considers noninvestment grade securities rated BB+ or lower as classified assets for regulatory and financial reporting. GSE asset-backed securities and GSE agency bonds with S&P AA+ ratings were treated as AAA based on regulatory guidance.
| | March 31, 2022 | | December 31, 2021 | |
| September 30, 2022 | | September 30, 2022 | | December 31, 2021 |
| Credit Rating | Credit Rating | | Amount | | Credit Rating | | Amount | Credit Rating | | Amount | | Credit Rating | | Amount |
| (dollars in thousands) | (dollars in thousands) | | | | (dollars in thousands) | | | (dollars in thousands) | | | | (dollars in thousands) | | |
| AAA | AAA | | $ | 466,296 | | | AAA | | $ | 456,162 | | AAA | | $ | 429,389 | | | AAA | | $ | 456,162 | |
| AA | AA | | 38,072 | | | AA | | 41,455 | | AA | | 32,355 | | | AA | | 41,455 | |
| A | A | | 199 | | | A | | 222 | | A | | 149 | | | A | | 222 | |
| BBB | BBB | | 2,960 | | | BBB | | — | | BBB | | 2,609 | | | BBB | | — | |
| Total | Total | | $ | 507,527 | | | Total | | $ | 497,839 | | Total | | $ | 464,502 | | | Total | | $ | 497,839 | |
Loan Portfolio and U.S. SBA PPP Loans
The Bank's primary market areas consist of Southern Maryland, the city of Fredericksburg, Virginia and Spotsylvania and Stafford counties in Virginia. Management is committed to continue as the leading commercial lending financial institution in Southern Maryland. In 2021, the Bank increased lending in Virginia in the cities and surrounding areas of Culpeper, Orange and Charlottesville. The Bank plans to open a loan production office in Charlottesville, Virginia in 2022. At March 31,September 30, 2022, loans inmanaged by our Maryland and Virginia lending teams are almost evenly distributed with approximately 49% of the Bank's outstanding portfolio loans in our expanding Virginia market.distributed. Management is optimistic that the Virginia market will continue to provide opportunities for organic loan growth.
At March 31,September 30, 2022, total net loans, which include portfolio loans and U.S. SBA PPP loans, increased 9.2%11.4% annualized or $36.6$135.7 million from December 31, 2021. Total net portfolio loans increased $47.8$160.9 million and U.S. SBA PPP loans decreased $11.1$25.2 million for the comparable period ends. The commercial real estate portfolio increased in total during the first threenine months of 2022, while increasingdecreasing slightly as a percentage of total portfolio loans. During the first nine months of 2022, the residential rental portfolio increased in total to 16.20% of total portfolio loans compared to 12.35% of total portfolio loans at December 31, 2021. The Company’s loan pipeline was $193$153.0 million at March 31,September 30, 2022 compared to $160$160.0 million at December 31, 2021.
During 2020 and 2021, the Company originated 1,532 U.S. SBA PPP loans with original balances of $201.3 million. As of March 31,September 30, 2022, there were 1147 U.S. SBA PPP loans outstanding with outstanding balancesan aggregate balance of $15.8$1.3 million. The Company is presently assisting customers with forgiveness applications for outstanding loans.
The following is a breakdown of the Company’s loan portfolio, net of deferred costs and fees at March 31,September 30, 2022 and December 31, 2021:
| | (dollars in thousands) | (dollars in thousands) | | March 31, 2022 | | % | | December 31, 2021** | | % | | $ Change | | Annualized % Change | (dollars in thousands) | | September 30, 2022 | | % | | December 31, 2021** | | % | | $ Change | | Annualized % Change |
| BY LOAN TYPE | BY LOAN TYPE | | | | | | | | | | | | | BY LOAN TYPE | | | | | | | | | | | | |
| Portfolio Loans: | Portfolio Loans: | | Portfolio Loans: | |
| Commercial real estate | Commercial real estate | | $ | 1,177,761 | | | 72.28 | % | | $ | 1,113,793 | | | 70.54 | % | | $ | 63,968 | | | 22.97 | % | Commercial real estate | | $ | 1,202,660 | | | 68.98 | % | | $ | 1,113,793 | | | 70.54 | % | | $ | 88,867 | | | 10.64 | % |
| Residential first mortgages | Residential first mortgages | | 86,416 | | | 5.30 | % | | 92,710 | | | 5.87 | % | | (6,294) | | | (27.16) | % | Residential first mortgages | | 83,081 | | | 4.77 | % | | 92,710 | | | 5.87 | % | | (9,629) | | | (13.85) | % |
| Residential rentals | Residential rentals | | 191,065 | | | 11.73 | % | | 194,911 | | | 12.35 | % | | (3,846) | | | (7.89) | % | Residential rentals | | 282,365 | | | 16.20 | % | | 194,911 | | | 12.35 | % | | 87,454 | | | 59.82 | % |
| Construction and land development | Construction and land development | | 30,649 | | | 1.88 | % | | 35,502 | | | 2.25 | % | | (4,853) | | | (54.68) | % | Construction and land development | | 23,197 | | | 1.33 | % | | 35,502 | | | 2.25 | % | | (12,305) | | | (46.21) | % |
| Home equity and second mortgages | Home equity and second mortgages | | 26,445 | | | 1.62 | % | | 25,661 | | | 1.63 | % | | 784 | | | 12.22 | % | Home equity and second mortgages | | 26,054 | | | 1.49 | % | | 25,661 | | | 1.63 | % | | 393 | | | 2.04 | % |
| Commercial loans | Commercial loans | | 48,948 | | | 3.00 | % | | 50,512 | | | 3.20 | % | | (1,564) | | | (12.39) | % | Commercial loans | | 41,615 | | | 2.39 | % | | 50,512 | | | 3.20 | % | | (8,897) | | | (23.48) | % |
| Consumer loans | Consumer loans | | 3,592 | | | 0.22 | % | | 3,015 | | | 0.19 | % | | 577 | | | 76.55 | % | Consumer loans | | 5,754 | | | 0.33 | % | | 3,015 | | | 0.19 | % | | 2,739 | | | 121.13 | % |
| Commercial equipment | Commercial equipment | | 64,662 | | | 3.97 | % | | 62,706 | | | 3.97 | % | | 1,956 | | | 12.48 | % | Commercial equipment | | 78,551 | | | 4.51 | % | | 62,706 | | | 3.97 | % | | 15,845 | | | 33.69 | % |
| | Total portfolio loans | Total portfolio loans | | 1,629,538 | | | 100.00 | % | | 1,578,810 | | | 100.00 | % | | 50,728 | | | 12.85 | % | Total portfolio loans | | 1,743,277 | | | 100.00 | % | | 1,578,810 | | | 100.00 | % | | 164,467 | | | 13.89 | % |
| Less: Allowance for Credit Losses | Less: Allowance for Credit Losses | | (21,382) | | | (1.31) | % | | (18,417) | | | (1.17) | % | | (2,965) | | | 64.40 | % | Less: Allowance for Credit Losses | | (22,027) | | | (1.26) | % | | (18,417) | | | (1.17) | % | | (3,610) | | | 26.14 | % |
| Total net portfolio loans | Total net portfolio loans | | 1,608,156 | | | 1,560,393 | | | 47,763 | | | 12.24 | % | Total net portfolio loans | | 1,721,250 | | | 1,560,393 | | | 160,857 | | | 13.74 | % |
| U.S. SBA PPP loans | U.S. SBA PPP loans | | 15,279 | | | 26,398 | | | (11,119) | | | (168.48) | % | U.S. SBA PPP loans | | 1,211 | | | 26,398 | | | (25,187) | | | (127.22) | % |
| Total net loans | Total net loans | | $ | 1,623,435 | | | $ | 1,586,791 | | | $ | 36,644 | | | 9.24 | % | Total net loans | | $ | 1,722,461 | | | $ | 1,586,791 | | | $ | 135,670 | | | 11.40 | % |
**December 31, 2021 reported balance are shown net of deferred costs and fees to conform with the current period's presentation.
Loan Concentrations
At March 31,September 30, 2022 and December 31, 2021, commercial loans, including residential rentals, represented 91.0%92.1% and 90.1%, respectively, of total portfolio loans. The Bank's commercial loans are concentrated in its market area; however, these loans are distributed among many different borrowers and industries.
Non-owner occupied commercial real estate as a percentage of risk-based capital at March 31,September 30, 2022 and December 31, 2021 were $872$978.2 million or 347%373.8% and $813$813.0 million or 331%331.4%, respectively. Construction loans as a percentage of risk-based capital at March 31,September 30, 2022 and December 31, 2021 were $138$145.4 million or 55%55.6% and $140$140.4 million or 57%57.2%, respectively.
Asset Quality
The following tables show asset quality ratios at March 31,September 30, 2022 and December 31, 2021.
| | | | | (Unaudited) | | | | (Unaudited) | |
| (dollars in thousands, except per share amounts) | (dollars in thousands, except per share amounts) | | March 31, 2022 | | December 31, 2021 | (dollars in thousands, except per share amounts) | | September 30, 2022 | | December 31, 2021 |
| ASSET QUALITY | ASSET QUALITY | | | | | ASSET QUALITY | | | | |
| Total portfolio loans | Total portfolio loans | | $ | 1,629,538 | | | $ | 1,578,810 | | Total portfolio loans | | $ | 1,743,277 | | | $ | 1,578,810 | |
| Classified Assets | Classified Assets | | 4,745 | | | 5,211 | | Classified Assets | | 5,967 | | | 5,211 | |
| Allowance for credit losses | Allowance for credit losses | | 21,382 | | | 18,417 | | Allowance for credit losses | | 22,027 | | | 18,417 | |
| | Past due loans - 31 to 89 days | Past due loans - 31 to 89 days | | 386 | | | 568 | | Past due loans - 31 to 89 days | | 713 | | | 568 | |
Past due loans >=90 days (1) | Past due loans >=90 days (1) | | 1,233 | | | 961 | | Past due loans >=90 days (1) | | 428 | | | 961 | |
| Total past due (delinquency) loans | Total past due (delinquency) loans | | 1,619 | | | 1,529 | | Total past due (delinquency) loans | | 1,141 | | | 1,529 | |
| Non-accrual loans (2) | Non-accrual loans (2) | | 7,465 | | | 7,631 | | Non-accrual loans (2) | | 6,290 | | | 7,631 | |
Accruing troubled debt restructures (TDRs) (3) | Accruing troubled debt restructures (TDRs) (3) | | 442 | | | 447 | | Accruing troubled debt restructures (TDRs) (3) | | 433 | | | 447 | |
| Other real estate owned (OREO) | Other real estate owned (OREO) | | — | | | — | | Other real estate owned (OREO) | | — | | | — | |
| Non-accrual loans, OREO and TDRs | Non-accrual loans, OREO and TDRs | | $ | 7,907 | | | $ | 8,078 | | Non-accrual loans, OREO and TDRs | | $ | 6,723 | | | $ | 8,078 | |
| ASSET QUALITY RATIOS (4) | ASSET QUALITY RATIOS (4) | | ASSET QUALITY RATIOS (4) | |
| Classified assets to total assets | Classified assets to total assets | | 0.20 | % | | 0.22 | % | Classified assets to total assets | | 0.25 | % | | 0.22 | % |
| Classified assets to risk-based capital | Classified assets to risk-based capital | | 1.87 | | | 2.10 | | Classified assets to risk-based capital | | 2.25 | | | 2.10 | |
| Allowance for loan losses to total portfolio loans | | 1.31 | | | 1.17 | | |
| Allowance for loan losses to non-accrual loans | | 286.43 | | | 241.34 | | |
| Allowance for credit losses to total portfolio loans | | Allowance for credit losses to total portfolio loans | | 1.26 | | | 1.17 | |
| Allowance for credit losses to non-accrual loans | | Allowance for credit losses to non-accrual loans | | 350.19 | | | 241.34 | |
| Past due loans - 31 to 89 days to total portfolio loans | Past due loans - 31 to 89 days to total portfolio loans | | 0.02 | | | 0.04 | | Past due loans - 31 to 89 days to total portfolio loans | | 0.04 | | | 0.04 | |
| Past due loans >=90 days to total portfolio loans | Past due loans >=90 days to total portfolio loans | | 0.08 | | | 0.06 | | Past due loans >=90 days to total portfolio loans | | 0.02 | | | 0.06 | |
| Total past due (delinquency) to total portfolio loans | Total past due (delinquency) to total portfolio loans | | 0.10 | | | 0.10 | | Total past due (delinquency) to total portfolio loans | | 0.07 | | | 0.10 | |
| Non-accrual loans to total portfolio loans | Non-accrual loans to total portfolio loans | | 0.46 | | | 0.48 | | Non-accrual loans to total portfolio loans | | 0.36 | | | 0.48 | |
| Non-accrual loans and TDRs to total portfolio loans | Non-accrual loans and TDRs to total portfolio loans | | 0.49 | | | 0.51 | | Non-accrual loans and TDRs to total portfolio loans | | 0.39 | | | 0.51 | |
| Non-accrual loans and OREO to total assets | Non-accrual loans and OREO to total assets | | 0.32 | | | 0.33 | | Non-accrual loans and OREO to total assets | | 0.27 | | | 0.33 | |
| Non-accrual loans and OREO to total portfolio loans and OREO | Non-accrual loans and OREO to total portfolio loans and OREO | | 0.46 | | | 0.48 | | Non-accrual loans and OREO to total portfolio loans and OREO | | 0.36 | | | 0.48 | |
| Non-accrual loans, OREO and TDRs to total assets | Non-accrual loans, OREO and TDRs to total assets | | 0.34 | | | 0.35 | | Non-accrual loans, OREO and TDRs to total assets | | 0.28 | | | 0.35 | |
(1) Nonperforming loans include all loans that are 90 days or more delinquent.
(2) Non-accrual loans include all loans that are 90 days or more delinquent and loans that are non-accrual due to the operating results or cash flows of a customer.
(3) TDR loans include both non-accrual and accruing performing loans. All TDR loans are included in the calculation of asset quality financial ratios. Non-accrual TDR loans are included in the non-accrual balance and accruing TDR loans are included in the accruing TDR balance.
(4) Portfolio loans include all loan portfolios except the U.S. SBA PPP loan portfolio. Asset quality ratios for loans exclude U.S. SBA PPP loans.
Allowance for Credit Losses and("ACL"), Provision for Credit Losses ("PCL"), Allowance for Loan Losses ("ALLL") and Provision for Loan Losses ("PLL")
The following is a breakdown of the Company’s general and specific allowances as a percentage of grosstotal portfolio loans at and for the three months ended March 31,September 30, 2022 and 2021 and year endedat December 31, 2021:
Breakdown of general and specific allowance as a percentage of total portfolio loans (1)
| | | | | March 31, 2022 | | March 31, 2021 | | December 31, 2021 | | | September 30, 2022 | | September 30, 2021 | | December 31, 2021 |
| General allowance | General allowance | | $ | 21,087 | | | $ | 17,365 | | | $ | 18,151 | | General allowance | | $ | 21,919 | | | $ | 18,256 | | | $ | 18,151 | |
| Specific allowance | Specific allowance | | 295 | | | 891 | | | 266 | | Specific allowance | | 108 | | | 323 | | | 266 | |
| | | | $ | 21,382 | | | $ | 18,256 | | | $ | 18,417 | | | | $ | 22,027 | | | $ | 18,579 | | | $ | 18,417 | |
| General allowance | General allowance | | 1.29 | % | | 1.15 | % | | 1.15 | % | General allowance | | 1.26 | % | | 1.19 | % | | 1.15 | % |
| Specific allowance | Specific allowance | | 0.02 | % | | 0.06 | % | | 0.02 | % | Specific allowance | | 0.00 | % | | 0.02 | % | | 0.02 | % |
Allowance to total portfolio loans | Allowance to total portfolio loans | | 1.31 | % | | 1.21 | % | | 1.17 | % | Allowance to total portfolio loans | | 1.26 | % | | 1.21 | % | | 1.17 | % |
| | Allowance to non-acquired loans (2) | Allowance to non-acquired loans (2) | | n/a | | 1.26 | % | | 1.20 | % | Allowance to non-acquired loans(2) | | n/a | | 1.25 | % | | 1.20 | % |
| | Total acquired loans (2) | Total acquired loans (2) | | n/a | | $ | 57,334 | | | $ | 42,182 | | Total acquired loans(2) | | n/a | | $ | 50,486 | | | $ | 42,182 | |
| Non-acquired loans** (2) | Non-acquired loans** (2) | | n/a | | $ | 1,449,849 | | | $ | 1,536,761 | | Non-acquired loans**(2) | | n/a | | $ | 1,482,565 | | | $ | 1,536,761 | |
| Total portfolio loans | Total portfolio loans | | $ | 1,629,538 | | | $ | 1,507,183 | | | $ | 1,578,943 | | Total portfolio loans | | $ | 1,743,277 | | | $ | 1,533,051 | | | $ | 1,578,943 | |
**Non-acquired loans include loans transferred from acquired pools following release of acquisition accounting FMV adjustments. Non-acquired loans exclude U.S. SBA PPP loans.
(1)Portfolio loans include all loan portfolios except the U.S. SBA PPP loan portfolio.
(2)Allowance to non-acquired loans is no longer relevant as the ACL considers all portfolio loans.
On January 1, 2022, the Company adopted ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss methodology for determining our provision for credit losses and ACL with an expected loss methodology that is referred to asimplemented the current expected credit loss model ("CECL"). The ACL is a valuation account that is deducted from loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
The Bank uses a range of data to estimate expected credit losses under CECL, including information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the cash flows of the loans. Historical loss experience serves as the foundation for our estimated credit losses. Adjustments to our historical loss experience are made for differences in current loan portfolio segment credit risk characteristics such as the impact of changing unemployment rates, changes in U.S. Treasury yields, portfolio concentrations, the volume of classified loans, and other prevailing economic conditions and factors that may affect the borrower’s ability to repay, or reduce the estimated value of any underlying collateral. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
We adopted ASU 2016-13 using the modified retrospective method. Results for reporting periods beginning after January 1, 2022 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP.
Upon the adoption of ASC 326, the Company recorded a $2.5 million increase to the ACL. At March 31,September 30, 2022, the ACL was $21.4$22.0 million increased $3.0$3.6 million or 16.1%19.6% when compared to $18.4 million at December 31, 2021. The increase is related to the impact of adoption and the current quarter'syear-to-date provision.
ACL levelsbalances increased to 1.31%1.26% of portfolio loans at March 31,September 30, 2022 compared to 1.17% at December 31, 2021. At and for the threenine months ended March 31,September 30, 2022, the Company's ACL increased $3.0$3.6 million or 16.1%19.6% to $21.4$22.0 million at March 31,September 30, 2022 from $18.4 million at December 31, 2021. The increase in the general allowance was primarily related to the impact of adoption of ASC-326 and portfolio loan growth.
The Company recorded an increase in its provision for credit loss expensea $0.7 million and $1.6 million PCL for the three and nine months ended March 31,September 30, 2022 compared to the same periods in the prior year. Net charge-offs also decreaseda $0 and $0.6 million PLL for the comparable periods from $1.5three and nine months ended September 30, 2021. There were $0.5 million in net charge-offs induring the first quarter of 2021nine months ended September 30, 2022 compared to $19,000$1.4 million in net recoveries incharge-offs for the first quarter of 2022.nine months ended September 30, 2021. During the threenine months ended March 31,September 30, 2021, the Bank sold
non-accrual and classified commercial real estate and residential mortgage loans with an amortized cost of $9.1 million, net of charge-offs of $1.4 million, and recognized a loss on the sale of $191,000.$0.2 million. During the nine
Management believes that loans included in
months ended September 30, 2022, the COVID-19 deferral program in 2020 and 2021 are more likely to default in the future and the identification and resolution of problem credits could be delayed. In our evaluation of current and previously deferred loans, we considered the customer industry, the length of the deferral period, and the type and amount of collateral. All COVID-19 deferred loans were current prior to the crisis and will not be considered delinquent or troubled debt restructures ("TDRs") upon completion of the modification agreements due to provisions in the CARES Act and regulations that permit U.S. financial institutions to temporarily suspend U.S. GAAP requirements to treat such loan modifications as TDRs.
As of March 31, 2022 there were previously COVID-19 deferred loans of $1.0 million (two relationships - both were current but non-accrual) deemed to beBank sold non-accrual and substandard basedclassified commercial real estate and residential mortgage loans with an amortized cost of $3.4 million, net of charge-offs of $0.4 million, and recognized a gain on internal reviews. Asthe sale of December 31, 2021 there were $3.9 million of COVID-19 deferred loans deemed to be non-accrual and substandard. In our evaluation of previously deferred loans, we considered the length of the deferral period, the type and amount of collateral and customer industries.$0.2 million.
Management believes that the allowance is adequate at March 31,September 30, 2022. The ACL as a percent of total loans may increase or decrease in future periods based on economic conditions. Management’s determination of the adequacy of the allowance is based on a periodic evaluation of the portfolio. For additional information regarding the allowance for credit losses, refer to Notes 1 and 3 of the Consolidated Financial Statements and the Critical Accounting Policy section of the MD&A.
The following table allocates the ACL and ALLL by portfolio loan category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
| | | March 31, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
| (dollars in thousands) | (dollars in thousands) | | Amount | | % (1) | | Amount | | % (1) | (dollars in thousands) | | Amount | | %** | | Amount | | %** |
| Commercial real estate | Commercial real estate | | $ | 17,313 | | | 72.28 | % | | $ | 13,095 | | | 70.66 | % | Commercial real estate | | $ | 17,036 | | | 68.98 | % | | $ | 13,095 | | | 70.54 | % |
| Residential first mortgages | Residential first mortgages | | 284 | | | 5.30 | % | | 1,002 | | | 5.77 | % | Residential first mortgages | | 237 | | | 4.77 | % | | 1,002 | | | 5.87 | % |
| Residential rentals | Residential rentals | | 1,546 | | | 11.73 | % | | 2,175 | | | 12.35 | % | Residential rentals | | 2,545 | | | 16.20 | % | | 2,175 | | | 12.35 | % |
| Construction and land development | Construction and land development | | 137 | | | 1.88 | % | | 260 | | | 2.25 | % | Construction and land development | | 197 | | | 1.33 | % | | 260 | | | 2.25 | % |
| Home equity and second mortgages | Home equity and second mortgages | | 178 | | | 1.62 | % | | 274 | | | 1.62 | % | Home equity and second mortgages | | 142 | | | 1.49 | % | | 274 | | | 1.63 | % |
| Commercial loans | Commercial loans | | 319 | | | 3.00 | % | | 582 | | | 3.20 | % | Commercial loans | | 254 | | | 2.39 | % | | 582 | | | 3.20 | % |
| Consumer loans | Consumer loans | | 73 | | | 0.22 | % | | 58 | | | 0.19 | % | Consumer loans | | 142 | | | 0.33 | % | | 58 | | | 0.19 | % |
| Commercial equipment | Commercial equipment | | 1,532 | | | 3.97 | % | | 971 | | | 3.96 | % | Commercial equipment | | 1,474 | | | 4.51 | % | | 971 | | | 3.97 | % |
| | Total allowance for credit losses | Total allowance for credit losses | | $ | 21,382 | | | 100.00 | % | | $ | 18,417 | | | 100.00 | % | Total allowance for credit losses | | $ | 22,027 | | | 100.00 | % | | $ | 18,417 | | | 100.00 | % |
(1)**Percent of loans in each category to total portfolio loansloans. December 31, 2021 reported percentages are shown net of deferred costs and fees to conform with the current period's presentation.
The following table indicates net charge-offs by average portfolio loan category for the quartersthree and nine months ended March 31,September 30, 2022 and March 31,September 30, 2021, and for the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | September 30, 2022 | | September 30, 2021 | | |
| (dollars in thousands) | | Net (Charge-off) Recovery | | Average Balance | | % | | Net (Charge-off) Recovery | | Average Balance | | % | | | | | | |
| Commercial real estate | | $ | — | | | $ | 1,205,675 | | | — | % | | $ | (487) | | | $ | 1,094,089 | | | (0.18) | % | | | | | | |
| Residential first mortgages | | 14 | | | 82,336 | | | 0.07 | % | | — | | | 100,195 | | | — | % | | | | | | |
| Residential rentals | | — | | | 223,532 | | | — | % | | — | | | 154,481 | | | — | % | | | | | | |
| Construction and land development | | — | | | 27,770 | | | — | % | | — | | | 34,810 | | | — | % | | | | | | |
| Home equity and second mortgages | | — | | | 25,612 | | | — | % | | 1 | | | 27,751 | | | 0.01 | % | | | | | | |
| Commercial loans | | (48) | | | 52,280 | | | (0.37) | % | | 529 | | | 44,881 | | | 4.71 | % | | | | | | |
| Consumer loans | | (14) | | | 5,082 | | | (1.10) | % | | — | | | 1,742 | | | — | % | | | | | | |
| Commercial equipment loans | | (23) | | | 76,392 | | | (0.12) | % | | 20 | | | 59,964 | | | 0.13 | % | | | | | | |
| | (71) | | | 1,698,679 | | | (0.02) | % | | 63 | | | 1,517,913 | | | 0.02 | % | | | | | | |
| Allowance for credit losses | | — | | | (21,667) | | | — | % | | — | | | (18,852) | | | — | % | | | | | | |
| Total net charge-off and average portfolio loans | | $ | (71) | | | $ | 1,677,012 | | | (0.02) | % | | $ | 63 | | | $ | 1,499,061 | | | 0.02 | % | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine Months Ended | | Year Ended |
| | March 31, 2022 | | March 31, 2021 | | December 31, 2021 | | September 30, 2022 | | September 30, 2021 | | December 31, 2021 |
| (dollars in thousands) | (dollars in thousands) | | Net (Charge-off) Recovery | | Average Balance | | % | | Net (Charge-off) Recovery | | Average Balance | | % | | Net (Charge-off) Recovery | | Average Balance | | % | (dollars in thousands) | | Net (Charge-off) Recovery | | Average Balance | | % | | Net (Charge-off) Recovery | | Average Balance | | % | | Net (Charge-off) Recovery | | Average Balance | | % |
| Commercial real estate | Commercial real estate | | $ | — | | | $ | 1,112,108 | | | — | % | | $ | (1,246) | | | $ | 1,059,803 | | | (0.12) | % | | $ | (1,914) | | | $ | 1,085,823 | | | (0.18) | % | Commercial real estate | | $ | (280) | | | $ | 1,166,898 | | | (0.03) | % | | $ | (1,733) | | | $ | 1,081,350 | | | (0.21) | % | | $ | (1,914) | | | $ | 1,085,823 | | | (0.18) | % |
| Residential first mortgages | Residential first mortgages | | — | | | 86,805 | | | — | | | (142) | | | 124,984 | | | (0.11) | | | (142) | | | 107,011 | | | (0.13) | | Residential first mortgages | | (97) | | | 84,707 | | | (0.15) | % | | (142) | | | 111,401 | | | (0.17) | % | | (142) | | | 107,011 | | | (0.13) | % |
| Residential rentals | Residential rentals | | — | | | 197,312 | | | — | | | (46) | | | 139,220 | | | (0.03) | | | (46) | | | 151,606 | | | (0.03) | | Residential rentals | | — | | | 205,368 | | | — | % | | (46) | | | 144,316 | | | (0.04) | % | | (46) | | | 151,606 | | | (0.03) | % |
| Construction and land development | Construction and land development | | — | | | 33,669 | | | — | | | — | | | 36,091 | | | — | | | — | | | 36,891 | | | — | | Construction and land development | | — | | | 30,559 | | | — | % | | — | | | 36,401 | | | — | % | | — | | | 36,891 | | | — | % |
| Home equity and second mortgages | Home equity and second mortgages | | — | | | 25,946 | | | — | | | 1 | | | 29,272 | | | — | | | 5 | | | 28,051 | | | 0.02 | | Home equity and second mortgages | | 1 | | | 25,885 | | | 0.01 | % | | 4 | | | 28,689 | | | 0.02 | % | | 5 | | | 28,051 | | | 0.02 | % |
| Commercial loans | Commercial loans | | 1 | | | 46,668 | | | — | | | (45) | | | 44,740 | | | (0.10) | | | 467 | | | 46,390 | | | 1.01 | | Commercial loans | | (97) | | | 47,252 | | | (0.27) | % | | 463 | | | 44,241 | | | 1.40 | % | | 467 | | | 46,390 | | | 1.01 | % |
| Consumer loans | Consumer loans | | — | | | 3,213 | | | — | | | — | | | 1,320 | | | — | | | — | | | 1,783 | | | — | | Consumer loans | | (20) | | | 4,119 | | | (0.65) | % | | — | | | 1,497 | | | — | % | | — | | | 1,783 | | | — | % |
| Commercial equipment loans | Commercial equipment loans | | 18 | | | 61,715 | | | 0.03 | | | 15 | | | 60,544 | | | 0.02 | | | 37 | | | 60,845 | | | 0.06 | | Commercial equipment loans | | 38 | | | 68,872 | | | 0.07 | % | | 23 | | | 60,506 | | | 0.05 | % | | 37 | | | 60,845 | | | 0.06 | % |
| | 19 | | | 1,567,436 | | | — | | | (1,463) | | | 1,495,974 | | | (0.10) | | | (1,593) | | | 1,518,400 | | | (0.10) | | | (455) | | | 1,633,660 | | | (0.04) | % | | (1,431) | | | 1,508,401 | | | (0.13) | % | | (1,593) | | | 1,518,400 | | | (0.10) | % |
| Allowance for credit losses | Allowance for credit losses | | — | | | (21,043) | | | — | | | — | | | (19,614) | | | — | | | — | | | (18,788) | | | — | | Allowance for credit losses | | — | | | (21,364) | | | — | % | | — | | | (18,908) | | | — | % | | — | | | (18,788) | | | — | % |
| Total net charge-off and average portfolio loans | Total net charge-off and average portfolio loans | | $ | 19 | | | $ | 1,546,393 | | | — | % | | $ | (1,463) | | | $ | 1,476,360 | | | (0.10) | % | | $ | (1,593) | | | $ | 1,499,612 | | | (0.11) | % | Total net charge-off and average portfolio loans | | $ | (455) | | | $ | 1,612,296 | | | (0.04) | % | | $ | (1,431) | | | $ | 1,489,493 | | | (0.13) | % | | $ | (1,593) | | | $ | 1,499,612 | | | (0.11) | % |
Off Balance Sheet Credit Exposure Reserve
The Company's reserve for off balance sheet credit exposures was $0.2$0.3 million and increased due to impact of the ASC 326 adoption and a $31,000 recovery in the current quarter following a reduction of available credit lines.adoption. The Company is monitoring line of credit usage and has not seen substantive increases in usage or expected usage. Management believes that many of the Bank's customers presently have sufficient liquidity due to COVID-19 government stimulus programs. The Company will continue to monitor activity for potential increases in the off-balance sheet reserve in future quarters as customers use available liquidity.
Classified Assets and Special Mention Assets
Classified assets decreased $0.5increased $0.8 million from $5.2 million at December 31, 2021 to $4.7$6.0 million at March 31,September 30, 2022. Management considers classified assets to be an important measure of asset quality. The Company's risk rating process for classified loans are an important input into the Company's allowance methodology. Risk ratings are expected to be an important indicator in assessing ongoing credit risks of COVID-19 deferred loans.ACL qualitative framework. The following is a breakdown of the Company’s classified and special mention assets at September 30, 2022, June 30, 2022, and March 31, 2022, and December 31, 2021, 2020, 2019, and 2018, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | As of |
| (dollars in thousands) | | | | | | 3/31/2022 | | 12/31/2021 | | 12/31/2020 | | 12/31/2019 | | 12/31/2018 |
| Classified loans | | | | | | | | | | | | | | |
| Substandard | | | | | | $ | 4,745 | | | $ | 5,211 | | | $ | 19,249 | | | $ | 26,863 | | | $ | 32,226 | |
| Doubtful | | | | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | |
| Total classified loans | | | | | | 4,745 | | | 5,211 | | | 19,249 | | | 26,863 | | | 32,226 | |
| Special mention loans | | | | | | — | | | — | | | 7,672 | | | — | | | — | |
| Total classified and special mention loans | | | | | | $ | 4,745 | | | $ | 5,211 | | | $ | 26,921 | | | $ | 26,863 | | | $ | 32,226 | |
| | | | | | | | | | | | | | |
| Classified loans | | | | | | $ | 4,745 | | | $ | 5,211 | | | $ | 19,249 | | | $ | 26,863 | | | $ | 32,226 | |
| Classified securities | | | | | | — | | | — | | | — | | | — | | | 482 | |
| Other real estate owned | | | | | | — | | | — | | | 3,109 | | | 7,773 | | | 8,111 | |
| Total classified assets | | | | | | $ | 4,745 | | | $ | 5,211 | | | $ | 22,358 | | | $ | 34,636 | | | $ | 40,819 | |
| | | | | | | | | | | | | | |
| Total classified assets as a percentage of total assets | | | | | | 0.20 | % | | 0.22 | % | | 1.10 | % | | 1.93 | % | | 2.42 | % |
| Total classified assets as a percentage of Risk Based Capital | | | | | | 1.87 | % | | 2.10 | % | | 9.61 | % | | 16.21 | % | | 21.54 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| (dollars in thousands) | | 9/30/2022 | | 6/30/2022 | | 3/31/2022 | | 12/31/2021 | | 12/31/2020 | | 12/31/2019 | | 12/31/2018 |
| Classified loans | | | | | | | | | | | | | | |
| Substandard | | $ | 5,967 | | | $ | 6,062 | | | $ | 4,745 | | | $ | 5,211 | | | $ | 19,249 | | | $ | 26,863 | | | $ | 32,226 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | |
| Total classified loans | | 5,967 | | | 6,062 | | | 4,745 | | | 5,211 | | | 19,249 | | | 26,863 | | | 32,226 | |
| Special mention loans | | 160 | | | 160 | | | — | | | — | | | 7,672 | | | — | | | — | |
| Total classified and special mention loans | | $ | 6,127 | | | $ | 6,222 | | | $ | 4,745 | | | $ | 5,211 | | | $ | 26,921 | | | $ | 26,863 | | | $ | 32,226 | |
| | | | | | | | | | | | | | |
| Classified loans | | $ | 5,967 | | | $ | 6,062 | | | $ | 4,745 | | | $ | 5,211 | | | $ | 19,249 | | | $ | 26,863 | | | $ | 32,226 | |
| Classified securities | | — | | | — | | | — | | | — | | | — | | | — | | | 482 | |
| Other real estate owned | | — | | | — | | | — | | | — | | | 3,109 | | | 7,773 | | | 8,111 | |
| Total classified assets | | $ | 5,967 | | | $ | 6,062 | | | $ | 4,745 | | | $ | 5,211 | | | $ | 22,358 | | | $ | 34,636 | | | $ | 40,819 | |
| | | | | | | | | | | | | | |
| Total classified assets as a percentage of total assets | | 0.25 | % | | 0.26 | % | | 0.20 | % | | 0.22 | % | | 1.10 | % | | 1.93 | % | | 2.42 | % |
| Total classified assets as a percentage of Risk Based Capital | | 2.25 | % | | 2.35 | % | | 1.87 | % | | 2.10 | % | | 9.61 | % | | 16.21 | % | | 21.54 | % |
Non-Performing Assets
| | (dollars in thousands) | (dollars in thousands) | | March 31, 2022 | | December 31, 2021 | (dollars in thousands) | | September 30, 2022 | | December 31, 2021 |
| Non-accrual loans: | Non-accrual loans: | | | | | Non-accrual loans: | | | | |
| Commercial real estate | Commercial real estate | | $ | 4,988 | | | $ | 4,890 | | Commercial real estate | | $ | 4,661 | | | $ | 4,890 | |
| Residential first mortgages | Residential first mortgages | | 736 | | | 450 | | Residential first mortgages | | — | | | 450 | |
| Residential rentals | Residential rentals | | 672 | | | 942 | | Residential rentals | | 1,153 | | | 942 | |
| Construction and land development | Construction and land development | | — | | | — | | Construction and land development | | — | | | — | |
| Home equity and second mortgages | Home equity and second mortgages | | 377 | | | 601 | | Home equity and second mortgages | | 240 | | | 601 | |
| Commercial loans | Commercial loans | | 25 | | | — | | Commercial loans | | 25 | | | — | |
| Consumer loans | Consumer loans | | — | | | — | | Consumer loans | | — | | | — | |
| Commercial equipment | Commercial equipment | | 666 | | | 691 | | Commercial equipment | | 211 | | | 691 | |
| | U.S. SBA PPP loans | U.S. SBA PPP loans | | 1 | | | 57 | | U.S. SBA PPP loans | | — | | | 57 | |
Total non-accrual loans (1) | Total non-accrual loans (1) | | 7,465 | | | 7,631 | | Total non-accrual loans (1) | | 6,290 | | | 7,631 | |
| | OREO | OREO | | — | | | — | | OREO | | — | | | — | |
| TDRs: (1) (2) | TDRs: (1) (2) | | TDRs: (1) (2) | |
| Commercial real estate | Commercial real estate | | — | | | — | | Commercial real estate | | — | | | — | |
| Residential first mortgages | Residential first mortgages | | — | | | — | | Residential first mortgages | | — | | | — | |
| Residential rentals | Residential rentals | | — | | | — | | Residential rentals | | — | | | — | |
| Construction and land development | Construction and land development | | — | | | — | | Construction and land development | | — | | | — | |
| Home equity and second mortgages | Home equity and second mortgages | | — | | | — | | Home equity and second mortgages | | — | | | — | |
| Commercial loans | Commercial loans | | — | | | — | | Commercial loans | | — | | | — | |
| Consumer loans | Consumer loans | | — | | | — | | Consumer loans | | — | | | — | |
| Commercial equipment | Commercial equipment | | 442 | | | 447 | | Commercial equipment | | 433 | | | 447 | |
| | U.S. SBA PPP loans | U.S. SBA PPP loans | | — | | | — | | U.S. SBA PPP loans | | — | | | — | |
| Total TDRs | Total TDRs | | 442 | | | 447 | | Total TDRs | | 433 | | | 447 | |
| Total Accrual TDRs | Total Accrual TDRs | | 442 | | | 447 | | Total Accrual TDRs | | 433 | | | 447 | |
| | Total non-accrual loans, OREO and Accrual TDRs | Total non-accrual loans, OREO and Accrual TDRs | | $ | 7,907 | | | $ | 8,078 | | Total non-accrual loans, OREO and Accrual TDRs | | $ | 6,723 | | | $ | 8,078 | |
| | Interest income due at stated rates, but not recognized on non-accruals | Interest income due at stated rates, but not recognized on non-accruals | | $ | 40 | | | $ | 102 | | Interest income due at stated rates, but not recognized on non-accruals | | $ | 36 | | | $ | 102 | |
(1) Non-accrual loans include all loans that are 90 days or more delinquent and loans that are non-accrual due to the operating results or cash flows of a customer.
(2) TDR loans include both non-accrual and accruing performing loans. All TDR loans are included in the calculation of asset quality financial ratios. Non-accrual TDR loans are included in the non-accrual balance and accruing TDR loans are included in the accruing TDR balance.
Non-performing assets, which consist of OREO, non-accrual loans and TDRs, decreased $0.2$1.4 million from $8.1 million at December 31, 2021 to $7.9$6.7 million at March 31,September 30, 2022.
Non-accrual loans and OREO to total portfolio loans and OREO decreased two12 basis points from 0.48% at December 31, 2021 to 0.46%0.36% at March 31,September 30, 2022. Non-accrual loans, OREO and TDRs to total assets decreased oneseven basis points from 0.35% at December 31, 2021 to 0.34%0.28% at March 31,September 30, 2022.
All interest accrued but not collected from loans that are placed on non-accrual or charged-off is reversed against interest income. Interest income is recognized on a cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the collection of additional interest is doubtful. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Non-accrual loans include certain loans that are current with all loan payments and are placed on non-accrual status due to customer operating results and cash flows. Non-accrual loans are considered impaired and evaluated for impairment on a loan-by-loan basis.
At March 31,September 30, 2022, there were $6.3$5.7 million (84%(90.8%) of non-accrual loans current with all payments of principal and interest with specific reserves of $0.3$0.1 million. Delinquent non-accrual loans were $1.2$0.6 million (16%(9.2%) of with no specific reserves at March 31,September 30, 2022. At December 31, 2021, there were $6.7$6.1 million (88%(98.0%) of non-accrual loans current with all payments of principal and interest with no impairment and $0.9$0.1 million (12%(2.0%) of delinquent non-accrual loans with a total of zerotwenty-nine thousand specifically reserved. There were no non-accrual TDRs at March 31,September 30, 2022. Non-accrual loans at December 31, 2021 included zero TDRs. These loans were classified solely as non-accrual for the calculation of financial ratios.
Other Real Estate Owned
There were no OREO balances at March 31,September 30, 2022 and at December 31, 2021. For additional information on OREO, refer to Note 5 of the Consolidated Financial Statements.
LIABILITIES
The following table shows the Company’s liabilities and the dollar and percentage changes for the periods presented.
| | (dollars in thousands) | (dollars in thousands) | | March 31, 2022 | | December 31, 2021 | | $ Change | | % Change | (dollars in thousands) | | September 30, 2022 | | December 31, 2021 | | $ Change | | % Change |
| Deposits | Deposits | | | | | | | | | Deposits | | | | | | | | |
| Non-interest-bearing deposits | Non-interest-bearing deposits | | $ | 644,385 | | | $ | 445,778 | | | $ | 198,607 | | | 44.6 | % | Non-interest-bearing deposits | | $ | 647,432 | | | $ | 445,778 | | | $ | 201,654 | | | 45.2 | % |
| Interest-bearing deposits | Interest-bearing deposits | | 1,450,698 | | | 1,610,386 | | | (159,688) | | | (9.9) | % | Interest-bearing deposits | | 1,479,125 | | | 1,610,386 | | | (131,261) | | | (8.2) | % |
| Total deposits | Total deposits | | 2,095,083 | | | 2,056,164 | | | 38,919 | | | 1.9 | % | Total deposits | | 2,126,557 | | | 2,056,164 | | | 70,393 | | | 3.4 | % |
| | Long-term debt | Long-term debt | | 12,213 | | | 12,231 | | | (18) | | | (0.1) | % | Long-term debt | | — | | | 12,231 | | | (12,231) | | | (100.0) | % |
| | Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs") | Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs") | | 12,000 | | | 12,000 | | | — | | | — | % | Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs") | | 12,000 | | | 12,000 | | | — | | | — | % |
| Subordinated notes net of debt issuance costs - 4.75% | Subordinated notes net of debt issuance costs - 4.75% | | 19,524 | | | 19,510 | | | 14 | | | — | % | Subordinated notes net of debt issuance costs - 4.75% | | 19,552 | | | 19,510 | | | 42 | | | 0.2 | % |
| Lease liabilities - operating leases | Lease liabilities - operating leases | | 6,266 | | | 6,343 | | | (77) | | | (1.2) | % | Lease liabilities - operating leases | | 6,288 | | | 6,343 | | | (55) | | | (0.9) | % |
| Accrued expenses and other liabilities | Accrued expenses and other liabilities | | 13,697 | | | 12,925 | | | 772 | | | 6.0 | % | Accrued expenses and other liabilities | | 16,070 | | | 12,925 | | | 3,145 | | | 24.3 | % |
| Total Liabilities | Total Liabilities | | $ | 2,158,783 | | | $ | 2,119,173 | | | $ | 39,610 | | | 1.9 | % | Total Liabilities | | $ | 2,180,467 | | | $ | 2,119,173 | | | $ | 61,294 | | | 2.9 | % |
Funding
The Bank uses retail deposits and wholesale funding. Wholesale funding includes short-term borrowings, long-term debt and brokered deposits. Retail deposits continue to be the most significant source of funds totaling $2,087.1$2,126.5 million or 99.0%100.0% of funding at March 31,September 30, 2022 compared to $2,048.2 million or 99.0% of funding at December 31, 2021. Wholesale funding, which consists of FHLB advancesshort-term borrowings, long-term debt and brokered deposits, was $20.2 million or 1.0% of fundingzero at March 31,September 30, 2022 compared to $20.2 million or 1.0% of funding at December 31, 2021.
In addition to funding for operations, the Company had junior subordinated debentures of $12.0 million and subordinated notes of $20.0 million of 4.75% fixed-to-floating rate subordinated notes at March 31,September 30, 2022 and December 31, 2021.
The following is a breakdown of the Company’s deposit portfolio at March 31,September 30, 2022 and December 31, 2021:
| | | March 31, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
| (dollars in thousands) | (dollars in thousands) | | Balance | | % | | Balance | | % | (dollars in thousands) | | Balance | | % | | Balance | | % |
| Noninterest-bearing demand | Noninterest-bearing demand | | $ | 644,385 | | | 30.76 | % | | $ | 445,778 | | | 21.68 | % | Noninterest-bearing demand | | $ | 647,432 | | | 30.45 | % | | $ | 445,778 | | | 21.68 | % |
| Interest-bearing: | Interest-bearing: | | Interest-bearing: | |
| Demand | Demand | | 618,869 | | | 29.54 | % | | 790,481 | | | 38.44 | % | Demand | | 691,987 | | | 32.54 | % | | 790,481 | | | 38.45 | % |
| Money market deposits | Money market deposits | | 387,700 | | | 18.51 | % | | 372,717 | | | 18.13 | % | Money market deposits | | 371,175 | | | 17.45 | % | | 372,717 | | | 18.13 | % |
| Savings | Savings | | 124,038 | | | 5.92 | % | | 119,767 | | | 5.82 | % | Savings | | 123,564 | | | 5.81 | % | | 119,767 | | | 5.82 | % |
| Certificates of deposit | Certificates of deposit | | 320,091 | | | 15.28 | % | | 327,421 | | | 15.92 | % | Certificates of deposit | | 292,399 | | | 13.75 | % | | 327,421 | | | 15.92 | % |
| Total interest-bearing | Total interest-bearing | | 1,450,698 | | | 69.24 | % | | 1,610,386 | | | 78.32 | % | Total interest-bearing | | 1,479,125 | | | 69.55 | % | | 1,610,386 | | | 78.32 | % |
| | Total Deposits | Total Deposits | | $ | 2,095,083 | | | 100.00 | % | | $ | 2,056,164 | | | 100.00 | % | Total Deposits | | $ | 2,126,557 | | | 100.00 | % | | $ | 2,056,164 | | | 100.00 | % |
| | Transaction accounts | Transaction accounts | | $ | 1,774,992 | | | 84.72 | % | | $ | 1,728,743 | | | 84.08 | % | Transaction accounts | | $ | 1,834,158 | | | 86.25 | % | | $ | 1,728,743 | | | 84.08 | % |
Total deposits increased $38.9$70.4 million or 1.89% (7.6%3.42% (4.6% annualized) at March 31,September 30, 2022 compared to December 31, 2021. The increase reflects a $46.2Transacrtion deposits grew by $105.4 million increase to transactionwhile time deposits offsetting a $7.3 million decrease to time deposits. The Bank typically experiences a reduction in transaction deposits duringdeclined by $35.0 million. During the first quarter as its customers use transaction account balances to pay expenses and taxes accrued in the prior year. In the first quarternine months of 2022, however, transactionnon-interest-bearing demand deposits increased due$201.7 million to new customer acquisitions as well as$647.4 million at September 30, 2022, representing 30.5% of deposits, compared to 21.7% of deposits at December 31, 2021. The Company's business development efforts continue to focus on increasing non-interest bearing and lower levels of consumer and business spending.cost transaction accounts. The Bank's increased customer deposit balances provided additional on-balance sheet liquidity compared to the prior year.
For FDIC call reporting purposes reciprocal deposits are classified as brokered deposits when they exceed 20% of a bank’s liabilities or $5.0 billion. Reciprocal deposits considered brokered deposits for call reporting purposes at March 31,September 30, 2022 were $69.2$136.8 million compared to $65.7 million at December 31, 2021. Reciprocal deposits are included in retail deposits and are used to maximize FDIC insurance available to the Bank's customers.
STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
The following table shows the Company’s equity and the dollar and percentage changes for the periods presented.
| | (dollars in thousands) | (dollars in thousands) | | March 31, 2022 | | December 31, 2021 | | $ Change | | % Change | (dollars in thousands) | | September 30, 2022 | | December 31, 2021 | | $ Change | | % Change |
| Common Stock at par of $0.01 | Common Stock at par of $0.01 | | $ | 57 | | | $ | 57 | | | $ | — | | | — | % | Common Stock at par of $0.01 | | $ | 56 | | | $ | 57 | | | $ | (1) | | | (1.75) | % |
| Additional paid in capital | Additional paid in capital | | 97,189 | | | 96,896 | | | 293 | | | 0.30 | % | Additional paid in capital | | 97,712 | | | 96,896 | | | 816 | | | 0.84 | % |
| Retained earnings | Retained earnings | | 115,179 | | | 113,448 | | | 1,731 | | | 1.53 | % | Retained earnings | | 125,608 | | | 113,448 | | | 12,160 | | | 10.72 | % |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (18,969) | | | (1,952) | | | (17,017) | | | 871.77 | % | Accumulated other comprehensive loss | | (43,906) | | | (1,952) | | | (41,954) | | | 2,149.28 | % |
| Unearned ESOP shares | Unearned ESOP shares | | (316) | | | (316) | | | — | | | — | % | Unearned ESOP shares | | (316) | | | (316) | | | — | | | — | % |
| Total Stockholders’ Equity | Total Stockholders’ Equity | | $ | 193,140 | | | $ | 208,133 | | | $ | (14,993) | | | (7.20) | % | Total Stockholders’ Equity | | $ | 179,154 | | | $ | 208,133 | | | $ | (28,979) | | | (13.92) | % |
Total stockholders’ equity decreased $29.0 million during the nine months ended September 30, 2022. Equity increased due to net income of $20.7 million and net stock related activities in connection with stock-based compensation and ESOP activity of $0.7 million. The decrease in equity was primarily due to an increase $17.0of $42.0 million in accumulated other comprehensive loss ("AOCL") in the Bank's AFS securities portfolio due to changes in market interest rates. In addition, equity decreased fromfor common dividends paid of $0.9$2.8 million, stock repurchases totaling $1.6of $3.6 million and $2.0 million for the adoption ASC 326.of the CECL accounting standard on January 1, 2022. On February 24,May 25, 2022, the Company announced a quarterly cash dividend from the previousof $0.175 per share of common stock. The dividend was paid on or about April 25,July 26, 2022 to stockholders of record as of the close of business on AprilJuly 12, 2022.
The Company had a book value per common share of $33.96$31.74 and $36.40, at March 31,September 30, 2022 and December 31, 2021, respectively. Tangible book value at March 31,September 30, 2022 and December 31, 2021 was $31.90$29.69 and $34.32. The Company's common equity to assets ratio decreased to 8.21%7.59% at March 31,September 30, 2022 from 8.94% at December 31, 2021. The Company’s ratio of TCE to tangible assets decreased to 7.75%7.14% at March 31,September 30, 2022 from 8.48% at December 31, 2021 (see Non-GAAP reconciliation schedules). The decrease in the TCE ratio was due primarily to increased unrealized losses in the Bank's AFS investment portfolio.
In April 2020, banking regulators issued an interim final rule that excluded U.S. SBA PPP loans from the calculation of risk-based capital ratios by assigning a zero percent risk weight. The Company remains well capitalized at March 31,September 30, 2022 with a Tier 1 capital to average assets ("leverage ratio") of 9.17%9.56% at March 31,September 30, 2022 compared to 9.23% at December 31, 2021.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
The Company has no business other than holding the stock of the Bank and does not have significant operating cash needs, except for the payment of dividends declared on common stock, and the payment of interest on subordinated debentures and subordinated notes, and noninterest expense.
The Company evaluates capital resources by its ability to maintain adequate regulatory capital ratios. The Company and the Bank annually update a three-year strategic capital plan. In developing its plan, the Company considers the impact to capital of asset growth, income accretion, dividends, holding company liquidity, investment in markets and people and stress testing.
Federal banking regulations require the Company and the Bank to maintain specified levels of capital. As of March 31,September 30, 2022 and December 31, 2021, the Company and Bank were well-capitalized under the regulatory framework for prompt corrective action under the Basel III Capital Rules. Management believes, as of March 31,September 30, 2022 and December 31, 2021, that the Company and the Bank met all capital adequacy requirements to which they were subject. See Note 10 of the Consolidated Financial Statements.
Liquidity
Liquidity is our ability to meet cash demands as they arise. Cash needs may come from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position.
Based on management’s going concern evaluation, we believe that there are no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s or the Bank’s ability to continue as a going concern, within one year of the date of the issuance of the financial statements.
The Company’s principal sources of liquidity are cash on hand and dividends received from the Bank. The Bank’s most liquid assets are cash, cash equivalents and federal funds sold. The levels of such assets are dependent on the Bank’s operating, financing and investment activities at any given time. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows. Customer deposits are considered the primary source of funds supporting the Bank’s lending and investment activities.
Liquidity is provided by access to funding sources, which include core depositors and brokered deposits. Other sources of funds include our ability to borrow, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and advances from the FHLB of Atlanta. The Bank uses wholesale funding (brokered deposits and other sources of funds) to supplement funding when loan growth exceeds core deposit growth and for asset-liability management purposes.
At March 31,September 30, 2022 and December 31, 2021, the Bank had $68.8$59.1 million and $64.4 million, respectively, in loan commitments outstanding. In addition, at March 31,September 30, 2022 and December 31, 2021, the Bank had $23.7$23.0 million and $22.0 million, respectively, in letters of credit and approximately $222.6$261.1 million and $241.7 million, respectively, available under lines of credit. Certificates of deposit due within one year of March 31,September 30, 2022 and December 31, 2021 totaled $260.7$225.5 million, or 81.45%77.11% and $256.9 million, or 78.45%, respectively, of total certificates of deposit outstanding. If maturing deposits do not remain, the Bank will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, the Bank may be required to pay higher rates on such deposits or other borrowings than the Bank currently pays on the certificates of deposits. Management believes, however, based on past experience that a significant portion of the Bank's certificates of deposit will remain with the Bank. Management has the ability to attract and retain deposits by adjusting the interest rates offered.
Management has increased oversight and review of customer line of credit usage.usage due to current inflationary pressures and the possibility of a recession. If we were to experience increases in draws on customer lines of credit or decreased deposit levels in future periods as a result of the distressed economic conditions in our market areas, relating to the COVID-19 pandemic, our level of borrowed funds could increase.
At March 31,September 30, 2022, the Company had on-balance sheet liquidity of $113.2$53.3 million in cash and cash equivalents. At March 31,September 30, 2022, the Company had loans and securities pledged or in safekeeping at FHLB which provided for funding availability of $562.7$564.0 million at March 31,September 30, 2022.
Advances from the FHLB are secured by the Bank’s stock in the FHLB, a portion of the Bank’s loan portfolio and certain investments. Generally, the Bank’s ability to borrow from the FHLB of Atlanta is limited by its available collateral and also by an overall limitation of 30% of assets. FHLB long-term debt consistsmay consist of adjustable-rate advances with rates based upon LIBOR, fixed-rate advances, and convertible advances. As of March 31,September 30, 2022, 100% of the Bank'sBank has no FHLB long-term debt was fixed for rate and term, as the conversion optionality of the advances have either been exercised or expired. In addition, theoutstanding. The Bank has also established unsecured and secured lines of credit with the Federal Reserve Bank and commercial banks.
The decrease in equity of $29.0 million during the nine months ended September 30, 2022 was primarily due to an increase of $42.0 million in AOCL in the Bank's AFS securities portfolio due to changes in market interest rates. The Company intends and has the ability to hold AFS securities with unrealized losses until maturity or interest rates decrease. Management believes there is adequate available liquidity with available lines of credit and cash to fund operational needs.
For additional information on these agreements, including collateral, see Note 8 of the Consolidated Financial Statements as presented in the Company’s Form 10-K for the year ended December 31, 2021.
The Company’s net loan to deposit ratio increased from 77.2% at December 31, 2021 and to 77.5%81.0% at March 31,September 30, 2022. The Company intends to use available on-balance sheet liquidity to fund loans increase investments and limit the use of wholesale funding.
The Bank’s principal sources of funds for investment and operations are net income, deposits, sales of loans, borrowings, principal and interest payments on loans, principal and interest received on investment securities and proceeds from the maturity and sale of investment securities. The Bank’s principal funding commitments are for the origination or purchase of loans, the purchase of securities and the payment of maturing deposits.
The Bank is subject to various regulatory restrictions on the payment of dividends.
The Bank’s most liquid assets are cash, cash equivalents and federal funds sold. The levels of such assets are dependent on the Bank’s operating, financing and investment activities at any given time. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows.
During the threenine months ended March 31,September 30, 2022, all financing activities provided $36.4$51.8 million in cash compared to $121.4$234.9 million in cash for the same period in 2021. Cash from financing activities decreased $85.0$183.1 million for the threenine months ended March 31,September 30, 2022 compared to the threenine months ended March 31,September 30, 2021 primarily due to decreased deposit growth of $83.4$188.6 million and increasesan increase in dividends paid, slightly offset by a decrease in payments of long-term debt and repurchases of common stock.
During the threenine months ended March 31,September 30, 2022 all investing activities used $73.6$165.7 million in cash compared to $19.8$195.2 million in cash used for the same period in 2021. The increasedecrease in cash used was primarily the result of purchases of investment securities andwhich decreased $196.6 million from $265.7 million for the nine months ended September 30, 2021 to $69.1 million for the nine months ended September 30, 2022. Cash used increased $160.5 million as cash used for loan activities which increased $10.8 million and $21.1 million from $35.6 million and $18.7 million, respectively, for the threenine months ended March 31, 2021 to $46.4 million and $39.8 million, respectively, forSeptember 30, 2022 increased over the three months ended March 31, 2022. Cashprior year comparable period. In addition, cash used increased $11.9decreased $5.5 million as total proceeds from the sales and principal payments of available for sale securities for the threenine months ended March 31,September 30, 2022 decreased over the prior year comparable period.
Operating activities usedprovided cash of $10.7$27.5 million, or $1.5$2.9 million moreless cash, for the threenine months ended March 31,September 30, 2022, compared to $9.2$30.5 million of cash provided for the same period of 2021.
For information on risks relating to liquidity, see Item 1A. "Risk Factors - Liquidity Risk", as presented in the Company's Form 10-K for the year ended December 31, 2021.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest rate risk is defined as the exposure to changes in net interest income and capital that arises from movements in interest rates. Depending on the composition of the balance sheet, increasing or decreasing interest rates can negatively affect the Company’s results of operations and financial condition.
The Company measures interest rate risk over the short and long term. The Company measures interest rate risk as the change in net interest income (“NII”) caused by a change in interest rates over twelve and twenty-four months. The Company’s NII simulations provide information about short-term interest rate risk exposure. The Company also measures interest rate risk by measuring changes in the values of assets and liabilities due to changes in interest rates. The economic value of equity (“EVE”) is defined as the present value of future cash flows from existing assets, minus the present value of future cash flows from existing liabilities. EVE simulations reflect the interest rate sensitivity of assets and liabilities over a longer time period, considering the maturities, average life and duration of all balance sheet accounts.
The Board of Directors has approved the Company's interest rate risk policy and assigned oversight to the Board Risk Oversight Committee (“BROC”). The policy establishes limits on risk, which are quantitative measures of the percentage change in NII and EVE resulting from changes in interest rates. Both NII and EVE simulations assist in identifying, measuring, monitoring and controlling interest rate risk and along with mitigating strategies are used by management to maintain interest rate risk exposure within Board policy guidelines.
The Company’s interest rate risk (“IRR”) model uses assumptions which include factors such as call features, prepayment options and interest rate caps and floors included in investment and loan portfolio contracts. The IRR model estimates the lives and interest rate sensitivity of the Company’s non-maturity deposits. These assumptions have a significant effect on model results. The assumptions are developed primarily based upon historical behavior of Bank customers. The Company also considers industry and regional data in developing IRR model assumptions. There are inherent limitations in the Company’s IRR model and underlying assumptions. When interest rates change, actual movements of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model.
The Company prepares a current base case and several alternative simulations at least quarterly. Current interest rates are shocked by +/- 100, 200, 300, and 400 basis points (“bp”). In addition, the Company simulates additional rate curve scenarios (e.g., bear flattener). The Company may elect not to use particular scenarios that it determines are impractical in a current rate environment.
The Company’s internal limits for parallel shock scenarios are as follows:
| | | | | | | | | | | | | | |
| Shock in Basis Points | | Net Interest Income | | Economic Value of Equity |
| + - 400 | | 25% | | 40% |
| + - 300 | | 20% | | 30% |
| + - 200 | | 15% | | 20% |
| + - 100 | | 10% | | 10% |
It is management’s goal to manage the Bank’s portfolios so that net interest income at risk over twelve and twenty-four-month periods and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels. At March 31,September 30, 2022 and December 31, 2021, the Company did not exceed any Board approved sensitivity limits for percentage change in net interest income. In the firstthird quarter of 2022 the percentage change in economic value of equity slightly exceeded policy guidelines due to already low level of rates on non-maturing deposit instruments. Management has determined that due to the level of market rates at March 31,September 30, 2022, interest rate shocks of -100, -200, -300 and -400 basis points leave the Bank with near zero down to negative rate instruments and are not considered practical or informative. Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. The below schedule estimates the changes in net interest income over a twelve-month period for parallel rate shocks for up 200, 100 and down 100 scenarios:
| | | | | | | | | | | | | | | | | | | | |
| Estimated Changes in Net Interest Income | | | | | | |
| Change in Interest Rates: | | + 200 bp | | + 100 bp | | -100 bp |
| Policy Limit | | (15.00) | % | | (10.00) | % | | (10.00) | % |
| | | | | | |
| | | | | | |
| | | | | | |
| March 31, 2022 | | (1.83) | % | | (0.84) | % | | (5.95) | % |
| December 31, 2021 | | (1.54) | % | | (0.74) | % | | (1.13) | % |
| | | | | | | | | | | | | | | | | | | | |
| Estimated Changes in Net Interest Income | | | | | | |
| Change in Interest Rates: | | + 200 bp | | + 100 bp | | -100 bp |
| Policy Limit | | (15.00) | % | | (10.00) | % | | (10.00) | % |
| | | | | | |
| September 30, 2022 | | (1.71) | % | | (0.56) | % | | (4.14) | % |
| June 30, 2022 | | 1.60 | % | | 1.55 | % | | (6.23) | % |
| March 31, 2022 | | (1.83) | % | | (0.84) | % | | (5.95) | % |
| December 31, 2021 | | (1.54) | % | | (0.74) | % | | (1.13) | % |
Measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in interest rates on all of the Company’s cash flows, and by discounting the cash flows to estimate the present value of assets and liabilities. The below schedule estimates the changes in the EVE at parallel shocks for up 200, up 100 and down 100 scenarios:
| | Estimated Changes in Economic Value of Equity | Estimated Changes in Economic Value of Equity | | Estimated Changes in Economic Value of Equity | |
| Change in Interest Rates: | Change in Interest Rates: | | + 200 bp | | + 100 bp | | -100 bp | Change in Interest Rates: | | + 200 bp | | + 100 bp | | -100 bp |
| Policy Limit | Policy Limit | | (20.00) | % | | (10.00) | % | | (10.00) | % | Policy Limit | | (20.00) | % | | (10.00) | % | | (10.00) | % |
| | | September 30, 2022 | | September 30, 2022 | | 9.11 | % | | 5.99 | % | | (10.59) | % |
| June 30, 2022 | | June 30, 2022 | | 10.34 | % | | 6.82 | % | | (11.88) | % |
| March 31, 2022 | March 31, 2022 | | 13.66 | % | | 9.28 | % | | (16.40) | % | March 31, 2022 | | 13.66 | % | | 9.28 | % | | (16.40) | % |
| December 31, 2021 | December 31, 2021 | | 24.45 | % | | 15.16 | % | | (25.07) | % | December 31, 2021 | | 24.45 | % | | 15.16 | % | | (25.07) | % |
ITEM 4 – CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its principal executive and financial officers as appropriate to allow timely decisions regarding required disclosure. It should be noted that the design of the Company’s disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company’s principal executive and financial officers have concluded that the Company’s disclosure controls and procedures are, in fact, effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
Effective January 1, 2022, the Company adopted FASB ASU 2016-13. The Company designed new controls and modified existing controls as part of the adoption. Management revised previous internal controls used under legacy GAAP and incorporated new internal controls related to the methodology of the new allowance for credit losses. There were no other changes in the Company's internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
In the normal course of business, the Company becomes involved in litigation arising from the banking, financial and other activities it conducts. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising from these matters will have a material effect on the Company’s financial condition, operating results or liquidity.
Item 1A – Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Part I, “Item 1A- Risk Factors” in the Form 10-K for the year ended December 31, 2021 that the Company filed with the SEC on March 3, 2022. These risk factors could materially affect our business, financial condition or future results. The risks described are not the only risks that the Company face. Additional risks and uncertainties not currently known or that the Company currently deem to be immaterial also may materially adversely affect its business, financial condition and/or operating results. There have been no material changes to the risk factors discussed in the Company's Form 10-K filed on March 3, 2022.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
(a)Not applicable
(b)Not applicable
(c)On October 20, 2020, 184,863 shares were available to be repurchased under the 2015 repurchase plan, and, on that date, the Board of Directors approved an expansion to the 2015 repurchase plan (the "2020 repurchase plan") that allows the Company to repurchase up to 300,000 of the Company’s outstanding shares of common stock using up to $7.0 million of the proceeds the Company raised in its $20.0 million subordinated debt offering completed in October 2020. On July 15, 2021, the Company announced that it had completed the repurchase of the $7.0 million of shares of the Company’s common stock that it was originally authorized to repurchase under the 2020 repurchase plan. On December 9, 2021, the Company announced that its Board of Directors authorized the Company to continue repurchasing shares of the Company’s common stock under the October 2020 repurchase plan using up to $4.0 million in the aggregate and up to $1.5 million in the aggregate on a quarterly basis. As of March 31,September 30, 2022, 51,6640 shares were available to be repurchased under the 2020 repurchase plan. The following schedule shows the repurchases during the three months ended March 31,September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | ( a )
Total Number of Shares Purchased | | ( b )
Average Price Paid per Share | | ( c )
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | ( d )
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| January 1 - 31, 2022 | | 20,516 | | | $ | 39.24 | | | 20,516 | | | 70,197 | |
| February 1 - 28, 2022 | | 14,934 | | | $ | 40.24 | | | 14,934 | | | 55,263 | |
| March 1 - 31, 2022 | | 3,599 | | | $ | 40.07 | | | 3,599 | | | 51,664 | |
| Total | | 39,049 | | | $ | 39.70 | | | 39,049 | | | 51,664 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | ( a )
Total Number of Shares Purchased | | ( b )
Average Price Paid per Share | | ( c )
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | ( d )
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| July 1-31, 2022 | | 1,600 | | | $ | 36.67 | | | 1,600 | | | 12,047 | |
| August 1-31, 2022 | | 12,047 | | | $ | 37.17 | | | 12,047 | | | — | |
| September 1-30, 2022 | | — | | | $ | — | | | — | | | — | |
| Total | | 13,647 | | | $ | 37.11 | | | 13,647 | | | — | |
Item 3 – Defaults Upon Senior Securities
Not applicable.
Item 4 – Mine Safety Disclosures
Not applicable.
Item 5 – Other Information
None
Item 6 – Exhibits | | | | | | | | |
| Number | | Description |
| | |
| | |
| | |
| | |
| 101 | | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,September 30, 2022, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income/Loss, (iv) the Consolidated Statements of Changes in Stockholders' Equity, (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to the Consolidated Financial Statements. |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| THE COMMUNITY FINANCIAL CORPORATION |
| | |
Date: May 9,November 7, 2022 | By: | /s/ William J. PasenelliJames M. Burke |
| | William J. PasenelliJames M. Burke |
| | Chief Executive Officer |
| | |
| | | | | | | | |
| | |
Date: May 9,November 7, 2022 | By: | /s/ Todd L. Capitani |
| | Todd L. Capitani |
| | Chief Financial Officer |
| | |
