AUBURN NATIONAL BANCORPORATION, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
The following is a discussion of our financial condition at
2022 and 2021 and our results of operations for
the years ended
information about our financial condition and results of operations which is not otherwise apparent from the consolidated
financial statements. The following discussion and analysis should be read along with our consolidated financial statements and the related notes included elsewhere herein. In addition, this discussion and analysis contains
forward-looking statements, so you should refer to Item 1A, "Risk Factors" and "Special Cautionary Notice Regarding Forward-Looking Statements".
OVERVIEW
The Company was incorporated in 1990 under the laws of the
holding company after it acquired itsAlabama predecessor,
which was a bank holding company established in 1984. The Bank, the Company's
principal subsidiary, is an
state-chartered bank that is a member of the
inAuburn, Alabama . The Bank conducts its business primarily inEast Alabama , includingLee County and surrounding areas. The Bank operates full-service branches inAuburn ,Opelika ,Notasulga andValley ,
The Bank also operates a loan production office in Phenix
City,Alabama . Table of Contents 51 Summary of Results of Operations Year endedDecember 31 (Dollars in thousands, except per share data) 2022 2021 Net interest income (a)$ 27,622 $ 24,460 Less: tax-equivalent adjustment 456 470 Net interest income (GAAP) 27,166 23,990 Noninterest income 6,506 4,288 Total revenue 33,672 28,278 Provision for loan losses 1,000 (600) Noninterest expense 19,823 19,433 Income tax expense 2,503 1,406 Net earnings$ 10,346 $ 8,039 Basic and diluted net earnings per share$ 2.95 $ 2.27 (a) Tax-equivalent.
See "Table 1 - Explanation of Non-GAAP Financial Measures".
Financial Summary
million for the full year 2022, compared to
Basic and diluted net earnings per share were
compared to$2.27 per share for the full year 2021.
Net interest income (tax-equivalent) was
13% increase compared to
net interest margin.
The Company's net interest margin (tax-equivalent) was 2.81% in 2022, compared to 2.55% in 2021.
This increase was primarily due to changes in our asset mix and higher market interest rates on interest earning assets,
while our cost of funds decreased 4 basis points to 0.35%.
At
for loan losses was
At
investment
in loans considered impaired was
(included in the allowance for loan
losses) of
of$0.2 million with no corresponding valuation allowance atDecember 31, 2021 .
The Company recorded a charge to provision for loan losses of
million during 2021.
The provision for loan losses in 2022 was primarily related to loan growth and the downgrade of one borrowing
relationship.
The provision for loan losses is based upon various estimates and judgements, including the absolute level
of loans, loan growth, credit quality and the amount of net charge-offs.
Net charge-offs as a percent of average loans were 0.04%
in 2022 compared to 0.02% in 2021.
Noninterest income was
million in 2021.
The increase was primarily related to a$3.2 million gain on the sale of land adjacent to the Company's
headquarters.
Excluding the impact of this gain, noninterest income was$3.3 million in 2022, a 24% decrease compared to 2021. This decrease in noninterest income was primarily due to a decrease in mortgage lending income
of
Noninterest expense was
million in 2022 compared to
million in 2021. Noninterest expense included a
Excluding the impact of this payroll tax credit, noninterest expense
was
The increase in noninterest expense was primarily due to
increases in net occupancy and equipment expense of
new headquarters, which opened inJune 2022 ,
an increase in salaries and benefits expense of
million. Table of Contents 52 Income tax expense was$2.5 million in 2022,
compared to
The Company's effective tax
rate for 2022 was 19.48%, compared to 14.89% in 2021.
This increase in tax expense was primarily due to increased pre-tax
earnings in 2022 and additional income tax expense of
decision to surrender certain bank-owned life insurance contracts in 2022.
The Company's effective income
tax rate is principally impacted by tax- exempt earnings from the Company's investments
in municipal securities, bank-owned life insurance, and New Markets Tax Credits.
The Company paid cash dividends of
AtDecember 31, 2022 , the Bank's regulatory capital ratios
were well above the minimum amounts required to be "well capitalized" under current regulatory standards with a total risk-based capital ratio of 16.25
%, a tier 1 leverage ratio of 10.01% and common equity tier 1 ("CET1") of 15.39%
atDecember 31, 2022 . COVID-19 Impact Assessment The COVID-19 pandemic has occurred in waves of different
variants since the first quarter of 2020. Vaccines
to protect against and/or reduce the severity of COVID-19 were widely introduced at the beginning
of 2021. At times, the pandemic severely restricted the level of economic activity in our markets. In response to the
COVID-19 pandemic, the
spread of the virus, including imposing restrictions on travel and business operations and a statewide mask mandate,
advising or requiring individuals to limit or forego their time outside of their homes, limitations on gathering of people and social distancing,
and causing temporary closures of businesses that have been deemed to be non-essential. Though
certain of these measures have been relaxed or eliminated, especially as vaccination levels increased, such measures could be reestablished in cases of new waves, especially a wave of a COVID-19 variant that is more resistant
to existing vaccines,
booster vaccines and newly developed treatments.
COVID-19 significantly affected local state, national and global
health and economic activity and its future effects are uncertain and will depend on various factors, including, among others, the duration
and scope of the pandemic, especially new variants of the virus, effective vaccines and drug treatments, together with governmental, regulatory and private sector responses. COVID-19 has had continuing significant effects
on the economy, financial
markets and our employees, customers and vendors. Our business, financial condition and results of operations
generally rely upon the ability of our borrowers to make deposits and repay their loans, the value of collateral underlying our
secured loans, market value, stability and liquidity and demand for loans and other products and services we offer,
all of which are affected by the pandemic.
We believe that the
direct economic effects of COVID-19 are diminishing, but that indirect effects
from the pandemic and government economic and monetary stimuli to counter the pandemic,
continue.
These indirect effects include a tight labor market, supply chain disruptions, consumer demand and the economic
effects of these stimulative government fiscal and monetary policies in response to COVID-19 beginning in early
2020, which have led to inflation and
to the
2022. We have implemented
a number of procedures in response to the pandemic to support the safety and well-being
of our employees, customers and shareholders. ? We believe our business continuity
plan has worked to provide essential banking services to our communities and customers, while protecting our employees' health. As part of our efforts
to exercise social distancing in
accordance with the guidelines of the
of theState of Alabama , startingMarch 23, 2020 , we limited branch lobby service to appointment only while continuing to operate our branch drive-thru facilities and ATMs.
As permitted by state public health guidelines, on
continue to provide services through our online and other electronic channels. In addition, we maintain remote work access to help employees stay at home while providing continuity of service during outbreaks of
COVID-19 variants. Bank employees, generally, are
working full time in the office although we have provided scheduling
flexibility to our employees. ? We serviced the financial
needs of our commercial and consumer clients with extensions and deferrals
to loan customers effected by COVID-19, provided such customers were not more than 30 days past due at the time of the request; and Table of Contents 53 ? We
were an active PPP lender and made an aggregate of 677 PPP loans totaling
approximately
million.
PPP
loans were forgivable, in whole or in part, if the proceeds are used for payroll
and other permitted purposes in accordance with the requirements of the PPP.
These loans carry a fixed rate of 1.00% and a term of two years
(loans made before
if not forgiven, in whole or
in part. Payments are deferred until either the date on which the
("SBA") remits
the amount of forgiveness proceeds to the lender or the date that is 10
months after the last day of the covered
period if the borrower does not apply for forgiveness within that 10-month
period. We
believe these loans and our participation in the program helped our customers and the communities
we serve.
As of
SBA.
COVID-19 has also had various economic effects, generally.
These include supply chain disruptions and manufacturing delays, shortages of certain goods and services, reduced consumer expenditure on
hospitality and travel, and migration from larger urban centers to less populated areas and remote work. The
demand for single family housing has exceeded existing supplies. When coupled with construction delays attributable to supply chain disruptions
and worker shortages, these factors have caused housing prices and apartment rents to increase, generally.
Stimulative monetary and fiscal policies, along with shortages of certain goods and services, and rising petroleum and food
prices, reflecting, among other things, the war in theUkraine , have led to the highest inflation in decades.
The
atDecember 31, 2022 , and 4.50 - 4.75% atJanuary 31, 2023 .
The
to reduce market liquidity and counteract inflation. A summary of PPP loans extended during 2020 follows: (Dollars in thousands) # of SBA Approved Mix $ of SBA Approved Mix SBA Tier:$2 million to$10 million - - % $ - - %$350,000 to less than$2 million 23 5 14,691 40 Up to$350,000 400 95 21,784 60 Total 423 100 %$ 36,475 100 % We collected
approximately
December
31, 2021, we had recognized all of these fees, net of related costs. As of
2021, we had received payments and forgiveness on all PPP loans extended in 2020. OnDecember 27, 2020 , the Economic Aid to Hard-Hit Small Businesses, Nonprofits,
and Venues
Act (the "Economic Aid Act") was signed into law. The
Economic Aid Act provided a second
$325 billion in additional PPP loans. The Economic Aid Act also permits the collection of a higher amount of PPP loan fees by participating banks.
A summary of PPP loans extended during 2021 under the Economic Aid Act
follows: (Dollars in thousands) # of SBA Approved Mix $ of SBA Approved Mix SBA Tier:$2 million to$10 million - - % $ - - %$350,000 to less than$2 million 12 5 6,494 32 Up to$350,000 242 95 13,757 68 Total 254 100 %$ 20,251 100 % We collected
approximately
Aid Act. ThroughDecember 31, 2022 , we have recognized all of these fees, net of related costs. As ofDecember 31, 2022 , we have received payments and forgiveness on all but one PPP loan, in the amount of$0.1
million, under the Economic Aid Act.
Table of Contents 54 We believe that the COVID-19
pandemic stimuli and decreased economic activity increased customer liquidity and
tier
deposits at the Bank and decreased loan demand, while monetary stimulus reduced
interest rates and our costs of funds and our interest earnings on loans.
As a result, our net interest margin was adversely affected.
A return to higher interest rates appears underway, beginning in
to curb inflation.
This has resulted in improved net interest margin, but at the same time
has reduced the market values of our securities portfolio and resulted in unrealized securities losses.
As a result, we have had losses in our other comprehensive income and our equity under generally accepted accounting principles has declined.
This has not adversely affected our regulatory capital, however.
We continue to closely
monitor the pandemic's effects,
and are working to continue our services and to address developments as those occur. Our results of operations
for the year ended
pandemic, may not be indicative of future results or financial conditions, including possible changes in monetary or fiscal stimulus,
and the possible effects of the expiration or extension of temporary accounting and bank regulatory relief measures in
response to the COVID-19 pandemic. As ofDecember 31, 2022 ,
all of our capital ratios were in excess of all regulatory requirements to be well capitalized.
Inflation and the shift from stimulative monetary policy in response to the COVID-19
pandemic to tightening monetary
policy beginning in
credit quality and our regulatory capital ratios, and inflation will affect our costs, interest rates and the values of our assets and
liabilities, changes in customer savings and payment behaviors and economic activity.
Continuing supply chain disruptions and tight labor markets also adversely affect the levels and costs of economic activities.
We continue to closely
monitor these continuing effects of the pandemic, and are working to anticipate and address developments. The CARES Act and the 2020 Consolidated Appropriations Act provide eligible employers an employee retention credit related to COVID-19.
After consultation with our tax advisors, we filed amended payroll tax returns
with the
new medications and increased resistance to the virus as a result of prior infections, although new strains continue
to appear. The economic effects of the pandemic and government fiscal and monetary policy responses, supply chain disruptions and inflation continue, however. CRITICAL ACCOUNTING POLICIES The accounting and financial reporting policies of the Company conform withU.S. generally accepted
accounting
principles and with general practices within the banking industry.
In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance
for loan losses, our assessment of other-than-temporary impairment, recurring and
non-recurring fair value measurements, the valuation of other real estate owned, and the valuation of deferred tax assets, were critical to the determination
of our financial position and results of operations. Other policies also require subjective judgment and assumptions
and may accordingly impact our financial position and results of operations. Allowance for Loan Losses The Company assesses the adequacy of its allowance for loan losses prior
to the end of each calendar quarter. The
level of the allowance is based upon management's
evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect
a borrower's ability to repay (including the timing of future payment), the estimated value of any underlying collateral,
composition of the loan portfolio, economic conditions, changes in, and expectations regarding, market interest rates and inflation,
industry and peer bank loan loss rates and other pertinent factors. This evaluation is inherently subjective as it requires
material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible
to significant change. Loans are charged off, in whole or in part, when management
believes that the full collectability of the loan is unlikely.
A
loan may be partially charged-off after a "confirming event"
has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely.
In addition, our regulators, as an integral part of their examination process, will periodically review the Company's loans and
allowance for loan losses, and may require the Company to make additional provisions to the allowance for loan losses based on their judgment about information available
to them at the time of their examinations. Table of Contents 55 The Company deems loans impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Collection of all amounts due according to the contractual terms means that both the interest and principal payments
of a loan will be collected as scheduled in the loan agreement. An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan's effective
interest rate, or if the loan is collateral dependent, impairment measurement is based on the fair value of the collateral, less estimated disposal costs. The level of the allowance for loan losses maintained is believed by
management, based on its processes and estimates, to be adequate to absorb probable losses inherent in the portfolio at the balance sheet date.
The allowance is increased by provisions charged to expense and decreased by charge-offs,
net of recoveries of amounts previously charged-off and by releases from the allowance when determined to be appropriate to the levels of loans and probable
loan losses in such loans. In assessing the adequacy of the allowance, the Company also considers the results of its
ongoing internal, independent loan review process. The Company's loan
review process assists in determining whether there are loans in the portfolio whose credit quality has weakened over time and evaluating the risk characteristics of the
entire loan portfolio. The Company's loan review process includes the judgment
of management, the input from our independent loan reviewers, and reviews that may have been conducted by bank regulatory agencies as part of their
examination process. The Company incorporates loan review results in the determination of whether or not it is probable
that it will be able to collect all amounts due according to the contractual terms of a loan. As part of the Company's quarterly assessment
of the allowance, management divides the loan portfolio into five segments: commercial and industrial, construction and land development, commercial real estate,
residential real estate, and consumer installment loans. The Company analyzes each segment and estimates an allowance allocation
for each loan segment. The allocation of the allowance for loan losses begins with a process of estimating the
probable losses inherent for these types of loans. The estimates for these loans are established by category and based
on the Company's internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the Company's
internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may
make adjustments based, in part, on loss rates of peer bank
groups. At
its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups. The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management's estimate of probable losses for several "qualitative and environmental" factors.
The allocation for qualitative and environmental factors is particularly subjective and does not lend itself to exact mathematical calculation.
This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of
the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, credit
concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures and other influencing factors.
These qualitative and environmental factors are considered for each of the five loan segments
and the allowance allocation, as determined by the processes noted above, is increased or
decreased based on the incremental assessment of these factors. The Company regularly re-evaluates its practices in determining the allowance for loan losses. Since the fourth quarter of 2016, the Company has increased its look-back period each quarter to incorporate the effects of at least one economic downturn in its loss history. The Company believes
the extension of its look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this extension, the early cycle periods in which the
Company experienced significant losses would be excluded from the determination of the allowance for loan losses and its balance
would decrease. For the year endedDecember 31, 2022 , the Company increased its look-back period to 55 quarters to continue to include losses incurred by the Company beginning with the first quarter of 2009.
During 2021, the Company adjusted certain qualitative and economic factors to reflect improvements in economic conditions in our primary
market area that had previously been observed as a result of the COVID-19 pandemic.
No changes were made to qualitative and economic factors during 2022.
Table of Contents 56 Assessment for Other-Than-Temporary Impairment of Securities On a quarterly basis, management makes an assessment to determine
whether there have been events or economic circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily
impaired.
For debt securities with an unrealized loss, an other-than-temporary
impairment write-down is triggered when (1) the Company has the intent to sell a debt security,
(2) it is more likely than not that the Company will be required to sell the debt security before recovery of its amortized cost basis, or (3) the Company does not expect
to recover the entire amortized cost basis of the debt security.
If the Company has the intent to sell a debt security or if it is more likely than not that it
will
be required to sell the debt security before recovery,
the other-than-temporary write-down is equal to the entire difference between the debt security's amortized cost
and its fair value.
If the Company does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery,
the other-than-temporary impairment write- down is separated into the amount that is credit related (credit loss component) and the amount due to all other
factors.
The
credit loss component is recognized in earnings and is the difference between
the security's amortized cost basis and
the
present value of its expected future cash flows.
The remaining difference between the security's
fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income, net of applicable taxes. The Company is required to own certain stock as a condition of membership, such
as FHLB and FRB.
These non- marketable equity securities are accounted for at cost which equals par or redemption value.
These securities do not have a readily determinable fair value as their ownership is restricted and there is no market
for these securities. The Company records these non-marketable equity securities as a component of other assets, which are periodically evaluated for impairment. Management considers these non-marketable equity securities to
be long-term investments. Accordingly,
when
evaluating these securities for impairment, management considers
the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Fair Value
Determination
assets and liabilities at fair value, including investments classified as available-for-sale and derivatives. ASC 820, Fair Value Measurements and Disclosures , which defines fair value, establishes a framework for measuring fair value in accordance withU.S. GAAP and expands disclosures about fair value measurements.
For more information regarding fair value measurements and disclosures, please refer to Note 14, Fair Value,
of the consolidated financial statements that accompany this report. Fair values are based on active market prices of identical assets or liabilities when available.
Comparable assets or liabilities or a composite of comparable assets in active markets are used when identical assets or liabilities do not have readily available active market pricing.
However, some of the Company's
assets or liabilities lack an available or comparable trading market characterized by frequent transactions between willing buyers and sellers. In these cases, fair value is estimated using pricing models that use discounted cash flows and other pricing techniques. Pricing models and their underlying assumptions are based upon management's
best estimates for appropriate discount rates, default rates, prepayments, market volatility and other factors, taking into account current observable
market data and experience. These assumptions may have a significant effect on the reported
fair values of assets and liabilities and the related income and expense. As such, the use of different models and assumptions, as
well as changes in market conditions, could result in materially different net earnings and retained earnings results.
Other Real Estate Owned Other real estate owned or OREO, consists of properties obtained through foreclosure or
in satisfaction of loans and is reported at the lower of cost or fair value, less estimated costs to sell at the date acquired
with any loss recognized as a charge-off through the allowance for loan losses. Additional
OREO losses for subsequent valuation adjustments are determined on a specific property basis and are included as a component of other noninterest
expense along with holding costs. Any gains or losses on disposal of OREO are also reflected in noninterest expense.
Significant judgments and complex estimates are required in estimating the fair value of OREO, and the period
of time within which such estimates can be considered current is significantly shortened during periods of market volatility. As a result, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of OREO. Table of Contents 57 Deferred Tax
Asset Valuation A valuation allowance is recognized for a deferred tax asset if, based on the weight of available
evidence, it is more-likely- than-not that some portion or the entire deferred tax asset will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. At
2022 we had total deferred tax assets of
in our securities portfolio.
Based upon the level of taxable income over the last three years and projections for future taxable
income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences atDecember 31, 2022 . The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are reduced. Average Balance Sheet and Interest Rates Year endedDecember 31 2022 2021 Average Yield/ Average Yield/ (Dollars in thousands) Balance Rate Balance Rate Loans and loans held for sale$ 454,604 4.45%$ 459,712 4.45% Securities - taxable 364,029 1.81% 320,766 1.28% Securities - tax-exempt (a) 61,591 3.53% 62,736 3.57% Total securities 425,620 2.06% 383,502 1.66% Federal funds sold 43,766 1.00% 38,659 0.15% Interest bearing bank deposits 58,141 0.99% 77,220 0.13% Total interest-earning assets 982,131 3.05% 959,093 2.81% Deposits: NOW 197,177 0.19% 178,197 0.12% Savings and money market 327,139 0.20% 296,708 0.22% Certificates of deposits 154,273 0.84% 159,111 1.03% Total interest-bearing deposits 678,589 0.34% 634,016 0.39% Short-term borrowings 4,516 1.33% 3,349 0.51% Total interest-bearing liabilities 683,105 0.35% 637,365 0.39% Net interest income and margin (a)$ 27,622 2.81%$ 24,460 2.55% (a) Tax-equivalent.
See "Table 1 - Explanation of Non-GAAP
Financial Measures". RESULTS OF OPERATIONS Net Interest Income and Margin Net interest income (tax-equivalent) was$27.6 million in 2022, compared
to
This increase was due to improvements in the Company's net interest
margin (tax-equivalent).
Net interest margin (tax-equivalent) increased to 2.81% in 2022, compared to 2.55% in 2021 due to increases in the Federal
Reserve's target federal
funds rates beginningMarch 17, 2022 , and changes in our asset mix.
During 2022, the
The
target rate was increased another 25 basis points on
and further increases in the target federal funds rate appear likely if inflation remains elevated.
Net interest income (tax-equivalent) included$0.3 million in PPP loan fees, net of related costs for 2022,
compared to
See "Supervision and Regulation - Fiscal and Monetary Policies". The tax-equivalent yield on total interest-earning assets increased by 24 basis points to 3.05% in 2022 compared to 2.81% in 2021.
This increase was primarily due to changes in our asset mix and higher market interest
rates on interest earning assets. Table of Contents 58 The cost of total interest-bearing liabilities decreased by 4 basis points to 0.35%
in 2022 compared to 0.39% in 2021.
The
net decrease in our funding costs was primarily due to a portion of our time deposits repricing into
lower prevailing market interest rates during 2022.
Our deposit costs may increase as the
funds rate, market interest rates increase, and as customer savings behaviors change as a result of inflation
and higher market interest rates on deposits and other alternative investments. The Company continues to deploy various asset liability management strategies
to manage its risk to interest rate fluctuations.
Deposit and loan pricing remains competitive in our markets.
We believe this
challenging competitive environment will continue in 2023.
Our ability to hold our deposit rates low until our interest-earning assets reprice
will be important to maintaining or potentially increasing our net interest
margin during the monetary tightening cycle that we believe will continue in 2023.
Provision for Loan Losses The provision for loan losses represents a charge to earnings necessary to provide
an allowance for loan losses that management believes, based on its processes and estimates, should be adequate to provide for the probable losses on outstanding loans. AtDecember 31, 2022 , the Company's
recorded investment in loans considered impaired was
for loan losses) of
valuation allowance atDecember 31, 2021 .
The Company recorded a charge to provision for loan losses of
million during 2022, compared to a negative provision for loan losses of$0.6 million during 2021.
The provision for loan losses in 2022 was primarily related to loan growth and the downgrade of one borrowing relationship.
The provision for loan losses is based upon various estimates and judgments, including the absolute level of loans, loan growth, credit quality and the amount of
net charge-offs.
Net
charge-offs as a percent of average loans were 0.04% in 2022
compared to 0.02% in 2021.
Based upon its assessment of the loan portfolio, management adjusts the allowance for loan
losses to an amount it believes should be appropriate to adequately cover its estimate of probable losses in the loan portfolio.
The Company's allowance
for loan losses as a percentage of total loans was 1.14% at
to 1.08% at
resulting provision for loan losses charged to operations, are considered adequate by management and are
reviewed from time to time by our regulators, they are based on estimates and judgments and are therefore approximate and imprecise.
Factors beyond our control (such as conditions in the local and national economy,
inflation and market interest rates, and local real estate markets and businesses) may have a material adverse effect on our asset
quality and the adequacy of our allowance for loan losses under CECL resulting in significant increases in the provision for credit losses. Noninterest Income
Year endedDecember 31 (Dollars in thousands) 2022 2021 Service charges on deposit accounts$ 598 $ 566 Mortgage lending 650 1,547 Bank-owned life insurance 317 403 Gain on sale of premises and equipment 3,234 - Securities gains, net 12 15 Other 1,695 1,757 Total noninterest income$ 6,506 $ 4,288 The Company's noninterest income from
mortgage lending is primarily attributable to the (1) origination and sale of new mortgage loans and (2) servicing of mortgage loans. Origination income, net, is comprised
of gains or losses from the sale of the mortgage loans originated, origination fees, underwriting fees and other fees
associated with the origination of mortgage loans, which are netted against the commission expense associated with these originations. The Company's normal practice is to originate mortgage loans for sale in the secondary market and to either sell or retain the MSRs when the loan is sold.
MSRs are recognized based on the fair value of the servicing right on the date the corresponding
mortgage loan is sold.
Subsequent to the date of transfer, the Company
has elected to measure its MSRs under the amortization method.
Servicing
fee income is reported net of any related amortization expense.
Table of Contents 59 The Company evaluates MSRs for impairment quarterly.
Impairment is determined by grouping MSRs by common predominant characteristics, such as interest rate and loan type.
If the aggregate carrying amount of a particular group of MSRs exceeds the group's aggregate
fair value, a valuation allowance for that group is established.
The valuation allowance is adjusted as the fair value changes.
An increase in mortgage interest rates typically results in an increase in the fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease
in the fair value of MSRs.
The following table presents a breakdown of the Company's
mortgage lending income for 2022 and 2021. Year endedDecember 31 (Dollars in thousands) 2022 2021 Origination income$ 309 $ 1,417 Servicing fees, net 341 130 Total mortgage lending income$ 650 $ 1,547 The Company's income from mortgage lending
typically fluctuates as mortgage interest rates change and is primarily attributable to the origination and sale of new mortgage loans.
Origination income decreased as market interest rates on mortgage loans increased.
The decrease in origination income was partially offset by an increase in
servicing fees, net of related amortization expense as prepayment speeds slowed, resulting in decreased amortization expense. InOctober 2022 , the Company closed the sale of approximately 0.85 acres of land located next to the Company's headquarters inAuburn, Alabama for a purchase price of$4.3 million .
The sale resulted in a gain of
former main office building.
Noninterest Expense Year endedDecember 31 (Dollars in thousands) 2022 2021 Salaries and benefits$ 12,307 $ 11,710 Employee retention credit (1,569) - Net occupancy and equipment 2,742 1,743 Professional fees 975 995FDIC and other regulatory assessments 404 426 Other 4,964 4,559 Total noninterest expense$ 19,823 $ 19,433 The increase in salaries and benefits was primarily due to a decrease in deferred costs related to the PPP loan program, and routine annual wage and benefit increases.
The employee retention tax credit of
credit provided by the CARES Act and the 2020 Consolidated Appropriations Act.
The increase in net occupancy and equipment expense was primarily due to increased
expenses related to the redevelopment of the Company's headquarters
in downtown
This amount includes depreciation expense and one- time costs associated with the opening of the Company's
new headquarters.
The Company relocated its main office branch
and bank operations into its newly constructed headquarters during
increased information technology and systems expenses, loan related expenses, losses on New Markets Tax
Credits investments and other miscellaneous operating expenses. Table of Contents 60 Income Tax Expense
Income tax expense was
million in 2021. The Company's effective tax rate for 2022 was 19.48%, compared to 14.89% in 2021.
This increase in tax expense was primarily due to increased pre-tax
earnings in 2022 and additional income tax expense of
decision to surrender certain bank-owned life insurance contracts in 2022.
The Company's effective income
tax rate is principally
impacted by tax- exempt earnings from the Company's investments in municipal securities, bank-owned life insurance, and New Markets Tax Credits. BALANCE SHEET ANALYSIS Securities
Securities available-for-sale were
million at
This decrease reflects an increase in the amortized cost basis of securities available-for-sale
of$39.2 million , offset by a decrease of$55.8 million in the fair value of securities available-for-sale. The increase in the amortized cost basis of securities available-for-sale was primarily attributable to
management allocating more funding to the investment portfolio following the significant increase in customer deposits.
The decrease in the fair value of securities was primarily due to an
increase in long-term market interest rates, which resulted in
million of deferred tax assets included in our other assets.
The average annualized tax-equivalent yields earned on total securities
were 2.06%
in 2022 and 1.66% in 2021. The following table shows the carrying value and weighted average
yield of securities available-for-sale as of
Actual maturities may differ from contractual maturities of mortgage-backed securities ("MBS") because
the mortgages underlying the securities may be called or prepaid
with or without penalty.December 31, 2022 1 year 1 to 5 5 to 10 After 10 Total (Dollars in thousands) or less years years years Fair Value Agency obligations$ 4,935 50,746 69,936 - 125,617 Agency MBS - 7,130 27,153 183,877 218,160 State and political subdivisions 300 642 15,130 45,455 61,527 Total available-for-sale$ 5,235 58,518 112,219 229,332 405,304 Weighted average yield (1): Agency obligations 1.64% 1.29% 1.83% - 1.61% Agency MBS - 1.35% 1.56% 2.14% 2.05% State and political subdivisions 4.00% 1.83% 2.29% 2.77% 2.65% Total available-for-sale 1.77% 1.30% 1.83% 2.27% 2.00% (1) Yields are calculated based on amortized cost. LoansDecember 31 (In thousands) 2022 2021 Commercial and industrial$ 66,179 83,977 Construction and land development 66,479 32,432 Commercial real estate 265,181 258,371 Residential real estate 97,735 77,661 Consumer installment 9,546 6,682 Total loans 505,120 459,123 Less: unearned income (662) (759) Loans, net of unearned income$ 504,458 458,364 Table of Contents 61 Total loans, net of unearned income,
were
31, 2021, an increase of$46.1 million , or 10%.
Total loans at December
31, 2021 included
2022.
Excluding PPP loans, total loans, net of unearned income, increased$54.0 million , or 12% fromDecember 31, 2021 .
Four loan categories represented the majority of the
loan portfolio at
residential real estate (19%), construction and land development (13%), and commercial and industrial (13%).
Approximately 23% of the Company's commercial
real estate loans were classified as owner-occupied atDecember 31 ,
2022.
Within the residential real estate portfolio
segment, the Company had junior lien mortgages of approximately
million,
or 1%, and
2022 and 2021, respectively.
For
residential real estate mortgage loans with a consumer purpose, the Company
had no loans that required interest only payments atDecember 31, 2022 and 2021. The Company's
residential real estate mortgage portfolio does not include any option ARM loans, subprime loans, or any material amount of other consumer
mortgage products which are generally viewed as high risk.
The average yield earned on loans and loans held for sale was 4.45% in 2022
and 2021, respectively.
The specific economic and credit risks associated with our loan portfolio include,
but are not limited to, the effects of current economic conditions, including inflation and the continuing increases in market interest rates, remaining COVID-19 pandemic effects including supply chain disruptions, commercial
office occupancy levels, housing supply shortages and inflation, on our borrowers' cash flows, real estate market sales volumes
and liquidity,
valuations used in making loans and evaluating collateral, availability and cost of financing properties, real
estate industry concentrations, competitive pressures from a wide range of other lenders, deterioration in certain credits, interest rate fluctuations,
reduced collateral values or non-existent collateral, title defects, inaccurate appraisals, financial deterioration
of borrowers, fraud, and any violation of applicable laws and regulations.
Various
projects financed earlier that were based on lower interest rate assumptions
than
currently in effect may not be as profitable or successful at higher interest rate currently
in effect and currently expected in the future.
The Company attempts to reduce these economic and credit risks through its loan-to-value
guidelines for collateralized loans, investigating the creditworthiness of borrowers and monitoring borrowers' financial
position. Also, we have established and periodically review,
lending policies and procedures. Banking regulations limit a bank's
credit exposure by prohibiting unsecured loan relationships that exceed 10% of its capital; or
20% of capital, if loans in excess of 10% of capital are fully secured. Under these regulations, we are prohibited from having secured
loan relationships in excess of approximately$22.6 million . Furthermore, we have an internal limit
for aggregate credit exposure (loans outstanding plus
unfunded commitments) to a single borrower of
that the Loan Committee of the Board of Directors approve any loan relationships that exceed this internal limit.
AtDecember 31, 2022 , the Bank had no relationships exceeding these limits. We periodically analyze
our commercial loan portfolio to determine if a concentration of credit
risk exists in any one or more industries. We
use classification systems broadly accepted by the financial services industry in
order to categorize our commercial borrowers. Loan concentrations to borrowers in the following classes
exceeded 25% of the Bank's total
risk-
based capital at
2021).December 31 (In thousands) 2022 2021 Lessors of 1-4 family residential properties$ 52,325 $ 47,880 Multi-family residential properties 41,181 42,587 Hotel/motel 33,457 43,856 Table of Contents 62
In light of disruptions in economic conditions caused by COVID-19, the financial institution regulators have issued guidance encouraging banks to work constructively with borrowers affected
by the virus in our community.
This guidance, including the Interagency Statement on COVID-19 Loan Modifications and the Interagency
Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions, provides that the agencies will not criticize financial institutions that mitigate credit
risk through prudent actions consistent with safe and sound practices.
Specifically, examiners
will not criticize institutions for working with borrowers as part of a risk mitigation strategy intended to improve existing loans, even if the restructured
loans have or develop weaknesses that ultimately result in adverse credit classification.
Upon demonstrating the need for payment relief, the bank will work
with
qualified borrowers that were otherwise current before the pandemic to determine
the most appropriate deferral option.
For
residential mortgage and consumer loans the borrower may elect to defer payments
for up to three months.
Interest
continues to accrue and the amount due at maturity increases.
Commercial real estate, commercial, and small business borrowers may elect to defer payments for up to three months or pay scheduled interest payments
for a six-month period.
The bank recognized that a combination of the payment relief options may be prudent dependent
on a borrower's business type.
As of
one COVID-19 loan deferral totaling$0.1 million atDecember 31, 2021 , down from$32.3 million of deferrals at the end of 2020. Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.
In addition, the Interagency Statement on COVID-19 Loan Modifications provides
circumstances in which a loan modification is not subject to classification as a TDR if such loan is not eligible
for modification under Section 4013. Allowance for Loan Losses
The Company maintains the allowance for loan losses at a level that management believes
appropriate to adequately cover the Company's estimate of probable
losses inherent in the loan portfolio. The allowance for loan losses was
which management believed to be adequate at each of the respective dates. The judgments and estimates associated
with the determination of the allowance for loan losses are described under "Critical Accounting Policies."
Table of Contents 63 A summary of the changes in the allowance for loan losses and certain asset quality ratios for the years endedDecember 31, 2022 and 2021 are presented below. Year endedDecember 31 (Dollars in thousands) 2022 2021 Allowance for loan losses: Balance at beginning of period$ 4,939 5,618 Charge-offs: Commercial and industrial (222) - Construction and land development - (254) Residential real estate - (3) Consumer installment (70) (37) Total charge -offs (292) (294) Recoveries: Commercial and industrial 7 140 Commercial real estate 23 - Residential real estate 26 55 Consumer installment 62 20 Total recoveries 118 215 Net charge-offs (174) (79) Provision for loan losses 1,000 (600) Ending balance$ 5,765 4,939 as a % of loans 1.14 % 1.08 as a % of nonperforming loans 211 % 1,112 Net charge-offs as a % of average loans 0.04 % 0.02 As described under "Critical Accounting Policies", management assesses the adequacy of the allowance prior to the end of each calendar quarter. The level of the allowance
is based upon management's evaluation
of the loan portfolios, past loan loss experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay (including the timing of future payment), the estimated value of any underlying
collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent
factors. This evaluation is inherently subjective as it requires various material estimates and judgments including
the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The ratio of our allowance for loan losses to total loans outstanding was 1.14% atDecember 31, 2022 , compared to 1.08% atDecember 31, 2021 .
In the future, the allowance for loan losses used in the allowance to total loans outstanding ratio
will be determined in accordance with the CECL standard, and may increase or decrease
to the extent the factors that influence our quarterly allowance assessment,
including changes in economic conditions that are part of our CECL model, either
improve or weaken.
In addition our regulators, as an integral part of their examination process,
will periodically review the Company's loans and allowance for loan losses, and may require the Company to make additional
provisions to the allowance for loan losses based on their judgment about information available to them at the time of their examinations. Nonperforming Assets AtDecember 31, 2022 the Company had$2.7 million in nonperforming assets compared to$0.8 million atDecember 31, 2021 . Table of Contents 64 The table below provides information concerning total nonperforming assets
and certain asset quality ratios.
December 31 (Dollars in thousands) 2022 2021 Nonperforming assets: Nonperforming (nonaccrual) loans$ 2,731 444 Other real estate owned - 374 Total nonperforming assets$ 2,731 818 as a % of loans and other real estate owned 0.54 % 0.18 as a % of total assets 0.27 % 0.07 Nonperforming loans as a % of total loans 0.54 % 0.10 Accruing loans 90 days or more past due $ - - The table below provides information concerning the composition of nonaccrual loans atDecember 31, 2022 and 2021, respectively.December 31 (In thousands) 2022 2021 Nonaccrual loans: Commercial and industrial$ 443 - Commercial real estate 2,116 187 Residential real estate 172 257 Total nonaccrual loans / nonperforming loans$ 2,731 444 The Company discontinues the accrual of interest income when (1) there is a significant
deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or
(2) the principal or interest is more than 90 days past due, unless the loan is both well-secured and in the process of collection.
AtDecember 31, 2022 and 2021, respectively, the Company
had
million in nonaccrual loans.
There were no loans 90 days past due and still accruing interest at
and 2021, respectively.
The table below provides information concerning the composition of OREO at December
31, 2022 and 2021, respectively.December 31 (In thousands) 2022 2021 Other real estate owned: Commercial real estate $ - 374 Total other real estate owned $ - 374 Potential Problem Loans Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower's ability to comply with present repayment terms.
This definition is believed to be substantially consistent with the standards
established by theFederal Reserve , the Company's primary regulator,
for loans classified as substandard, excluding nonaccrual loans.
Potential
problem loans, which are not included in nonperforming assets, amounted to
million, or 0.3% of total loans at
Table of Contents 65 The table below provides information concerning the composition of potential problem loans atDecember 31, 2022 and 2021, respectively.December 31 (In thousands) 2022 2021 Potential problem loans: Commercial and industrial$ 212 226 Construction and land development - 218 Commercial real estate 161 156 Residential real estate 835 1,748 Consumer installment 47 12 Total potential problem loans$ 1,255 2,360
AtDecember 31, 2022 , there were no potential problem loans past due at least 30
but less than 90 days.
The following table is a summary of the Company's
performing loans that were past due at least 30 days but less than
90 days as of
December 31 (In thousands) 2022 2021 Performing loans past due 30 to 89 days: Commercial and industrial$ 5 3 Construction and land development - 204 Commercial real estate - - Residential real estate 38 516 Consumer installment 40 25 Total performing loans past due 30 to 89 days$ 83 748 DepositsDecember 31 (In thousands) 2022 2021 Noninterest bearing demand$ 311,371 316,132 NOW 178,641 183,021 Money market 214,298 244,195 Savings 95,652 91,245 Certificates of deposit under$250,000 93,017 101,660 Certificates of deposit and other time deposits of$250,000 or more 57,358 57,990 Total deposits$ 950,337 994,243 Total deposits decreased
compared to$994.2 million atDecember 31, 2021 .
This decrease reflects net outflows to higher yield investment alternatives in
a rising interest rate environment and a decline in balances in existing accounts due to increased customer
spending.
Noninterest-bearing
deposits were
deposits, at
had no brokered deposits at
2022 and 2021, respectively.
Uninsured amounts are estimated based on the portion of account balances in
excess of
insurance limits.
The average rates paid on total interest-bearing deposits were 0.34%
in 2022 and 0.39% in 2021. Table of Contents 66 Other Borrowings
Other borrowings generally consist of short-term borrowings and long-term debt. Short-term borrowings generally consist of federal funds purchased and securities sold under agreements to repurchase
with an original maturity of one year or less.
The Bank had available federal fund lines totaling
million with none outstanding atDecember 31, 2022 and 2021, respectively. Securities
sold under agreements to repurchase totaled
million atDecember 31, 2022 and 2021, respectively. The average rates paid on short-term borrowings were 1.33%
and 0.51% in 2022 and 2021, respectively.
The Company had no long-term debt outstanding atDecember 31, 2022 and 2021, respectively. CAPITAL ADEQUACY The Company's consolidated stockholders' equity was$68.0 million and$103.7 million as ofDecember 31, 2022 and 2021, respectively.
The decrease from
loss due to the change in unrealized gains/losses on securities available-for-sale,
net of tax, of
which was partially offset by net earnings of$10.3 million .
Our unrealized losses on securities and the related decline in our accumulated other comprehensive
income ("AOCI")
resulted from increases in market interest rates in 2022 due to inflation and
monetary policy actions.
Our
AOCI declined
to
This is the primary reason both our shareholders' equity and book value per share declined 34%, respectively,
in 2022.
The Bank and the Company, as permitted by theFederal Reserve and the other Federal bank regulators, made a permanent election inMarch 2015 to opt out of the requirement to include most components of AOCI in regulatory capital.
Accordingly, AOCI does not affect
our
capital for regulatory purposes.
If our tangible GAAP equity, however,
ever became negative,
renewals of existing lines and advance may be permissible.
Investors may also view tangible GAAP equity,
net of AOCI as important in connection with capital raising, if any, especially
in stressed economic conditions.
On a GAAP basis, our returns on equity increased as result of the negative AOCI's
reduction of stockholders' equity.
On
framework and relatedDodd-Frank Wall Street
Reform and Consumer Protection Act changes. The rules included the implementation
of a capital conservation buffer that is added to the minimum requirements
for capital adequacy purposes. The capital conservation
buffer was fully phased-in on
with a capital conservation buffer of less than the required minimum amount will be subject to limitations on capital distributions,
including dividend payments and certain discretionary bonus payments to executive officers.
At
ratio exceeded 2.5% and the capital conservation buffer requirements. EffectiveMarch 20, 2020 , theFederal Reserve and the other federal
banking regulators adopted an interim final rule that amended the capital conservation buffer.
The interim final rule was adopted as a final rule on
new
rule revises the definition of "eligible retained income" for purposes of the maximum payout
ratio to allow banking organizations to more freely use their capital buffers to promote
lending and other financial intermediation activities, by making the limitations on capital distributions more gradual. The
eligible retained income is now the greater of (i) net income for the four preceding quarters, net of distributions and associated tax effects
not reflected in net income; and (ii) the average of all net income over the preceding four quarters. The interim final rule only affects the capital buffers, and banking organizations were encouraged to make prudent capital
distribution decisions.
The
Reserve's policy.
Accordingly,
our capital adequacy is evaluated at the Bank level, and not for the Company and its consolidated
subsidiaries. The Bank's tier 1 leverage ratio was 10.01%, CET1 risk-based capital ratio
was 15.39%, tier 1 risk-based capital ratio was 15.39%, and total risk-based capital ratio was 16.25%
at
8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio to be considered "well capitalized." The
Bank's capital conservation buffer
was 8.25% atDecember 31, 2022 . Table of Contents 67 MARKET AND LIQUIDITY RISK MANAGEMENT Management's objective is to manage assets and
liabilities to provide a satisfactory,
consistent level of profitability within the framework of established liquidity,
loan, investment, borrowing, and capital policies. The Bank's
Asset Liability
Management Committee ("ALCO") is charged with the responsibility
of monitoring these policies, which are designed to ensure an acceptable asset/liability composition. Two
critical areas of focus for ALCO are interest rate risk and liquidity risk management. Interest Rate Risk Management In the normal course of business, the Company is exposed to market risk arising from fluctuations in interest rates because assets and liabilities may mature or reprice at different times. For example,
if liabilities reprice faster than assets, and interest rates are generally rising, earnings will initially decline. In addition, assets
and liabilities may reprice at the same time but by different amounts. For example, when the general level of interest rates is rising,
the Company may increase rates paid on interest bearing demand deposit accounts and savings deposit accounts by an amount that is less than the general increase in market interest rates. Also, short-term and long-term market interest rates may change by different amounts. For example, a flattening yield curve may reduce the interest spread
between new loan yields and funding costs. The yield curve has been inverted at various times in 2022 and in the first months of 2023.
An inverted yield curve reduces the net interest margin expansion that may be expected otherwise as interest
rates rise.
Further, the remaining maturity of various assets and liabilities may shorten or lengthen as interest rates change. For
example, if long-term mortgage interest rates decline sharply, mortgage-backed
securities in the securities portfolio may prepay earlier than anticipated,
which
could reduce earnings. Interest rates may also have a direct or indirect effect
on loan demand, loan losses, mortgage origination volume, the fair value of MSRs and other items affecting earnings. ALCO measures and evaluates the interest rate risk so that we can meet customer demands
for various types of loans and deposits. ALCO determines the most appropriate amounts of on-balance
sheet and off-balance sheet items. Measurements used to help manage interest rate sensitivity include an earnings simulation and an economic
value of equity model. Earnings simulation Management believes that interest rate risk is best estimated by our earnings simulation modeling. On at least a quarterly basis, we simulate the following 12-month time period to determine a baseline
net interest income forecast and the sensitivity of this forecast to changes in interest rates. The baseline forecast assumes an
unchanged or flat interest rate environment. Forecasted levels of earning assets, interest-bearing liabilities, and
off-balance sheet financial instruments are combined with ALCO forecasts of market interest rates for the next 12
months and other factors in order to produce various earnings simulations and estimates. To help limit interest rate risk,
we have guidelines for earnings at risk which seek to limit the variance of net interest income from gradual changes in interest rates.
For changes up or down in rates from management's
flat interest rate forecast over the next 12 months, policy limits for net interest income variances are as follows: +/- 20% for a gradual change of 400 basis points +/- 15% for a gradual change of 300 basis points +/- 10% for a gradual change of 200 basis points +/- 5% for a gradual change of 100 basis points Table of Contents 68
The following table reports the variance of net interest income over the next 12 months assuming a gradual change in interest rates up or down when compared to the baseline net interest income
forecast at
Changes in Interest Rates Net Interest Income % Variance 400 basis points (3.81) % 300 basis points (2.62) 200 basis points (1.50) 100 basis points (0.58) (100) basis points (0.59) (200) basis points (1.50) (300) basis points (2.29) (400) basis points (2.92) AtDecember 31, 2022 , our earnings simulation model indicated that we were in compliance with the policy guidelines noted above. Economic Value of Equity Economic value of equity ("EVE") measures the extent that estimated economic
values of our assets, liabilities and off- balance sheet items will change as a result of interest rate changes. Economic values are
estimated by discounting expected cash flows from assets, liabilities and off-balance sheet items, to
which establish
a base case EVE. In contrast with our earnings simulation model which evaluates interest rate risk over a 12-month
timeframe, EVE uses a terminal horizon which allows for the re-pricing of all assets, liabilities, and off-balance sheet items.
Further, EVE is measured using values as of a point in time and does not reflect any actions that ALCO might take in responding to
or anticipating changes in interest rates, or market and competitive conditions. To help limit interest rate risk,
we have stated policy guidelines for an instantaneous basis point change in interest rates, such that our EVE should not decrease from our base case by more than the following: 45% for an instantaneous change of +/- 400 basis points 35% for an instantaneous change of +/- 300 basis points 25% for an instantaneous change of +/- 200 basis points 15% for an instantaneous change of +/- 100 basis points The following table reports the variance of EVE assuming an immediate change in interest rates up or down when compared to the baseline EVE atDecember 31, 2022 . Changes in Interest Rates EVE % Variance 400 basis points (3.87) % 300 basis points (1.11) 200 basis points 0.58 100 basis points 1.16 (100) basis points (5.12) (200) basis points (15.06) (300) basis points (28.96) (400) basis points (31.85) AtDecember 31, 2022 , our EVE model indicated that we were in compliance
with the policy guidelines noted above.
Table of Contents 69 Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income
will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated
with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition,
the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain
assets and liabilities may have similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates, and other economic and market factors, including market perceptions.
Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types of assets
and liabilities may lag behind changes in general market rates. In addition, certain assets, such as adjustable-rate
mortgage loans, have features (generally referred to as "interest rate caps and floors") which limit changes in interest rates.
Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments.
The ability of many borrowers to service their debts also may decrease during periods of rising interest rates or
economic stress, which may differ across industries and economic sectors. ALCO reviews each of the
above interest rate sensitivity analyses along with several different interest rate scenarios in seeking satisfactory,
consistent levels of profitability within the framework of the Company's established liquidity,
loan, investment, borrowing, and capital policies. The Company may also use derivative financial instruments to improve the balance between
interest-sensitive assets and interest-sensitive liabilities and as one tool to manage interest rate sensitivity
while continuing to meet the credit and
deposit needs of our customers. From time to time, the Company may enter into
interest rate swaps ("swaps") to facilitate
customer transactions and meet their financing needs. These swaps qualify as
derivatives, but are not designated as hedging
instruments. At December 31, 2022 and 2021, the Company had no derivative
contracts to assist in managing interest rate
sensitivity.
Liquidity Risk Management
Liquidity is the Company's ability to convert
assets into cash equivalents in order to meet daily cash flow requirements, primarily for deposit withdrawals, loan demand and maturing obligations. Without
proper management of its liquidity,
the
Company could experience higher costs of obtaining funds due to insufficient liquidity,
while excessive liquidity can lead to a decline in earnings due to the cost of foregoing alternative higher-yielding
investment opportunities. Liquidity is managed at two levels. The first is the liquidity of the Company.
The second is the liquidity of the Bank. The management of liquidity at both levels is essential, because the Company and the Bank are
separate and distinct legal entities with different funding needs and sources, and each are subject
to regulatory guidelines and requirements. The Company depends upon dividends from the Bank for liquidity to pay its operating expenses,
debt obligations and dividends. The Bank's payment of dividends depends
on its earnings, liquidity, capital
and the absence of any regulatory restrictions. The primary source of funding and liquidity for the Company has been dividends received
from the Bank. The Company depends upon dividends from the Bank for liquidity to pay its operating expense, debt obligations,
if any, and cash dividends on, and repurchases of, Company common stock.
The Bank's payment of dividends depends
on its earnings, liquidity, capital and the absence
of any regulatory restrictions.
If needed, the Company could also issue common stock or other securities.
Primary sources of funding for the Bank include primarily customer deposits,
together with other borrowings, repayment and maturity of securities, and sale and repayment of loans.
The Bank has participated in the FHLB's
advance program to obtain funding for its growth.
FHLB advances include both fixed and variable terms and are taken out with varying maturities.
The Bank also has access to federal funds lines from various banks and borrowings
from theFederal Reserve discount window.
As of
with the FHLB and$61.0 million of federal funds lines, with none outstanding.
Primary uses of funds include repayment of maturing obligations and growing the loan portfolio.
Table of Contents 70 The following table presents additional information about our contractual obligations as ofDecember 31, 2022 , which by their terms had contractual maturity and termination dates subsequent toDecember 31, 2022 : Payments due by period 1 year 1 to 3 3 to 5 More than (Dollars in thousands) Total or less years years 5 years Contractual obligations: Deposit maturities (1)$ 950,337 894,523 38,266 17,357 191 Operating lease obligations 674 123 237 192 122 Total$ 951,011 894,646 38,503 17,549 313 (1) Deposits with no stated maturity (demand, NOW, money market, and savings deposits) are presented
in the "1 year or less" column Management believes that the Company and the Bank have adequate sources of liquidity
from deposits, FHLB advances, sales of securities under agreement to repurchase and federal funds lines, as
well as possible sales of securities, to meet all known contractual obligations and unfunded commitments, including loan commitments
and reasonable borrower, depositor, and creditor requirements over the next 12
months.
The
Funding Program ("BTFP") established on
without suffering any adverse effects from unrealized losses on securities.
BTFP offers loans of up to one year to banks, savings associations, credit unions, and other eligible depository institutions
pledging
assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating
an institution's need to quickly sell those securities in times of stress.
In addition, the discount window will apply the same margins used
for the securities eligible for the BTFP,
further increasing the value of investment securities at the discount window.
Off-Balance Sheet Arrangements
At
0 million and unfunded loan commitments outstanding of$87.7 million . Because these commitments generally
have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future
cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate federal funds sold,
obtain FHLB advances, raise deposits or sell securities available-for-sale, or to purchase federal
funds from other financial institutions on a short-term basis while it obtains the other longer term funding. Residential mortgage lending and servicing activities We primarily sell conforming
residential mortgage loans in the secondary market to Fannie Mae
while retaining the servicing of these loans (MSRs). The sale agreements for these residential mortgage
loans with Fannie Mae and other investors include various representations and warranties regarding the origination
and characteristics of the residential mortgage loans. Although the representations and warranties vary among investors,
they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property
securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable
federal, state, and local laws, among other matters.
The Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis.
As a result, the Bank is not obligated to make any advances to Fannie Mae on principal and interest on such mortgage
loans where the borrower is entitled to forbearance. Table of Contents 71 As ofDecember 31, 2022 , the unpaid principal balance of residential mortgage loans,
which we have originated and sold,
but retained the servicing rights (MSRs) totaled
are generally sold on a non-recourse basis, except for breaches of customary seller representations and warranties, we may have to repurchase residential mortgage loans in cases where we breach such representations or
warranties or the other terms of the sale, such as where we fail to deliver required documents or the documents we deliver are defective. Investors
also may require the repurchase of a mortgage loan when an early payment default underwriting review reveals significant
underwriting deficiencies, even if the mortgage loan has subsequently been brought current. Repurchase demands are typically reviewed
on an individual loan by loan basis to validate the claims made by the investor and to determine if a contractually
required repurchase event has occurred. We
seek to reduce and manage the risks of potential repurchases or other claims by mortgage loan
investors
through our underwriting, quality assurance and servicing practices, including
good communications with our residential mortgage investors. The Company was not required to repurchase any loans during 2022 and 2021 as a result of representation and warranty provisions contained in the Company's sale agre
ements with Fannie Mae, and had no pending repurchase or make-whole
requests at
mortgage loans originated and sold by us to Fannie Mae. As servicer,
our primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments
of principal and interest; (3) maintain and administer any hazard, title, or primary mortgage insurance policies relating to the
mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments;
and (5) foreclose on defaulted mortgage loans or take other actions to mitigate the potential losses to investors
consistent with the agreements governing our rights and duties as servicer. The agreement under which we act as servicer generally specifies our
standards of responsibility for actions taken by us in such capacity and provides protection against expenses and liabilities incurred by us
when acting in compliance with the respective servicing agreements. However, if
we commit a material breach of our obligations as servicer,
we may be subject to termination if the breach is not cured within a specified period following notice. The
standards governing servicing and the possible remedies for violations of such standards are determined by servicing
guides issued by Fannie Mae as well as the contract provisions established between Fannie Mae and the Bank. Remedies could include repurchase of an affected loan. Although to date repurchase requests related to representation and warranty provisions,
and servicing activities have been limited, it is possible that requests to repurchase mortgage loans may increase in frequency
if investors more aggressively pursue all means of recovering losses on their purchased loans. As of December
31, 2022, we believe that this exposure is not material due to the historical level of repurchase requests and loss trends, the results
of our quality control reviews, and the fact that 99% of our residential mortgage loans serviced for Fannie Mae
were current as of such date. We
maintain
ongoing communications with our investors and will continue to evaluate this exposure
by monitoring the level and number of repurchase requests as well as the delinquency rates in our investor portfolios. Section 4021 of the CARES Act allows borrowers under 1-to-4 family residential
mortgage loans sold to Fannie Mae to request forbearance from the servicer after affirming that such borrower is experiencing
financial hardships during the COVID-19 emergency. Except for vacant or abandoned properties, Fannie Mae servicers may not initiate foreclosures on similar procedures or related evictions or sales generally untilJune 30, 2021 . Effects of Inflation and Changing Prices The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with GAAP and practices within the banking industry
which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in
the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of inflation. Table of Contents 72 CURRENT ACCOUNTING DEVELOPMENTS The following ASUs have been issued by the FASB
but are not yet effective.
? ASU 2016-13, Financial Instruments - Credit Losses (Topic
326):
Measurement of Credit Losses on Financial Instruments; and ? ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. Information about these pronouncements are described in more detail below. ASU 2016-13, Financial Instruments - Credit Losses (Topic
326): Measurement of Credit
Losses on Financial Instruments , amends guidance on reporting credit losses for assets held at amortized cost basis and available
for sale debt securities. For assets held at amortized cost basis, the new standard eliminates the probable initial recognition
threshold previously provided by GAAP and, instead, requires an entity to reflect its current estimate of all expected
credit losses using a broader range of information regarding past events, current conditions and forecasts assessing the
collectability of cash flows. The allowance for credit losses is a valuation account that is deducted from the amortized
cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit
losses should be measured in a manner similar to current GAAP,
however the new standard will require that credit losses be presented as an allowance rather than as a write-down. The new guidance affects entities holding
financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect
loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables,
and any other financial assets not excluded from the scope that have the contractual right to receive cash. For public
business entities, the new guidance was originally effective for annual and interim periods in fiscal years
beginning after
a previously issued proposal granting smaller reporting companies a postponement of the required implementation date for ASU 2016-13. This standard became effective
for the Company on
provisions as a cumulative- effect adjustment to retained earnings as of the beginning of the first reporting
period in which the guidance is effective.
The Company is finalizing implementation efforts through its implementation
team.
The team has worked with an advisory consultant and has finalized and documented the methodologies that will be utilized.
The team is currently finalizing controls, processes, policies and disclosures and has completed full end-to-end
parallel runs.
Based on the Company's
portfolio composition as of
conditions, the reserve for credit losses is expected to increase from 1.14% as a percentage of total loans at December
31, 2022 to a range between 1.32% and 1.36% of total loans upon adoption of this standard, primarily resulting from
the impact of adjusting from the incurred loss model to the expected loss model, which provides for
expected credit losses over the life of the loan portfolio.
The Company does not expect to record an allowance for available-for-sale
securities as the investment portfolio consists
primarily of debt securities explicitly or implicitly backed by the
for which credit risk is deemed minimal.
The impact of ASU 2016-13 is not expected to have a material impact on the allowance
for unfunded commitments.
The
Company continues to finalize its day-one adjustment and
will record the after-tax impact as a cumulative-effect adjustment
to retained earnings as of
This estimate is subject to change as key assumptions are refined.
The impact going forward will depend on the composition, characteristics, and credit quality of the loan and securities portfolios as well as the economic conditions at future reporting periods. ASU 2022-02 Financial Instruments - Credit Losses (Topic
326): Troubled
Debt Restructurings and Vintage
Disclosures
,
eliminates the accounting guidance for troubled debt restructurings ("TDRs"),
while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing
financial difficulty. The new standard is effective for fiscal years, and interim periods
within those fiscal years, beginning after
consolidated financial statements.
Table of Contents 73 Table 1 - Explanation of Non-GAAP Financial Measures In addition to results presented in accordance with GAAP,
this annual report on Form 10-K includes certain designated net interest income amounts presented on a tax-equivalent basis, a non-GAAP financial
measure, including the presentation of total revenue and the calculation of the efficiency ratio. The Company believes the presentation of net interest income on a tax-equivalent
basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability
within the industry. Although the Company believes these non-GAAP financial measures enhance investors' understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to
GAAP.
The reconciliation of these non- GAAP financial measures from GAAP to non-GAAP is presented below. Year endedDecember 31 (In thousands) 2022 2021 2020 2019 2018 Net interest income (GAAP)$ 27,166 23,990 24,338 26,064 25,570 Tax-equivalent adjustment 456 470 492 557 613 Net interest income (Tax-equivalent)$ 27,622 24,460 24,830 26,621 26,183 Table of Contents 74 Table 2 - Selected Financial Data Year endedDecember 31 (Dollars in thousands, except per share amounts) 2022 2021 2020 2019 2018 Income statement Tax-equivalent interest income (a)$ 30,001 26,977 28,686 30,804 29,859 Total interest expense 2,379 2,517 3,856 4,183 3,676 Tax equivalent net interest income (a) 27,622 24,460 24,830 26,621 26,183 Provision for loan losses 1,000 (600) 1,100 (250) - Total noninterest income 6,506 4,288 5,375 5,494 3,325 Total noninterest expense 19,823 19,433 19,554 19,697 17,874 Net earnings before income taxes and tax-equivalent adjustment 13,305 9,915 9,551 12,668 11,634 Tax-equivalent adjustment 456 470 492 557 613 Income tax expense 2,503 1,406 1,605 2,370 2,187 Net earnings$ 10,346 8,039 7,454 9,741 8,834 Per share data: Basic and diluted net earnings$ 2.95 2.27 2.09 2.72 2.42 Cash dividends declared$ 1.06 1.04 1.02 1.00 0.96 Weighted average shares outstanding Basic and diluted 3,510,869 3,545,310 3,566,207 3,581,476 3,643,780 Shares outstanding 3,503,452 3,520,485 3,566,276 3,566,146 3,643,868 Book value$ 19.42 29.46 30.20 27.57 24.44 Common stock price High$ 34.49 48.00 63.40 53.90 53.50 Low 22.07 31.32 24.11 30.61 28.88 Period-end$ 23.00 32.30 42.29 53.00 31.66 To earnings ratio 7.80 x 14.23 20.23 19.49 13.08 To book value 118 % 110 140 192 130 Performance ratios: Return on average equity 12.48 % 7.54 7.12 10.35 10.14 Return on average assets 0.96 % 0.78 0.83 1.18 1.08 Dividend payout ratio 35.93 % 45.81 48.80 36.76 39.67 Average equity to average assets 7.72 % 10.39 11.63 11.39 10.63 Asset Quality: Allowance for loan losses as a % of: Loans 1.14 % 1.08 1.22 0.95 1.00 Nonperforming loans 211 % 1,112 1,052 2,345 2,691 Nonperforming assets as a % of: Loans and other real estate owned 0.54 % 0.18 0.12 0.04 0.07 Total assets 0.27 % 0.07 0.06 0.02 0.04 Nonperforming loans as % of loans 0.54 % 0.10 0.12 0.04 0.04 Net charge-offs (recoveries) as a % of average loans 0.04 % 0.02 (0.03) 0.03 (0.01) Capital Adequacy (c): CET 1 risk-based capital ratio 15.39 % 16.23 17.27 17.28 16.49 Tier 1 risk-based capital ratio 15.39 % 16.23 17.27 17.28 16.49 Total risk-based capital ratio 16.25 % 17.06 18.31 18.12 17.38 Tier 1 leverage ratio 10.01 % 9.35 10.32 11.23 11.33 Other financial data: Net interest margin (a) 2.81 % 2.55 2.92 3.43 3.40 Effective income tax rate 19.48 % 14.89 17.72 19.57 19.84 Efficiency ratio (b) 58.08 % 67.60 64.74 61.33 60.57 Selected period end balances: Securities$ 405,304 421,891 335,177 235,902 239,801 Loans, net of unearned income 504,458 458,364 461,700 460,901 476,908 Allowance for loan losses 5,765 4,939 5,618 4,386 4,790 Total assets 1,023,888 1,105,150 956,597 828,570 818,077 Total deposits 950,337 994,243 839,792 724,152 724,193 Total stockholders' equity 68,041 103,726 107,689 98,328 89,055 (a) Tax-equivalent.
See "Table 1 - Explanation of Non-GAAP Financial Measures". (b) Efficiency ratio is the result of noninterest expense divided
by the sum of noninterest income and tax-equivalent net interest
income.
(c) Regulatory capital ratios presented are for the Company's
wholly-owned subsidiary,
Table of Contents 75 Table 3 - Average Balance and Net Interest Income Analysis Year endedDecember 31 2022 2021 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Interest-earning assets: Loans and loans held for sale (1)$ 454,604 $ 20,241 4.45%$ 459,712 $ 20,473 4.45% Securities - taxable 364,029 6,576 1.81% 320,766 4,107 1.28% Securities - tax-exempt (2) 61,591 2,172 3.53% 62,736 2,242 3.57% Total securities 425,620 8,748 2.06% 383,502 6,349 1.66% Federal funds sold 43,766 435 1.00% 38,659 55 0.15% Interest bearing bank deposits 58,141 577 0.99% 77,220 100 0.13% Total interest-earning assets 982,131 30,001 3.05% 959,093 26,977 2.81% Cash and due from banks 15,108 14,591 Other assets 77,496 51,664 Total assets$ 1,074,735 $ 1,025,348 Interest-bearing liabilities: Deposits: NOW$ 197,177 370 0.19%$ 178,197 212 0.12% Savings and money market 327,139 649 0.20% 296,708 655 0.22% Certificates of deposits 154,273 1,300 0.84% 159,111 1,633 1.03% Total interest-bearing deposits 678,589 2,319 0.34% 634,016 2,500 0.39% Short-term borrowings 4,516 60 1.33% 3,349 17 0.51% Total interest-bearing liabilities 683,105 2,379 0.35% 637,365 2,517 0.39% Noninterest-bearing deposits 306,772 278,013 Other liabilities 1,933 3,392 Stockholders' equity 82,925 106,578 Total liabilities and and stockholders' equity$ 1,074,735 $ 1,025,348 Net interest income and margin$ 27,622 2.81%$ 24,460 2.55%
(1) Average loan balances are
shown net of unearned income and loans on nonaccrual status have been included in the computation of average balances. (2) Yields on tax-exempt securities have been
computed on a tax-equivalent basis using an income tax rate of 21%. Table of Contents 76 Table 4 - Volume and Rate Variance Analysis Year endedDecember 31, 2022 vs. 2021 Year endedDecember 31, 2021 vs. 2020Net Due to change inNet Due to change in (Dollars in thousands) Change Rate (2) Volume (2) Change Rate (2) Volume (2) Interest income:
Loans and loans held for sale
$ (232) (5) (227)$ (1,582) (1,333) (249) Securities - taxable 2,469 1,687 782 175 (933) 1,108 Securities - tax-exempt (1) (70) (30) (40) (101) (91) (10) Total securities 2,399 1,657 742 74 (1,024) 1,098 Federal funds sold 380 329 51 (70) (81) 11 Interest bearing bank deposits 477 666 (189) (131) (159) 28 Total interest income$ 3,024 2,647 377$ (1,709) (2,597) 888 Interest expense: Deposits: NOW$ 158 122 36$ (311) (340) 29 Savings and money market (6) (66) 60 (416) (537) 121 Certificates of deposits (333) (292) (41) (620) (560) (60) Total interest-bearing deposits (181) (236) 55 (1,347) (1,437) 90 Short-term borrowings 43 8 35 8 - 8 Total interest expense (138) (228) 90 (1,339) (1,437) 98 Net interest income$ 3,162 2,875 287$ (370) (1,160) 790
(1) Yields on tax-exempt securities have been
computed on a tax-equivalent basis using an income
tax rate of 21%. (2) Changes that are not solely a result of volume or rate have been allocated to volume.
Table of Contents 77 Table 5
- Net Charge-Offs (Recoveries) to Average
Loans 2022 2021Net Net Net charge-off Net charge-off charge-offs Average (recovery) charge-offs Average (recovery) (Dollars in thousands) (recoveries) Loans (2) ratio (recoveries) Loans (2) ratio Commercial and industrial (1)$ 215 69,973 0.31 %$ (140) 64,618 (0.22) % Construction and land development - 44,177 - - 33,945 - Commercial real estate (3) 247,374 - 254 253,113 0.10 Residential real estate (26) 85,223 (0.03) (52) 81,526 (0.06) Consumer installment 8 7,915 0.10 17 6,975 0.24 Total$ 194 454,662 0.04 %$ 79 440,177 0.02 % (1) Excludes PPP loans, which are guaranteed by the SBA. (2) Gross loan balances. Table of Contents 78 Table 6 - Loan MaturitiesDecember 31, 2022 1 year 1 to 5 5 to 15 After 15 (Dollars in thousands) or less years years years Total Commercial and industrial$ 18,643 7,867 37,948 1,721 66,179 Construction and land development 51,560 13,162 1,713 44 66,479 Commercial real estate 19,978 92,259 148,899 4,045 265,181 Residential real estate 4,897 20,988 36,276 35,574 97,735 Consumer installment 3,537 5,337 672 - 9,546 Total loans$ 98,615 139,613 225,508 41,384 505,120 Table of Contents 79 Table 7
- Sensitivities to Changes in Interest Rates on Loans Maturing in More
Than One YearDecember 31, 2022 Variable Fixed (Dollars in thousands) Rate Rate Total Commercial and industrial$ 141 47,395 47,536 Construction and land development 1,989 12,930 14,919 Commercial real estate 1,937 243,266 245,203 Residential real estate 34,767 58,071 92,838 Consumer installment 21 5,988 6,009 Total loans$ 38,855 367,650 406,505 Table of Contents 80 Table 8 - Allocation of Allowance for Loan Losses 2022 2021 (Dollars in thousands) Amount %* Amount %* Commercial and industrial$ 747 13.1$ 857 18.3 Construction and land development 949 13.2 518 7.1 Commercial real estate 3,109 52.5 2739 56.2 Residential real estate 828 19.3 739 16.9 Consumer installment 132 1.9 86 1.5 Total allowance for loan losses$ 5,765 $ 4,939 * Loan balance in each category expressed as a percentage of total loans. Table of Contents 81 Table 9 - Estimated Uninsured Time Deposits by Maturity (Dollars in thousands)December 31, 2022 Maturity of: 3 months or less$ 774 Over 3 months through 6 months 173 Over 6 months through 12 months 26,220 Over 12 months 14,941 Total estimated uninsured time deposits$ 42,108 Table of Contents 82 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information called for by ITEM 7A is set forth in ITEM 7 under the caption "Market and Liquidity Risk Management" and is incorporated herein by reference.
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