METROCITY BANKSHARES, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under "Cautionary Note Regarding Forward-Looking Statements," "Risk Factors," and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected in the forward looking statements. We assume no obligation to update any of these forward-looking statements.
Overview
We areMetroCity Bankshares, Inc. , a bank holding company headquartered in theAtlanta, Georgia metropolitan area. We operate through our wholly-owned banking subsidiary,Metro City Bank , aGeorgia state-chartered commercial bank that was founded in 2006. We currently operate 19 full-service branch locations in multi-ethnic communities inAlabama ,Florida ,Georgia ,New York ,New Jersey ,Texas andVirginia . We are focused on delivering full-service banking services in markets, predominantly Asian-American communities in growing metropolitan markets in theEastern U.S. andTexas . Prior toDecember 2014 , we operated without a holding company, and inDecember 2014 , the Bank formedMetroCity Bankshares, Inc. as its holding company. OnDecember 31, 2014 ,MetroCity Bankshares, Inc. acquired all of the outstanding common stock ofMetro City Bank as a part of the holding company formation transaction.
We are a bank holding company and we conduct all of our material business operations through the Bank. As a result, the discussion and analysis relates to activities primarily conducted at the Bank level.
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform to accounting principles generally accepted inthe United States of America ("GAAP") and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions
and judgments reflected in the financial statement. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements.
The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments. Additional information about these policies can be found in Note 1 of our consolidated financial statements as ofDecember 31, 2022 , included elsewhere in this Annual Report on Form 10-K.
Allowance for Loan Losses
The ALL is a valuation allowance for probable incurred credit losses. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance. Management estimates the allowance balance
required using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgment, should be charged off.
The ALL is maintained at a level that management believes is appropriate to
provide for known and inherent incurred loan losses as of the date of the
consolidated balance sheet and we have established methodologies for the
determination of its adequacy. The methodologies are set forth in a formal
policy and take into consideration the need for an overall general valuation
allowance as well as specific allowances that are determined on an individual
loan basis.
41
Table of Contents
This evaluation is inherently subjective as it requires material estimates that are susceptible to significant change including the amounts and timing of future cash flows expected to be received on impaired loans.
Results of Operations
Net Income
Year ended
We recorded net income of$62.6 million for the year endedDecember 31, 2022 compared to$61.7 million for the same period in 2021, an increase of$901,000 , or 1.5%. The increase was due to a$15.4 million increase in net interest income and a$9.7 decrease in provision for loan losses, offset by a$14.6 million decrease in noninterest income, a$1.9 million increase in noninterest expense and a$7.7 million increase in provision for income taxes. Basic and diluted earnings per common share for the year endedDecember 31, 2022 was$2.46 and$2.44 , respectively, compared to$2.41 and$2.39 for the basic and diluted earnings per common share for the same period in 2021.
Year ended
We recorded net income of$61.7 million for the year endedDecember 31, 2021 compared to$36.4 million for the same period in 2020, an increase of$25.3 million , or 69.5%. The increase was due to a$38.1 million increase in net interest income and a$6.6 million increase in noninterest income, offset by a$3.5 million increase in provision for loan losses, a$7.3 million increase in noninterest expense and a$8.6 million increase in provision for income taxes. Basic and diluted earnings per common share for the year endedDecember 31, 2021 was$2.41 and$2.39 , respectively, compared to$1.42 and$1.41 for the basic and diluted earnings per common share for the same period in 2020.
Net Interest Income
The management of interest income and expense is fundamental to our financial performance. Net interest income, the difference between interest income and interest expense, is the largest component of the Company's total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets). We seek to maximize net interest income without exposing the Company to an excessive level of interest rate risk through our asset and liability policies. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities.
Year ended
Net interest income for the year endedDecember 31, 2022 was$119.6 million compared to$104.2 million for the year endedDecember 31, 2021 , an increase of$15.4 million , or 14.8%. Interest income totaled$147.2 million for the year endedDecember 31, 2022 , an increase of$38.5 million , or 35.4%, from the year endedDecember 31, 2021 , primarily due to a$661.4 million increase in average loans while the yield on average loans increased by four basis points. We recognized PPP loan fee income of$1.0 million during 2022 compared to PPP loan fee income of$5.4 million during 2021. Average earning assets increased by$692.4 million , primarily due to an increase of$661.4 million in average loans and$31.0 million in average investment securities, fed funds sold and interest-bearing cash accounts. The increase in average loans included increases of$653.0 million in average residential real estate loans and$85.0 million in average commercial real estate loans, offset by decreases of$12.5 million in average construction and development loans and$64.1 million in average commercial and industrial loans. Interest expense for the year endedDecember 31, 2022 increased$23.0 million to$27.6 million compared to interest expense of$4.6 million for the year endedDecember 31, 2021 . This increase is primarily attributable to a$491.3 million increase in average deposit balances and a 100 basis points increase in deposit costs, which includes a 119 basis points 42
Table of Contents
increase in the average yield on money market deposits and an 84 basis points decrease in the average yield on time deposits. Average borrowings outstanding for the year endedDecember 31, 2022 increased by$150.2 million with an increase in rate of 81 basis points compared to the year endedDecember 31, 2021 . The net interest margin for the year endedDecember 31, 2022 was 3.95% compared to 4.45% for the year endedDecember 31, 2021 , a decrease of 50 basis points. The cost of interest-bearing liabilities increased by 96 basis points to 1.25% from 0.29%, while the yield on interest-earning assets increased by 21 basis points to 4.86% from 4.65% for the previous year. Average earning assets increased by$692.4 million , primarily due to an increase of$661.4 million in average loans and an increase of$31.0 million in average total investments. Average interest-bearing liabilities increased by$641.5 million as average interest-bearing deposits increased by$491.3 million and average borrowings increased by$150.2 million .
Year ended
Net interest income for the year endedDecember 31, 2021 was$104.2 million compared to$66.1 million for the year endedDecember 31, 2020 , an increase of$38.1 million , or 57.5%. Interest income totaled$108.7 million for the year endedDecember 31, 2021 , an increase of$31.1 million , or 40.1%, from the year endedDecember 31, 2020 , primarily due to a$722.7 million increase in average loans while the yield on average loans decreased by 36 basis points. We also recognized PPP loan fee income of$5.4 million during 2021 compared to PPP loan fee income of$1.7 million during 2020. Average earning assets increased by$756.9 million , primarily due to an increase of$722.7 million in average loans and$60.3 million in average fed funds sold and interest-bearing cash accounts. The increase in average loans included increases of$674.2 million in average residential real estate loans,$25.5 million in average commercial real estate loans,$16.4 million in average construction and development loans, and$7.3 million in average commercial and industrial loans, which includes$77.0 million in average PPP loans. Interest expense for the year endedDecember 31, 2021 decreased$6.9 million to$4.6 million compared to interest expense of$11.5 million for the year endedDecember 31, 2020 . This decrease is primarily attributable to a 91 basis points decrease in deposit costs, which includes a 47 basis points decrease in the average yield on money market deposits and a 110 basis points decrease in the average yield on time deposits. Average borrowings outstanding for the year endedDecember 31, 2021 increased by$140.1 million with a decrease in rate of 41 basis points compared to the year endedDecember 31, 2020 . The net interest margin for the year endedDecember 31, 2021 was 4.45% compared to 4.18% for the year endedDecember 31, 2020 , an increase of 27 basis points. The cost of interest-bearing liabilities decreased by 86 basis points to 0.29% from 1.15%, while the yield on interest-earning assets decreased by 26 basis points to 4.65% from 4.91% for the previous year. Average earning assets increased by$756.9 million , primarily due to an increase of$722.7 million in average loans and an increase of$34.2 million in average total investments. Average interest-bearing liabilities increased by$565.6 million as average interest-bearing deposits increased by$425.5 million and average borrowings increased by$140.1 million . The inclusion of PPP loan average balances, interest and fees had an 11 basis points impact on the yield on average loans and a 12 basis point impact on the net interest margin for 2021. 43
Table of Contents
Average Balances, Interest and Yields
The following tables present, for the years endedDecember 31, 2022 , 2021 and 2020, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Year Ended December 31, 2022 2021 2020 Average Interest and Yield / Average Interest and Yield / Average Interest and Yield / (Dollars in thousands) Balance Fees Rate Balance Fees Rate Balance Fees Rate Earning Assets: Federal funds sold and other investments(1)$ 225,154 $ 3,524 1.57 %$ 207,771 $ 500 0.24 %$ 147,431 $ 1,056 0.72 % Securities purchased under agreements to resell - - - - - - 29,932 271 0.91 Investment securities 35,188 881 2.50 21,573 390 1.81 17,806 410 2.30 Total investments 260,342 4,405 1.69 229,344 890 0.39 195,169 1,737 0.89 Construction and development 35,562 1,898 5.34 48,076 2,513 5.23 31,658 1,685 5.32 Commercial real estate 589,017 38,582 6.55 503,968 29,750 5.90 478,481 27,316 5.71 Commercial and industrial 55,516 3,920 7.06 119,640 8,407 7.03 112,313 5,301 4.72 Residential real estate 2,090,389 98,277 4.70 1,437,377 67,058 4.67 763,136 41,391 5.42 Consumer and Other 193 138 71.50 188 123 65.43 989 179 18.10 Gross loans(2) 2,770,677 142,815 5.15 2,109,249 107,851 5.11 1,386,577 75,872 5.47 Total earning assets 3,031,019 147,220 4.86 2,338,593 108,741 4.65 1,581,746 77,609 4.91 Noninterest-earning assets 156,185 122,038 98,504 Total assets 3,187,204 2,460,631 1,680,250 Interest-bearing liabilities: NOW and savings deposits 186,061 1,046 0.56 112,943 222 0.20 68,610 166 0.24 Money market deposits 1,130,439 16,067 1.42 726,268 1,693 0.23 248,633 1,731 0.70 Time deposits 513,867 6,445 1.25 499,856 2,033 0.41 596,325 9,021 1.51 Total interest-bearing deposits 1,830,367 23,558 1.29
1,339,067 3,948 0.29 913,568 10,918 1.20 Borrowings 373,238 4,051 1.09 223,027 624 0.28 82,955 571 0.69 Total interest-bearing liabilities 2,203,605 27,609 1.25 1,562,094 4,572 0.29 996,523 11,489 1.15 Noninterest-bearing liabilities: Noninterest-bearing deposits 599,340 559,797 394,338 Other noninterest-bearing liabilities 63,997 76,727 62,153 Total noninterest-bearing liabilities 663,337 636,524 456,491 Shareholders' equity 320,262 262,013 227,236 Total liabilities and shareholders' equity$ 3,187,204 $ 2,460,631 $ 1,680,250 Net interest income$ 119,611 $ 104,169 $ 66,120 Net interest spread 3.61 4.36 3.76 Net interest margin 3.95 4.45 4.18
(1) Includes income and average balances for term federal funds, interest-earning
cash accounts, and other miscellaneous earning assets.
(2) Average loan balances include nonaccrual loans and loans held for sale.
44
Table of Contents
Rate/Volume Analysis
Increases and decreases in interest income and interest expense result from
changes in average balances (volume) of interest-earning assets and
interest-bearing liabilities, as well as changes in average interest rates. The
following table sets forth the effects of changing rates and volumes on our net
interest income during the period shown. Information is provided with respect to
(i) effects on interest income attributable to changes in volume (change in
volume multiplied by prior rate) and (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume).
Change applicable to both volumes and rate have been allocated to volume.
Year Ended December 31,
2022 Compared to 2021 2021 Compared to 2020
Increase (Decrease) Due to Change in: Increase (Decrease) Due to Change in:
(Dollars in thousands) Volume Yield/Rate Total Change Volume Yield/Rate Total Change
Earning assets:
Federal funds sold and other
investments(1) $ 458 $ 2,586 $ 3,044 $ 274 $ (830) $ (556)
Securities purchased under
agreements to resell - - - (271) - (271)
Investment securities 505 (34) 471 19 (39) (20)
Total investments 963 2,552 3,515 22 (869) (847)
Construction and development (685) 70 (615) 752 76 828
Commercial real estate 5,030 3,802 8,832 3,460 (1,026) 2,434
Commercial and industrial (4,667) 180 (4,487) 407 2,699 3,106
Residential real estate 30,875 344 31,219 31,587 (5,920) 25,667
Consumer and Other 7 8 15 (94) 38 (56)
Gross loans(2) 30,560 4,404 34,964 36,112 (4,133) 31,979
Total earning assets 31,523 6,956 38,479 36,134 (5,002) 31,132
Interest-bearing liabilities:
NOW and savings deposits 197 627 824 90 (34) 56
Money market deposits 1,817 12,557 14,374 1,177 (1,215) (38)
Time deposits 490 3,922 4,412 (1,934) (5,054) (6,988)Total interest-bearing deposits 2,504 17,106 19,610 (667) (6,303) (6,970) Borrowings 662 2,765 3,427 552 (499) 53 Total interest-bearing liabilities 3,166 19,871
23,037 (115) (6,802) (6,917)
Net interest income $ 28,357 $ (12,915) $ 15,442 $ 36,249 $ 1,800 $ 38,049 (1) Includes income and average balances for term federal funds, interest-earning
cash accounts, and other miscellaneous earning assets.
(2) Loan balances include nonaccrual loans and loans held for sale.
Provision for Loan Losses
Credit risk is inherent in the business of making loans. We establish an ALL through charges to earnings, which are shown in the statements of operations as the provision for loan losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance for loan losses. The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of our ALL and charging the shortfall or excess, if any, to the current quarter's expense. This has the effect of creating variability in the amount and frequency of charges to earnings. The provision for loan losses and level of ALL for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market areas. The determination of the amount is complex and involves a high degree of judgment and subjectivity.
Year ended
We recorded a credit provision for loan losses of
45
Table of Contents
recorded during the year ended December 31, 2022 was due to the release of
additional reserves allocated for the uncertainties in our loan portfolio caused
by the COVID-19 pandemic as certain loans that were modified during the COVID-19
pandemic returned to their contractual payment terms. We did not experience the
level of credit deterioration for these loans that we had initially anticipated.
Our allowance for loan losses as a percentage of gross loans for the periods
ended December 31, 2022 and 2021 was 0.45% and 0.67%, respectively. None of the
ALL balance was allocated to our PPP loan portfolio at December 31, 2022 and
2021. Our ALL as a percent of gross loans is relatively lower than our peers due
to our high percentage of residential mortgage loans, which tend to have lower
allowance for loan loss ratios compared to other commercial or consumer loans.
Year ended
We recorded provision for loan losses of$6.9 million during the year endedDecember 31, 2021 compared to$3.5 million provision for loan losses recorded during the year endedDecember 31, 2020 . The increase in our provision for loan losses during the year endedDecember 31, 2021 was partially due to the continued uncertainty surrounding the COVID-19 pandemic, as well as the significant growth in our loan portfolio. Our allowance for loan losses as a percentage of gross loans for the periods endedDecember 31, 2021 and 2020 was 0.67% and 0.62%, respectively. Excluding outstanding PPP loans of$31.0 million and$92.4 million as ofDecember 31, 2021 and 2020, the ALL as a percentage of total loans was 0.68% and 0.66%, respectively. None of the ALL balance was allocated to our PPP loan portfolio atDecember 31, 2021 and 2020. Our ALL as a percent of gross loans is relatively lower than our peers due to our high percentage of residential mortgage loans, which tend to have lower allowance for loan loss ratios compared to other commercial or consumer loans.
Noninterest Income
Noninterest income is an important component of our total revenues. A portion of our noninterest income is associated with SBA and residential mortgage lending activity, consisting of gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing rights retained. Other sources of noninterest income include service charges on deposit accounts and other service charges, commissions and fees.
The following table sets forth the major components of our noninterest income
for the years ended
Years Ended December 31, 2022 vs. 2021 2021 vs. 2020
(Dollars in thousands) 2022 2021 2020 $ Change % Change $ Change % Change Noninterest Income: Service charges on deposit accounts
$ 1,991 $ 1,696 $
1,312
- 2,529 2,017 100.0 (2,529) (100.0) Mortgage servicing income, net
(561) (564) 1,308 3 0.5 (1,872) (143.1)
Gain on sale of SBA loans 2,068 10,952 6,467 (8,884) (81.1) 4,485 69.4 SBA servicing income, net
1,825 5,884 6,130 (4,059) (69.0) (246) (4.0)
Other income 2,139 1,398 920 741 53.0 478 52.0
Total noninterest income $ 19,204 $ 33,803 $
27,211
Year ended
Service charges on deposit accounts were$2.0 million for the year endedDecember 31, 2022 compared to$1.7 million for the year endedDecember 31, 2021 , an increase of$295,000 , or 17.4%. The increase was primarily attributable to increased analysis fees and overdraft fees. Other service charges, commissions and fees decreased$4.7 million , or 32.6%, to$9.7 million for year endedDecember 31, 2022 compared to$14.4 million for the year endedDecember 31, 2021 . The decrease is mainly attributable to lower underwriting, processing and origination fees earned from our origination of residential mortgage loans as mortgage volume declined during the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . 46
Table of Contents
Mortgage loan originations totaled
Total gain on sale of loans was$4.1 million for the year endedDecember 31, 2022 compared to$11.0 million for the year endedDecember 31, 2021 , a decrease of$6.9 million , or 62.7%. Gain on sale of residential loans totaled$2.0 million for the year endedDecember 31, 2022 compared to no gain on sale of residential mortgage loans recorded for the year endedDecember 31, 2021 as no mortgage loans were sold during 2021. We sold$94.9 million in residential mortgage loans with an average premium of 2.13% during the year endedDecember 31, 2022 . Gain on sale of SBA loans totaled$2.1 million for the year endedDecember 31, 2022 compared to$11.0 million for the year endedDecember 31, 2021 . We sold$31.5 million in SBA loans during the year endedDecember 31, 2022 with average premiums of 8.45% compared to the sale of$124.7 million in SBA loans with an average premium of 10.67% in the same period in 2021. Mortgage loan servicing income had an expense balance of$561,000 for the year endedDecember 31, 2022 compared to an expense balance of$564,000 for the year endedDecember 31, 2021 , a slight increase of$3,000 , or 0.5%. Included in mortgage loan servicing income for the year endedDecember 31, 2022 was$3.2 million in mortgage servicing fees compared to$4.7 million for 2021, and capitalized mortgage servicing assets of$761,000 for the year endedDecember 31, 2022 compared to$0 for 2021. These amounts were offset by mortgage loan servicing asset amortization of$4.7 million for the year endedDecember 31, 2022 compared to$5.7 million for the year endedDecember 31, 2021 . During the year endedDecember 31, 2022 , we recorded fair value impairment recovery of$163,000 on our mortgage servicing assets compared to a fair value impairment recovery of$478,000 recorded during the year endedDecember 31, 2021 . Our total residential mortgage loan servicing portfolio was$526.7 million atDecember 31, 2022 compared to$608.2 million atDecember 31, 2021 . SBA servicing income was$1.8 million for the year endedDecember 31, 2022 compared to$5.9 million for the year endedDecember 31, 2021 , a decrease of$4.1 million , or 69.0%. Our total SBA loan servicing portfolio was$465.1 million as ofDecember 31, 2022 compared to$543.0 million as ofDecember 31, 2021 . SBA servicing fees totaled$5.0 million for the year endedDecember 31, 2022 compared to$5.3 million for the year endedDecember 31, 2021 . Our SBA servicing rights are carried at fair value and inputs used to calculate fair value change from period to period. During the year endedDecember 31, 2022 , we recorded a$3.1 million fair value adjustment charge on our SBA servicing rights compared to a$619,000 fair value gain on our SBA servicing rights during the year endedDecember 31, 2021 . Other noninterest income was$2.1 million for the year endedDecember 31, 2022 compared to$1.4 million for the year endedDecember 31, 2021 , an increase of$741,000 , or 53.0%. The largest component of other noninterest income is the income on bank owned life insurance, which totaled$1.7 million and$1.1 million , respectively, for the years endedDecember 31, 2022 and 2021.
Year ended
Service charges on deposit accounts were$1.7 million for the year endedDecember 31, 2021 compared to$1.3 million for the year endedDecember 31, 2020 , an increase of$384,000 , or 29.3%. The increase was primarily attributable to increased analysis fees and wire transfer fees. Other service charges, commissions and fees increased$5.9 million , or 69.0%, to$14.4 million for year endedDecember 31, 2021 compared to$8.5 million for the year endedDecember 31, 2020 . The increase is mainly attributable to higher underwriting, processing and origination fees earned from our origination of residential mortgage loans as mortgage volume significantly increased during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Mortgage loan originations totaled$1.20 billion during the year endedDecember 31, 2021 compared to$484.2 million during the year endedDecember 31, 2020 . 47 Table of Contents Total gain on sale of loans was$11.0 million for the year endedDecember 31, 2021 compared to$9.0 million for the year endedDecember 31, 2020 , an increase of$2.0 million , or 21.7%. We recorded no gain on sale of residential mortgage loans for the year endedDecember 31, 2021 as no mortgage loans were sold during the period compared to$2.5 million for the year endedDecember 31, 2020 . We sold$92.7 million in residential mortgage loans with an average premium of 2.78% during the year endedDecember 31, 2020 . Gain on sale of SBA loans totaled$11.0 million for the year endedDecember 31, 2021 compared to$6.5 million for the year endedDecember 31, 2020 . We sold$124.7 million in SBA loans during the year endedDecember 31, 2021 with average premiums of 10.67% compared to the sale of$128.6 million in SBA loans with an average premium of 7.58% in the same period in 2020. Mortgage loan servicing income had an expense balance of$564,000 for the year endedDecember 31, 2021 compared to income of$1.3 million for the year endedDecember 31, 2020 , a decrease of$1.9 million , or 143.1%. The decrease in mortgage loan servicing income was due to the decrease in capitalized mortgage servicing assets and mortgage servicing fees and increased servicing asset amortization. Included in mortgage loan servicing income for the year endedDecember 31, 2021 was$4.7 million in mortgage servicing fees compared to$6.4 million for 2020, and capitalized mortgage servicing assets of$0 for the year endedDecember 31, 2021 compared to$1.0 million for 2020. These amounts were offset by mortgage loan servicing asset amortization of$5.7 million for the year endedDecember 31, 2021 compared to$5.4 million for the year endedDecember 31, 2020 . During the year endedDecember 31, 2021 , we recorded fair value impairment recovery of$478,000 on our mortgage servicing assets compared to a fair value impairment of$641,000 recorded during the year endedDecember 31, 2020 . Our total residential mortgage loan servicing portfolio was$608.2 million atDecember 31, 2021 compared to$961.7 million atDecember 31, 2020 . SBA servicing income was$5.9 million for the year endedDecember 31, 2021 compared to$6.1 million for the year endedDecember 31, 2020 , a decrease of$246,000 , or 4.0%. Our total SBA loan servicing portfolio was$543.0 million as ofDecember 31, 2021 compared to$507.4 million as ofDecember 31, 2020 . Our SBA servicing rights are carried at fair value. While our servicing portfolio grew, the inputs used to calculate fair value also changed, which resulted in a$619,000 increase to our SBA servicing rights during the year endedDecember 31, 2021 . During the year endedDecember 31, 2020 , we recorded an increase of$1.5 million to our SBA servicing rights. Other noninterest income was$1.4 million for the year endedDecember 31, 2021 compared to$920,000 for the year endedDecember 31, 2020 , an increase of$478,000 , or 52.0%. The largest component of other noninterest income is the income on bank owned life insurance which totaled$1.1 million and$587,000 , respectively, for the years endedDecember 31, 2021 and 2020.
Noninterest Expense
The following table sets forth the major components of our noninterest expense
for the years ended
Years Ended December 31, 2022 vs. 2021 2021 vs. 2020
(Dollars in thousands ) 2022 2021 2020 $ Change % Change $ Change % Change
Noninterest Expense:
Salaries and employee benefits $ 30,502 $ 30,112 $ 25,500 $ 390 1.3 %$ 4,612 18.1 % Occupancy and equipment 4,857 5,028 5,083 (171) (3.4) (55) (1.1) Data processing 1,095 1,100 1,078 (5) (0.5) 22 2.0 Advertising 606 541 566 65 12.0 (25) (4.4) Other expenses 13,305 11,643 8,873
1,662 14.3 2,770 31.2
Total noninterest expense
48
Table of Contents
Year ended
Salaries and employee benefits expense for the year endedDecember 31, 2022 was$30.5 million compared to$30.1 million for the year endedDecember 31, 2021 , an increase of$390,000 , or 1.3%. This increase was mainly attributable to the increase in the overall number of employees necessary to support our continued growth and annual salary adjustments, as well as increased restricted stock expense, offset by lower commissions paid to our loan officers as loan volume declined during the year endedDecember 31, 2022 . The average number of full-time equivalent employees was 216 for the year endedDecember 31, 2022 compared to 213 for the year endedDecember 31, 2021 . Occupancy expense for the year endedDecember 31, 2022 was$4.9 million compared to$5.0 million for the same period during 2021, a decrease of$171,000 , or 3.4%. This decrease was partially due to lower maintenance and repairs expense and rent expense.
Data processing expense for the years ended
Advertising expense for the year ended
Other expenses for the year endedDecember 31, 2022 were$13.3 million compared to$11.6 million for the year endedDecember 31, 2021 , an increase of$1.7 million , or 14.3%. The increase was primarily due to higherFDIC deposit insurance premiums, professional fees, communication expenses, and fair value losses on our equity investments, offset by lower loan and other real estate owned expenses. Included in other expenses were directors' fees of$565,000 and$455,000 for the years endedDecember 31, 2022 and 2021, respectively.
Year ended
Salaries and employee benefits expense for the year endedDecember 31, 2021 was$30.1 million compared to$25.5 million for the year endedDecember 31, 2020 , an increase of$4.6 million , or 18.1%. This increase was mainly attributable higher commissions paid to our loan officers as loan volume significantly increased during the year endedDecember 31, 2021 , as well as the increase in the overall number of employees necessary to support our continued growth and annual salary adjustments. The average number of full-time equivalent employees was 213 for the year endedDecember 31, 2021 compared to 209 for the year endedDecember 31, 2020 . Occupancy expense for the year endedDecember 31, 2021 was$5.0 million compared to$5.1 million for the same period during 2020, a slight decrease of$55,000 , or 1.1%. This decrease was partially due to lower maintenance and repairs expense and rent expense.
Data processing expense for the years ended
Advertising expense for the year endedDecember 31, 2021 was$541,000 compared to$566,000 for 2020, a decrease of$25,000 , or 4.4%. The decrease was due to management's ongoing efforts to reduce costs. Other expenses for the year endedDecember 31, 2021 were$11.6 million compared to$8.9 million for the year endedDecember 31, 2020 , an increase of$2.8 million , or 31.2%. The increase was primarily due to higher mortgage and other real estate owned expenses andFDIC insurance premiums, as well as increased operating and customer service expenses. Included in other expenses were directors' fees of$455,000 and$383,000 for the years endedDecember 31, 2021 and 2020, respectively. 49 Table of Contents Income Tax Expense
Income tax expense for the years endedDecember 31, 2022 , 2021 and 2020 was$28.6 million ,$20.9 million and$12.4 million , respectively. The Company's effective tax rates for the years endedDecember 31, 2022 , 2021 and 2020 were 31.4%, 25.3% and 25.4%, respectively. The significant increase in the effective tax rate for the year endedDecember 31, 2022 was due to the re-allocation of state income tax apportionment schedules from prior year tax returns, as well as corrections for the treatment of prior year's state tax credits. We had a net deferred tax liability of$1.6 million atDecember 31, 2022 , a net deferred tax asset of$2.2 million atDecember 31, 2021 and net deferred tax liability of$1.0 million atDecember 31, 2020 .
Return on Equity and Assets
The following table sets forth our return on average assets, return on average
equity, dividend payout ratio and average shareholders' equity to average assets
ratio for the periods indicated:
Years Ended December 31,
2022 2021 2020
Return on average assets 1.96 % 2.51 % 2.17 %
Return on average equity 19.55 % 23.55 % 16.02 %
Dividend payout ratio 24.52 % 19.17 % 28.32 %Average shareholders' equity to average assets 10.05 % 10.65 %
13.52 %
For the year endedDecember 31, 2022 , our average equity includes$7.6 million of average accumulated other comprehensive income. This amount includes unrealized losses on our available for sale securities portfolio and significant unrealized gains on our interest rate derivatives. Excluding the average accumulated other comprehensive income balance, the return on average equity was 20.02% for the year endedDecember 31, 2022 . The average accumulated other comprehensive icome balance had little to no impact on the return on average equity for the years endedDecember 31, 2021 and 2020.
Financial Condition
Total assets increased$321.1 million , or 10.3%, to$3.43 billion atDecember 31, 2022 as compared to$3.11 billion atDecember 31, 2021 . The increase in total assets was primarily attributable to increases in loans held for investment of$550.6 million , federal funds sold of$19.7 million , bank owned life insurance of$9.7 million and interest rate derivative assets of$28.4 million , partially offset by a$281.6 million decrease in cash and due from banks which was used to help fund our loan growth.
Loans
Our loans represent the largest portion of our earning assets, substantially greater than the securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition. Our gross loans increased$553.8 million , or 22.1%, to$3.07 billion as ofDecember 31, 2022 compared to$2.51 billion as ofDecember 31, 2021 . Our loan growth during the year endedDecember 31, 2022 was comprised of an increase of$8.9 million , or 23.0%, in construction and development loans, an increase of$136.8 million , or 26.3%, in commercial real estate loans, a decrease of$19.9 million , or 27.2 %, in commercial and industrial loans, an increase of$427.9 million , or 22.8%, in residential real estate loans and an increase of$137,000 , or 173.4%, in consumer and other loans. Included in commercial and industrial loans were PPP loans with outstanding balances totaling$713,000 and$31.0 million as ofDecember 31, 2022 and 2021, respectively. 50
Table of Contents
The following table presents the ending balance of each major category in our loan portfolio at the dates indicated.
December 31,
2022 2021 2020 2019 2018(Dollars in thousands) Amount % of Total Amount
% of Total Amount % of Total Amount % of Total Amount % of
1.6 % $ 38,857 1.6 % $ 45,653 2.8 % $ 31,739 2.7 % $ 42,718 3.7 %
Commercial Real Estate 657,246 21.4 520,488 20.7 477,419 29.2 424,950 36.5 396,598 34.6
Commercial and Industrial 53,173 1.7 73,072 2.9 137,239 8.4 53,105 4.6 33,100 2.9
Residential Real Estate 2,306,915 75.3 1,879,012 74.8 974,445 59.6 651,645 56.0 670,341 58.5
Consumer and other 216 0.0 79 0.0 183 0.0 1,768 0.2 2,957 0.3
Total gross loans 3,065,329 100.0 % 2,511,508 100.0 % 1,634,939 100.0 % 1,163,207 100.0 % 1,145,714 100.0 %
Unearned income (9,640) (6,438) (4,595) (2,045) (2,139)
Allowance for loan losses (13,888) (16,952) (10,135) (6,839) (6,645)
Total loans, net $ 3,041,801 $ 2,488,118 $ 1,620,209 $ 1,154,323 $ 1,136,930
The following table presents the maturity distribution of our loans as of
December 31, 2022 . The table also shows the distribution of such loans between
those loans with predetermined (fixed) interest rates and those with variable
(floating) interest rates.
December 31, 2022
Five to Fifteen
(Dollars in thousands) One Year or Less One to Five Years
Years Over Fifteen Years
40,426 $ 6,286 $ 1,067 $ - $ 47,779
Commercial Real Estate 21,332 211,482 172,320 252,112 657,246
Commercial and Industrial 11,231 7,237 34,705 - 53,173
Residential Real Estate - - 1,044,896 1,262,019 2,306,915
Consumer and other 216 - - - 216
Total gross loans $ 73,205 $ 225,005 $ 1,252,988 $ 1,514,131 $ 3,065,329
Amounts with fixed rates $ 46,474 $ 121,439 $ 1,080,496 $ 209,918 $ 1,458,327
Amounts with floating or
adjustable rates 26,731 103,566 172,492 1,304,213 1,607,002
Total gross loans $ 73,205 $ 225,005 $ 1,252,988 $ 1,514,131 $ 3,065,329
Our loan portfolio is concentrated in commercial real estate and residential
mortgage loans with the remaining balance in construction and development,
commercial and industrial, and consumer loans. 98.3% of our gross loans were
secured by real property as of December 31, 2022 , compared to 97.1% as of
December 31, 2021 and 91.6% as of December 31, 2020 .
We have established concentration limits in the loan portfolio for commercial
real estate loans, commercial and industrial loans, and unsecured lending, among
others. All loan types are within established limits. We use underwriting
guidelines to assess the borrowers' historical cash flow to determine debt
service, and we further stress test the debt service under higher interest rate
scenarios. Financial and performance covenants are used in commercial lending
agreements to allow us to react to a borrower's deteriorating financial
condition, should that occur. For more information, see "Item 1 - Business
-
Lending Activities."
51
Table of Contents
The principal categories of our loan portfolios are discussed below:
Construction and development loans. Our construction and development loans are comprised of commercial construction and land acquisition and development construction. Interest reserves are generally established on real estate construction loans. These loans typically carry a fixed interest rate and have maturities of less than 18 months. Our LTV policy limits are 65% for construction and development loans. Additionally, we impose limits on the total dollar amount of this category of our portfolio. The risks inherent in construction lending may affect adversely our results of operations. Such risks include, among other things, the possibility that contractors may fail to complete, or complete on a timely basis, construction of the relevant properties; substantial cost overruns in excess of original estimates and financing; market deterioration during construction; and lack of permanent take-out financing. Loans secured by such properties also involve additional risk because they have no operating history. Advances on construction loans are made relative to the overall percentage of completion on the project in an effort to remain adequately secured. Such properties may not be sold or leased so as to generate the cash flow anticipated by the borrower. As ofDecember 31, 2022 , our construction and development loans comprised$47.8 million , or 1.6%, of total loans, compared to$38.9 million , or 1.6%, of total loans as ofDecember 31, 2021 . This compares to$45.7 million , or 2.8%, of total loans as ofDecember 31, 2020 . Commercial real estate loans. Commercial real estate loans include owner-occupied and non-owner occupied commercial real estate. We require our commercial real estate loans to be secured by what we believe to be well-managed property with adequate margins and we generally obtain a personal guarantee from responsible parties. We originate both fixed-rate and adjustable-rate loans with terms up to 25 years. AtDecember 31, 2022 , approximately 89.6% of our commercial real estate loans were owner-occupied. As ofDecember 31, 2022 , our loans secured by commercial real estate were$657.2 million , or 21.4%, of total loans compared to$520.5 million , or 20.7%, as ofDecember 31, 2021 . This increase was due to consistent loan production and market demand for these types of loans. Commercial real estate loans were$477.4 million , or 29.2%, of our portfolio as ofDecember 31, 2020 . Our non-owner occupied commercial real estate loans make up a small percentage of our overall commercial real estate loan portfolio. Non-owner occupied commercial real estate loans were 10.4%, 12.4%, and 13.6%, as a percentage of commercial real estate loans for the years endingDecember 31, 2022 , 2021, and 2020, respectively. We originate both fixed and adjustable rate loans. Adjustable rate loans are based on LIBOR, prime rate or constant maturity treasury ("CMT"). AtDecember 31, 2022 and 2021, approximately 25.2% and 20.9% of the commercial real estate portfolio consisted of fixed-rate loans, respectively. Our policy maximum LTV is 85% for commercial real estate loans. However, our weighted average LTV is well below this policy maximum. Newly originated and renewed non-SBA commercial real estate loans for the years endingDecember 31, 2022 and 2021 carried a weighted average LTV of 57.7% and 59.5%, respectively. Commercial and industrial loans. We provide a mix of variable and fixed rate commercial and industrial loans. The loans are typically made to small and medium-sized businesses for working capital needs, business expansions and for trade financing. We extend commercial business loans on an unsecured and secured basis for working capital, accounts receivable and inventory financing, machinery and equipment purchases, and other business purposes. Generally, short-term loans have maturities ranging from six months to one year, and "term loans" have maturities ranging from five to ten years. Loans are generally intended to finance current transactions and typically provide for periodic principal payments, with interest payable monthly. Term loans generally provide for floating interest rates, with monthly payments of both principal and interest. As ofDecember 31, 2022 , our commercial and industrial loans comprised$53.2 million , or 1.7%, of total loans, compared to$73.1 million , or 2.9% of total loans as ofDecember 31, 2021 . This compares to$137.2 million , or 8.4%, of total loans as ofDecember 31, 2020 . These decreases were mainly due to the forgiveness of PPP loans that were originated in 2020 and 2021.
A significant portion of both our commercial real estate and commercial and industrial loans are SBA loans. We are designated an SBA Preferred Lender under the SBA Preferred Lender Program. We offer mostly SBA 7(a) variable-rate
52
Table of Contents
loans. We have historically sold the guaranteed portion (75%-90%) of the SBA loans that we originate. Our SBA loans are typically made to small-sized retail, hotel/motel, service and distribution businesses for working capital needs or business expansions. SBA loans have maturities up to 25 years. Typically, non-real estate secured loans mature in less than 10 years. Collateral may also include inventory, accounts receivable and equipment, and may include personal guarantees. Our unguaranteed SBA loans collateralized by real estate are monitored by collateral type and included in our CRE Concentration Guidance. As ofDecember 31, 2022 , our SBA portfolio totaled$304.3 million compared to$269.8 million as ofDecember 31, 2021 . This increase was primarily the result of the Company electing to stop selling the guaranteed portion of our SBA loans beginning in the second quarter of 2022 since the sales premium offered by third party investors significantly declined compared to prior year. We originated and sold$136.7 million and$31.5 million during the year endedDecember 31, 2022 compared to originations and sales of$285.8 million and$124.7 million for the year endedDecember 31, 2021 . We originated and sold$245.7 million and$128.6 million of SBA loans during the year endedDecember 31, 2020 .
From our total SBA loan portfolio of
As a preferred SBA lender, we participated in the Paycheck Protection Program
("PPP") created under the CARES Act and implemented by the SBA to help provide
loans to our business customers in need. During the first round of PPP funding
in the second and third quarters of 2020, the Company approved and funded over
1,800 PPP loans totaling $97.0 million . These PPP loans were funded with our
current cash balances and all PPP loans are fully guaranteed by the SBA. The SBA
had granted forgiveness for these PPP loans for 99.9% of the PPP loans funded.
The Economic Aid Act, signed into law on
Residential real estate loans. We originate mainly non-conforming single-family residential mortgage loans through our branch network, without the use of any third party originator. During 2022, our primary loan products were 15-year and 30-year fixed rate products and a five-year or ten-year hybrid adjustable rate mortgage which reprice after five or ten years to the one-year CMT plus certain spreads. We originate the residential mortgage loans to hold for investment and also sell on the secondary market when premiums are elevated. As ofDecember 31, 2022 , our residential real estate loans comprised$2.31 billion , or 75.3%, of total loans, compared to$1.88 billion , or 74.8%, of total loans as ofDecember 31, 2021 . This compares to$974.4 million , or 59.6%, of total loans as ofDecember 31, 2020 . The increase in 2022 was due to management's decision to hold all of our production for investment rather than sell our residential loans on the secondary market. During the years endedDecember 31, 2022 and 2021, we originated$833.6 million and$1.20 billion and sold$94.9 and$0 million , respectively, in residential mortgage loans. During the year endedDecember 31, 2020 , we originated$484.2 million and sold$92.7 million in residential mortgage loans. Consumer and other loans. These loans represent a small portion of our overall portfolio and primarily consists of purchased auto loan pools, overdrafts, and consumer lines of credit. Consumer loans carry a greater amount of risk and collections are dependent on the borrower's continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans. As ofDecember 31, 2022 , our consumer and other loans totaled$216,000 compared to$79,000 as ofDecember 31, 2021 . This compares to$183,000 as ofDecember 31, 2020 . 53 Table of Contents Nonperforming Assets Loans are considered delinquent when principal or interest payments are past due 30 days or more. Delinquent loans may remain on accrual status between 30 days and 90 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal and interest payments are past due 90 days or more or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan's principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable. Real estate acquired as a result of foreclosure or by deed-in-lieu of foreclosure is classified as OREO until sold, and is carried at the balance of the loan at the time of foreclosure or at estimated fair value less estimated costs to sell, whichever is less.
Nonperforming loans include loans 90 days or more past due and still accruing, loans accounted for on a nonaccrual basis and accruing restructured loans. Nonperforming assets consist of nonperforming loans plus OREO.
Nonperforming loans were$20.2 million atDecember 31, 2022 compared to$11.8 million atDecember 31, 2021 and$13.1 million atDecember 31, 2020 . The increase fromDecember 31, 2021 toDecember 31, 2022 was primarily attributable to a$1.2 million increase in nonaccrual commercial real estate loans and a$7.2 million increase in accruing troubled debt restructured loans. The decrease fromDecember 31, 2020 toDecember 31, 2021 was primarily attributable to a$2.4 million decrease in nonaccrual residential real estate loans, offset by a$857,000 increase in nonaccrual commercial real estate loans and$342,000 increase in loans past due ninety days or more and still accruing. The decrease fromDecember 31, 2019 toDecember 31, 2020 was primarily attributable to a$1.4 million decrease in nonaccrual construction and development loans and$627,000 decrease in nonaccrual residential real estate loans. We did not recognize any interest income on nonaccrual loans during the years endedDecember 31, 2022 , 2021 and 2020. We recognized interest income on loans modified under troubled debt restructurings of$540,000 ,$131,000 and$143,000 for the years endedDecember 31, 2022 , 2021 and 2020, respectively. The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings. AtDecember 31, 2022 , included in nonaccrual loans were$4.9 million of commercial real estate loans,$136,000 in commercial and industrial loans and$5.0 million in residential real estate loans. Nonaccrual loans atDecember 31, 2021 comprised of$3.7 million of commercial real estate loans,$152,000 in commercial and industrial loans and$4.9 million in residential real estate loans. The weighted average LTV of nonaccrual residential real estate loans was approximately 51.4% atDecember 31, 2022 . December 31, (Dollars in thousands) 2022 2021 2020 2019 2018 Nonaccrual loans$ 10,065 $ 8,759 $ 10,203 $ 12,236 $ 5,667 Past due loans 90 days or more and still accruing 180 342 - - - Accruing troubled debt restructured loans 9,919 2,697 2,891 2,459 3,298 Total nonperforming loans 20,164 11,798 13,094 14,695 8,965 Other real estate owned 4,328 3,618 3,844 423 - Total nonperforming assets$ 24,492 $ 15,416 $ 16,938 $ 15,118 $ 8,965 Nonperforming loans to gross loans 0.66 % 0.47 % 0.80 % 1.26 % 0.78 % Nonperforming assets to total assets 0.71 % 0.50 % 0.89 % 0.93 % 0.63 % Allowance for loan losses to nonperforming loans 68.88 % 143.69 % 77.40 % 46.54 % 74.12 % 54 Table of Contents Allowance for loan losses
The allowance for loan losses is an estimate of probable incurred losses in the loan portfolio. Loans are charged-off against the allowance when management believes a loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance for loan losses. Management's methodology for estimating the allowance balance consists of several key elements, which include specific allowances on individual impaired loans and the formula driven allowances on pools of loans with similar risk characteristics. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. The ALL is determined on a quarterly basis and reflects management's estimate of probable incurred credit losses inherent in the loan portfolio. We also rely on internal and external loan review procedures to further assess individual loans and loan pools, and economic data for overall industry and geographic trends. The computation includes element of judgment and high levels of subjectivity. A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include loans on nonaccrual status and performing restructured loans. Income from loans on nonaccrual status is recognized to the extent cash is received and when the loan's principal balance is deemed collectible. Depending on a particular loan's circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. A loan is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral. Fair value, where possible, is determined by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market value for the collateral. The impairment amount on a collateral-dependent loan is charged-off to the allowance if deemed not collectible and the impairment amount on a loan that is not collateral-dependent is set up as a specific reserve. In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring. These concessions may include a reduction of the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the loan is modified may be excluded from restructured loan disclosures in years subsequent to the restructuring if the loans are in compliance with their modified terms. A restructured loan is considered impaired despite its accrual status and a specific reserve is calculated based on the present value of expected cash flows discounted at the loan's effective interest rate or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. Interest income on impaired loans is accrued as earned, unless the loan is placed on non-accrual status. The allowance for loan losses was$13.9 million atDecember 31, 2022 compared to$16.9 million atDecember 31, 2021 , a decrease of$3.0 million , or 18.1%. The decrease in the allowance for loan losses balance was due to the release of additional reserves allocated for uncertainties in our loan portfolio caused by the COVID-19 pandemic as certain loans that were modified during the COVID-19 pandemic returned to their contractual payment terms. We did not experience the level of credit deterioration for these loans that we had initially anticipated. The Company is not required to implement the provisions of the CECL accounting standard issued by the FASB in the ASU No. 2016-13 untilJanuary 1, 2023 , and continued to account for the allowance for loan losses under the incurred loss model as ofDecember 31, 2022 .
In determining the allowance and the related provision for loan losses, we consider three principal elements: (i) valuation allowances based upon probable losses identified during the review of impaired commercial and industrial,
commercial real estate, construction and land development loans, (ii)
allocations, by loan classes, on loan portfolios based on historical loan loss
experience and qualitative factors and (iii) review of the credit discounts in
relationship to the valuation allowance calculated for purchased loans.
Provisions for loan losses are charged to operations to record changes to the
total allowance to a level deemed appropriate by us.
55
Table of Contents
It is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the loan portfolio. TheFDIC and GA DBF also review the allowance for loan losses as an integral part of their examination process. Based on information currently available, management believes that our allowance for loan losses is adequate. However, the loan portfolio can be adversely affected if economic conditions and the real estate market in our market areas were to weaken. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect our future growth and profitability. No assurance of the ultimate level of credit losses can be given with any certainty.
Analysis of the Allowance for Loan Losses. The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge-offs for the periods presented below:
December 31,
(Dollars in thousands) 2022 2021 2020 2019 2018
Balance, beginning of
period $ 16,952 $ 10,135 $ 6,839 $ 6,645 $ 6,925
Charge-offs:
Construction and
development - - - - -
Commercial real estate - 67 109 237 88
Commercial and
industrial 390 64 51 14 39
Residential real estate - - - - -
Consumer and other - - 97 525 1,939
Total charge-offs 390 131 257 776 2,066
Recoveries:
Construction and
development - - - - -
Commercial real estate 7 12 10 752 22
Commercial and
industrial 81 - 25 - -
Residential real estate - - - - -
Consumer and other 5 7 51 218 527
Total recoveries 93 19 86 970 549
Net
charge-offs/(recoveries) 297 112 171 (194) 1,517
Provision for loan
losses (2,767) 6,929 3,467 - 1,237
Balance, end of period $ 13,888 $ 16,952 $ 10,135 $ 6,839 $ 6,645
Total loans at end of
period $ 3,065,329 $ 2,511,508 $ 1,634,939 $ 1,163,207 $ 1,145,714
Average loans(1) 2,761,195 2,109,249 1,365,129 1,218,219 1,110,451
Net charge-offs to
average loans 0.01 % 0.01 % 0.01 % (0.02) % 0.14 %
Allowance for loan
losses to total loans 0.45 % 0.67 % 0.62 % 0.59 % 0.58 %
(1) Excludes loans held for sale.
Management believes the allowance for loan losses is adequate to provide for
losses inherent in the loan portfolio as of
56
Table of Contents
The following table presents a summary of the allocation of the allowance for loan losses by loan portfolio segment for the periods indicated:
December 31,
2022 2021 2020 2019 2018
Allowance for % of Loans to Allowance for % of Loans to Allowance for % of Loans to Allowance for % of Loans to Allowance for % of Loans to
(Dollars in thousands) Loan Losses Total Loans Loan Losses Total Loans Loan Losses Total Loans Loan Losses Total Loans Loan Losses Total Loans
Construction and
Development $ 124 1.6 % $ 100 1.6 % $ 178 2.8 % $ 131 2.7 % $ 235 3.7 %
Commercial Real Estate 2,811 21.4 4,146 20.7 5,161 29.2 2,320 36.5 2,601 34.6
Commercial and
Industrial 1,326 1.7 4,989 2.9 438 8.4 448 4.6 380 2.9
Residential Real
Estate 9,626 75.3 7,717 74.8 4,350 59.6 3,457 56.0 3,042 58.5
Consumer and other 1 - - - 8 - 91 0.2 387 0.3
Unallocated - - - - - - 392 - - -
Total allowance for
loan losses $ 13,888 100.0 % $ 16,952 100.0 % $ 10,135 100.0 % $ 6,839 100.0 % $ 6,645 100.0 %
Investment Securities
Our securities portfolio is the third largest component of our interest earning
assets. The portfolio serves the following purposes: (i) to optimize the Bank's
income consistent with the investment portfolio's liquidity and risk objectives;
(ii) to balance market and credit risks of other assets and the Bank's liability
structure; (iii) to profitably deploy funds which are not needed to fulfill
loan demand, deposit redemptions or other liquidity purposes; and (iv) to
provide collateral which the Bank is required to pledge against public funds.
We classify our debt securities as either available-for-sale or held-to-maturity at the time of purchase. Accounting guidance requires available-for-sale securities to be marked to fair value with an offset to accumulated other comprehensive income (loss), a component of shareholders' equity. Monthly adjustments are made to reflect changes in the fair value of our available-for-sale securities.
All of the debt securities in our investment portfolio were classified as available-for-sale as ofDecember 31, 2022 . All available-for-sale securities are carried at fair value. Securities available-for-sale consist primarily ofU.S. government-sponsored agency securities, home mortgage-backed securities and state and municipal bonds. No issuer of the available-for-sale securities comprised more than ten percent of our shareholders' equity as ofDecember 31, 2022 , 2021 or 2020.
The following table presents the amortized cost and fair value of our available-for-sale securities portfolio as of the dates presented.
Year Ended December 31,
2022 2021 2020
(Dollars in thousands) Amortized Cost Fair Value
Amortized Cost Fair Value Amortized Cost Fair Value
Obligations of
$ 5,059 $ 5,059 $
6,949
8,121 6,403 8,169 8,361 7,182 7,429
Mortgage-backed GSE residential 9,540 7,783 10,562 10,423 1,368 1,382
Total securities available for sale
25,680 $ 25,733 $ 17,856 $ 18,117
57
Table of Contents
Certain securities have fair values less than amortized cost and, therefore,
contain unrealized losses. At December 31, 2022 , we evaluated the securities
which had an unrealized loss for other than temporary impairment (OTTI) and
determined all declines in value to be temporary. We anticipate full recovery of
amortized cost with respect to these securities by maturity, or sooner in the
event of a more favorable market interest rate environment. We do not intend to
sell these securities and it is not more likely than not that we will be
required to sell them before recovery of the amortized cost basis, which may be
at maturity.
The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities available for sale as of the dates presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
As of December 31, 2022
More Than One Year More Than Five Years
One Year or Less Through Five Years Through Ten Years More Than Ten Years Total
Weighted Weighted Weighted Weighted Weighted(Dollars in thousands) Fair Value Average Yield Fair Value Average Yield Fair Value Average Yield Fair Value Average Yield Fair Value Average Yield Obligations ofU.S. Government entities and agencies $ - - %$ 5,059 3.55 % $ - - % $ - - %$ 5,059 3.55 % States and political subdivisions - - 834 2.09 372 2.33 5,197 2.19 6,403 2.19 Mortgage-backed GSE residential 782 1.52 1,746 1.60 1,068 1.81 4,187 1.89 7,783 1.78 Total securities available for sale $ 782 1.52 %$ 7,639 2.94 %$ 1,440 1.94 %$ 9,384 2.06 %$ 19,245 2.32 %
We have not used interest rate swaps or other derivative instruments to hedge fixed rate loans or securities to otherwise mitigate our interest rate risk.
As ofDecember 31, 2022 andDecember 31, 2021 , the Company had equity securities with carrying values totaling$10.3 million and$11.4 million , respectively. The equity securities consist of our investment in a bond mutual fund that invests in high quality fixed income bonds, mainly government agency securities whose proceeds are designed to positively impact community development throughoutthe United States . The mutual fund focuses exclusively on providing affordable housing to low- and moderate-income borrowers and renters, including those in Majority Minority Census Tracts. During the year endedDecember 31, 2022 and 2021, we recognized an unrealized loss of$1.1 million and$114,000 , respectively, in net income on our equity securities. No unrealized gains or losses on equity securities were recognized in net income during the year endedDecember 31, 2020 .
Deposits
Deposits represent the Bank's primary source of funds, and we gather deposits
primarily through our branch locations, as well as the use of wholesale and
brokered deposits. We offer a variety of deposit products including demand
deposit accounts, interest-bearing products, savings accounts and certificate of
deposits. We put continued effort into gathering
58
Table of Contents
noninterest-bearing demand deposits accounts through marketing to our existing and new loan customers, customer referrals, and expansion into new markets.
Total deposits increased$403.8 million , or 17.8%, to$2.67 billion atDecember 31, 2022 compared to$2.26 billion atDecember 31, 2021 . As ofDecember 31, 2022 , 22.9% of total deposits were comprised of noninterest-bearing demand accounts and 77.1% of interest-bearing deposit accounts compared to 26.2% and 73.8% as ofDecember 31, 2021 , respectively. Total deposits increased$783.1 million , or 52.9%, to$2.26 billion atDecember 31, 2021 compared to$1.48 billion atDecember 31, 2020 . Our noninterest-bearing demand accounts were 31.3% of total deposits and our interest-bearing deposits accounted for the remaining 68.7% of our deposits as ofDecember 31, 2020 . As ofDecember 31, 2022 and 2021, the Company had estimated uninsured deposits of$874.7 million and$619.5 million , respectively. These estimates were derived using the same methodologies and assumptions used for the Bank's regulatory reporting. We had brokered deposits of$523.7 million , or 19.6% of total deposits, atDecember 31, 2022 compared to$425.1 million , or 18.8% of total deposits, atDecember 31, 2021 and$164.3 million , or 11.1% of total deposits, atDecember 31, 2020 . We use brokered deposits, subject to certain limitations and requirements, as a source of funding to support our asset growth and augment the deposits generated from our branch network, which are our principal source of funding. Our level of brokered deposits varies from time to time depending on competitive interest rate conditions and other factors and tends to increase as a percentage of total deposits when the brokered deposits are less costly than issuing internet certificates of deposit or borrowing from theFederal Home Loan Bank . We use interest rate swap and cap agreements to hedge our deposit accounts that are indexed to the Federal Funds Effective rate. These swap agreements are designated as cash flow hedges. As ofDecember 31, 2022 , the total amount of deposits tied to the Federal Funds Effective rate was$951.9 million . See Note 10 of our consolidated financial statements as ofDecember 31, 2022 , included elsewhere in this Annual Report on Form 10-K, for additional information.
The following table summarizes our average deposit balances and weighted average
rates for the years ended
Year Ended December 31,
2022 2021 2020
Weighted Weighted Weighted
Average Average Average Average Average Average
(Dollars in thousands) Balance Rate Balance Rate Balance Rate
Noninterest-bearing demand deposits $ 599,340 - % $ 559,797 - % $ 394,338 - %
Interest-bearing demand deposits 159,277 0.62 84,502 0.19 48,702 0.20
Savings and money market deposits 695,758 1.21 394,553 0.34 250,605 0.71
Brokered money market deposits 461,465 1.66 360,156 0.11 17,936 0.12
Time deposits 513,867 1.25 499,856 0.41 596,325 1.51
Total interest-bearing deposits 1,830,367 1.29 1,339,067 0.29 913,568 1.20
Total deposits $ 2,429,707 0.97 % $ 1,898,864 0.21 % $ 1,307,906 0.83 %
The following table sets forth the scheduled maturities of time deposits of
(Dollars in thousands) December 31, 2022 Remaining maturity: Three months or less $ 11,814 Over three through six months 22,020 Over six through twelve months 282,165 Over twelve months 75,634 Total time deposits$250,000 or greater $ 391,633 59 Table of Contents Borrowed Funds
Other than deposits, the Company utilizes FHLB advances as a supplementary funding source to finance our operations. The advances from the FHLB are collateralized by residential real estate loans. AtDecember 31, 2022 and 2021, we had$375.0 million and$500.0 million , respectively, of outstanding advances from the FHLB. The following table provides information related to our FHLB Advances for the periods indicated: As of or for the Year Ended December 31, (Dollars in thousands) 2022 2021 2020 Maximum amount outstanding at any month-end during the period$ 500,000 $ 500,000 $ 110,000 Balance outstanding at end of period 375,000 500,000 110,000 Average outstanding balance during the period 368,333 237,500 82,500 Weighted average interest rate during the period 1.16 % 0.26 % 0.69 % Weighted average interest rate at end of period 1.94 0.12 0.58 In addition to our advances with the FHLB, we maintain federal funds agreements with our correspondent banks. Our available borrowings under these agreements were$47.5 million atDecember 31, 2022 and 2021. We did not have any advances outstanding under these agreements for any of the periods presented. We also have access to theFederal Reserve's discount window in the amount of$10.0 million with no borrowings outstanding as ofDecember 31, 2022 and 2021. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.
Liquidity
Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders. Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks, federal funds sold, and fair value of unpledged investment securities. Other available sources of liquidity include wholesale deposits and additional borrowings from correspondent banks, FHLB advances, and theFederal Reserve discount window. Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis. As part of our liquidity management strategy, we open federal funds lines with our correspondent banks. As ofDecember 31, 2022 and 2021, we had$47.5 million of unsecured federal funds lines with no amounts advanced. In addition, we have access to theFederal Reserve's discount window in the amount of$10.0 million with no borrowings outstanding as ofDecember 31, 2022 and 2021. TheFederal Reserve discount window line is collateralized by a pool of commercial real estate loans and commercial and industrial loans. AtDecember 31, 2022 and 2021, we had$375.0 million and$500.0 million , respectively, of outstanding advances from the FHLB. Based on the values of residential mortgage loans pledged as collateral, we had$633.6 million and$326.9 million of additional borrowing availability with the FHLB as ofDecember 31, 2022 and 2021, respectively. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts. 60 Table of Contents Capital Requirements
The Company and the Bank are required under federal law to maintain certain minimum capital levels based on ratios of capital to total assets and capital to risk-weighted assets. The required capital ratios are minimums, and the federal banking agencies may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution's exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution's ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution's overall capital adequacy. For more information, see "Item 1. Business - Regulation and Supervision - Regulation of the Company - Capital Requirements." The table below summarizes the capital requirements applicable to the Company and the Bank in order to be considered "well-capitalized" from a regulatory perspective, as well as the Company's and the Bank's capital ratios as ofDecember 31, 2022 and 2021. The Bank exceeded all regulatory capital requirements and was considered to be "well-capitalized" as ofDecember 31, 2022 and 2021. As ofDecember 31, 2022 , theFDIC categorized the Bank as well-capitalized under the prompt corrective action framework. There have been no conditions or events sinceDecember 31, 2022 that management believes would change this classification. While the Company believes that it has sufficient capital to withstand an extended economic recession, its reported and regulatory capital ratios could be adversely impacted in future periods. To Be Well Capitalized Minimum Capital Required Under Prompt Corrective (Dollars in thousands) Actual Basel III Action Provisions: Amount Ratio Amount ? Ratio ? Amount ? Ratio ? As ofDecember 31, 2022 Total Capital (to Risk Weighted Assets) Consolidated$ 338,185 16.68 % 212,932 10.50 % N/A N/A Bank 336,866 16.61 % 212,915 10.50 202,777 10.00 %Tier I Capital (to Risk Weighted Assets) Consolidated 324,297 15.99 % 172,374 8.50 % N/A N/A Bank 322,978 15.93 % 172,360 8.50 162,221 8.00 % Common Tier 1 (CET1) Consolidated 324,297 15.99 % 141,955 7.00 % N/A N/A Bank 322,978 15.93 % 141,944 7.00 131,805 6.50 % Tier 1 Capital (to Average Assets) Consolidated 324,297 9.57 % 135,485 4.00 % N/A N/A Bank 322,978 9.54 % 135,446 4.00 169,307 5.00 % As ofDecember 31, 2021 Total Capital (to Risk Weighted Assets) Consolidated$ 297,108 17.77 % 175,564 10.50 % N/A N/A Bank 287,258 17.18 % 175,525 10.50 167,166 10.00 %Tier I Capital (to Risk Weighted Assets) Consolidated 280,156 16.76 % 142,123 8.50 % N/A N/A Bank 270,306 16.17 % 142,091 8.50 133,733 8.00 % Common Tier 1 (CET1) Consolidated 280,156 16.76 % 117,043 7.00 % N/A N/A Bank 270,306 16.17 % 117,016 7.00 108,658 6.50 % Tier 1 Capital (to Average Assets) Consolidated 280,156 9.44 % 118,682 4.00 % N/A N/A Bank 270,306 9.11 % 118,667 4.00 148,333 5.00 % 61 Table of Contents Contractual Obligations
The following table presents supplemental information regarding total
contractual obligations as of
Payments Due by Period at December 31, 2022
(Dollars in thousands) Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Total
Deposits without a stated maturity $ 1,857,430 $ - $ - $ - $ 1,857,430
Time deposits 663,704 145,144 560 - 809,408
FHLB advances - - 25,000 350,000 375,000Operating lease liabilities 1,776 3,222 2,406 1,481 8,885
Total contractual obligations
351,481 $ 3,050,723 We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain
adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated balance sheet. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if we deem collateral is necessary upon extension of credit, is based on management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. They are intended to be disbursed, subject to certain condition, upon request of the borrower.
The following table presents outstanding financial commitments whose contractual amount represents credit risks as of the dates indicated:
December 31,
(Dollars in thousands) 2022 2021
Commitments to extend credit $ 62,334 $ 61,345
Standby letters of credit 6,303 4,674
Total off-balance sheet commitments
© Edgar Online, source
