PARS BANC The following discussion compares the Company's financial condition at
This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto in Item 8 of Part II of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , and the other information included in this Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2022 (this "Quarterly Report"). Operating results for the three and nine months endedSeptember 30, 2022 are not necessarily indicative of the results for the year endingDecember 31, 2022 or any other period.
Forward-Looking Statements
Certain statements in this Quarterly Report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include, without limitation, statements regarding anticipated changes in the interest rate environments and the related impacts on the Company's net interest margin, changes in economic conditions, the impacts of the COVID-19 pandemic, management's belief regarding liquidity and capital resources, and statements that include other projections, predictions, expectations, or beliefs about future events or results or otherwise are not statements of historical fact. Such forward-looking statements are based on various assumptions as of the time they are made, and are inherently subject to known and unknown risks, uncertainties, and other factors, some of which cannot be predicted or quantified, that may cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Forward-looking statements are often accompanied by words that convey projected future events or outcomes such as "expect," "believe," "estimate," "plan," "project," "anticipate," "intend," "will," "may," "view," "opportunity," "potential," or words of similar meaning or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of, or trends affecting, the Company will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to:
potential adverse consequences related to the termination of the merger ? agreement with OCFC, which may cause us to incur substantial costs that may
adversely affect our business, reputation, financial results and the market
price of our stock, including as a result of litigation;
changes in interest rates, such as volatility in yields on
conditions, customer and client behavior, the Company's funding costs and the
Company's loan and securities portfolios;
monetary and fiscal policies of the
on interest rates and business in our markets; general business conditions, as well as conditions within the financial
markets, including the impact thereon of unusual and infrequently occurring ? events, such as weather-related disasters, terrorist acts, geopolitical
conflicts (such as the military conflict between
health events (such as COVID-19), and of governmental and societal responses
thereto;
general economic conditions, in
including the effects of declines in real estate values, increases in
unemployment levels and inflation, recession and slowdowns in economic growth;
? changes in the value of securities held in the Company's investment portfolios;
? changes in the quality or composition of the loan portfolios and the value of
the collateral securing those loans;
? changes in the level of net charge-offs on loans and the adequacy of our
allowance for credit losses;
? demand for loan products;
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? deposit flows;
? the strength of the Company's counterparties;
? competition from both banks and non-banks;
? demand for financial services in the Company's market areas;
? reliance on third parties for key services;
? changes in the commercial and residential real estate markets;
? cyber threats, attacks or events;
? expansion of Delmarva's and Partners' product offerings;
changes in accounting principles, standards, rules and interpretations, and ? elections by the Company thereunder, and the related impact on the Company's
financial statements;
potential claims, damages, and fines related to litigation or government ? actions, including litigation or actions arising from the Company's
participation in and administration of programs related to the COVID-19
pandemic;
the effect of steps the Company takes in response to the COVID-19 pandemic, the
severity and duration of the pandemic, the uncertainty regarding new variants ? of COVID-19 that may emerge, the distribution and efficacy of vaccines, the
impact of loosening or tightening of government restrictions, the pace of
recovery as the pandemic subsides and the heightened impact it has on many of
the risks described herein;
? legislative or regulatory changes and requirements;
the discontinuation of LIBOR and its impact on the financial markets, and the ? Company's ability to manage operational, legal and compliance risks related to
the discontinuation of LIBOR and implementation of one or more alternative
reference rates; and
? other factors, many of which are beyond the control of the Company.
Please refer to the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of the Company's 2021 Annual Report on Form 10-K and comparable sections of this Quarterly Report and related disclosures in other filings which have been filed with theSEC and are available on theSEC's website at www.sec.gov. All risk factors and uncertainties described herein and therein should be considered in evaluating forward-looking statements. All of the forward-looking statements made in this Quarterly Report are expressly qualified by the cautionary statements contained or referred to herein. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on the Company or its businesses or operations. Readers are cautioned not to rely too heavily on the forward-looking statements contained in this Quarterly Report. Forward-looking statements speak only as of the date they are made. The Company does not undertake any obligation to update, revise, or clarify these forward-looking statements whether as a result of new information, future events or otherwise.
Overview
Partners Bancorp , a bank holding corporation, through its wholly owned subsidiaries,The Bank of Delmarva ("Delmarva") andVirginia Partners Bank ("Virginia Partners "), each of which are commercial banking corporations, engages in general commercial banking operations, with nineteen branches throughoutWicomico ,Charles ,Anne Arundel , andWorcester Counties inMaryland ,Sussex County inDelaware ,Camden andBurlington Counties inNew Jersey , the cities ofFredericksburg andReston, Virginia , andSpotsylvania County, Virginia . The Company derives the majority of its income from interest received on our loans and investment securities. The primary source of funding for making these loans and purchasing investment securities are deposits and secondarily, borrowings. Consequently, one of the key measures of the Company's success is the amount of net interest income, or the difference between the income on interest-earning assets, such as loans and investment securities, and the expense on interest-bearing liabilities, such as deposits and borrowings. The resulting ratio of that difference as a percentage of average interest-earning assets represents the net interest margin. Another key measure is the spread between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, which is called the net interest spread. In addition to 49 Table of Contents earning interest on loans and investment securities, the Company earns income through fees and other charges to customers. Also included is a discussion of the various components of this noninterest income, as well as of noninterest expense. There are risks inherent in all loans, so the Company maintains an allowance for credit losses to absorb probable losses on existing loans that may become uncollectible. The Company maintains this allowance for credit losses by charging a provision for credit losses as needed against our operating earnings for each period. The Company has included a detailed discussion of this process, as well as several tables describing its allowance for credit losses. As previously disclosed, onNovember 4, 2021 , the Company and OCFC announced that they entered into a definitive agreement and plan of merger (the "Merger Agreement") pursuant to which the Company was to merge intoOceanFirst Bank, N.A. , withOceanFirst Bank surviving, and following which Partners and Delmarva were each successively to merge with and into OCFC, with OCFC surviving each bank merger. OnNovember 9, 2022 , the Company and OCFC entered into a Mutual Termination Agreement (the "Termination Agreement") pursuant to which, among other things, the parties mutually agreed to terminate the Merger Agreement and transactions completed thereby. Each party will bear its own costs and expenses in connection with the terminated transaction, and neither party will pay a termination fee in connection with the termination of the Merger Agreement. The Termination Agreement also mutually releases the parties from any claims of liability to one another relating to the Merger Agreement and the terminated transaction. Following the termination of the Merger Agreement, the Company expects to undertake a review of all strategic alternatives available to the Company to enhance returns to shareholders, including internal initiatives designed to drive targeted growth and to increase efficiency and operating performance, as well as other strategic transactions which may include a sale of the Company. The Company expects to communicate an update with respect to this strategic review in early 2023. The Company believes that it is well-positioned to be successful in its banking markets, including the highly competitiveGreater Washington market. The Company's financial performance generally, and in particular the ability of its borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is highly dependent on the business environment in the Company's primary markets where the Company operates and inthe United States as a whole. The ongoing COVID-19 pandemic has severely disrupted supply chains and adversely affected production, demand, sales and employee productivity across a range of industries, and previously resulted in orders directing the closing or limited operation of certain businesses and restrictions on public gatherings. These events affected the Company's operations during fiscal year 2021 and the first nine months of 2022, and, along with economic uncertainty caused by geopolitical conflicts such as the war inUkraine and other events, are expected to impact the Company's financial results throughout the remainder of fiscal year 2022 and into 2023.
Please refer to the "Provision for Credit Losses and Allowance for Credit Losses" section of this "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information related to payment deferrals, concentrations in higher risk industries, and the impact on the allowance for credit losses.
The following discussion and analysis also identifies significant factors that have affected the Company's financial position and operating results during the periods included in the consolidated financial statements accompanying this report. This "Management's Discussion and Analysis" should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in Item 1 in this Quarterly Report, and the other information included in this Quarterly Report.
Critical Accounting Estimates
Certain critical accounting policies affect significant judgments and estimates used in the preparation of the Company's consolidated financial statements. These significant accounting policies are described in the notes to the consolidated financial statements included in this Quarterly Report as well as in Item 8 of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . The accounting principles the Company follows and the methods 50 Table of Contents of applying these principles conform toU.S. GAAP and general banking industry practices. The Company's most critical accounting policy relates to the determination of the allowance for credit losses, which reflects the estimated losses resulting from the inability of borrowers to make loan payments. The determination of the adequacy of the allowance for credit losses involves significant judgment and complexity and is based on many factors. If the financial condition of the Company's borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the estimates would be updated and additional provisions for credit losses may be required. See "Provision for Credit Losses and Allowance for Credit Losses" and Note 1 - Nature of Business and Its Significant Accounting Policies and Note 3 - Loans, Allowance for Credit Losses and Impaired Loans of the unaudited consolidated financial statements included in this Quarterly Report. Another of the Company's critical accounting policies, with the acquisitions of Liberty in 2018 andVirginia Partners in 2019, relates to the valuation of goodwill and intangible assets. The Company accounted for the Liberty Merger and the Virginia Partners Share Exchange in accordance with ASC Topic No. 805, Business Combinations, which requires the use of the acquisition method of accounting. Under this method, assets acquired, including intangible assets, and liabilities assumed, are recorded at their fair value. Determination of fair value involves estimates based on internal valuations of discounted cash flow analyses performed, third party valuations, or other valuation techniques that involve subjective assumptions. Additionally, the term of the useful lives and appropriate amortization periods of intangible assets is subjective. Resulting goodwill from the Liberty Merger and the Virginia Partners Share Exchange, which totaled approximately$5.2 million and$4.4 million , respectively, under the acquisition method of accounting represents the excess of the purchase price over the fair value of net assets acquired.Goodwill is not amortized, but is evaluated for impairment annually or more frequently if deemed necessary. If the fair value of an asset exceeds the carrying amount of the asset, no charge to goodwill is made. If the carrying amount exceeds the fair value of the asset, goodwill will be adjusted through a charge to earnings, which is limited to the amount of goodwill allocated to that reporting unit. In evaluating the goodwill on its consolidated balance sheet for impairment after the consummation date of the Liberty Merger and the Virginia Partners Share Exchange, the Company will first assess qualitative factors to determine whether it is more likely than not that the fair value of our acquired assets is less than the carrying amount of the acquired assets, as allowed under ASU 2017-04. After making the assessment based on several factors, which will include, but is not limited to, the current economic environment, the economic outlook in our markets, our financial performance and common stock value as compared to our peers, we will determine if it is more likely than not that the fair value of our assets is greater than their carrying amount and, accordingly, will determine whether impairment of goodwill should be recorded as a charge to earnings in years subsequent to the Liberty Merger and the Virginia Partners Share Exchange. This assessment was performed during the fourth quarter of 2021, and resulted in no impairment of goodwill. Management considers the impact of changes in the financial markets and their impact on the Company and may determine that goodwill is required to be evaluated for impairment due to the presence of a triggering event, which may have a negative impact on the Company's results of operations. No impairment of goodwill was required for the nine months endedSeptember 30, 2022 based on management's assessment. See Note 13 -Goodwill and Intangible Assets of the unaudited consolidated financial statements included in this Quarterly Report for more information related to goodwill and intangible assets. In addition to the Company's policies related to the valuation of goodwill and intangible assets, ongoing accounting for acquired loans is considered a critical accounting policy. Acquired loans are classified as either PCI loans or purchased performing loans and are recorded at fair value on the date of acquisition. PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the "nonaccretable difference." Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the "accretable yield" and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Periodically, the Company evaluates its estimate of cash flows expected to be collected on PCI loans. Estimates of cash flows for PCI loans require significant judgment. Subsequent decreases to the expected cash flows will generally result in a provision for credit losses resulting in an increase to the allowance for credit losses. Subsequent significant increases in cash flows may result in a reversal of post-acquisition provision for credit losses or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining life of the loan, or pool(s) of loans. The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans' contractual cash flows. 51 Table of Contents Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for credit losses established at the acquisition date for purchased performing loans, but a provision for credit losses may be required for any deterioration in these loans in future periods. The Company evaluates purchased performing loans quarterly for deterioration and records any required additional provision for credit losses.
Results of Operations
Net income attributable to the Company was$4.1 million , or$0.23 per basic and diluted share, for the three months endedSeptember 30, 2022 , a$1.4 million , or 52.5%, increase when compared to net income attributable to the Company of$2.7 million , or$0.15 per basic and diluted share, for the same period in 2021.
Net
income attributable to the Company was$9.4 million , or$0.52 per basic and diluted share, for the nine months endedSeptember 30, 2022 , a$3.5 million , or 58.0%, increase when compared to net income attributable to the Company of$5.9 million , or$0.33 per basic and diluted share, for the same period in 2021.
The Company's results of operations for the three months ended
Positive Impacts:
An increase in net interest income due primarily to a decrease in average
interest-bearing deposit balances and lower rates paid, a decrease in average
borrowings balances, an increase in average loan balances, an increase in
yields earned on average cash and cash equivalents balances, and an increase in ? average investment securities balances and yields earned, which were partially
offset by lower loan yields earned, and a decrease in average cash and cash
equivalents balances. Net interest income was negatively impacted during the
three months ended
to the forgiveness of loans originated and funded under the PPP of the SBA;
? A higher net interest margin (tax equivalent basis); and
? Recording no losses or operating expenses on OREO during the three months ended
September 30, 2022 . Negative Impacts:
Recording a provision for credit losses as compared to a recovery of credit ? losses for the same period of 2021 due primarily to organic loan growth, which
was partially offset by the current economic environment and the milder impact
of the COVID-19 pandemic compared to
? Recording losses on sales and calls of investment securities as compared to
gains for the same period of 2021;
? Reduced operating results from
and lower mortgage division fees at Delmarva;
Expenses associated with
and commercial banking office in
2021; and
Merger related expenses of
with OCFC.
The Company's results of operations for the nine months ended
Positive Impacts:
An increase in net interest income due primarily to lower rates paid on average
interest-bearing deposit balances, a decrease in average borrowings balances,
an increase in average loan balances, an increase in average cash and cash ? equivalents balances and yields earned, and an increase in average investment
securities balances and yields earned, which were partially offset by lower
loan yields earned, and an increase in average interest-bearing deposit
balances.
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Net interest income was negatively impacted during the nine months ended
of loans originated and funded under the PPP;
? A higher net interest margin (tax equivalent basis);
A significantly lower provision for credit losses due to the current economic ? environment and the milder impact of the COVID-19 pandemic compared to
? Recording gains on OREO as compared to losses for the same period of 2021.
Negative Impacts:
? Recording losses on sales and calls of investment securities as compared to
gains for the same period of 2021;
? Reduced operating results from
and lower mortgage division fees at Delmarva;
Expenses associated with
the
2021, and Delmarva opening its twelfth full-service branch at
Merger related expenses of
with OCFC.
For the three months endedSeptember 30, 2022 , the Company's annualized return on average assets, annualized return on average equity and efficiency ratio were 0.98%, 12.01% and 64.00%, respectively, as compared to 0.66%, 7.79% and 73.81%, respectively, for the same period in 2021. For the nine months endedSeptember 30, 2022 , the Company's annualized return on average assets, annualized return on average equity and efficiency ratio were 0.75%, 9.23% and 69.96%, respectively, as compared to 0.50%, 5.86% and 73.46%, respectively, for the same period in 2021. The increase in net income attributable to the Company for the three months endedSeptember 30, 2022 , as compared to the same period in 2021, was driven by an increase in net interest income and lower other expenses, and was partially offset by a higher provision for credit losses, a decrease in other income and higher federal and state income taxes. The increase in net income attributable to the Company for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, was driven by an increase in net interest income and a lower provision for credit losses, and was partially offset by a decrease in other income, higher other expenses, and higher federal and state income taxes.
Financial Condition
Total assets as ofSeptember 30, 2022 were$1.65 billion , an increase of$5.7 million , or 0.3%, fromDecember 31, 2021 . Key drivers of this change were increases in investment securities available for sale, at fair value, and total loans held for investment, which were partially offset by decreases in cash and cash equivalents. Changes in key balance sheet components as ofSeptember 30, 2022 compared toDecember 31, 2021 were as follows:
Interest bearing deposits in other financial institutions as of
2022 were
available for sale, at fair value, and total loan growth outpacing total deposit growth;
Federal funds sold as of
were the aforementioned items noted in the analysis of interest bearing deposits in other financial institutions;
Investment securities available for sale, at fair value as of
2022 were
securities portfolio in light of the Company's liquidity needs, which were
partially offset by two higher yielding
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investment securities being called, and an increase in unrealized losses on the
investment securities available for sale portfolio;
Loans, net of unamortized discounts on acquired loans of
from
organic growth, including growth of approximately
market, which was partially offset by forgiveness payments received of
approximately
2022, there were no loans under round two of the PPP that were still outstanding;
Total deposits as of
were organic growth as a result of our continued focus on total relationship
? banking and
market, and customers seeking the liquidity and safety of deposit accounts in
light of continuing economic uncertainty and volatility in stock and other
investment markets;
Total borrowings as of
principal curtailments, which was partially offset by an increase in
Partners' majority owned subsidiary JMC's warehouse line of credit with another
financial institution; and Total stockholders' equity as ofSeptember 30, 2022 was$133.8 million , a
decrease of
this change were an increase in accumulated other comprehensive (loss), net of ? tax, and cash dividends paid to shareholders, which were partially offset by
the net income attributable to the Company for the nine months ended September
30, 2022, the proceeds from stock option exercises, and stock-based
compensation expense related to restricted stock awards.
Delmarva's Tier 1 leverage capital ratio was 8.7% atSeptember 30, 2022 as compared to 8.1% atDecember 31, 2021 . AtSeptember 30, 2022 , Delmarva's Tier 1 risk weighted capital ratio and total risk weighted capital ratio were 11.8% and 13.0%, respectively, as compared to a Tier 1 risk weighted capital ratio and total risk weighted capital ratio of 11.6% and 12.9%, respectively, atDecember 31, 2021 .Virginia Partners' Tier 1 leverage capital ratio was 8.6% atSeptember 30, 2022 as compared to 8.5% atDecember 31, 2021 . AtSeptember 30, 2022 ,Virginia Partners' Tier 1 risk weighted capital ratio and total risk weighted capital ratio were 10.6% and 11.4%, respectively, as compared to a Tier 1 risk weighted capital ratio and total risk weighted capital ratio of 11.3% and 12.0%, respectively, atDecember 31, 2021 .
As of
See "Capital" below for additional information about Delmarva's and Virginia Partners' capital ratios and requirements.
AtSeptember 30, 2022 , nonperforming assets totaled$4.3 million , a decrease fromDecember 31, 2021 balances of$9.8 million . The primary drivers of this decrease were decreases in nonaccrual loans and OREO, net, which were partially offset by an increase in loans past due 90 days or more and still accruing interest. Nonaccrual loans totaled approximately$4.1 million atSeptember 30, 2022 , as compared to$9.0 million atDecember 31, 2021 . Loans past due 90 days or more and still accruing interest totaled$275 thousand atSeptember 30, 2022 , as compared to$0 atDecember 31, 2021 . OREO, net as ofSeptember 30, 2022 totaled$0 , as compared to$837 thousand atDecember 31, 2021 . Nonperforming loans as a percentage of total assets was 0.26% atSeptember 30, 2022 , as compared to 0.54% atDecember 31, 2021 . Nonperforming assets to total assets as ofSeptember 30, 2022 was 0.26%, as compared to 0.60% atDecember 31, 2021 . Loans classified as TDRs totaled$5.1 million atSeptember 30, 2022 , as compared to$7.9 million atDecember 31, 2021 , representing a decrease of$2.8 million during the first nine months of 2022. Of this decrease, approximately$1.1 million was due to five loan relationships that are no longer considered to be TDRs due to the restructuring of the loans subsequent to them initially being classified as a TDR. At the time of the subsequent restructurings, the borrowers were not experiencing financial difficulties and, under the terms of the subsequent restructuring agreements, no concessions have been granted to the borrowers. In addition, during the second and third quarters of 2022, one loan relationship that was classified as a TDR was partially charged-off, reducing the balance in total by approximately$1.3 54
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million, which was partially offset by one loan relationship in the amount of approximately$48 thousand being classified as a TDR during the second quarter of 2022. The remaining decrease was the result of loan relationships classified as TDRs that were paid down or paid off. Net charge-offs were$660 thousand , or 0.22% of average total loans (annualized), for the three months endedSeptember 30, 2022 , as compared to$249 thousand , or 0.09% of average total loans (annualized), for the same period of 2021. Net charge-offs were$1.6 million , or 0.19% of average total loans (annualized), for the nine months endedSeptember 30, 2022 , as compared to$740 thousand , or 0.09% of average total loans (annualized), for the same period of 2021. The allowance for credit losses to total loans ratio was 1.15% atSeptember 30, 2022 , as compared to 1.31% atDecember 31, 2021 . In addition to the allowance for credit losses, as ofSeptember 30, 2022 andDecember 31, 2021 , the Company had$1.8 million and$2.3 million , respectively, in unamortized discounts on acquired loans related to the acquisitions ofLiberty and Virginia Partners . This discount is amortized over the life of the remaining loans.
Summary of Return on Equity and Assets
Three Months Nine Months
Ended Ended Year Ended
September 30, September 30, December 31,
2022 2022 2021
Yield on earning assets (annualized) 4.03 % 3.68 % 3.60 %
Return on average assets (annualized) 0.98 % 0.75 % 0.46 %
Return on average equity (annualized) 12.01 % 9.23 % 5.43 %
Average equity to average assets 8.12 % 8.13 % 8.52 %
Earnings Analysis
The Company's primary source of revenue is interest income and fees, which it
earns by lending and investing the funds which are held on deposit. Because
loans generally earn higher rates of interest than investment securities, the
Company seeks to deploy as much of its deposit funds as possible in the form of
loans to individuals, businesses, and other organizations. To ensure sufficient
liquidity, the Company also maintains a portion of its deposits in cash and cash
equivalents, government securities, interest bearing deposits in other financial
institutions, and overnight loans of excess reserves (known as ''Federal Funds
Sold'') to correspondent banks. The revenue which the Company earns (prior to
deducting its overhead expenses) is essentially a function of the amount of the
Company's loans and deposits, as well as the profit margin (''interest spread'')
and fee income which can be generated on these amounts.
Net income attributable to the Company was $4.1 million and $9.4 million for the
three and nine months ended September 30, 2022 , respectively, as compared to net
income attributable to the Company of $2.7 million and $5.9 million ,
respectively, for the same periods of 2021.
The following is a summary of the results of operations by the Company for the
three and nine months ended
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Summary of Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(Dollars in Thousands)
Net interest income $ 14,875 $ 11,904 $ 39,669 $ 34,528 Provision for (recovery of) credit losses 419 (30)
803 2,568 Provision for income taxes 1,292 839 2,914 1,847 Noninterest income 1,241 2,076 3,986 6,543 Noninterest expense 10,347 10,359 30,648 30,284 Total income 17,698 16,157 48,619 48,028 Total expenses 13,640 13,345 39,329 41,656 Net income 4,058 2,812 9,290 6,372
Net income attributable to Partners Bancorp 4,110 2,696 9,398 5,946 Basic earnings per share 0.229 0.152 0.523 0.335 Diluted earnings per share 0.228 0.151
0.522 0.334
Interest Income and Expense - Three Months Ended
Net interest income and net interest margin
The largest component of net income for the Company is net interest income, which is the difference between the income earned on assets, such as loans and investment securities, and interest paid on liabilities, such as deposits and borrowings, used to support such assets. Net interest income is determined by the rates earned on the Company's interest-earning assets and the rates paid on its interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of its interest-earning assets and interest-bearing liabilities. Net interest income in the third quarter of 2022 increased by$3.0 million , or 25.0%, when compared to the third quarter of 2021. The Company's net interest margin (tax equivalent basis) increased to 3.64%, representing an increase of 62 basis points for the three months endedSeptember 30, 2022 as compared to the same period in 2021. The increase in the net interest margin (tax equivalent basis) was primarily due to higher average balances of loans, higher average balances of and yields earned on investment securities, higher yields earned on average interest bearing deposits in other financial institutions and federal funds sold, and lower average balances of and rates paid on interest-bearing liabilities, which were partially offset by a decrease in the yields earned on average loans, due primarily to lower net loan fees earned related to the forgiveness of loans originated and funded under the PPP, and lower average balances of interest bearing deposits in other financial institutions and federal funds sold. Total interest income increased by$2.4 million , or 16.9%, for the three months endedSeptember 30, 2022 , while total interest expense decreased by$595 thousand , or 27.3%, both as compared to the same period in 2021.
The most significant factors impacting net interest income during the three
month period ended
Positive Impacts:
Increases in average loan balances, primarily due to organic loan growth, which ? was partially offset by the forgiveness of loans originated and funded under
the PPP; Increases in average investment securities balances and higher investment
securities yields, primarily due to management of the investment securities ? portfolio in light of the Company's liquidity needs, lower accelerated
pre-payments on mortgage-backed investment securities and higher interest rates
over the comparable periods, partially offset by calls on higher yielding
investment securities in the previously low interest rate environment;
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Decrease in average interest bearing deposits in other financial institutions ? and federal funds sold, primarily due to loan growth outpacing deposit growth
and higher investment securities balances, and higher yields on each due to
higher interest rates over the comparable periods;
Decrease in average interest-bearing deposit balances and lower rates paid,
primarily due to scheduled maturities of higher cost time deposits that were ? not replaced, partially offset by organic deposit growth in money market and
savings accounts, and lower rates paid on average interest bearing demand,
money market and time deposits; and
Decrease in average borrowings balances, primarily due to a decrease in the ? average balance of FHLB advances resulting from scheduled principal
curtailments. Negative Impacts:
Lower loan yields, primarily due to lower net loan fees earned related to the ? forgiveness of loans originated and funded under the PPP and pay-offs of higher
yielding fixed rate loans, which were partially offset by repricing of variable
rate loans and higher average yields on new loan originations.
Loans
Average loan balances increased by$81.9 million , or 7.5%, and average yields earned decreased by 0.09% to 4.77% for the three months endedSeptember 30, 2022 , as compared to the same period in 2021. The increase in average loan balances was primarily due to organic loan growth, including growth in average loan balances of approximately$53.3 million related toVirginia Partners' recent expansion into theGreater Washington market, which was partially offset by the forgiveness of loans originated and funded under the PPP. The decrease in average yields earned was primarily due to lower net loan fees earned related to the forgiveness of loans originated and funded under the PPP and pay-offs of higher yielding fixed rate loans, which were partially offset by repricing of variable rate loans and higher average yields on new loan originations. Total average loans were 72.3% of total average interest-earning assets for the three months endedSeptember 30, 2022 , compared to 69.4% for the three months endedSeptember 30, 2021 . Investment securities
Average total investment securities balances increased by$27.5 million , or 21.6%, and average yields earned increased by 0.31% to 2.30% for the three months endedSeptember 30, 2022 , as compared to the same period in 2021. The increases in average total investment securities balances and average yields earned was primarily due to management of the investment securities portfolio in light of the Company's liquidity needs, lower accelerated pre-payments on mortgage-backed investment securities and higher interest rates over the comparable periods, partially offset by calls on higher yielding investment securities in the previously low interest rate environment. During the third quarter of 2021, accelerated pre-payments on mortgage-backed investment securities caused the premiums paid on these investment securities to be amortized into expense on an accelerated basis thereby reducing income and yield earned. Total average investment securities were 9.5% of total average interest-earning assets for the three months endedSeptember 30, 2022 , compared to 8.1% for the three months endedSeptember 30, 2021 .
Interest-bearing deposits
Average total interest-bearing deposit balances decreased by$33.8 million , or 3.6%, and average rates paid decreased by 0.23% to 0.47% for the three months endedSeptember 30, 2022 , as compared to the same period in 2021, primarily due to scheduled maturities of higher cost time deposits that were not replaced, partially offset by organic deposit growth in money market and savings accounts, including average growth of approximately$12.4 million in interest-bearing deposits related toVirginia Partners' recent expansion into theGreater Washington market, and a decrease in the average rate paid on interest bearing demand, money market and time deposits.
Borrowings
Average total borrowings decreased by$697 thousand , or 1.4%, and average rates paid increased by 0.09% to 4.01% for the three months endedSeptember 30, 2022 , as compared to the same period in 2021. The decrease in average total borrowings balances was primarily due to a decrease in the average balance of FHLB advances resulting 57 Table of Contents from scheduled principal curtailments. The increase in average rates paid was primarily due to the decrease in the average balance of FHLB advances which was a lower cost interest-bearing liability. Interest Income and Expense - Nine Months EndedSeptember 30, 2022 and 2021
Net interest income and net interest margin
Net interest income during the first nine months of 2022 increased by$5.1 million , or 14.9%, when compared to the first nine months of 2021. The Company's net interest margin (tax equivalent basis) increased to 3.27%, representing an increase of 22 basis points for the nine months endedSeptember 30, 2022 as compared to the same period in 2021. The increase in the net interest margin (tax equivalent basis) was primarily due to higher average balances of loans, higher average balances of and yields earned on investment securities, higher average balances of and yields earned on interest bearing deposits in other financial institutions, higher yields earned on average federal funds sold, and lower rates paid on average interest-bearing liabilities, which were partially offset by a decrease in the yields earned on average loans, due primarily to lower net loan fees earned related to the forgiveness of loans originated and funded under the PPP, lower average balances of federal funds sold, and higher average balances of interest-bearing liabilities. Total interest income increased by$3.1 million , or 7.6%, for the nine months endedSeptember 30, 2022 , while total interest expense decreased by$2.0 million , or 28.6%, both as compared to the same period in 2021.
The most significant factors impacting net interest income during the nine
months ended
Positive Impacts:
Increases in average loan balances, primarily due to organic loan growth, which ? was partially offset by the forgiveness of loans originated and funded under
the PPP; Increases in average investment securities balances and higher investment
securities yields, primarily due to management of the investment securities ? portfolio in light of the Company's liquidity needs, lower accelerated
pre-payments on mortgage-backed investment securities and higher interest rates
over the comparable periods, partially offset by calls on higher yielding investment securities in the previously low interest rate environment;
Increase in average interest bearing deposits in other financial institutions, ? partially offset by a decrease in average federal funds sold, primarily due to
deposit growth outpacing loan growth, and higher yields on each due to higher
interest rates over the comparable periods;
Decrease in the rate paid on average interest-bearing deposit balances,
primarily due to a decrease in the average rate paid on interest bearing ? demand, money market and time deposits, partially offset by increases in
average interest-bearing deposit balances, primarily due to organic deposit
growth; and
Decrease in average borrowings balances, primarily due to a decrease in the
average balance of FHLB advances resulting from maturities and payoffs of
borrowings that were not replaced and scheduled principal curtailments, a
decrease in average borrowings at the PPPLF in which the loans under the PPP
originated by the Company were previously pledged as collateral, the early
? redemption of
2021, partially offset by higher rates paid. The increase in average rates
paid was primarily due to the decreases in the average balances of FHLB
advances and borrowings at the PPPLF, both of which were lower cost
interest-bearing liabilities, partially offset by the early redemption of
subordinated notes payable, which was a higher cost interest-bearing liability.
Negative Impacts:
Lower loan yields, primarily due to lower net loan fees earned related to the ? forgiveness of loans originated and funded under the PPP and pay-offs of higher
yielding fixed rate loans, which were partially offset by the repricing of
variable rate loans and higher average yields on new loan originations.
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Loans
Average loan balances increased by $74.5 million , or 6.9%, and average yields
earned decreased by 0.24% to 4.66% for the nine months ended September 30, 2022 ,
as compared to the same period in 2021. The increase in average loan balances
was primarily due to organic loan growth, including growth in average loan
balances of approximately $53.9 million related to Virginia Partners' recent
expansion into the Greater Washington market, which was partially offset by the
forgiveness of loans originated and funded under the PPP. The decrease in
average yields earned was primarily due to lower net loan fees earned related to
the forgiveness of loans originated and funded under the PPP and pay-offs of
higher yielding fixed rate loans, which were partially offset by the repricing
of variable rate loans and higher average yields on new loan originations.
Total average loans were 71.0% of total average interest-earning assets for the
nine months ended
Investment securities
Average total investment securities balances increased by$15.9 million , or 12.3%, and average yields earned increased by 0.34% to 2.20% for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021. The increases in average total investment securities balances and average yields earned was primarily due to management of the investment securities portfolio in light of the Company's liquidity needs, lower accelerated pre-payments on mortgage-backed investment securities and higher interest rates over the comparable periods, partially offset by calls on higher yielding investment securities in the previously low interest rate environment. During the first nine months of 2021, accelerated pre-payments on mortgage-backed investment securities caused the premiums paid on these investment securities to be amortized into expense on an accelerated basis thereby reducing income and yield earned. Total average investment securities were 8.9% of total average interest-earning assets for the nine months endedSeptember 30, 2022 , compared to 8.5% for the nine months
endedSeptember 30, 2021 . Interest-bearing deposits
Average total interest-bearing deposit balances increased by$16.5 million , or 1.8%, and average rates paid decreased by 0.28% to 0.50% for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, primarily due to organic deposit growth, including average growth of approximately$20.5 million in interest-bearing deposits related toVirginia Partners' recent expansion into theGreater Washington market, and a decrease in the average rate paid on interest bearing demand, money market and time deposits.
Borrowings
Average total borrowings decreased by$12.6 million , or 20.4%, and average rates paid increased by 0.52% to 4.03% for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021. The decrease in average total borrowings balances was primarily due to a decrease in the average balance of FHLB advances resulting from maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments, a decrease in average borrowings at the PPPLF in which the loans under the PPP originated by the Company were previously pledged as collateral, and the early redemption of$2.0 million in subordinated notes payable, net, in earlyJuly 2021 . The increase in average rates paid was primarily due to the decreases in the average balances of FHLB advances and borrowings at the PPPLF, which were lower cost interest-bearing liabilities, partially offset by the early redemption of subordinated notes payable, which was a higher cost interest-bearing liability.
Interest earned on assets and interest paid on liabilities is significantly
influenced by market factors, specifically interest rate targets established by
the
The Federal Open Markets Committee ("FOMC") raised Federal Funds target rates by
25 basis points in March 2022 , which was the first increase since December 2018 .
Subsequent to this, the FOMC raised Federal Funds target rates by 50 basis
points in May 2022 , 75 basis points in June 2022 , 75 basis points in July 2022 ,
75 basis points in September 2022 and 75 basis points in November 2022 . These
increases were done in an effort to address increasing inflation without
negatively impacting economic growth. The FOMC currently projects an aggressive
path of rate increases, with rate increases targeted at the remaining FOMC
meeting in December 2022 . The FOMC's current Federal
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Table of Contents
Funds target rate range is 3.75% to 4.00%. As a result, long-term interest rates
have increased. The Company anticipates that the current and projected interest
rate environment will lead to an expanded net interest margin for the Company.
In general, the Company believes interest rate increases lead to improved net
interest margins whereas interest rate decreases result in correspondingly lower
net interest margins.
The following tables depict, for the periods indicated, certain information
related to the average balance sheet and average yields earned on assets and
average costs paid on liabilities for the Company. Such yields and costs are
derived by dividing income or expense by the average balance of the
corresponding assets or liabilities. Average balances have been derived from
daily averages.
Three Months Ended Three Months Ended
September 30, 2022 September 30, 2021
(Dollars in Thousands) Average Interest/ Yield/Rate Average Interest/ Yield/Rate
(Unaudited) Balance Expense (Annualized) Balance Expense (Annualized)
Assets
Cash & Due From Banks $ 15,349 $ - - % $ 15,881 $ - - %Interest Bearing Deposits From Banks 215,572 1,137
2.09 % 252,363 95 0.15 %
Taxable Securities (1) 125,557 668 2.11 % 92,694 364 1.56 %
Tax-exempt Securities (2) 29,119 228 3.11 % 34,512 274 3.15 %Total Investment Securities (1) (2) 154,676 896
2.30 % 127,206 638 1.99 %
Federal Funds Sold 64,804 353 2.16 % 86,472 25 0.11 %
Loans: (3)
Commercial and Industrial (4) 131,482 1,766 5.33 % 152,582 2,179 5.67 %
Real Estate (4) 1,021,247 12,064 4.69 % 917,056 10,985 4.75 %
Consumer (4) 2,175 32 5.84 % 2,962 42 5.63 %
Keyline Equity (4) 17,101 237 5.50 % 17,183 155 3.58 %
Visa Credit Card - - - % - - - %
State and Political 870 11 5.02 % 981 12 4.85 %
Keyline Credit 110 6 21.64 % 123 6 19.35 %
Other Loans 2,118 5 0.94 % 2,355 4 0.67 %
Total Loans (2) 1,175,103 14,121 4.77 % 1,093,242 13,383 4.86 %
Allowance For Credit Losses 14,136 15,219Unamortized Discounts on Acquired Loans 1,873
3,055
Total Loans, Net 1,159,094 1,074,968
Other Assets 62,242 72,664Total Assets/Interest Income$ 1,671,737 $ 16,507 $ 1,629,554 $ 14,141 Liabilities and Stockholders' Equity Deposits In Domestic Offices Non-interest Bearing Demand$ 577,922 $ -
- % $ 498,646 $ - - %
Interest Bearing Demand 148,479 89 0.24 % 135,841 105 0.31 %
Money Market Accounts 283,702 134 0.19 % 245,085 150 0.24 %
Savings Accounts 151,740 56 0.15 % 131,415 52 0.16 %
All Time Deposits 313,660 792 1.00 % 419,020 1,332 1.26 %Total Interest Bearing Deposits 897,581 1,071
0.47 % 931,361 1,639 0.70 %
Total Deposits 1,475,503 1,430,007
Borrowings 26,292 128 1.93 % 27,020 135 1.98 %
Notes Payable 22,818 368 6.40 % 22,787 388 6.76 %
Lease Liability 2,055 15 2.90 % 2,174 15 2.74 %
Other Liabilities 9,362 - 10,368 -
Stockholder's Equity 135,707 - 137,198 -
Total Liabilities & Equity/Interest
Expense $ 1,671,737 $ 1,582 $ 1,629,554 $ 2,177
Earning Assets/Interest Income (2) $ 1,625,504 $ 16,507 4.03 % $ 1,575,164 $ 14,141 3.56 %
Interest Bearing Liabilities/Interest
Expense $ 948,746 $ 1,582 0.66 % $ 983,342 $ 2,177 0.88 %
Net interest income $ 14,925 $ 11,964 Net Yield on Interest Earning Assets 3.64 % 3.01 % Earning Assets/Interest Expense
0.39 % 0.55 %
Net Interest Spread (2) 3.37 % 2.68 %
Net Interest Margin (2) 3.64 % 3.01 %
Yields on securities available-for-sale have been calculated on the basis of (1) historical cost and do not give effect to changes in the fair value of those
securities, which is reflected as a component of stockholder's equity.
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Presented on a taxable-equivalent basis using the statutory income tax rate
of 21.0%. Taxable equivalent adjustment of
income and loan interest income, respectively, for the three months ended
three months ended
(3) Loans placed on nonaccrual are included in average balances.
Yields do not include the average balance of the fair value adjustment for
(4) pools of non-credit impaired loans acquired or discounts on credit impaired
loans acquired.
Nine Months Ended Nine Months Ended
September 30, 2022 September 30, 2021
(Dollars in Thousands) Average Interest/ Yield/Rate Average Interest/ Yield/Rate
(Unaudited) Balance Expense (Annualized) Balance Expense (Annualized)
Assets
Cash & Due From Banks $ 16,095 $ - - % $ 16,085 $ - - %Interest Bearing Deposits From Banks 257,344 1,734
0.90 % 237,224 199 0.11 %
Taxable Securities (1) 116,042 1,699 1.96 % 94,503 962 1.36 %
Taxexempt Securities (2) 29,299 690 3.15 % 34,863 838 3.21 %Total Investment Securities (1) (2) 145,341 2,389
2.20 % 129,366 1,800 1.86 %
Federal Funds Sold 53,273 433 1.09 % 62,948 44 0.09 %
Loans: (3)
Commercial and Industrial (4) 134,680 5,175 5.14 % 159,372 7,195 6.04 %
Real Estate (4) 998,433 34,315 4.60 % 890,596 31,771 4.77 %
Consumer (4) 2,403 98 5.45 % 3,232 143 5.92 %
Keyline Equity (4) 17,485 577 4.41 % 16,610 449 3.61 %
Visa Credit Card - - - % 64 1 2.09 %
State and Political 895 33 4.93 % 755 30 5.31 %
Keyline Credit 120 22 24.51 % 128 24 25.07 %
Other Loans 1,193 9 1.01 % 9,910 12 0.16 %
Total Loans (2) 1,155,209 40,229 4.66 % 1,080,667 39,625 4.90 %
Allowance For Credit Losses 14,412 14,741Unamortized Discounts on Acquired Loans 2,025
3,464
Total Loans, Net 1,138,772 1,062,462
Other Assets 63,985 71,840Total Assets/Interest Income$ 1,674,810 $ 44,785 $ 1,579,925 $ 41,668 Liabilities and Stockholders' Equity Deposits In Domestic Offices Noninterest Bearing Demand$ 560,279 $ -
- % $ 470,019 $ - - %
Interest Bearing Demand 149,809 248 0.22 % 123,706 315 0.34 %
Money Market Accounts 279,547 356 0.17 % 231,035 509 0.29 %
Savings Accounts 147,947 160 0.14 % 124,520 147 0.16 %
All Time Deposits 340,528 2,676 1.05 % 422,052 4,263 1.35 %Total Interest Bearing Deposits 917,831 3,440
0.50 % 901,313 5,234 0.78 %
Total Deposits 1,478,110 1,371,332
Borrowings 26,329 378 1.92 % 37,604 484 1.72 %
Notes Payable 22,812 1,102 6.46 % 24,098 1,192 6.61 %
Lease Liability 2,084 44 2.82 % 2,203 47 2.85 %
Other Liabilities 9,306 - 9,058 -
Stockholder's Equity 136,169 - 135,630 -
Total Liabilities & Equity/Interest
Expense $ 1,674,810 $ 4,964 $ 1,579,925 $ 6,957
Earning Assets/Interest Income (2) $ 1,627,262 $ 44,785 3.68 % $ 1,526,290 $ 41,668 3.65 %
Interest Bearing Liabilities/Interest
Expense $ 969,056 $ 4,964 0.68 % $ 965,218 $ 6,957 0.96 %
Net interest income $ 39,821 $ 34,711 Net Yield on Interest Earning Assets 3.27 % 3.04 % Earning Assets/Interest Expense
0.41 % 0.61 %
Net Interest Spread (2) 2.99 % 2.69 %
Net Interest Margin (2) 3.27 % 3.04 %
Yields on securities available-for-sale have been calculated on the basis of (1) historical cost and do not give effect to changes in the fair value of those
securities, which is reflected as a component of stockholder's equity.
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Table of Contents
Presented on a taxable-equivalent basis using the statutory income tax rate
of 21.0%. Taxable equivalent adjustment of
income and loan interest income, respectively, for the nine months ended
nine months ended
(3) Loans placed on nonaccrual are included in average balances.
Yields do not include the average balance of the fair value adjustment for (4) pools of non-credit impaired loans acquired or discounts on credit impaired
loans acquired.
The level of net interest income is affected primarily by variations in the
volume and mix of these interest-earning assets and interest-bearing
liabilities, as well as changes in interest rates. The following table shows the
effect that these factors had on the interest earned from the Company's
interest-earning assets and interest paid on its interest-bearing liabilities
for the period indicated.
Rate and Volume Analysis
Three Months Ended September 30, 2022 Versus September 30, 2021
(Dollars in Thousands)
Increase (Decrease) Due to
Volume Yield/Rate Net
Earning Assets
Loans (1) $ 1,002 $ (264) $ 738
Investment securities
Taxable 129 175 304
Exempt from Federal income tax (43) (3) (46)
Federal funds sold (6) 334 328
Other interest income (14) 1,056 1,042
Total interest income 1,068 1,298 2,366
Interest Bearing Liabilities
Interest bearing deposits (59) (509) (568)
Notes payable and leases (1) (19) (20)
Funds purchased (4) (3) (7)
Total Interest Expense (64) (531) (595)
Net Interest Income $ 1,132 $ 1,829 $ 2,961 (1) Nonaccrual loans are included in average balances and do not have a material
effect on the average yield.
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Rate and Volume Analysis
Nine Months Ended September 30, 2022 Versus September 30, 2021
(Dollars in Thousands)
Increase (Decrease) Due to
Volume Yield/Rate Net
Earning Assets
Loans (1) $ 2,733 $ (2,129) $ 604
Investment securities
Taxable 219 518 737
Exempt from Federal income tax (134) (14) (148)
Federal funds sold (7) 396 389
Other interest income 17 1,518 1,535
Total interest income 2,828 289 3,117
Interest Bearing Liabilities
Interest bearing deposits 96 (1,890) (1,794)
Notes payable and leases (66) (27) (93)
Funds purchased (145) 39 (106)
Total Interest Expense (115) (1,878) (1,993)
Net Interest Income $ 2,943 $ 2,167 $ 5,110 (1) Nonaccrual loans are included in average balances and do not have a material
effect on the average yield.
Interest Sensitivity. The Company monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on its net interest income. The Company also performs asset/liability modeling to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. Interest rate sensitivity can be managed by repricing assets or liabilities, selling investment securities available for sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. The Company evaluates interest sensitivity risk and then formulates guidelines regarding asset generation and repricing, funding sources and pricing, and off-balance sheet commitments in order to decrease interest rate sensitivity risk. AtSeptember 30, 2022 andDecember 31, 2021 , the Company was asset sensitive within the one-year time frame when looking at a repricing gap analysis. The cumulative gap, in an unchanged interest rate environment, as a percentage of total assets up to one year is 24.6% and 27.0% atSeptember 30, 2022 andDecember 31, 2021 , respectively. A positive gap indicates more assets than liabilities are repricing within the indicated time frame. Management believes there is more upside potential than downside risk and, based on the current and projected interest rate environment, management expects to see net interest income rise in the future.
Provision for Credit Losses and Allowance for Credit Losses
The Company has developed policies and procedures for evaluating the overall
quality of its credit portfolio and for timely identifying potential problem
loans. Management's judgment as to the adequacy of the allowance for credit
losses is based upon a number of assumptions about future events which it
believes to be reasonable, but which may not prove to be accurate. Thus, there
can be no assurance that loan charge-offs in future periods will not exceed the
allowance for credit losses or that additional increases in the allowance for
credit losses will not be required.
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The Company's allowance for credit losses consists of two parts. The first part is determined in accordance with authoritative guidance issued by the FASB regarding the allowance for credit losses. The Company's determination of this part of the allowance for credit losses is based upon quantitative and qualitative factors. A loan loss history based upon the prior three years is utilized in determining the appropriate allowance for credit losses. Historical loss factors are determined by criticized and uncriticized loans by loan type. These historical loss factors are applied to the loans by loan type to determine an indicated allowance for credit losses. The historical loss factors may also be modified based upon other qualitative factors including, but not limited to, local and national economic conditions, trends of delinquent loans, changes in lending policies and underwriting standards, concentrations, and management's knowledge of the loan portfolio. The second part of the allowance for credit losses is determined in accordance with guidance issued by the FASB regarding impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if in the Company's opinion the ultimate source of repayment will be generated from the liquidation of collateral. The sum of the two parts constitutes management's best estimate of an appropriate allowance for credit losses. When the estimated allowance for credit losses is determined, it is presented to the Company's Board of Directors for review and approval on a quarterly basis. AtSeptember 30, 2022 , the Company's allowance for credit losses was$13.8 million , or 1.15% of total outstanding loans. AtDecember 31, 2021 , the Company's allowance for credit losses was$14.7 million , or 1.31% of total outstanding loans. The Company's provision for credit losses in the third quarter of 2022 was$419 thousand , an increase of$449 thousand , or 1,496.7%, when compared to the reversal of credit losses of$30 thousand in the third quarter of 2021. The increase in the provision for credit losses during the three months endedSeptember 30, 2022 , as compared to the same period of 2021, was primarily due to organic loan growth, loans acquired in theVirginia Partners acquisition that have converted from acquired to originated status and higher net charge-offs, which were partially offset by a reduction of qualitative adjustment factors that had previously been increased in the allowance for credit losses related to the COVID-19 pandemic and the uncertainty in the economic environment. The Company's provision for credit losses during the first nine months of 2022 was$803 thousand , a decrease of$1.8 million , or 68.7%, when compared to the provision for credit losses of$2.6 million during the first nine months of 2021. The decrease in the provision for credit losses during the nine months endedSeptember 30, 2022 , as compared to the same period of 2021, was primarily due to a reduction of qualitative adjustment factors that had previously been increased in the allowance for credit losses related to the COVID-19 pandemic and the uncertainty in the economic environment, and the reversal of a specific reserve on one loan relationship due to a large principal curtailment and improved performance, which were partially offset by higher net charge-offs, loans acquired in theVirginia Partners acquisition that have converted from acquired to originated status, and organic loan growth. 64
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The provision for credit losses during the three and nine months endedSeptember 30, 2022 , as well as the allowance for credit losses as ofSeptember 30, 2022 , represents management's best estimate of the impact of the COVID-19 pandemic as well as the uncertainty in the macroeconomic environment due to higher market interest rates, inflation and the possibility of a recession on the ability of the Company's borrowers to repay their loans. Management continues to carefully assess the exposure of the Company's loan portfolio to COVID-19 pandemic related factors and economic trends and their potential effect on asset quality. As ofSeptember 30, 2022 , the Company's delinquencies and nonperforming assets had not been materially impacted by the COVID-19 pandemic or current macroeconomic factors. In addition, as ofSeptember 30, 2022 , all of the loan balances that were approved by the Company, on a consolidated basis, for loan payment deferrals or payments of interest only have either resumed regular payments or have been paid off. The Company discontinues accrual of interest on loans when management believes, after considering economic and business conditions and collection efforts that a borrower's financial condition is such that the collection of interest is doubtful. Generally, the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.
The following tables illustrate the Company's past due and nonaccrual loans at
Past Due and Nonaccrual Loans
At September 30, 2022 and December 31, 2021
(Dollars in Thousands)
30 - 89 Days Greater than 90 Days Total
September 30, 2022 Past Due Past Due Past Due NonAccrual
Real Estate Mortgage
Construction and land development $ - $ 575$ 575 $ 576 Residential real estate 1,288 380 1,668 1,243 Nonresidential 427 311 738 1,894 Home equity loans - 45 45 - Commercial 7 - 7 337 Consumer and other loans 1 - 1 - TOTAL$ 1,723 $ 1,311$ 3,034 $ 4,050 30 - 89 Days Greater than 90 Days Total December 31, 2021 Past Due Past Due Past Due NonAccrual Real Estate Mortgage Construction and land development $ - $
598$ 598 $ 598 Residential real estate 903 361 1,264 1,293 Nonresidential - 2,915 2,915 6,486 Home equity loans 160 - 160 - Commercial 46 77 123 584 Consumer and other loans 15 - 15 - TOTAL$ 1,124 $ 3,951$ 5,075 $ 8,961 65 Table of Contents Total nonaccrual loans atSeptember 30, 2022 were$4.1 million , which reflects a decrease of$4.9 million from$9.0 million atDecember 31, 2021 . Management believes the relationships on nonaccrual were adequately reserved atSeptember 30, 2022 . TDRs not past due more than 90 days or on nonaccrual atSeptember 30, 2022 amounted to$2.4 million , as compared to$3.9 million atDecember 31, 2021 . Of this decrease, approximately$1.1 million was due to five loan relationships that are no longer considered to be TDRs due to the restructuring of the loans subsequent to them initially being classified as a TDR. At the time of the subsequent restructurings, the borrowers were not experiencing financial difficulties and, under the terms of the subsequent restructuring agreements, no concessions have been granted to the borrowers. The remaining decrease was the result of loan relationships classified as TDRs that were paid down or paid off, which were partially offset by one loan relationship in the amount of approximately$48 thousand being classified as a performing TDR during the second quarter of 2022. Total TDRs decreased$2.8 million to$5.1 million atSeptember 30, 2022 , compared to$7.9 million atDecember 31, 2021 . Of this decrease, approximately$1.1 million was due to five loan relationships that are no longer considered to be TDRs due to the restructuring of the loans subsequent to them initially being classified as a TDR. At the time of the subsequent restructurings, the borrowers were not experiencing financial difficulties and, under the terms of the subsequent restructuring agreements, no concessions have been granted to the borrowers. In addition, during the second and third quarters of 2022, one loan relationship that was classified as a TDR was partially charged-off, reducing the balance in total by approximately$1.3 million , which was partially offset by one loan relationship in the amount of approximately$48 thousand being classified as a TDR during the second quarter of 2022. The remaining decrease was the result of loan relationships classified as TDRs that were paid down or paid off. Nonperforming assets, defined as nonaccrual loans, loans past due 90 days or more and accruing, and OREO, net, atSeptember 30, 2022 was$4.3 million compared to$9.8 million atDecember 31, 2021 . The Company's ratio of nonperforming assets to total assets was 0.26% atSeptember 30, 2022 compared to 0.60% atDecember 31, 2021 . As noted above, there was a decrease in nonaccrual loans during the nine months endedSeptember 30, 2022 . Loans past due 90 days or more and accruing were$275 thousand as ofSeptember 30, 2022 , as compared to$0 as ofDecember 31, 2021 . OREO, net decreased during the nine months endedSeptember 30, 2022 by$837 thousand fromDecember 31, 2021 . There were two properties with aggregate values of$837 thousand that were sold at a gain of$7 thousand during the first quarter of 2022. It is likely that the COVID-19 pandemic and the economic disruption related to it as well as the uncertainty in the macroeconomic environment due to higher market interest rates, inflation and the possibility of a recession will continue to negatively impact the Company's financial position and results of operations throughout the remainder of fiscal year 2022. 66
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The following tables provide additional information on the Company's
nonperforming assets at
Nonperforming Assets
At September 30, 2022 and December 31, 2021
(Dollars in thousands)
September 30, December 31,
2022 2021
Nonperforming assets:
Nonaccrual loans $ 4,050 $ 8,961
Loans past due 90 days or more and accruing 275
-
Total nonperforming loans (NPLs) $ 4,325 $
8,961
Other real estate owned (OREO) -
837
Total nonperforming assets (NPAs) $ 4,325 $
9,798
Performing TDR's and TDR's 30-89 days past due $ 2,620 $
3,922 NPLs/Total Assets 0.26 % 0.54 % NPAs/Total Assets 0.26 % 0.60 % NPAs and TDRs/Total Assets 0.42 % 0.83 %
Allowance for credit losses/Nonaccrual Loans 341.19 % 163.55 % Allowance for credit losses/NPLs 319.49 % 163.55 % Nonaccrual loans to total loans outstanding 0.34 %
0.81 %
Nonperforming Loans by Type
At September 30, 2022 and December 31, 2021
(Dollars in thousands)
September 30, December 31,
2022 2021
Real Estate Mortgage
Construction and land development $ 576 $ 598
Residential real estate 1,473 1,293
Nonresidential 1,894 6,486
Home equity loans 45 -
Commercial 337 584
Consumer and other loans - -
Total $ 4,325 $ 8,961
67
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The following tables provide data related to loan balances and the allowance for
credit losses for the nine months ended September 30, 2022 and the year ended
December 31, 2021 .
Allowance for Credit Losses Data
At September 30, 2022 and December 31, 2021
(Dollars in Thousands)
September 30, December 31,
2022 2021
Average loans outstanding $ 1,155,209 $ 1,089,069
Total loans outstanding 1,203,960 1,117,195
Total nonaccrual loans 4,050 8,961
Net loans charged off 1,641 870
Provision for credit losses 803 2,323
Allowance for credit losses 13,818 14,656Allowance as a percentage of total loans outstanding 1.1 % 1.3 % Net loans charged off to average loans outstanding 0.1 % 0.1 % Nonaccrual loans as a percentage of total loans outstanding 0.3 % 0.8 % Allowance as a percentage of nonaccrual loans outstanding 341.2 % 163.6 %
The following tables represent the activity of the allowance for credit losses
for the three and nine months ended
Allowance for Credit Losses and Recorded Investments in Financing Receivables
At September 30, 2022 and 2021
(Dollars in Thousands)
September 30, 2022
Real Estate Mortgage
Construction
and Land Residential Consumer
Development Real Estate Nonresidential Home Equity Commercial and Other Unallocated Total
Quarter Ended
Beginning Balance $ 935 $ 1,869 $ 9,203 $ 234 $ 1,663 $ 31 $ 124 $ 14,059
Charge-offs - - (659) - (47) (16) - (722)
Recoveries 1 16 6 - 2 37 - 62
Provision 157 98 (387) 14 273 34 230 419
Ending Balance $ 1,093 $ 1,983 $ 8,163 $ 248 $ 1,891 $ 86 $ 354 $ 13,818
Nine Months Ended
Beginning Balance $ 1,143 $ 1,893 $ 9,239 $ 212 $ 1,885 $ 36 $ 248 $ 14,656
Charge-offs - - (1,545) (27) (167) (41) - (1,780)
Recoveries - 56 22 6 13 42 - 139
Provision (50) 34 447 57 160 49 106 803
Ending Balance $ 1,093 $ 1,983 $ 8,163 $ 248 $ 1,891 $ 86 $ 354 $ 13,818
68
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September 30, 2021
Real Estate Mortgage
Construction
and Land Residential Consumer
Development Real Estate Nonresidential Home Equity Commercial and Other Unallocated Total
Quarter Ended
Beginning Balance $ 1,038 $ 2,206 $ 8,654 $ 228 $ 1,803 $ 32 $ 1,348 $ 15,309
Charge-offs - (11) (138) - (91) (23) - (263)
Recoveries - 6 - - 2 7 - 15
Provision 88 (50) 565 40 187 21 (881) (30)
Ending Balance $ 1,126 $ 2,151 $ 9,081 $ 268 $ 1,901 $ 37 $ 467 $ 15,031
Nine Months Ended
Beginning Balance $ 903 $ 2,351 $ 7,584 $ 271 $ 1,943 $ 37 $ 114 $ 13,203
Charge-offs - (39) (570) (6) (185) (46) - (846)
Recoveries 1 22 53 - 11 19 - 106
Provision 222 (183) 2,014 3 132 27 353 2,568
Ending Balance $ 1,126 $ 2,151 $ 9,081 $ 268 $ 1,901 $ 37 $ 467 $ 15,031 The following table provides information related to the allocation of the allowance for credit losses by loan category, the related loan balance for each category, and the percentage of loan balance to total loans by category:
Allocation of the Allowance for Credit Losses
At September 30, 2022 and December 31, 2021
(Dollars in thousands)
September 30, December 31,
2022 2021
Percent Percent
of of
Loan Total Loan Total
Balances Allocation Loans Balances Allocation Loans
Real Estate Mortgage
Construction and land development $ 119,211 $ 1,093 10 % $ 107,983 $ 1,143 10 %
Residential real estate 224,321 1,983 19
% 201,230 1,893 18 %
Nonresidential 698,314 8,163 58 % 642,217 9,239 57 %
Home equity loans 30,769 248 3 % 30,395 212 3 %
Commercial 127,673 1,891 10 % 130,908 1,885 12 %
Consumer and other loans 3,672 86 0 % 4,462 36 0 %
Unallocated - 354 - % - 248 - %
$ 1,203,960 $ 13,818 100 % $ 1,117,195 $ 14,656 100 %
69
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Additional information related to net charge-offs (recoveries) is presented in the table below for the periods indicated.
Net Charge-Off Ratio
At September 30, 2022 and 2021
(Dollars in Thousands)
September 30, September 30,
2022 2021
Net Net Net
Net Charge-Off Charge-Off
Charge-Offs Average Ratio Charge-Offs Average Ratio
Quarter Ended (Recoveries) Loans (Annualized) (Recoveries) Loans (Annualized)
Real Estate Mortgage
Construction and land development $ (1) $ 117,185 (0.00) % $ - $ 91,942 - %
Residential real estate (16) 223,179 (0.03) % 5 214,202 0.01 %
Nonresidential 653 672,550 0.39 % 138 601,379 0.09 %
Home equity loans - 27,797 - % - 29,098 - %
Commercial 45 131,157 0.14 % 89 152,555 0.23 %
Consumer and other loans (21) 3,235 (2.58) % 16 4,066 1.56 %
Total Loans Receivable $ 660 $ 1,175,103 0.22 % $ 248 $ 1,093,242 0.09 %
Nine Months Ended
Real Estate MortgageConstruction and land development $ -$ 107,199
- % $ (1)$ 86,413 (0.00) % Residential real estate (56) 215,307 (0.03) % 17 209,989 0.01 % Nonresidential 1,523 666,722 0.31 % 517 592,529 0.12 % Home equity loans 21 27,814 0.10 % 6 28,835 0.03 % Commercial 154 134,666 0.15 % 174 158,777 0.15 % Consumer and other loans (1) 3,501 (0.04) % 27 4,124 0.88 % Total Loans Receivable$ 1,641 $ 1,155,209 0.19 % $ 740$ 1,080,667 0.09 % The Company continues to closely monitor credit risk and its exposure to increased loan losses resulting from the impact of the COVID-19 pandemic on its borrowers. The Company has identified nine specific higher risk industries for credit exposure monitoring during this crisis. 70
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The table below identifies these higher risk industries and the Company's
exposure to them as of
Exposure to Higher Risk Industries
At September 30, 2022
(Dollars in Thousands)
As a percentage of
Loan balances Number of loans total loan balances
Higher Risk Industries outstanding outstanding outstanding (%)*
Hospitality (Hotels) $ 80,606 32 6.70 %
Amusement Services 16,115 16 1.34
Restaurants 66,855 65 5.55
Retail Commercial Real Estate 33,052 40 2.75
Movie Theatres 6,136 2 0.51
Charter Boats/Cruises 1,702 3 0.14
Commuter Services 44 4 0
Manufacturing/Distribution 2,112 6 0.18
Totals $ 206,622 168 17.17 %* Excludes loans originated under the PPP of the SBA.
As of
Noninterest Income
Noninterest Income. The Company's primary source of noninterest income is service charges on deposit accounts, mortgage banking income and other income. Sources of other noninterest income include ATM, merchant card and credit card fees, debit card income, safe deposit box income, earnings on bank owned life insurance policies and investment fees and commissions. Noninterest income during the three months endedSeptember 30, 2022 decreased by$834 thousand , or 40.2%, when compared to the three months endedSeptember 30, 2021 . Key changes in the components of noninterest income for the three months endedSeptember 30, 2022 , as compared to the same period in 2021, are as follows:
Service charges on deposit accounts increased by
primarily to increases in overdraft fees as a result of the easing of
restrictions and the lifting of lockdowns in the Company's markets of operation
? and
previously done in an effort to provide all necessary financial support and
services to its customers and communities, both as related to the ongoing COVID-19 pandemic as compared to the same period of 2021;
Losses on sales and calls of investment securities increased by
310.1%, due primarily to
sales or calls of investment securities during the third quarter of 2022, as ? compared to recording no losses on sales or calls of investment securities
during the same period of 2021. In addition, during the third quarter of 2021,
Delmarva recorded gains of
securities, as compared to recording no gains on sales or calls of investment
securities during the same period of 2022;
Mortgage banking income decreased by
closings as compared to the same period in 2021; and
Other income decreased by
its participation in a loan hedging program with a correspondent bank, and
decreases in ATM fees and debit card income.
Noninterest income during the nine months endedSeptember 30, 2022 decreased by$2.6 million , or 39.1%, when compared to the nine months endedSeptember 30, 2021 . Key changes in the components of noninterest income for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, are as follows: 71 Table of Contents
Service charges on deposit accounts increased by
primarily to increases in overdraft fees as a result of the easing of
restrictions and the lifting of lockdowns in the Company's markets of operation
? and
previously done in an effort to provide all necessary financial support and
services to its customers and communities, both as related to the ongoing COVID-19 pandemic as compared to the same period of 2021;
Losses on sales and calls of investment securities increased by
or 123.8%, due primarily to
on sales or calls of investment securities during the first nine months of
? 2022, as compared to recording gains of
investment securities during the same period of 2021. In addition, during the
first nine months of 2021, Delmarva recorded gains of
calls of investment securities, as compared to recording no gains on sales or
calls of investment securities during the same period of 2022;
Impairment (loss) on restricted stock increased from zero to
inMaryland Financial Bank , which had been going through an orderly liquidation;
Mortgage banking income decreased by
closings as compared to the same period in 2021;
Gains on sales of other assets decreased by
2021. There were no gains on sales of other assets for the same period of
2022; and Other income decreased by$563 thousand , or 19.6%, due primarily to lower
mortgage division fees at Delmarva,
decreases in ATM fees and debit card income, which were partially offset by
Delmarva recording higher earnings on bank owned life insurance policies due to
additional purchases made in 2021.
Noninterest Expense
Noninterest Expense. Noninterest expense includes all expenses with the exception of those paid for interest on deposits and borrowings. Significant expense items included in this component are salaries and employee benefits, premises and equipment and other operating expenses. Noninterest expense during the three months endedSeptember 30, 2022 decreased by$10 thousand , or 0.1%, when compared to the three months endedSeptember 30, 2021 . Key changes in the components of noninterest expense for the three months endedSeptember 30, 2022 , as compared to the same period in 2021, are as follows:
Salaries and employee benefits decreased by
due to decreases related to staffing changes, a decrease in commissions expense
paid due to the decrease in mortgage banking income from
offset by merit increases and higher expenses related to benefit costs and
bonus accruals. In addition, salaries and employee benefits increased due to
market;
Premises and equipment increased by
increase related to
commercial banking office in
which were partially offset by lower expenses related to building security and
purchased equipment and furniture, the cost of which did not qualify for capitalization;
Amortization of core deposit intangible decreased by
million, respectively, in core deposit intangibles recognized in the
Partners and Liberty acquisitions;
Losses and expenses on other real estate owned decreased by
properties during the third quarter of 2021 as compared to no valuation
adjustments or expenses being recorded during the same period of 2022;
? Merger related expenses increased from zero to
legal fees and other costs associated with the terminated merger with OCFC; and
72
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Other expenses decreased by $72 thousand , or 2.4%, primarily due to lower
expenses related to legal, other professional fees,
which were partially offset by higher expenses related to loans, advertising,
ATM, audit and accounting fees, and sponsorships.
Noninterest expense during the nine months endedSeptember 30, 2022 increased by$365 thousand , or 1.2%, when compared to the nine months endedSeptember 30, 2021 . Key changes in the components of noninterest expense for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, are as follows:
Salaries and employee benefits decreased by
due to decreases related to staffing changes and a decrease in commissions
expense paid due to the decrease in mortgage banking income from
Partners' majority owned subsidiary JMC, which were partially offset by merit ? increases and higher expenses related to payroll taxes, benefit costs,
stock-based compensation expense and bonus accruals. In addition, salaries and
employee benefits increased due toVirginia Partners' new key hires and expansion into theGreater Washington market and Delmarva opening its new full-service branch at26th Street inOcean City, Maryland ;
Premises and equipment increased by
increases related to Delmarva opening its new full-service branch at 26th
Street in
to software amortization and maintenance contracts, which were partially offset
by lower expenses related to building security and purchased software, the cost
of which did not qualify for capitalization;
Amortization of core deposit intangible decreased by
million, respectively, in core deposit intangibles recognized in the
Partners and Liberty acquisitions; (Gains) losses and expenses on other real estate owned decreased by$192
thousand, or 105.2%, primarily due to valuation adjustments being recorded on ? properties during the first nine months of 2021 as compared to no valuation
adjustments being recorded during the same period of 2022, and lower expenses
related to other real estate owned;
? Merger related expenses increased from zero to
legal fees and other costs associated with the terminated merger with OCFC; and
Other expenses decreased by
expenses related to legal, subscriptions and publications, data and item ? processing, other losses, and other professional fees, which were partially
offset by higher expenses related to advertising, printing and postage,
insurance assessments, loans, consulting, ATM,
franchise tax, and telephone and data circuits.
Income Taxes
The provision for income taxes was$1.3 million during the three months endedSeptember 30, 2022 , compared to the provision for income taxes of$839 thousand during the three months endedSeptember 30, 2021 , an increase of$453 thousand or 53.9%. This increase was due primarily to higher consolidated income before taxes, higher merger related expenses, which are typically non-deductible, and lower earnings on tax-exempt income, primarily tax-exempt investment securities.
For the three months ended
The provision for income taxes was$2.9 million during the nine months endedSeptember 30, 2022 , compared to the provision for income taxes of$1.8 million during the nine months endedSeptember 30, 2021 , an increase of$1.1 million or 57.8%. This increase was due primarily to higher consolidated income before taxes, higher merger related expenses, which are typically non-deductible, and lower earnings on tax-exempt income, primarily tax-exempt investment securities.
For the nine months ended
In addition,Virginia Partners is not subject toVirginia state income tax, but instead paysVirginia franchise tax. TheVirginia franchise tax paid byVirginia Partners is recorded in the "Other operating expenses" line item on the Consolidated Statements of Income for the three and nine months endedSeptember 30, 2022 and 2021. 73 Table of Contents Financial Condition Interest Earning Assets Loans. Loans typically provide higher yields than the other types of interest-earning assets, and thus one of the Company's goals is to increase loan balances. Management attempts to control and counterbalance the inherent credit and liquidity risks associated with the higher loan yields without sacrificing asset quality to achieve its asset mix goals. Total gross loans, including unamortized discounts on acquired loans, averaged$1.18 billion and$1.09 billion during the three months endedSeptember 30, 2022 and 2021, respectively, and averaged$1.16 billion and$1.08 billion during the nine months endedSeptember 30, 2022 and 2021, respectively.
The following table shows the composition of the loan portfolio by category at
Composition of Loan Portfolio by Category
As of September 30, 2022 and December 31, 2021
(Dollars in Thousands)
September 30, December 31,
2022 2021
Real Estate Mortgage
Construction and land development $ 119,211 $ 107,983
Residential real estate 224,321 201,230
Nonresidential 698,314 642,217
Home equity loans 30,769 30,395
Commercial 127,673 130,908
Consumer and other loans 3,672 4,462
$ 1,203,960 $ 1,117,195
Less: Allowance for credit losses (13,818) (14,656)
$ 1,190,142 $ 1,102,539
74
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The following table sets forth the repricing characteristics and sensitivity to
interest rate changes of the Company's loan portfolio at September 30, 2022 :
Loan Maturities and Interest Rate Sensitivity
At September 30, 2022
(Dollars in thousands)
Between Between
One Year One and Five and After
September 30, 2022 or Less Five Years Fifteen Years Fifteen Years Total
Real Estate MortgageConstruction and land development$ 72,611 $ 30,950 $
12,372 $ 3,278$ 119,211 Residential real estate 40,019 104,962 49,275 30,065 224,321 Nonresidential 122,236 385,695 160,913 29,470 698,314 Home equity loans 17,201 3,460 5,611 4,497 30,769 Commercial 48,120 46,205 24,156 9,192 127,673 Consumer and other loans 365 1,656 700 951 3,672 Total loans receivable$ 300,552 $ 572,928 $ 253,027 $ 77,453 $ 1,203,960 Fixed-rate loans: Real Estate Mortgage
Construction and land development$ 31,040 $ 22,834 $
7,989 $ 2,054$ 63,917 Residential real estate 26,927 88,062 19,248 1,141 135,378 Nonresidential 100,462 364,391 108,997 8,348 582,198 Home equity loans - - - - - Commercial 9,618 43,491 22,218 - 75,327 Consumer and other loans 290 1,652 623 525 3,090 Total fixed-rate loans$ 168,337 $ 520,430 $ 159,075 $ 12,068 $ 859,910 Floating-rate loans: Real Estate Mortgage
Construction and land development$ 41,571 $ 8,116 $
4,383 $ 1,224$ 55,294 Residential real estate 13,092 16,900 30,027 28,924 88,943 Nonresidential 21,774 21,304 51,916 21,122 116,116 Home equity loans 17,201 3,460 5,611 4,497 30,769 Commercial 38,502 2,714 1,938 9,192 52,346 Consumer and other loans 75 4 77 426 582 Total floating-rate loans$ 132,215 $ 52,498 $ 93,952 $ 65,385 $ 344,050 AtSeptember 30, 2022 , real estate mortgage loans included$323.2 million of owner-occupied non-farm, non-residential loans, and$314.5 million of other non-farm, non-residential loans, which is 30.1% and 29.3% of real estate mortgage loans, respectively. By comparison, atDecember 31, 2021 , real estate mortgage loans included$287.4 million of owner-occupied non-farm, non-residential loans, and$313.8 million of other non-farm, non-residential loans, which is 29.3% and 32.0% of real estate mortgage loans, respectively. This represents an increase atSeptember 30, 2022 of$35.9 million and$697 thousand , or 12.5% and 0.2%, in owner-occupied non-farm, non-residential loans and other non-farm, non-residential loans, respectively. AtSeptember 30, 2022 , real estate mortgage loans included$119.2 million of construction and land development loans, and$44.2 million of multi-family residential loans, which are 11.1% and 4.1% of real estate mortgage loans, respectively. By comparison, atDecember 31, 2021 , real estate mortgage loans included$107.9 million of construction and land development loans, and$24.4 million of multi-family residential loans, which were 11.0% and 2.5% of real estate mortgage loans, respectively. This represents an increase atSeptember 30, 2022 of$11.3 million , or 10.5%, in construction and land development loans, and an increase atSeptember 30, 2022 of$19.8 million , or 81.0%, in multi-family residential loans. 75
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Commercial real estate loans, excluding owner-occupied non-farm, non-residential loans, were 274.2% of total risk-based capital atSeptember 30, 2022 , as compared to 267.9% atDecember 31, 2021 . Construction and land development loans were 68.4% of total risk-based capital atSeptember 30, 2022 , as compared to 64.8% atDecember 31, 2021 . AtSeptember 30, 2022 , real estate mortgage loans included home equity loans of$30.8 million and residential real estate loans of$224.3 million , compared to$30.4 million and$201.2 million atDecember 31, 2021 , respectively. Home equity loans increased$373 thousand , or 1.2%, during the nine months endedSeptember 30, 2022 , and residential real estate loans increased$23.1 million , or 11.5%, during the nine months endedSeptember 30, 2022 . AtSeptember 30, 2022 , commercial loans were$127.7 million , compared to$130.9 million atDecember 31, 2021 , a decrease of$3.2 million , or 2.5%, during the nine months endedSeptember 30, 2022 . The overall increase in loans from the year endedDecember 31, 2021 toSeptember 30, 2022 was due primarily to an increase in organic growth, including growth of approximately$46.2 million in loans related toVirginia Partners' recent expansion into theGreater Washington market, which was partially offset by forgiveness payments received of approximately$8.2 million under round two of the PPP. As ofSeptember 30, 2022 , there were no loans under round two of the PPP that were still outstanding.Investment Securities . The investment securities portfolio is a significant component of the Company's total interest-earning assets. Total investment securities averaged$154.7 million during the three months endedSeptember 30, 2022 as compared to$127.2 million for the three months endedSeptember 30, 2021 . This represented 9.5% and 8.1% of total average interest-earning assets for the three months endedSeptember 30, 2022 and 2021, respectively. The increase in average total investment securities for the three months endedSeptember 30, 2022 , as compared to the same period of 2021, was primarily due to management of the investment securities portfolio in light of the Company's liquidity needs and lower accelerated pre-payments on mortgage-backed investment securities, partially offset by calls on higher yielding investment securities in the previously low interest rate environment. During the third quarter of 2021, accelerated pre-payments on mortgage-backed investment securities caused the premiums paid on these investment securities to be amortized into expense on an accelerated basis thereby reducing income and yield earned. Total investment securities averaged$145.3 million during the nine months endedSeptember 30, 2022 as compared to$129.4 million for the nine months endedSeptember 30, 2021 . This represented 8.9% and 8.5% of total average interest-earning assets for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase in average total investment securities for the nine months endedSeptember 30, 2022 , as compared to the same period of 2021, was primarily due to management of the investment securities portfolio in light of the Company's liquidity needs and lower accelerated pre-payments on mortgage-backed investment securities, partially offset by calls on higher yielding investment securities in the previously low interest rate environment. During the first nine months of 2021, accelerated pre-payments on mortgage-backed investment securities caused the premiums paid on these investment securities to be amortized into expense on an accelerated basis thereby reducing income and yield earned. During the first nine months of 2022, the Company's investment securities portfolio was negatively impacted by unrealized losses in the market value of investment securities available for sale as a result of increases in market interest rates. The Company believes that further increases in market interest rates will likely result in higher unrealized losses in the market value of the investment securities available for sale portfolio. The Company expects to recover its investment in debt securities through scheduled payments of principal and interest, and unrealized losses are not expected to affect the earnings or regulatory capital of the Company. The Company classifies all of its investment securities as available for sale. This classification requires that investment securities be recorded at their fair value with any difference between the fair value and amortized cost (the purchase price adjusted by any discount accretion or premium amortization) reported as a component of stockholders' equity (accumulated other comprehensive income (loss)), net of deferred taxes. AtSeptember 30, 2022 andDecember 31, 2021 , investment securities available for sale, at fair value totaled$131.5 million and$122.0 million , respectively. Investment securities available for sale, at fair value increased by approximately$9.4 million , or 7.7%, during the nine months endedSeptember 30, 2022 fromDecember 31, 2021 . This increase was primarily due to management of the investment securities portfolio in light of the Company's liquidity needs, which was partially offset by two higher yielding 76 Table of Contents
investment securities being called, and an increase in unrealized losses on the investment securities available for sale portfolio. The Company attempts to maintain an investment securities portfolio of high quality, highly liquid investments with returns competitive with short-termU.S. Treasury or agency obligations. This objective is particularly important as the Company focuses on growing its loan portfolio. The Company primarily invests in securities ofU.S. Government agencies, municipals, and corporate obligations. AtSeptember 30, 2022 andDecember 31, 2021 there were no issuers, other than theU.S. Government and its agencies, whose securities owned by the Company had a book or fair value exceeding 10% of the Company's stockholders' equity.
The following table summarizes the amortized cost and fair value of investment
securities available for sale as of
Amortized Cost and Fair Value of Investment Securities
At September 30, 2022
(Dollars in Thousands)
September 30, 2022
Gross Gross
Amortized Percentage Unrealized Unrealized Fair
Cost of Total Gains Losses Value
Obligations of U.S. Government
agencies and corporations $ 15,167 10.0 % $ - $ 1,665 $ 13,502
Obligations of States and political
subdivisions 29,094 19.3 % - 3,475 25,619
Mortgage-backed securities 104,383 69.1 % - 14,444 89,939
Subordinated debt investments 2,467 1.6 %
- 62 2,405
$ 151,111 100.0 % $ - $ 19,646 $ 131,465
The following table sets forth the fair value and weighted average yields by
maturity category of the investment securities available for sale portfolio as
of September 30, 2022 . Weighted-average yields have been computed on a fully
taxable-equivalent basis using a tax rate of 21%. Mortgage-backed securities are
included in maturity categories based on their stated maturity date. Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations.
Fair Value and Weighted Average Yields of Investment Securities by Maturity
At September 30, 2022
(Dollars in Thousands)
September 30, 2022
Within 1 Year 1-5 Years 5-10 years After 10 Years Total
Weighted Weighted Weighted Weighted Weighted
Fair Average Fair Average Fair Average Fair Average Fair Average
Value Yield Value Yield Value Yield Value Yield Value Yield
Obligations of
U.S. Government
agencies and
corporations $ - - % $ 6,629 3.39 % $ 4,987 1.85 % $ 1,886 1.92 % $ 13,502 2.62 %
Obligations of
States and
political
subdivisions - - % 3,743 2.79 % 11,019 2.45 % 10,857 2.40 % 25,619 2.48 % Mortgage-backed securities
1 4.50 % 371 1.38 % 24,511 2.39 % 65,056 1.78 % 89,939 1.94 % Subordinated debt investments
- - % - - % 2,405 5.56 % - - % 2,405 5.56 %
$ 1 4.50 % $ 10,743 3.12 % $ 42,922 2.52 % $ 77,799 1.87 % $ 131,465 2.18 %
In addition, the Company holds stock in various correspondent banks as well as theFederal Reserve Bank . The balance of these securities was$4.9 million atSeptember 30, 2022 andDecember 31, 2021 . 77
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Due to the increase in longer term interest rates and ongoing volatility in the securities markets during the nine months endedSeptember 30, 2022 , the net unrealized losses in the Company's investment securities available for sale portfolio increased fromDecember 31, 2021 by approximately$20.1 million , or 4,201.5%, to$19.6 million atSeptember 30, 2022 .
Subsequent interest rate fluctuations could have an adverse effect on our investment securities available for sale portfolio by increasing reinvestment risk and reducing our ability to achieve our targeted investment returns.
Interest Bearing Liabilities
Deposits. Average total deposits increased from$1.43 billion to$1.48 billion , an increase of$45.5 million , or 3.2%, for the three months endedSeptember 30, 2022 over the average total deposits for the three months endedSeptember 30, 2021 . Average total deposits increased from$1.37 billion to$1.48 billion , an increase of$106.8 million , or 7.8%, for the nine months endedSeptember 30, 2022 over the average total deposits for the nine months endedSeptember 30, 2021 . These increases were primarily due to organic deposit growth, which was partially offset by scheduled maturities of higher cost time deposits that were not replaced. AtSeptember 30, 2022 , total deposits were$1.46 billion as compared to$1.44 billion atDecember 31, 2021 , an increase of$13.1 million , or 0.9%. This increase was primarily driven by organic growth as a result of our continued focus on total relationship banking andVirginia Partners' recent expansion into theGreater Washington market, and customers seeking the liquidity and safety of deposit accounts in light of continuing economic uncertainty and volatility in stock and other investment markets. Non-interest bearing demand deposits increased to$568.1 million atSeptember 30, 2022 , a$74.2 million , or 15.0%, increase from$493.9 million in non-interest bearing demand deposits atDecember 31, 2021 , due primarily to the aforementioned items above with respect to actual and average total deposits.
The following table sets forth the deposits of the Company by category for the period indicated:
Deposits by Category
As of September 30, 2022 and December 31, 2021
(Dollars in Thousands)
September 30, Percentage December 31, Percentage
2022 of Deposits 2021 of DepositsNoninterest bearing demand deposits$ 568,113 39.02 %$ 493,913 34.23 % Interest bearing deposits: Money market, NOW, and savings accounts 584,794 40.16 % 569,707 39.48 % Certificates of deposit,$250 thousand or more 66,761 4.59 % 82,083 5.69 % Other certificates of deposit 236,276 16.23 % 297,173 20.60 % Total interest bearing deposits 887,831 60.98 %
948,963 65.77 %
Total $ 1,455,944 100.00 % $ 1,442,876 100.00 %
The Company's loan-to-deposit ratio was 82.7% at September 30, 2022 as compared
to 77.4% at December 31, 2021 . Core deposits, which exclude certificates of
deposit of more than $250 thousand , provide a relatively stable funding source
for the Company's loan portfolio and other interest-earning assets. The
Company's core deposits were $1.39 billion at September 30, 2022 , an increase of
$28.4 million , or 2.1%, from $1.36 billion at December 31, 2021 , and excluded
$66.8 million and $82.1 million in certificates of deposit of $250 thousand or
more as of those dates, respectively. Management anticipates that a stable base
of deposits will be the Company's primary source of funding to meet both its
short-term and long-term liquidity needs in the future, and, therefore, feels
that presenting core deposits provides valuable information to investors.
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The following table provides a summary of the Company's maturity distribution for certificates of deposit at the date indicated:
Maturities of Certificates of Deposit
At September 30, 2022 and December 31, 2021
(Dollars in Thousands)
September 30, December 31,
2022 2021
Three months or less $ 79,609 $ 46,845
Over three months through six months 46,787
64,574
Over six months through twelve months 82,487 129,517 Over twelve months 94,154 138,320 Total$ 303,037 $ 379,256 The following table provides a summary of the Company's maturity distribution for certificates of deposit of greater than$250 thousand or more at the date indicated: Maturities of Certificates of Deposit Greater than$250 Thousand At September 30, 2022 and December 31, 2021 (Dollars in Thousands) September 30, December 31, 2022 2021 Three months or less$ 12,996 $ 13,359 Over three months through six months 15,141 14,803 Over six months through twelve months 14,562 20,124 Over twelve months 24,062 33,797 Total$ 66,761 $ 82,083
Borrowings. Borrowings at
AtSeptember 30, 2022 andDecember 31, 2021 , there were no short-term borrowings with the FHLB. AtSeptember 30, 2022 , long-term borrowings with the FHLB were$25.8 million as compared to$26.3 million atDecember 31, 2021 , a decrease of$494 thousand , or 1.9%. This decrease was primarily due to scheduled principal curtailments. These borrowings are collateralized by a blanket lien on the first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB.
At
AtSeptember 30, 2022 , other borrowings were$811 thousand as compared to$755 thousand atDecember 31, 2021 , an increase of$55 thousand , or 7.3%.Virginia Partners majority owned subsidiary, JMC, has a warehouse line of credit with another financial institution in the amount of$3.0 million , of which$192 thousand and$120 thousand were outstanding as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. The increase in JMC's warehouse line of credit was partially offset by a decrease onVirginia Partners' note payable on410 William Street ,Fredericksburg, Virginia , primarily due to scheduled principal curtailments, partially offset by the amortization of the related discount on the note payable.
See Note 4 - Borrowings and Notes Payable of the unaudited consolidated
financial statements included in this Quarterly Report for additional
information on the Company's subordinated notes payable, net,
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Average total borrowings decreased by$697 thousand , or 1.4%, and average rates paid increased by 0.09% to 4.01% for the three months endedSeptember 30, 2022 , as compared to the same period in 2021. The decrease in average total borrowings balances was primarily due to a decrease in the average balance of FHLB advances resulting from scheduled principal curtailments. The increase in average rates paid was primarily due to the decrease in the average balance of FHLB advances which was a lower cost interest-bearing liability. Average total borrowings decreased by$12.6 million , or 20.4%, and average rates paid increased by 0.52% to 4.03% for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021. The decrease in average total borrowings balances was primarily due to a decrease in the average balance of FHLB advances resulting from maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments, a decrease in average borrowings at the PPPLF in which the loans under the PPP originated by the Company were previously pledged as collateral, and the early redemption of$2.0 million in subordinated notes payable, net, in earlyJuly 2021 . The increase in average rates paid was primarily due to the decreases in the average balances of FHLB advances and borrowings at the PPPLF, which were lower cost interest-bearing liabilities, partially offset by the early redemption of subordinated notes payable, which was a higher cost interest-bearing liability.
Capital
Total stockholders' equity as ofSeptember 30, 2022 was$133.8 million , a decrease of$7.6 million , or 5.4%, fromDecember 31, 2021 . Key drivers of this change were an increase in accumulated other comprehensive (loss), net of tax, and cash dividends paid to shareholders, which were partially offset by the net income attributable to the Company for the nine months endedSeptember 30, 2022 , the proceeds from stock option exercises, and stock-based compensation expense related to restricted stock awards. TheFederal Reserve and other bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. The following table presents actual and required capital ratios as ofSeptember 30, 2022 andDecember 31, 2021 forDelmarva and Virginia Partners under Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as ofSeptember 30, 2022 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as ofJanuary 1, 2019 when the Basel III Capital Rules were fully phased-in. Capital levels required for an institution to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. See Note 10 - Regulatory Capital Requirements of the unaudited consolidated financial statements included in this Quarterly Report for a more in depth discussion of regulatory capital requirements. 80 Table of Contents Capital Components Capital Components At September 30, 2022 and December 31, 2021 (Dollars in Thousands) To Be Well Capitalized For Capital Under Prompt Adequacy Corrective Action Actual Purposes Provisions Amount Ratio Amount Ratio Amount Ratio As ofSeptember 30, 2022 Total Capital Ratio (To Risk Weighted Assets) The Bank of Delmarva 95,924 13.0 % 77,304 10.5 % 73,623 10.0 % Virginia Partners Bank 62,076 11.4 % 57,233 10.5 % 54,508 10.0 % Tier 1 Capital Ratio (To Risk Weighted Assets) The Bank of Delmarva 86,715 11.8 % 62,580 8.5 % 58,898 8.0 % Virginia Partners Bank 57,718 10.6 % 46,332 8.5 % 43,606 8.0 % Common Equity Tier 1 Ratio (To Risk Weighted Assets) The Bank of Delmarva 86,715 11.8 % 51,536 7.0 % 47,855 6.5 % Virginia Partners Bank 57,718 10.6 % 38,156 7.0 % 35,430 6.5 % Tier 1 Leverage Ratio (To Average Assets) The Bank of Delmarva 86,715 8.7 % 39,916 4.0 % 49,895 5.0 % Virginia Partners Bank 57,718 8.6 % 26,772 4.0 % 33,465 5.0 % To Be Well Capitalized For Capital Under Prompt Adequacy Corrective Action Actual Purposes Provisions Amount Ratio Amount Ratio Amount Ratio As ofDecember 31, 2021 Total Capital Ratio (To Risk Weighted Assets) The Bank of Delmarva 91,928 12.9 % 74,963 10.5 % 71,394 10.0 % Virginia Partners Bank 56,192 12.0 % 49,103 10.5 % 46,765 10.0 % Tier 1 Capital Ratio (To Risk Weighted Assets) The Bank of Delmarva 82,972 11.6 % 60,684 8.5 % 57,115 8.0 % Virginia Partners Bank 52,844 11.3 % 39,750 8.5 % 37,412 8.0 % Common Equity Tier 1 Ratio (To Risk Weighted Assets) The Bank of Delmarva 82,972 11.6 % 49,975 7.0 % 46,406 6.5 % Virginia Partners Bank 52,844 11.3 % 32,735 7.0 % 30,397 6.5 % Tier1I Leverage Ratio (To Average Assets) The Bank of Delmarva 82,972 8.1 % 40,926 4.0 % 51,158 5.0 % Virginia Partners Bank 52,844 8.5 % 25,009 4.0 % 31,261 5.0 % 81 Table of Contents Liquidity Management
Liquidity management involves monitoring the Company's sources and uses of funds in order to meet its day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the available for sale investment securities portfolio is very predictable and subject to a high degree of control at the time investment decisions are made; however, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in the Company's market area. The Company's cash and cash equivalents position, which includes funds in cash and due from banks, interest bearing deposits in other financial institutions, and federal funds sold, averaged$295.7 million and$326.7 million during the three and nine months endedSeptember 30, 2022 , respectively, and totaled$248.3 million atSeptember 30, 2022 , as compared to an average of$354.7 million and$316.2 million during the three and nine months endedSeptember 30, 2021 , respectively, and a year-end position of$338.8 million atDecember 31, 2021 . Also, the Company has available advances from the FHLB. Advances available are generally based upon the amount of qualified first mortgage loans which can be used for collateral. AtSeptember 30, 2022 , advances available totaled approximately$422.0 million of which approximately$25.8 million had been drawn, or used for letters of credit. Management regularly reviews the liquidity position of the Company and has implemented internal policies which establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the balance sheet and funding from non-core sources. Subject to certain aggregation rules,FDIC deposit insurance covers the funds in deposit accounts up to$250 thousand .
Impact of Inflation
Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Company's performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, management seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.
Accounting Standards Update
See Note 16 - Recent Accounting Pronouncements of the unaudited consolidated financial statements included in this Quarterly Report for details on recently issued accounting pronouncements and their expected impact on the Company's
financial statements.
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