WILSON BANK HOLDING COMPANY The purpose of this discussion is to provide insight into the financial condition and results of operations of the Company and its bank subsidiary,Wilson Bank . This discussion should be read in conjunction with the Company's consolidated financial statements appearing elsewhere in this report. Reference should also be made to the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 for a more complete discussion of factors that impact the Company's liquidity, capital and results of operations. Forward-Looking Statements This Form 10-Q contains certain forward-looking statements within the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") regarding, among other things, the anticipated financial and operating results of the Company. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any modifications or revisions to these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. The Company cautions investors that future financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, the Company. The words "expect," "intend," "should," "may," "could," "believe," "suspect," "anticipate," "seek," "plan," "estimate" and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical fact may also be considered forward-looking. Such forward-looking statements involve known and unknown risks and uncertainties, including, but not limited to those described in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , and also include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in credit losses and provisions for these losses, (ii) the effects of new outbreaks of COVID-19, including actions taken by governmental officials to curb the spread of the virus, and the resulting impact on general economic and financial market conditions and on the Company's and its customers' business, results of operations, asset quality and financial condition; (iii) deterioration in the real estate market conditions in the Company's market areas, (iv) the impact of increased competition with other financial institutions, including pricing pressures on loans and deposits, and the resulting impact on the Company's results, including as a result of compression to net interest margin, (v) adverse conditions in local or national economies, including the economy in the Company's market areas, including as a result of inflationary pressures on our customers and on their businesses (vi) fluctuations or differences in interest rates on earning assets and interest bearing liabilities from those that the Company is modeling or anticipating, including as a result of the Bank's inability to maintain deposit rates or defer increases to those rates in a rising rate environment in connection with the changes in the short-term rate environment, or that affect the yield curve, (vii) the ability to grow and retain low-cost core deposits, (viii) significant downturns in the business of one or more large customers, (ix) the inability of the Company to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies, required capital maintenance levels, or regulatory requests or directives, (x) changes in state or Federal regulations, policies, or legislation applicable to banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the Dodd Frank Wall Street Reform and Consumer Protection Act, (xi) changes in capital levels and loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments, (xii) inadequate allowance for credit losses, (xiii) the effectiveness of the Company's activities in improving, resolving or liquidating lower quality assets, (xiv) results of regulatory examinations, (xv) the vulnerability of the Company's network and online banking portals, and the systems of parties with whom the Company contracts, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss, and other security breaches, (xvi) the possibility of additional increases to compliance costs or other operational expenses as a result of increased regulatory oversight, (xvii) loss of key personnel, (xviii) adverse results (including costs, fines, reputational harm and/or other negative effects) from current or future litigation, examinations or other legal and/or regulatory actions, (xix) further public acceptance of the vaccines that were developed against the virus as well as the decisions of governmental agencies with respect to vaccines, including recommendations related to booster shots and requirements that seek to mandate that individuals receive or employers require that their employees receive the vaccine, and (xx) those vaccines' efficacy against the virus, including new variants. These risks and uncertainties may cause the actual results or performance of the Company to be materially different from any future results or performance expressed or implied by such forward-looking statements. The Company's future operating results depend on a number of factors which were derived utilizing numerous assumptions that could cause actual results to differ materially from those projected in forward-looking statements. Impact of COVID-19 The outbreak and spread of the novel Coronavirus Disease 2019 ("COVID-19") in 2020 created a global public health crisis that has periodically contributed to uncertainty, volatility and deterioration in financial markets and in governmental, commercial and consumer activity including inthe United States , where we conduct substantially all of our activity. Though progress has been made in responding to the pandemic, the emergence of new variants of the virus and public reaction thereto may cause disruption to our operations and the economies in the markets where we operate. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included the Paycheck Protection Program ("PPP"), a nearly$659 billion program designed to aid small and medium-sized businesses and sole proprietors through federally guaranteed loans distributed through banks. These loans were intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. OnDecember 21, 2020 , the Coronavirus Response and Relief Supplemental Appropriations Act ("Coronavirus Relief Act") was signed into law. The Coronavirus Relief Act earmarked an additional$284 billion for a new round of PPP loans. The Company funded$125.2 million of PPP loans to our small business and other eligible customers,$607,000 of which remained outstanding as ofMarch 31, 2022 . In connection with our initial response to COVID-19, we took deliberate actions to try to ensure that we had the balance sheet strength to serve our clients and communities, including maintaining increased liquidity and reserves supported by a strong capital position. We currently expect our levels of liquidity and reserves to remain above pre-pandemic levels through the remainder of 2022. 33
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Application of Critical Accounting Policies and Accounting Estimates
We follow accounting and reporting policies that conform, in all material respects, to accounting principles generally accepted inthe United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information, forecasted economic conditions, and other factors deemed to be relevant, actual results could differ from those estimates. We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. Accounting policies related to the allowance for credit losses on financial instruments including loans and off-balance-sheet credit exposures are considered to be critical as these policies involve considerable subjective judgment and estimation by management. As discussed in Note 1 - Summary of Significant Accounting Policies, our policies related to allowances for credit losses changed onJanuary 1, 2022 in connection with the adoption of a new accounting standard update as codified in Accounting Standards Codification ("ASC") Topic 326 ("ASC 326") Financial Instruments - Credit Losses. In the case of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. The amount of each allowance account represents management's best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. For additional information regarding critical accounting policies, refer to Note 1 - Summary of Significant Accounting Policies and Note 2 - Loans and Allowance for Credit Losses in the notes to consolidated financial statements. Non-GAAP Financial Measures This Quarterly Report contains certain financial measures that are not measures recognized underU.S. GAAP and, therefore, are considered non-GAAP financial measures. Members of Company management use these non-GAAP financial measures in their analysis of the Company's performance, financial condition, and efficiency of operations. Management of the Company believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods. Management of the Company also believes that investors find these non-GAAP financial measures useful as they assist investors in understanding underlying operating performance and identifying and analyzing ongoing operating trends. However, the non-GAAP financial measures discussed herein should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance withU.S. GAAP. Moreover, the manner in which the non-GAAP financial measures discussed herein are calculated may differ from the manner in which measures with similar names are calculated by other companies. You should understand how other companies calculate their financial measures similar to, or with names similar to, the non-GAAP financial measures we have discussed herein when comparing such non-GAAP financial measures. The non-GAAP measures in this Quarterly Report include "pre-tax pre-provision income," "pre-tax pre-provision basic earnings per share," "pre-tax pre-provision annualized return on average equity," and "pre-tax pre-provision annualized return on average assets." 34
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Selected Financial Information
The executive management and Board of Directors of the Company evaluate key
performance indicators (KPIs) on a continuing basis. These KPIs serve as
benchmarks of Company performance and are used in making strategic decisions.
The following table represents the KPIs that management has determined to be
important in making decisions for the Bank:
As of or For the Three Months Ended
March 31,
2022 - 2021
Percent Increase
2022 2021 (Decrease)
PER SHARE DATA:
Basic earnings per common share (GAAP) $ 1.01 $ 1.01 0.00 %
Pre-tax pre-provision basic earnings per
share (1) $ 1.53 $ 1.41 8.51 %
Diluted earnings per common share (GAAP) $ 1.01 $ 1.00 1.00 %
Cash dividends per common share $ 0.75 $ 0.60 25.00 %
Dividends declared per common share as a
percentage of basic earnings per common
share 74.26 % 59.41 % 24.99 %
As of or For the Three Months Ended
March 31,
2022 - 2021
Percent Increase
2022 2021 (Decrease)
PERFORMANCE RATIOS:
Annualized return on average stockholders'
equity (GAAP) 11.70 % 11.82 % (1.02 )%
Pre-tax pre-provision annualized return on
average stockholders' equity (1) 17.75 % 16.57 % 7.12 %
Annualized return on average assets (GAAP) 1.15 % 1.33 % (13.53 )%
Pre-tax pre-provision annualized return on
average assets (1) 1.74 % 1.86 % (6.45 )%
Efficiency ratio 59.49 % 58.11 % 2.37 %
(1) Excludes income tax expense, and for 2022 provision for credit losses and
provision for credit losses on unfunded commitments. For 2021 excludes income
tax expense and provision for loan losses.
2022 - 2021
March 31, 2022 2021 (Decrease)
BALANCE SHEET RATIOS:
Total capital to assets ratio 9.25 % 10.37 % (10.80 )%
Equity to asset ratio (Average equity
divided by average total assets) 9.81 % 10.86 % (9.67 )%
Leverage capital ratio 10.60 % 10.77 % (1.58 )%
Non-performing asset ratio 0.01 % 0.01 % - %
Book value per common share $ 33.60 $ 36.93 (9.02 )%
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Reconciliation of Non-GAAP Financial Measures
Three Months Ended
March 31, 2022 March 31, 2021
Pre-tax pre-provision income:
Net income attributable to common stockholders (GAAP) $ 11,373 $ 11,144
Add: provision for credit losses 1,892 827
Add: provision for credit losses on unfunded commitments 825 -
Add: income tax expense 3,171 3,648
Pre-tax pre-provision income $ 17,261 $ 15,619
Pre-tax pre-provision basic earnings per share:
Pre-tax pre-provision income $ 17,261 $ 15,619
Weighted average shares 11,276,121 11,079,350
Basic earnings per common share (GAAP) $ 1.01 $ 1.01
Provision for credit losses $ 0.17 $ 0.07
Provision for credit losses on unfunded commitments $ 0.07 $ -
Income tax expense $ 0.28 $ 0.33
Pre-tax pre-provision basic earnings per common share $ 1.53 $ 1.41
Pre-tax pre-provision annualized return on average
assets:
Pre-tax pre-provision income $ 17,261 $ 15,619
Average assets 4,018,591 3,404,391
Annualized return on average assets (GAAP) 1.15 % 1.33 %
Provision for credit losses 0.19 % 0.10 %
Provision for credit losses on unfunded commitments 0.08 % - %
Income tax expense 0.32 % 0.43 %
Pre-tax pre-provision annualized return on average assets
1.74 % 1.86 %
Pre-tax pre-provision annualized return on average stockholders' equity: Pre-tax pre-provision income
$ 17,261 $ 15,619
Average total stockholders' equity 394,376 382,254
Annualized return on average stockholders' equity (GAAP) 11.70 % 11.82 %
Provision for credit losses 1.95 % 0.88 %
Provision for credit losses on unfunded commitments 0.85 % - %
Income tax expense 3.25 % 3.87 %
Pre-tax pre-provision annualized return on average
stockholders' equity 17.75 % 16.57 %
Results of Operations
Net earnings increased $229,000 , or 2.05% , to $11,373,000 for the three
months ended March 31, 2022 , from $11,144,000 in the first three months of
2021 . The increase in net earnings during the three months ended March 31,
2022 as compared to the prior year comparable period was primarily due to an
increase in net interest income, partially offset by an increase in provision
for credit losses, a decrease in non-interest income, and an increase in
non-interest expense. The increase in net interest income for the three months
ended March 31, 2022 compared to the comparable period in 2021 is due to an
increase in average interest earning asset balances between the relevant
periods and a decrease in cost of funds, partially offset by decreased yield on
earning assets. The decrease in non-interest income primarily resulted from a
decrease in the gain on sale of loans which resulted from a decrease in the
volume of refinancing transactions due to rising mortgage interest rates. The
increase in non-interest expense resulted from the Company's continued growth as
well as an increase in our provision for credit losses on unfunded commitments
due to the adoption of CECL.
Return on average assets (ROA) and return on average stockholders' equity (ROE)
are common benchmarks for bank profitability and are calculated by taking our
annualized net earnings and dividing by the average assets and average equity
for the relevant periods, respectively. ROA and ROE measure a company's return
on investment in a format that is easily comparable to other financial
institutions. ROA is particularly important to the Company as it serves as the
basis for certain executive and employee bonuses. The ROA for the three month
periods ended March 31, 2022 and 2021 were 1.15% and 1.33% ,
respectively. The ROE for the three month periods ended March 31, 2022 and 2021
were 11.70% and 11.82% , respectively.
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Table of Contents Net Interest Income
The average balances, interest, and average rates of our assets and liabilities
for the three-month periods ended
Three Months Ended Three Months Ended Net Change Three Months Ended
March 31, 2022 March 31, 2021 March 31, 2022 versus March 31, 2021
Income/ Income/ Percent
Average Balance Interest Rate
Expense Average Balance Interest Rate Expense Due to Volume Due to Rate Net Change Change
Loans, net of unearned
interest (1) (2)
4.82 % $ 29,604 $ 2,317,991 5.08 % $ 28,493 $ 8,543 $ (7,432 ) $ 1,111
Investment
securities-taxable 832,808 1.57 3,231 519,027 1.32 1,692 1,171 368 1,539
Investment
securities-tax exempt 77,525 1.69 324 78,364 1.67 323 (15 ) 16 1
Taxable equivalent
adjustment (3) - 0.45 86 - 0.45 86 (4 ) 4 -
Total tax-exempt
investment securities 77,525 2.14 410 78,364 2.12 409 (19 ) 20 1
Total investment
securities 910,333 1.62 3,641 597,391 1.43 2,101 1,152 388 1,540
Loans held for sale 12,655 4.94 154 19,921 2.04 100 (225 ) 279 54
Federal funds sold 27,290 0.10 7 675 - - - 7 7
Accounts with
depository institutions 366,616 0.16 145 328,150 0.13 108 14 23 37
Restricted equity
securities 5,089 2.71 34 5,089 2.07 26 - 8 8
Total earning assets 3,857,014 3.58 33,585 3,269,217 3.89 30,828 9,484 (6,727 ) 2,757 8.94 %
Cash and due from banks 23,447 34,802
Allowance for credit
losses (39,476 ) (38,575 )
Bank premises and
equipment 62,828 57,993
Other assets 114,778 80,954
Total assets $ 4,018,591 $ 3,404,391 Three Months Ended Three Months Ended Net Change Three Months Ended March 31, 2022 March 31, 2021 March 31, 2022 versus March 31, 2021 Income/ Income/ Percent Average Balance Interest Rate Expense Average Balance Interest Rate Expense Due to Volume Due to Rate Net Change Change Deposits: Negotiable order of withdrawal accounts$ 1,056,065 0.18 %$ 465 $ 825,582 0.21 %$ 436 $ 387$ (358 ) $ 29 Money market demand accounts 1,219,000 0.11 342 1,008,463 0.17 422 406 (486 ) (80 ) Time Deposits 581,088 0.85 1,221 610,020 1.43 2,149 (98 ) (830 ) (928 ) Other savings 309,205 0.13 100 217,246 0.22 118 189 (207 ) (18 ) Total interest-bearing deposits 3,165,358 0.27 2,128 2,661,311 0.48 3,125 884 (1,881 ) (997 )Federal Home Loan Bank advances - - - 3,480 15.50 133 (66 ) (67 ) (133 ) Finance leases 818 7.93 16 - - - - 16 16 Total interest-bearing liabilities 3,166,176 0.27 2,144 2,664,791 0.50 3,258 818 (1,932 ) (1,114 ) (34.19 %) Non-interest bearing deposits 426,676 336,400 Other liabilities 31,363 20,946 Stockholders' equity 394,376 382,254 Total liabilities and stockholders' equity$ 4,018,591 $ 3,404,391 Net interest income, on a tax equivalent basis$ 31,441 $ 27,570 $ 8,666$ (4,795 ) $ 3,871 14.04 % Net interest margin (4) 3.36 % 3.48 % Net interest spread (5) 3.31 % 3.39 % Notes:
(1) Yields on loans and total earning assets include the impact of State income tax credits related to incentive loans at below market rates and tax exempt loans to municipalities.
(2) Loan fees of$3.0 million are included in interest income in 2022, inclusive of$102,000 in 2022 in SBA fees related to PPP loans. Loan fees of$3.7 million are included in interest income in 2021, inclusive of$1.2 million in 2021 in SBA fees related to PPP loans.
(3) The tax equivalent adjustment has been computed using a 21% Federal tax rate.
(4) Annualized net interest income on a tax equivalent basis divided by average interest-earning assets.
(5) Average interest rate on interest-earning assets less average interest rate on interest-bearing liabilities.
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Net interest margin for the three months endedMarch 31, 2022 and 2021 was 3.36% and 3.48%, respectively. The decrease in net interest margin for the three months endedMarch 31, 2022 , was due to a decrease in the yield earned on our earning assets that outpaced the decrease in rates paid on our interest-bearing liabilities. TheFederal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, increased 25 basis points late in the first quarter of 2022, as theFederal Reserve sought to address high levels of inflation. The direction and speed with which short-term interest rates move has an impact on our net interest income. At present, we believe theFederal Reserve plans to raise short-term rates six more times in 2022. If short-term interest rates are increased and we remain asset-sensitive at that time (meaning that our interest-earning assets are expected to reprice more quickly than our interest-bearing liabilities), those increases could increase our net interest spread, as well as our net interest income, if we are able to raise rates on our loans faster than we are required to raise rates on our deposits. Deposit rates that we pay are largely impacted by rates offered by our competitors for similar products. The yield on loans decreased during the three months endedMarch 31, 2022 when compared to the comparable period in 2021 due to a decrease in loan fees largely related to PPP loans. Loan fees related to PPP loans accounted for 21 basis points of our loan yields for the period endedMarch 31, 2021 versus 2 basis points for the period endedMarch 31, 2022 . The yield on securities increased due to the company purchasing higher yielding securities, due to management's decision to purchase additional securities to utilize a portion of the Company's excess liquidity. The net interest spread was 3.31% and 3.39% for the three months endedMarch 31, 2022 andMarch 31, 2021 , respectively. The rate we pay on our deposits decreased in the three months endedMarch 31, 2022 when compared to the comparable period in 2021, as we decreased the rates we paid on several of our deposit products and higher paying time deposits repriced at lower rates throughout 2021. Our net interest margin could expand during the remainder of 2022 as could our net interest spread as theFederal Reserve is expected to raise short-term interest rates. This will depend on our ability to raise the rates we charge on loans at faster rates than we have to increase rates we pay on deposits. Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of the Company's earnings. Net interest income, excluding tax equivalent adjustments relating to tax exempt securities and loans, for the three months endedMarch 31, 2022 totaled$31,355,000 , compared to$27,484,000 for the same period in 2021, an increase of$3,871,000 between respective periods. The increase in interest income for the three months endedMarch 31, 2022 when compared to the three months endedMarch 31, 2021 was primarily attributable to an increase in interest and fees earned on loans as well as as increase in interest and dividends earned on taxable securities. The increase in interest and fees earned on loans resulted from an overall increase in average loans, partially offset by a decrease in fees earned on SBA PPP loans and a decrease in loan rates. The increase in interest and dividends earned on taxable securities resulted from an overall increase in the average balance of securities, due to management's decision to purchase additional securities to utilize excess liquidity, and increase in rates. The ratio of average earning assets to total average assets for the three months endedMarch 31, 2022 was 96.0%, compared to 96.0% for the same period in 2021. The decrease in interest expense for the three months endedMarch 31, 2022 as compared to the prior year's comparable period was primarily due to a decrease in the rates of average interest bearing deposits, reflecting the low rate environment that we have experienced since the first quarter of 2020, as well as the Company decreasing rates on several of our deposit products. The decrease in rates was partially offset by an overall increase in the volume of average interest-bearing deposits.
Provision for Credit Losses and Allowance for Credit Losses
OnJanuary 1, 2022 , we adopted FASB ASU 2016-13, which introduces the current expected credit losses (CECL) methodology and requires us to estimate all expected credit losses over the remaining life of our loan portfolio. The provision for credit losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management's evaluation, is adequate to provide coverage for all expected credit losses. The provision for credit losses for the three months endedMarch 31, 2022 was$1,892,000 calculated under the CECL methodology, compared to$827,000 incurred in the first three months of 2021 under the incurred loss methodology. The increase in provision expense for the three months endedMarch 31, 2022 from the comparable period in 2021 is primarily attributable to an increase in the volume of loans originated during the period. While the local and national economic outlooks have improved in 2022, we believe the challenges affecting supply chains globally and labor shortages stemming from the COVID-19 pandemic are still impacting our clients. In addition, inflation as well as the war inUkraine remain risks to the economy. Upon and subsequent to adoption of CECL, for available-for-sale debt securities in an unrealized loss position, we evaluate the securities at each measurement date to determine whether the decline in the fair value below the amortized cost basis is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized through the allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via provision for credit loss. AtJanuary 1, 2022 andMarch 31, 2022 , we determined that all available-for-sale securities that experienced a decline in fair value below the amortized cost basis were due to noncredit-related factors, principally the result of the rising rate environment we have been experiencing. Therefore, there was no provision for credit loss recognized during the three months endedMarch 31, 2022 with respect to our available-for-sale securities. The Bank's charge-off policy for collateral dependent loans is similar to its charge-off policy for all loans in that loans are charged-off in the month when a determination is made that the loan is uncollectible. The volume of net loans charged off for the first three months of 2022 totaled approximately$182,000 compared to approximately$36,000 in net loans charged off during the first three months of 2021. Our allowance for credit losses atMarch 31, 2022 reflects an amount deemed appropriate to adequately cover all expected future losses as of the date the allowance is determined based on our allowance for credit losses assessment methodology. The allowance for credit losses (net of charge-offs and recoveries) was$33,778,000 atMarch 31, 2022 , a decrease of$5,854,000 or 14.77%, from an allowance for loan losses of$39,632,000 atDecember 31, 2021 and a decrease of$5,552,000 , or 14.12%, from an allowance for loan losses of$39,330,000 atMarch 31, 2021 . The decrease in the allowance for credit losses is the result of the implementation of CECL onJanuary 1, 2022 , which resulted in an adjustment to the opening balance of the allowance for credit losses of$7.6 million ; offset by increased provisioning during the quarter endedMarch 31, 2022 largely due to an increase in loan growth. The allowance for credit losses was 1.29% of total loans outstanding atMarch 31, 2022 , compared to an allowance for loan losses of 1.60% of total loans atDecember 31, 2021 and 1.68% atMarch 31, 2021 . As a percentage of nonperforming loans atMarch 31, 2022 ,December 31, 2021 , andMarch 31, 2021 , the allowance for credit losses and allowance for loan losses, represented 11,852%, 7,154% and 1,635%, respectively. The internally classified loans as a percentage of the allowance for credit losses and allowance for loan losses, as applicable, were 15.9%, 19.4%, and 20.3% respectively, atMarch 31, 2022 ,December 31, 2021 , andMarch 31, 2021 . The level of the allowance and the amount of the provision for credit losses involve evaluation of uncertainties and matters of judgment. The Company maintains an allowance for credit losses which management believes is adequate to absorb losses in the loan portfolio. A formal calculation is prepared quarterly by the Chief Financial Officer and provided to the Board of Directors to determine the adequacy of the allowance for credit losses. The calculation includes an evaluation of historical default and loss experience, current and forecasted economic conditions, an evaluation of qualitative factors, industry and peer bank loan quality indicators and other factors. See the discussion above under "Critical Accounting Estimates" for more information. Management believes the allowance for credit losses atMarch 31, 2022 to be adequate, but if forecasted economic conditions deteriorate beyond management's current expectations the allowance for credit losses may require an increase through additional provision for credit loss expense which would negatively impact earnings. 38
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Table of Contents Non-Interest Income Our non-interest income is composed of several components, some of which vary significantly between quarterly and annual periods. The following is a summary of our non-interest income for the three months endedMarch 31, 2022 and 2021 (in thousands): Three Months Ended March 31, $ Increase % Increase 2022 2021 (Decrease) (Decrease) Service charges on deposit accounts$ 1,719 $ 1,325 $ 394 29.74 % Brokerage income 1,739 1,398 341 24.39 Debit and credit card interchange income 2,877 2,529 348 13.76 Other fees and commissions 308 309 (1 ) (0.32 ) Income on BOLI and annuity contracts 335 413 (78 ) (18.89 ) Gain on sale of loans 2,214 3,606 (1,392 ) (38.60 ) Gain on sale of fixed assets 28 - 28 100.00 Gain on sale of other assets 8 1 7 700.00 Other income (10 ) - (10 ) (100.00 ) Total non-interest income$ 9,218 $ 9,581 $ (363 ) (3.79% ) The decrease in non-interest income for the three months endedMarch 31, 2022 when compared to the comparable period in 2021 is attributable to a decrease in gain on sale of loans; partially offset by an increase in service charges on deposit accounts, an increase in debit and credit card interchange income, and an increase in brokerage income. The decrease in gain on sale of loans for the three months endedMarch 31, 2022 was due to a decrease in the volume of refinancing transactions due to rising mortgage interest rates as a result of theFederal Reserve ending quantitative easing. In addition, high inflation has also contributed to the increase in interest rates. The mortgage industry expects volume to decrease in 2022. The volume of mortgage loans originated for the three months endedMarch 31, 2022 was$53,117,000 compared to$78,769,000 for the three months endedMarch 31, 2021 . In anticipation of the slowing of mortgage origination volume due to the rising rate environment, the Company began to retain servicing rights on some of the loans it originates during the first quarter of 2022. The increase in service charges on deposit accounts for the three months endedMarch 31, 2022 primarily was due to an increase in service charges earned on overdraft fees and fees for paper statements. The increase in service charges on overdraft fees resulted from an increase in consumer spending. The increase in fees for paper statements resulted from an account conversion that placed new qualifications on certain account types. The increase in debit and credit card interchange income for the three months endedMarch 31, 2022 was due to an increase in the number and volume of debit card holders and transactions. The increase in the volume of transactions was partially attributable to an increase in economic activity as consumer spending continued to increase as pandemic conditions continued to improve. The increase in brokerage income for the three months endedMarch 31, 2022 was primarily due to an increase in the opening of new investment accounts during the last twelve months. 39
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Table of Contents Non-Interest Expense Non-interest expense consists primarily of employee costs, occupancy expenses, furniture and equipment expenses, advertising and public relations expenses, data processing expenses, ATM and interchange expenses, director's fees, audit, legal and consulting fees, and other operating expenses. The following is a summary of our non-interest expense for the three months endedMarch 31, 2022 and 2021 (in thousands): Three Months Ended March 31, $ Increase % Increase 2022 2021 (Decrease) (Decrease) Salaries and employee benefits$ 14,396 $ 13,300 $ 1,096 8.24 % Occupancy expenses, net 1,348 1,291 57 4.42 Advertising & public relations expense 659 487 172 35.32 Furniture and equipment expense 856 826 30 3.63 Data processing expense 1,757 1,387 370 26.68 ATM & interchange expense 1,192 1,090 102 9.36 Directors' fees 153 157 (4 ) (2.55 ) Audit, legal & consulting expenses 227 189 38 20.11 Provision for credit losses on unfunded commitments 825 - 825 100.00 Other operating expenses 1,899 2,719 (820 ) (30.16 )
Total non-interest expense
8.70 %
The increase in non-interest expense for the three months ended March 31,
2022 when compared to the comparable period in 2021 is primarily attributable to
an increase in salaries and employee benefits, an increase in occupancy expense,
an increase in other operating expenses, an increase in data processing
expense, an increase in advertising and public relations expense, and an
increase in ATM and interchange expense.
Salaries and employee benefits increased for the three months ended March 31,
2022 primarily due to an increase in the number of employees necessary to
support the Company's growth in operations as well as an increase in
incentives and an increase in new investment accounts. The increase in occupancy
expense is primarily attributable to an increase in lease expense due to an
increase in leased branches, an increase in utility expense due to increasing
utility rates and unseasonably cold weather, and an increase in depreciation
expense resulting from the opening of a new branch. The Company anticipates that
salaries and employee benefits expense and occupancy expense will continue to
increase as the Company's operations and facilities continue to grow and
competition to retain and attract associates is becoming more intense.
Provision for credit losses on unfunded commitments increased for the
three months ended
Data processing expense increased for the three months endedMarch 31, 2022 primarily due to an increase in computer maintenance and computer license expense. These expenses included movement of in-house systems to cloud servicers, additional investments in digital banking solutions, and an increase in information security expenses. The Company anticipates that data processing expenses will continue to increase as the Company's operations grow and the focus on the acceleration of digital product offerings increases. Advertising and public relations expense increased for the three months endedMarch 31, 2022 partially due to the opening of a new branch which included targeted marketing efforts to drive traffic and awareness for the new location, as well as additional targeted marketing efforts to help increase market share in our growth areas. We also saw an increase in expenses related to the return of in-person events, both bank hosted and by our community partners, as COVID-19 restrictions continued to loosen. In addition, we purchased several new marquee signs that we installed at local schools. ATM and interchange expense increased for the three months endedMarch 31, 2022 primarily due to an increase in debit card interchange fee expense due to the volume of transactions, and an increase in economic activity. The efficiency ratio is a common and comparable KPI used in the banking industry. The Company uses this metric to monitor how effective management is at using our internal resources. It is calculated by dividing our non-interest expense by our net interest income plus non-interest income. Our efficiency ratio for the three months endedMarch 31, 2022 and 2021 was 59.49% and 58.11%, respectively. The increase for the three months endedMarch 31, 2022 when compared to the prior year comparable period was attributable to, among other things, the decrease in gain on sale of loans due to the rising interest rate environment as well as an increase in the provision for credit losses on unfunded commitments. Income Taxes The Company's income tax expense was$3,171,000 for the three months endedMarch 31, 2022 , a decrease of$477,000 over the comparable period in 2021. The percentage of income tax expense to net income before taxes was 21.80% and 24.66% for the three months endedMarch 31, 2022 andMarch 31, 2021 , respectively. Our effective tax rate represents our blended federal and state rate of 26.14% affected by the impact of anticipated favorable permanent differences between our book and taxable income such as bank-owned life insurance, income earned on tax-exempt securities and loans, and certain federal and state tax credits. 40
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Table of Contents Financial Condition Balance Sheet Summary The Company's total assets increased$118,009,000 , or 2.96%, to$4,107,605,000 atMarch 31, 2022 from$3,989,596,000 atDecember 31, 2021 . Loans, net of allowance for credit losses, totaled$2,591,006,000 atMarch 31, 2022 , a 6.00% increase compared to$2,444,282,000 atDecember 31, 2021 . In 2021, management targeted owner-occupied commercial real estate, residential real estate lending and consumer lending as areas of focus on growing our loan portfolio. In 2022, management is targeting owner-occupied commercial real estate, residential real estate lending and consumer lending as areas of focus. The following details the loans of the Company atMarch 31, 2022 andDecember 31, 2021 : March 31, 2022 December 31, 2021 Balance $ Balance % Increase Increase Balance % of Portfolio Balance % of Portfolio (Decrease) (Decrease) Residential 1-4 family real estate$ 703,198 26.66 %$ 689,579 27.63 %$ 13,619 1.97 % Commercial and multi-family real estate 956,059 36.25 908,673 36.41 47,386 5.21 Construction, land development and farmland 678,516 25.73 612,659 24.55 65,857 10.75 Commercial, industrial and agricultural 118,006 4.47 118,155 4.73 (149 ) (0.13 ) 1-4 family equity lines of credit 103,358 3.92 92,229 3.69 11,129 12.07 Consumer and other 78,346 2.97 74,643 2.99 3,703 4.96 Total loans before net deferred loan
fees$ 2,637,483 100.00 %$ 2,495,938 100.00 %$ 141,545 5.67 % Overall, the Bank's loan demand and related new loan production has continued to be strong. The net loan growth of 6.00% fromDecember 31, 2021 , reflects the strong production, partially offset by several large loan payoffs. The demand is supported by the continued rise in new borrowers moving into the Bank's primary market areas. The increase in residential 1-4 family real estate loans is attributable to the Bank being able to grow its residential portfolio through marketing efforts directed at those building houses, and the developing investor sector of 1-4 family. The increase in construction, land development and farmland loans, commercial and multi-family real estate, and 1-4 family equity lines of credit is primarily attributable to the addition of several large loan relationships. Although the Company has continued to grow loans in 2022, the Company could experience a decline in demand for loans as interest rates continue to rise. Because construction loans remain a meaningful portion of our portfolio, the Bank has implemented an additional layer of monitoring as it seeks to avoid advancing funds that exceed the present value of the collateral securing the loan. The responsibility for monitoring percentage of completion and distribution of funds tied to these completion percentages is now monitored and administered by aCredit Administration Department independent of the lending function. The Bank continues to seek to diversify its real estate portfolio as it seeks to lessen concentrations in any one type of loan.
For a detailed discussion regarding our allowance for credit losses, see "Provision for Credit Losses and Allowance for Credit Losses" above.
Securities decreased$9,065,000 , or 1.01%, to$888,520,000 atMarch 31, 2022 from$897,585,000 atDecember 31, 2021 , primarily as a result of an increase in interest rates that caused the fair market value of our securities portfolio to decline, partially offset by the purchase of new securities. The average yield, excluding tax equivalent adjustment, of the securities portfolio atMarch 31, 2022 was 1.70% with a weighted average life of 8.42 years, as compared to an average yield of 1.59% and a weighted average life of 8.17 years atDecember 31, 2021 . The weighted average lives on mortgage-backed securities reflect the repayment rate used for book value calculations. Premises and equipment decreased$281,000, or 0.45%, fromDecember 31, 2021 toMarch 31, 2022 . The primary reason for the decrease was due to current year depreciation of$1,091,000 . This was partially offset by an increase in leasehold improvements and an increase in furniture, fixtures and equipment from the opening of a new branch, as well as an increase in equipment that was primarily attributable to the purchase of new debit card printers for several branches and security cameras, an increase in computer hardware and software, and the purchase of a company vehicle. 41
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The increase in deposits in the first three months of 2022, which is described below, was outpaced by loan growth during the period, causing interest bearing deposits with other financial institutions to decrease. Interest bearing deposits with other financial institutions decreased to$360,724,000 atMarch 31, 2022 from$400,940,000 atDecember 31, 2021 . Total liabilities increased by 4.25% to$3,727,707,000 atMarch 31, 2022 compared to$3,575,879,000 atDecember 31, 2021 . The increase in total liabilities sinceDecember 31, 2021 was composed of a$135,394,000 , or 3.81%, increase in total deposits and a$16,434,000 , or 78.98%, increase in accrued interest and other liabilities. The increase in total deposits sinceDecember 31, 2021 was primarily attributable to the opening of new deposit accounts as well as refunds to customers from the filing of their tax returns. The increase in accrued interest and other liabilities sinceDecember 31, 2021 was primarily attributable to an increase in reserve for unfunded commitments due to the adoption of CECL onJanuary 1, 2022 , which resulted in an adjustment to the opening balance of the reserve for unfunded commitments of$6,195,000 and an increased provisioning of$825,000 during the quarter endedMarch 31, 2022 due to growth in off-balance sheet commitments. This increase was also attributable to an increase in escrow payable, an increase in reserve for income taxes, an increase in finance lease payable, and an increase in employee bonus payable, partially offset by a decrease in interest payable on CDs as customers have moved their funds to NOW and money market accounts as a result of anticipated interest rate increases. Non-Performing Assets Non-performing loans, which included nonaccrual loans and loans 90 days past due, atMarch 31, 2022 totaled$152,000 , a decrease from$389,000 atDecember 31, 2021 . The decrease in non-performing loans during the three months endedMarch 31, 2022 of$237,000 is due primarily to two residential 1-4 family real estate loan relationships that are no longer 90 days past due, partially offset by the increase of one loan relationship that was not 90 days past due atDecember 31, 2021 . Management believes that it is probable that it will incur losses on its non-performing loans but believes that these losses should not exceed the amount in the allowance for credit losses already allocated to these loans, unless there is unanticipated deterioration of local real estate values. The net non-performing asset ratio (NPA) is used as a measure of the overall quality of the Company's assets. Our NPA ratio is calculated by taking the total of our loans greater than 90 days past due and accruing interest, nonaccrual loans, non-performing TDRs and other real estate owned divided by our total assets outstanding. Our NPA ratio for the periods endedMarch 31, 2022 andDecember 31, 2021 were 0.01% and 0.01%, respectively. Other loans may be classified as collateral dependent when the current net worth and financial capacity of the borrower or of the collateral pledged, if any, is viewed as inadequate and it is probable that the Company will be unable to collect the scheduled payments of principal and interest due under the contractual terms of the loan agreement. Such loans generally have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt, and if such deficiencies are not corrected, there is a probability that the Company will sustain some loss. In such cases, interest income continues to accrue as long as the loan does not meet the Company's criteria for nonaccrual status. Collateral dependent loans are measured at the fair value of the collateral less estimated selling costs. If the measure of the collateral dependent loan is less than the recorded investment in the loan, the Company shall recognize impairment by creating a valuation allowance with a corresponding charge to the provision for credit losses or by adjusting an existing valuation allowance for the collateral dependent loan with a corresponding charge or credit to the provision for credit losses. AtMarch 31, 2022 the Company had a recorded investment in collateral dependent loans totaling$657,000 , down from a recorded investment in impaired loans totaling$668,000 atDecember 31, 2021 . The decrease during the three months endedMarch 31, 2022 as compared toDecember 31, 2021 is primarily due to the paydown of three collateral dependent relationships. Overall, the Company's market areas have seen continued strengthening in the residential real estate market in recent years while the commercial real estate market has remained steady. The allowance for credit losses related to collateral dependent loans was measured based upon the estimated fair value of related collateral. Loans are charged-off in the month when the determination is made that the loan is uncollectible. Net charge-offs for the three months endedMarch 31, 2022 were$182,000 as compared to$36,000 in net charge-offs for the same period in 2021. Overall, the Bank has experienced minimal charge-offs during 2022. It is expected that charge-offs will be modest for the remainder of 2022; however, unanticipated changes in local economic conditions may negatively impact charge-offs in the future. AtMarch 31, 2022 , our internally classified loans decreased$2,310,000 , or 30.05%, to$5,376,000 from$7,686,000 atDecember 31, 2021 primarily due to the payoff of three internally classified loan relationships. Classified loan balances have remained relatively consistent due to the stable markets in which we operate and economic stimulus provided in response to the COVID-19 pandemic. Loans are listed as classified when information obtained about possible credit problems of the borrower has prompted management to question the ability of the borrower to comply with the repayment terms of the loan agreement. The loan classifications do not represent or result from trends or uncertainties which management expects will materially impact future operating results, liquidity or capital resources. 42
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Liquidity and Asset Management
The Company's management seeks to maximize net interest income by managing the Company's assets and liabilities within appropriate constraints on capital, liquidity and interest rate risk. Liquidity is the ability to maintain sufficient cash levels necessary to fund operations, meet the requirements of depositors and borrowers, and fund attractive investment opportunities. Higher levels of liquidity, like those we built up in response to the COVID-19 pandemic, bear corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher interest expense involved in extending liability maturities. Liquid assets include cash, due from banks, interest bearing deposits in other financial institutions and unpledged investment securities that will mature within one year. The Company's primary source of liquidity is a stable core deposit base. In addition, Federal funds purchased, FHLB advances, and brokered deposits provide a secondary source. These sources of liquidity are generally short-term in nature and are used to fund asset growth and meet other short-term liquidity needs. Liquidity needs can also be met from loan payments and investment security maturities. AtMarch 31, 2022 , the Company's liquid assets totaled$952.5 million down from$985.9 million atDecember 31, 2021 . Additionally, as ofMarch 31, 2022 , the Company had available approximately$130.8 million in unused federal funds lines of credit with regional banks and, subject to certain restrictions and collateral requirements, approximately$456.5 million of borrowing capacity with theFederal Home Loan Bank of Cincinnati to meet short term funding needs. The Company maintains a formal asset and liability management process to quantify, monitor and control interest rate risk and to assist management as management seeks to maintain stability in net interest margin under varying interest rate environments. The Company accomplishes this process through the development and implementation of lending, funding and pricing strategies designed to maximize net interest income under varying interest rate environments subject to specific liquidity and interest rate risk guidelines and competitive market conditions. Analysis of rate sensitivity and rate gap analysis are the primary tools used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Included in the analysis are cash flows and maturities of financial instruments held for purposes other than trading, changes in market conditions, loan volumes and pricing and deposit volume and mix. These assumptions are inherently uncertain, and, as a result, net interest income cannot be precisely estimated nor can the impact of higher or lower interest rates on net interest income be precisely predicted. Actual results will differ due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management's strategies, among other factors. The Company also uses simulation modeling to evaluate both the level of interest rate sensitivity as well as potential balance sheet strategies. The Company's Asset Liability Committee meets quarterly to analyze the interest rate shock simulation. The interest rate shock simulation model is based on a number of assumptions. These assumptions include, but are not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows and balance sheet management strategies. We model instantaneous change in interest rates using a growth in the balance sheet as well as a flat balance sheet to understand the impact to earnings and capital. Based on the Company's IRR simulation, the Company had an asset sensitive position (a positive gap) as ofMarch 31, 2022 . Asset sensitivity means that more of the Company's assets are capable of re-pricing over certain time frames than its liabilities. The interest rates associated with these assets may not actually change over this period but are capable of changing. Asset sensitivity generally should lead to an expansion in net interest margin in a rising rate environment, but for that to occur the Bank will need to reprice its assets more quickly than it reprices rates it pays on deposits. Conversely, a declining rate environment and an asset sensitive balance sheet could have a short-term negative impact on net interest margin, as assets would likely re-price faster than liabilities. Management regularly monitors the deposit rates of the Company's competitors. The Company's net interest margin and earnings could be negatively impacted if short-term rates continue to rise and competitive pressures in the Company's market areas force the Company to hold loan yields steady or increase deposit rates faster than it is able to increase yields on loans. As discussed elsewhere herein, the Bank anticipates that its net interest margin is likely to expand during the remainder of 2022 because of the Company's current balance sheet position in a rising rate environment. The Company also uses Economic Value of Equity ("EVE") sensitivity analysis to understand the impact of changes in interest rates on long-term cash flows, income and capital. EVE is calculated by discounting the cash flows for all balance sheet instruments under different interest rate scenarios. The EVE is a longer term view of interest rate risk because it measures the present value of the future cash flows. Presented below is the estimated impact on the Bank's net interest income and EVE as ofMarch 31, 2022 , assuming an immediate shift in interest rates: % Change from Base Case for
Immediate Parallel Changes in Rates
-200 BP(1) -100 BP(1) +100 BP +200 BP +300 BP
Net interest income (5.93 )% (3.55 )% 0.55 % 1.57 % 2.32 %
EVE (13.58 )% (5.70 )% (0.10 )% (0.84 )% (2.41 )%
(1) Currently, some short term interest rates are below the standard down rate
scenarios (100, 200 bps). The asset liability model does not calculate
negative interest rates and will floor any index at 0.
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While an instantaneous and severe shift in interest rates was used in this analysis to provide an estimate of exposure under these scenarios, we believe that a gradual shift in interest rates would have a more modest impact. Further, the earnings simulation model does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, and changing product spreads that could mitigate any potential adverse impact of changes in interest rates. Moreover, since EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, hedging strategies that we may institute, and changing product spreads that could mitigate any potential adverse impact of changes in interest rates.
Interest rate risk (sensitivity) management focuses on the earnings risk associated with changing interest rates. Management seeks to maintain profitability in both immediate and long-term earnings through funds management/interest rate risk management. The Company's rate sensitivity position has an important impact on earnings. Senior management of the Company analyzes the rate sensitivity position quarterly. Management focuses on the spread between the Company's cost of funds and interest yields generated primarily through loans and investments.
The Company's securities portfolio consists of earning assets that provide interest income. Securities classified as available-for-sale include securities intended to be used as part of the Company's asset/liability strategy and/or securities that may be sold in response to changes in interest rate, prepayment risk, or the need to fund loan demand. AtMarch 31, 2022 , securities totaling approxim a tely$29,032,000 mature or will be subject to rate adjustments within the next twelve months. A secondary source of liquidity is the Company's loan portfolio. AtMarch 31, 2022 , loans totaling appr oximately$877,768,000 either will become du e or will be subject to rate adjustments within twelve months from that date. As for liabilities, atMarch 31, 2022 , certificates of deposit of$250,000 or greater totaling approxi mately$94,260,000 will beco me due or reprice during the next twelve months. Historically, there has been no significant reduction in immediately withdrawable accounts such as negotiable order of withdrawal accounts, money market demand accounts, demand deposit accounts and regular savings accounts. Management anticipates that there will be no significant withdrawals from these accounts in the future.
Management believes that with present maturities, the anticipated growth in deposit base, and the efforts of management in its asset/liability management program, liquidity will not pose a problem in the near term future.
Off Balance Sheet Arrangements
AtMarch 31, 2022 , we had unfunded loan commitments outstanding of$1,331,196,000 and outstanding standby letters of credit of$110,245,000 . Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate federal funds sold or securities available-for-sale or on a short-term basis to borrow and purchase federal funds from other financial institutions. Additionally, the Bank could sell participations in these or other loans to correspondent banks. As mentioned above, the Bank has been able to fund its ongoing liquidity needs through its stable core deposit base, loan payments, investment security maturities and short-term borrowings.
Capital Position and Dividends
AtMarch 31, 2022 , total stockholders' equity was$379,898,000 , or 9.25% of total assets, which compares with$413,717,000 , or 10.37% of total assets, atDecember 31, 2021 . The dollar decrease in stockholders' equity during the three months endedMarch 31, 2022 is the result of the Company's net income of$11,373,000 , proceeds from the issuance of common stock related to exercise of stock options of$57,000 , the net effect of a$44,531,000 unrealized loss on investment securities net of applicable income tax benefit of$15,755,000 , cash dividends declared of$8,401,000 of which$6,511,000 was reinvested under the Company's dividend reinvestment plan,$161,000 related to stock option compensation, and$1,011,000 related to the cumulative effect of change in accounting principle for the adoption of CECL.
Impact of Inflation and Changing Prices
Our consolidated financial statements included herein have been prepared in accordance with GAAP, which presently require us to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on our operations is reflected in increased operating costs. Historically, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond our control, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of theU.S. government, its agencies and various other governmental regulatory authorities. 44
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