Management’s discussion and analysis of results of operations and financial condition contains forward-looking statements. Please refer to the discussion of forward-looking statements at the
beginning of this report.
The following section presents additional information to assess our results of operations and financial condition. This section should be read in conjunction with the consolidated financial
statements and the supplemental financial data contained elsewhere in this report.
The information under Item 1 – Business of this report is incorporated here by reference.
RESULTS OF OPERATIONS
Summary: Net income was $34.7 million ($43.1 million on a pretax basis) for 2022, compared to $29.0 million ($35.7 million on a pretax basis) for 2021.
Earnings per common share on a diluted basis were $1.01 for 2022 and $0.85 for 2021.
During 2022, the improvement in our earnings was the result of growth in revenue while expenses were relatively stable. Throughout 2022, the Federal Reserve Bank increased the federal funds
rate several times, bringing the high end of their rate range rate from 0.25% at the beginning of the year to 4.50% by the end of 2022. Given our asset sensitive balance sheet posture, this had a very positive impact on our earnings in 2022.
Net interest income increased to $70.1 million in 2022 compared to $56.1 million in 2021. Gains on sales of mortgage loans were $706,000 in 2022 compared to $4.7 million in 2021 with the decrease reflecting the impact of higher interest rates
in 2022. Other categories of noninterest income were up $309,000 in 2022, partially offsetting the impact of lower gains on mortgage sales. Total noninterest expense was $48.2 million in 2022 compared to $46.1 million in 2021.
We recorded a provision for loan losses benefit of $1.1 million in 2022 and a provision for loan losses benefit of $2.1 million in 2021. The provisions in 2022 and 2021 were favorably
impacted by low levels of nonperforming loans, strong asset quality and the levels of net loan charge-offs to recoveries realized in recent periods and reversals of the additional qualitative factors related to the COVID-19 pandemic. These
items are discussed more fully below.
Net Interest Income: Net interest income totaled $70.1 million during 2022 compared to $56.1 million during 2021.
The increase in net interest income during 2022 compared to 2021 was due primarily to an increase in yields on earning assets, particularly overnight deposits and variable rate loans as the
federal funds rate was increased by 425 basis points in 2022 in response to high inflation resulting from recovery from the COVID-19 pandemic and government stimulus. Average yields on securities, interest earning assets and net interest
margin are presented on a fully taxable equivalent basis. Our net interest income as a percentage of average interest-earning assets (i.e. "net interest margin" or "margin") was 2.56% for the year ended December 31, 2022 and 2.09% for the year
ended December 31, 2021.
The yield on earning assets increased 54 basis points from 2.19% for 2021 to 2.73% for 2022. The increase from 2021 to 2022 was generally due to an increase of average short-term interest
rates earned on overnight deposits and variable rate loans during 2022. The average rate on overnight deposits increased from 0.13% in 2021 to 1.53% in 2022. Our margin in recent years had been negatively impacted by our decision to hold
significant balances in liquid and short-term investments. In 2022, our margin benefitted significantly from this strategy. Net interest income also benefitted in 2022 from significant growth in our investment portfolio. Our average
investment portfolio balance in 2022 was $749.8 million compared to $363.0 million in 2021. Total average interest earning assets totaled $2.74 billion for 2022 compared to $2.70 billion in 2021.
Net interest income for 2022 increased $14.1 million compared to the same period in 2021. Of this increase, $12.1 million was from changes in the rates earned or paid, and $2.0 million was
from changes in volume of average interest earning assets and interest bearing liabilities. The largest changes occurred in interest income on federal funds (our overnight deposits), interest income on commercial loans and interest income in
our investment portfolio as we deployed more of our excess investable funds primarily into taxable securities. Interest income from federal funds sold and other short-term investments increased by $12.0 million in 2022 compared to 2021. The
425 basis point increase in the federal funds rate from March 2022 through December 2022 caused a $12.3 million increase in interest income, partially offset by a decrease in average balances of federal funds sold and other short-term
investments in 2022, which subtracted $324,000. The net change in interest income for commercial loans was a decrease of $3.7 million in 2022 as compared to 2021 with a $1.8 million increase due to rate offset by a $5.5 million reduction due
to a decrease in average balances. PPP loans significantly impacted yields and interest income on commercial loans in 2021. Interest and fees on PPP loans included in interest income were $8.6 million higher in 2021 versus 2022. Offsetting
this unfavorable swing in interest income in 2022 was the favorable impact of rising rates on our variable rate commercial loan portfolio. Interest income on this portfolio grew by $5.7 million while the yield increased from 2.95% to 4.19%
from 2021 to 2022 in response to rising short-term rates in 2022. The net change in interest income for taxable securities was an increase of $8.1 million with $7.2 million due to an increase in average balances and $844,000 due to rate.
Yield on commercial loans increased from 4.06% in 2021 to 4.23% in 2022. Yield on residential mortgage loans decreased from 3.41% in 2021 to 3.36% in 2022, while yield on consumer loans
increased from 4.05% in 2021 to 4.88% in 2022. The increases in yields on commercial loans and consumer loans were the result of the predominance of loans in these categories with variable rates of interest tied to prime and LIBOR or SOFR,
which increased throughout 2022.
Our net interest margin for 2022 was negatively impacted from a 13 basis point increase in our cost of funds from 0.15% for 2021 to 0.28% for 2022. Average interest bearing liabilities
increased from $1.69 billion in 2021 to $1.72 billion in 2022. Increases in the rates paid on certain deposit account types in response to the sharp market rate increases were the primary cause of the increase in our cost of funds. While our
funding costs have increased, the yields on our interest earning assets increased to a much larger extent, causing net interest income and net interest margin to increase significantly from 2021 to 2022.
In 2023, we expect that net interest margin will continue to benefit from increases in the overnight funds rate and by our higher levels of short-term investment balances. The
asset-sensitive profile of our balance sheet and our core deposit funding positions us well for favorable net interest margin results when market interest rates rise and remain elevated.
The following table shows an analysis of net interest margin for the years ended December 31, 2022 and 2021 (dollars in thousands).
|
|
For the years ended December 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
|
Average
Balance
|
|
|
Interest
Earned
or Paid
|
|
|
Average
Yield
or Cost
|
|
|
Average
Balance
|
|
|
Interest
Earned
or Paid
|
|
|
Average
Yield
or Cost
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities
|
|
$
|
597,899
|
|
|
$
|
11,333
|
|
|
|
1.90
|
%
|
|
$
|
210,513
|
|
|
$
|
3,283
|
|
|
|
1.56
|
%
|
Tax-exempt securities (1)
|
|
|
151,888
|
|
|
|
2,803
|
|
|
|
2.38
|
|
|
|
152,459
|
|
|
|
3,056
|
|
|
|
2.58
|
|
Commercial loans (2)
|
|
|
938,817
|
|
|
|
40,197
|
|
|
|
4.23
|
|
|
|
1,068,667
|
|
|
|
43,875
|
|
|
|
4.06
|
|
Residential mortgage loans
|
|
|
125,202
|
|
|
|
4,211
|
|
|
|
3.36
|
|
|
|
132,472
|
|
|
|
4,521
|
|
|
|
3.41
|
|
Consumer loans
|
|
|
56,684
|
|
|
|
2,768
|
|
|
|
4.88
|
|
|
|
55,940
|
|
|
|
2,268
|
|
|
|
4.05
|
|
Federal Home Loan Bank stock
|
|
|
10,411
|
|
|
|
199
|
|
|
|
1.89
|
|
|
|
11,558
|
|
|
|
211
|
|
|
|
1.80
|
|
Federal funds sold and other short-term investments
|
|
|
862,240
|
|
|
|
13,395
|
|
|
|
1.53
|
|
|
|
1,067,237
|
|
|
|
1,420
|
|
|
|
0.13
|
|
Total interest earning
assets (1)
|
|
|
2,743,141
|
|
|
|
74,906
|
|
|
|
2.73
|
|
|
|
2,698,846
|
|
|
|
58,634
|
|
|
|
2.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
36,428
|
|
|
|
|
|
|
|
|
|
|
|
34,740
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
85,685
|
|
|
|
|
|
|
|
|
|
|
|
103,041
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,865,254
|
|
|
|
|
|
|
|
|
|
|
$
|
2,836,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
704,926
|
|
|
$
|
952
|
|
|
|
0.14
|
%
|
|
$
|
681,411
|
|
|
$
|
166
|
|
|
|
0.03
|
%
|
Savings and money
market accounts
|
|
|
879,273
|
|
|
|
2,474
|
|
|
|
0.28
|
|
|
|
822,235
|
|
|
|
246
|
|
|
|
0.03
|
|
Time deposits
|
|
|
88,218
|
|
|
|
347
|
|
|
|
0.40
|
|
|
|
101,353
|
|
|
|
503
|
|
|
|
0.49
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowed funds
|
|
|
49,622
|
|
|
|
987
|
|
|
|
1.96
|
|
|
|
74,246
|
|
|
|
1,331
|
|
|
|
1.77
|
|
Long-term debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,564
|
|
|
|
319
|
|
|
|
2.98
|
|
Total interest bearing liabilities
|
|
|
1,722,039
|
|
|
|
4,760
|
|
|
|
0.28
|
|
|
|
1,689,809
|
|
|
|
2,565
|
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand accounts
|
|
|
884,579
|
|
|
|
|
|
|
|
|
|
|
|
885,838
|
|
|
|
|
|
|
|
|
|
Other noninterest bearing liabilities
|
|
|
13,795
|
|
|
|
|
|
|
|
|
|
|
|
13,905
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
244,841
|
|
|
|
|
|
|
|
|
|
|
|
247,075
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
2,865,254
|
|
|
|
|
|
|
|
|
|
|
$
|
2,836,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
70,146
|
|
|
|
|
|
|
|
|
|
|
$
|
56,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread (1)
|
|
|
|
|
|
|
|
|
|
|
2.45
|
%
|
|
|
|
|
|
|
|
|
|
|
2.04
|
%
|
Net interest margin (1)
|
|
|
|
|
|
|
|
|
|
|
2.56
|
%
|
|
|
|
|
|
|
|
|
|
|
2.09
|
%
|
Ratio of average interest earning assets to average interest bearing liabilities
|
|
|
159.30
|
%
|
|
|
|
|
|
|
|
|
|
|
159.71
|
%
|
|
|
|
|
|
|
|
|
(1) |
Yields are presented on a tax equivalent basis using a 21% tax rate.
|
(2) |
Loan fees of $1.8 million and $9.4 million for 2022 and 2021, respectively, are included in interest income. Included in these fee amounts were $1.3 million and $8.3 million in fees on PPP loans in 2022
and 2021, respectively. Includes average nonaccrual loans of approximately $86,000 and $431,000 for 2022 and 2021, respectively.
|
The following table presents the dollar amount of changes in net interest income due to changes in volume and rate.
|
|
For the years ended December 31,
|
|
|
|
2022 vs 2021
Increase (Decrease) Due to
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
Taxable securities
|
|
$
|
7,206
|
|
|
$
|
844
|
|
|
$
|
8,050
|
|
Tax-exempt securities
|
|
|
(11
|
)
|
|
|
(242
|
)
|
|
|
(253
|
)
|
Commercial loans
|
|
|
(5,462
|
)
|
|
|
1,784
|
|
|
|
(3,678
|
)
|
Residential mortgage loans
|
|
|
(245
|
)
|
|
|
(65
|
)
|
|
|
(310
|
)
|
Consumer loans
|
|
|
31
|
|
|
|
469
|
|
|
|
500
|
|
Federal Home Loan Bank stock
|
|
|
(23
|
)
|
|
|
11
|
|
|
|
(12
|
)
|
Federal funds sold and other short-term investments
|
|
|
(324
|
)
|
|
|
12,299
|
|
|
|
11,975
|
|
Total interest income
|
|
|
1,172
|
|
|
|
15,100
|
|
|
|
16,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
6
|
|
|
$
|
780
|
|
|
$
|
786
|
|
Savings and money market accounts
|
|
|
18
|
|
|
|
2,210
|
|
|
|
2,228
|
|
Time deposits
|
|
|
(60
|
)
|
|
|
(96
|
)
|
|
|
(156
|
)
|
Other borrowed funds
|
|
|
(475
|
)
|
|
|
131
|
|
|
|
(344
|
)
|
Long-term debt
|
|
|
(319
|
)
|
|
|
—
|
|
|
|
(319
|
)
|
Total interest expense
|
|
|
(830
|
)
|
|
|
3,025
|
|
|
|
2,195
|
|
Net interest income
|
|
$
|
2,002
|
|
|
$
|
12,075
|
|
|
$
|
14,077
|
|
Provision for Loan Losses: The provision for loan losses for 2022 was a benefit of $1.1 million compared to a benefit of $2.1 million for 2021. The
provision for loan losses for 2022 and 2021 were impacted by our continued strong asset quality metrics. In 2022 and 2021, economic conditions improved allowing for reductions in the additional qualitative adjustments made in 2020 related to
the COVID-19 pandemic. This contributed to the level of benefit recorded in 2022 and 2021. In addition, specific reserves on impaired loans decreased by $270,000 in 2022 and by $646,000 in 2021. Net loan recoveries were $521,000 in 2022
compared to $531,000 in 2021.
Our overall weighted average commercial loan grade has been below 4.00 for the past several years. Our weighted average commercial loan grade was 3.53 at December 31, 2022 and 3.60 at
December 31, 2021.
The amounts of loan loss provision in each period were the result of establishing our allowance for loan losses at levels believed necessary based upon our methodology for determining the
adequacy of the allowance. The sustained level of net recoveries over the past several years has had a significant effect on the historical loss component of our methodology. More information about our allowance for loan losses and our
methodology for establishing its level may be found in this Item 7 of this report under the heading “Allowance for Loan Losses” below and in Item 8 of this report in Note 3 of the Consolidated Financial Statements.
Noninterest Income: Noninterest income totaled $20.0 million in 2022 compared to $23.7 million in 2021. The components of noninterest income are shown in
the table below (in thousands):
|
|
2022
|
|
|
2021
|
|
Service charges and fees on deposit accounts
|
|
$
|
4,769
|
|
|
$
|
4,446
|
|
Net gains on mortgage loans
|
|
|
706
|
|
|
|
4,691
|
|
Trust fees
|
|
|
4,143
|
|
|
|
4,331
|
|
ATM and debit card fees
|
|
|
6,768
|
|
|
|
6,505
|
|
Bank owned life insurance (“BOLI”) income
|
|
|
878
|
|
|
|
1,033
|
|
Investment services fees
|
|
|
1,691
|
|
|
|
1,505
|
|
Other income
|
|
|
1,064
|
|
|
|
1,184
|
|
Total noninterest income
|
|
$
|
20,019
|
|
|
$
|
23,695
|
|
Net gains on sales of mortgage loans decreased $4.0 million from 2021 to 2022 due to much lower volumes of mortgage loans originated for sale in 2022. Net gains on mortgage loans represent
gains on the sale of real estate mortgage loans in the secondary market. We sell the majority of the fixed-rate mortgage loans we originate. We do not retain the servicing rights for the loans we sell.
A summary of gain on sales of loans and related loan volume was as follows (in thousands):
|
|
For the Year Ended December 31,
|
|
|
|
2022
|
|
|
2021
|
|
Gain on sales of loans
|
|
$
|
706
|
|
|
$
|
4,691
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgage loans originated for sale
|
|
$
|
26,236
|
|
|
$
|
124,287
|
|
Real estate mortgage loans sold
|
|
|
28,134
|
|
|
|
132,993
|
|
Net gain on the sale of mortgage loans as a percent of real estate mortgage loans sold ("Loan sale margin")
|
|
|
2.51
|
%
|
|
|
3.53
|
%
|
As demonstrated in the table above, volume of mortgage loans originated for sale was down significantly in 2022 compared to 2021. The rapid increase in interest rates during 2022
significantly impacted mortgage sale production volume. As long-term market interest rates impacting mortgage rates began to rise in the latter half of 2021, mortgage production slowed and resulting gains declined. As rates increased further
in 2022, refinancing activity all but stopped and more customers chose variable rate products, which we hold in portfolio. We expect our residential mortgage loan activity to remain below normal levels as we enter 2023 given the existing rate
environment.
Deposit service charges were up $323,000, primarily driven by growth in treasury management fee income charged to our commercial customers and growth in overdraft fee income. The improvement
in treasury management fee income was a result of success in growing the number of business and municipal customers using these services in the last two years. These fees in 2022 were offset in part by a higher level of earnings credits due to
higher deposit rates in 2022. Overdraft fees are driven by customer spending behavior and this activity dropped in 2020 and 2021 with the overall effect of government shutdowns on the economy, particularly in the second quarter of 2020, which
was most impacted by the COVID-19 response. The stimulus checks sent by the federal government also helped our customers keep their accounts from overdrawing. As the economy began to normalize and customers used the economic impact payments,
customer spending behavior began to return to normal in 2022.
Trust service revenue decreased $188,000 in 2022. This decrease was due primarily to market valuations of assets on which fees are assessed.
ATM and debit card processing income increased $263,000 in 2022 to $6.8 million compared to $6.5 million in 2021. This increase reflected an increase in ATM fees due to fees charged to
non-Macatawa customers. This new fee was implemented in 2022. Overall ATM and debit card income has rebounded and remains at pre-pandemic levels reflecting customer preference for this payment alternative. There was overall growth in the
number of debit and ATM card customers and promotional efforts to increase volume in these low cost transaction alternatives continue to be successful.
We did not sell any securities in 2022 or 2021. We continually review our securities portfolio and will dispose of securities that pose higher than desired credit or market risk, or as
warranted from overall portfolio maintenance or asset-liability management.
Investment services fees increased $186,000 in 2022 due largely to an increase in the sale of annuities in the latter part of 2022.
Earnings from bank owned life insurance decreased by $155,000 in 2022 compared to 2021 due to the general performance of the underlying investments.
Other income was down by $120,000 in 2022 due largely to a reduction of title insurance fees of $123,000 as mortgage volume was down due to the higher interest rate environment.
Noninterest Expense: Noninterest expense was $48.2 million in 2022 and $46.1 million in 2021. The small increase in total noninterest expense reflected our
active management of controllable costs. The components of noninterest expense are shown in the table below (in thousands):
|
|
2022
|
|
|
2021
|
|
Salaries and benefits
|
|
$
|
26,194
|
|
|
$
|
25,216
|
|
Occupancy of premises
|
|
|
4,200
|
|
|
|
3,986
|
|
Furniture and equipment
|
|
|
4,008
|
|
|
|
3,940
|
|
Legal and professional
|
|
|
961
|
|
|
|
1,042
|
|
Marketing and promotion
|
|
|
803
|
|
|
|
723
|
|
Data processing
|
|
|
3,756
|
|
|
|
3,456
|
|
FDIC assessment
|
|
|
789
|
|
|
|
749
|
|
Interchange and other card expense
|
|
|
1,586
|
|
|
|
1,517
|
|
Bond and D&O insurance
|
|
|
518
|
|
|
|
448
|
|
Outside services
|
|
|
2,139
|
|
|
|
1,922
|
|
Other noninterest expense
|
|
|
3,272
|
|
|
|
3,091
|
|
Total noninterest expense
|
|
$
|
48,226
|
|
|
$
|
46,090
|
|
Salaries and benefits expense was the largest component of noninterest expense and was $26.2 million in 2022 and $25.2 million in 2021. The increase in 2022 was primarily driven by higher
base compensation, higher variable compensation tied to brokerage activity, higher medical insurance costs from increased claims and higher 401(k) contributions more than offsetting the decrease in variable compensation tied to lower mortgage
loan production in 2022. Our 401(k) matching costs were lower in 2021 as we reduced our matching percentage for 2021 to 100% of the first 2% of salary contributions. This was increased back to normal level beginning January 1, 2022 at 100% of
the first 3% and 50% of the next 2% of salary contributions. The table below identifies the primary components of salaries and benefits (in thousands):
|
|
2022
|
|
|
2021
|
|
Salaries and other compensation
|
|
|
22,694
|
|
|
|
22,171
|
|
Salary deferral from commercial loans
|
|
|
(855
|
)
|
|
|
(1,062
|
)
|
Bonus
|
|
|
1,154
|
|
|
|
1,121
|
|
Mortgage production - variable comp
|
|
|
430
|
|
|
|
1,049
|
|
Brokerage - variable comp
|
|
|
470
|
|
|
|
440
|
|
401(k) matching contributions
|
|
|
755
|
|
|
|
412
|
|
Medical insurance costs
|
|
|
1,546
|
|
|
|
1,085
|
|
Total salaries and benefits
|
|
$
|
26,194
|
|
|
$
|
25,216
|
|
Costs associated with nonperforming assets remained at low levels, totaling $20,000 in 2022 and $45,000 in 2021. During 2022, we did not add any other real estate properties. We sold one
other real estate property that had a valuation allowance of 100%, so the balance remained unchanged at $2.3 million at December 31, 2022 and 2021. In 2021, we did not add any other real estate properties and sold $170,000 of other real
estate. On January 30, 2023, we sold the remaining other real estate owned property at a small gain, bringing the balance of other real estate owned to $0.
FDIC assessment expense increased to $789,000 in 2022 compared to $749,000 in 2021 primarily due to our overall asset balance sheet composition. Further discussion regarding the
determination of FDIC assessments for the Bank may be found in Item 1 of this report under the heading "Supervision and Regulation." This expense will increase in 2023 as the FDIC has raised the premium we pay by 67% until their bank insurance
fund reaches the level imposed by regulations.
Occupancy expense increased by $214,000 in 2022 primarily due to an increase in snow removal and building maintenance costs, partially offset by
depreciation of our buildings. Furniture and equipment expense increased by $68,000 in 2022 primarily due to an increase in equipment and software service contracts and software, partially offset by a decrease in software amortization costs.
Data processing expenses were $3.8 million in 2022 and $3.5 million in 2021. Increases in data processing for our systems and card programs in 2022 were the primary reasons for the increase
in 2022.
Outside services increased by $217,000 in 2022 primarily due to higher recruiting costs and outsourced internal audits.
Federal Income Tax Expense: We recorded federal income tax expense of $8.3 million in 2022 and $6.7 million in 2021. Our effective tax rate was 19.35%
for 2022 and 18.78% for 2021. The increase in the effective tax rate in 2022 over 2021 was due to higher levels of taxable income from both growth in taxable securities held in our investment portfolio and growth in taxable income from rising
interest rates while our tax-exempt income has remained relatively flat.
FINANCIAL CONDITION
Summary: Total assets were $2.91 billion at December 31, 2022, decrease of $21.8 million from $2.93 billion at December 31, 2021. This change reflected
increases of $68.8 million in our loan portfolio, $83.2 million in securities available for sale, $211.8 million in securities held to maturity, $3.5 million in accrued interest receivable, $877,000 in bank owned life insurance, $7.5 million in
net deferred tax assets and $2.5 million in other assets, offset by decreases of $396.6 million in cash and cash equivalents, $1.5 million in premises and equipment, and $1.2 million in loans held for sale. Total deposits increased by $37.2
million and other borrowed funds and long-term debt were down by $55.0 million at December 31, 2022 compared to December 31, 2021.
Total shareholders’ equity decreased by $7.0 million from December 31, 2021 to December 31, 2022. Shareholders’ equity was increased by $34.7 million of net income in 2022, partially offset
by cash dividends of $10.9 million, or $0.32 per share. Shareholders’ equity also decreased by $31.3 million in 2022 as a result of an unfavorable swing in accumulated other comprehensive income due to the effect of rising interest rates on
the fair value of our available for sale securities portfolio. As of December 31, 2022 and 2021, the Bank was categorized as “well capitalized” under applicable regulatory guidelines.
Cash and Cash Equivalents: Our cash and cash equivalents, which include federal funds sold and short-term investments, were $755.2 million at December 31,
2022 compared to $1.15 billion at December 31, 2021. This $396.6 million decrease was primarily the result of growth in our loan and investment portfolios during 2022.
Securities: Securities available for sale ("AFS") were $499.3 million at December 31, 2022 compared to $416.1 million at December 31, 2021. The balance at
December 31, 2022 primarily consisted of U.S. Treasury and agency securities, agency mortgage backed securities and various municipal investments. The growth in securities AFS was the result of increased purchase activity to accelerate the
strategic deployment of excess liquid funds caused by our robust deposit growth. Investment purchases were focused on short-term high quality securities consistent with our existing portfolio. Our held to maturity ("HTM") portfolio increased
from $137.0 million at December 31, 2021 to $348.8 million at December 31, 2022. Our HTM portfolio is comprised of U.S. Treasury securities and state municipal and privately placed commercial bonds. The commercial bond component of this
category declined by $5.5 million in 2022. These bonds represent financing provided to some of our non-profit commercial customers who qualified for borrowing on a tax-exempt basis. The municipal bond component of this category decreased by
$34.1 million. The U.S. Treasury securities component of this category increased by $251.3 million as we seized opportunities to deploy excess liquid funds in high quality bonds with short durations.
On January 1, 2022, we reclassified ten U.S. Treasury securities with an amortized cost of $123.5 million from available for sale to held to maturity, as we have the intent and ability to
hold these securities to maturity. All ten of these U.S. Treasury securities were purchased within the fourth quarter of 2021. Subsequently and upon further analysis of these purchases, management decided to reclassify them to held to maturity
given their short-term nature. These securities had net unrealized gains of $113,000 at the date of transfer, which will continue to be reported in accumulated comprehensive income, and will be amortized over the remaining life of the
securities as an adjustment of yield. The effect on interest income of the amortization of net unrealized gains is offset by the amortization of the premium on the securities transferred. Total securities increased $295.0 million from $553.1
million at December 31, 2021 to $848.0 million at December 31, 2022 as we continued to deploy excess liquidity into higher yielding assets.
Portfolio Loans and Asset Quality: Total portfolio loans increased by $68.8 million to $1.18 billion at December 31, 2022 compared to $1.11 billion at
December 31, 2021. During 2022, our commercial portfolio increased by $43.0 million, while our residential mortgage portfolio increased by $21.3 million and our consumer portfolio increased by $4.5 million. By December 31, 2022, all of our PPP
loans had received forgiveness from the SBA, while we had $41.9 million in remaining PPP loans at December 31, 2021.
We experienced year over year growth in commercial loans in 2022 after experiencing a decline in commercial loan balances in 2021. Commercial loans grew $119.6 million in 2020, decreased
$281.2 million in 2021 and increased $43.0 million in 2022. Most of the growth in 2020 and decline in 2021 was attributable to PPP loan activity. We returned to commercial loan growth in 2022 and plan for measured, high quality loan portfolio
growth in 2023. Excluding PPP loans, total commercial loans grew by $84.9 million in 2022.
Commercial and commercial real estate loans remained our largest loan segment and accounted for 83.2% of the total loan portfolio at December 31, 2022 and 84.4% at December 31, 2021.
Residential mortgage and consumer loans comprised 16.8% of total loans at December 31, 2022 and 15.6% at December 31, 2021.
A further breakdown of the composition of the loan portfolio is shown in the table below (in thousands):
|
|
December 31, 2022
|
|
|
December 31, 2021
|
|
|
|
Balance
|
|
|
Percent of
Total Loans
|
|
|
Balance
|
|
|
Percent of
Total Loans
|
|
Commercial real estate: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developed
|
|
$
|
7,234
|
|
|
|
0.6
|
%
|
|
$
|
4,862
|
|
|
|
0.4
|
%
|
Unsecured to residential developers
|
|
|
—
|
|
|
|
—
|
|
|
|
5,000
|
|
|
|
0.4
|
|
Vacant and unimproved
|
|
|
36,270
|
|
|
|
3.1
|
|
|
|
36,240
|
|
|
|
3.3
|
|
Commercial development
|
|
|
103
|
|
|
|
—
|
|
|
|
171
|
|
|
|
—
|
|
Residential improved
|
|
|
112,791
|
|
|
|
9.6
|
|
|
|
100,077
|
|
|
|
9.0
|
|
Commercial improved
|
|
|
259,281
|
|
|
|
22.0
|
|
|
|
259,039
|
|
|
|
23.4
|
|
Manufacturing and industrial
|
|
|
121,924
|
|
|
|
10.4
|
|
|
|
110,712
|
|
|
|
10.0
|
|
Total commercial real estate
|
|
|
537,603
|
|
|
|
45.7
|
|
|
|
516,101
|
|
|
|
46.5
|
|
Commercial and industrial, excluding PPP
|
|
|
441,716
|
|
|
|
37.5
|
|
|
|
378,318
|
|
|
|
34.1
|
|
Paycheck Protection Program (PPP)
|
|
|
—
|
|
|
|
—
|
|
|
|
41,939
|
|
|
|
3.8
|
|
Total commercial
|
|
|
979,319
|
|
|
|
83.2
|
|
|
|
936,358
|
|
|
|
84.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
139,148
|
|
|
|
11.8
|
|
|
|
117,800
|
|
|
|
10.7
|
|
Unsecured
|
|
|
121
|
|
|
|
—
|
|
|
|
210
|
|
|
|
—
|
|
Home equity
|
|
|
56,321
|
|
|
|
4.8
|
|
|
|
51,269
|
|
|
|
4.6
|
|
Other secured
|
|
|
2,839
|
|
|
|
0.2
|
|
|
|
3,356
|
|
|
|
0.3
|
|
Total consumer
|
|
|
198,429
|
|
|
|
16.8
|
|
|
|
172,635
|
|
|
|
15.6
|
|
Total loans
|
|
$
|
1,177,748
|
|
|
|
100.0
|
%
|
|
$
|
1,108,993
|
|
|
|
100.0
|
%
|
(1) |
Includes both owner occupied and non-owner occupied commercial real estate.
|
Commercial real estate loans increased $21.5 million since December 31, 2021 and accounted for 45.7% of our total loan portfolio at year-end 2022 and consisted primarily of loans to business
owners and developers of owner and non-owner occupied commercial properties and loans to developers of single and multi-family residential properties. In the table above, we show our commercial real estate portfolio by loans secured by
residential and commercial real estate, and by stage of development. Improved loans are generally secured by properties that are under construction or completed and placed in use. Development loans are secured by properties that are in the
process of development or fully developed. Vacant and unimproved loans are secured by raw land for which development has not yet begun and agricultural land.
Our overall commercial and industrial loan portfolio, including PPP, increased by $21.5 million to $441.7 million at December 31, 2022 and represented 37.5% of our total loan portfolio. This
change includes $41.9 million net reduction in outstanding balances on PPP loans, due to SBA forgiveness.
Our consumer residential mortgage loan portfolio, which also includes residential construction loans made to individual homeowners, comprised approximately 11.8% of portfolio loans at
December 31, 2022 and 10.7% at December 31, 2021. We expect to continue to retain in our loan portfolio certain types of residential mortgage loans (primarily high quality, low loan to value, adjustable rate loans) in an effort to continue to
diversify our credit risk and deploy our excess liquidity. Typically, a large portion of our residential mortgage loan production is sold on the secondary market with servicing released. However, given the significant increase in residential
mortgage loan rates, we have increased the amount of such loans retained in portfolio as they will typically have lower duration due to refinancings that occur when interest rates decline.
The volume of residential mortgage loans originated for sale during 2022 decreased from 2021 as interest rates increased in 2022 and demand for refinancings declined as many potential
borrowers had recently refinanced in the extended low interest rate environment. In addition, customer preference drove more production in loan product types we retain in portfolio (i.e. variable rate, short term mortgages). We expect
residential mortgage originations for sale to continue to be below normal levels as we enter 2023 given the existing rate environment. Residential mortgage loans originated for sale were $26.2 million in 2022 compared to $124.3 million in
2021. The Company had no repurchase demands or claims related to residential mortgage loans sold on the secondary market during the five-year period ended December 31, 2022.
Our portfolio of other consumer loans includes loans secured by personal property and home equity fixed term and line of credit loans. Consumer loans increased by $4.5 million to $59.3
million at December 31, 2022 from $54.8 million at December 31, 2021 primarily due to an increase in home equity loans. Consumer loans comprised approximately 5.0% of our portfolio loans at December 31, 2022 and 4.9% at December 31, 2021.
The following table shows our loan origination activity for portfolio loans during 2022 and 2021, broken out by loan type and also shows average originated loan size (dollars in thousands):
|
|
Year ended December 31, 2022
|
|
|
Year ended December 31, 2021
|
|
|
|
Portfolio
Originations
|
|
|
Percent of
Total
Originations
|
|
|
Average
Loan Size
|
|
|
Portfolio
Originations
|
|
|
Percent of
Total
Originations
|
|
|
Average
Loan Size
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developed
|
|
$
|
5,998
|
|
|
|
1.2
|
%
|
|
$
|
600
|
|
|
$
|
7,620
|
|
|
|
1.4
|
%
|
|
$
|
423
|
|
Unsecured to residential developers
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vacant and unimproved
|
|
|
10,982
|
|
|
|
2.2
|
|
|
|
998
|
|
|
|
18,762
|
|
|
|
3.3
|
|
|
|
1,173
|
|
Commercial development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential improved
|
|
|
51,565
|
|
|
|
10.5
|
|
|
|
549
|
|
|
|
101,492
|
|
|
|
17.9
|
|
|
|
634
|
|
Commercial improved
|
|
|
76,523
|
|
|
|
15.5
|
|
|
|
1,594
|
|
|
|
71,486
|
|
|
|
12.6
|
|
|
|
1,191
|
|
Manufacturing and industrial
|
|
|
71,641
|
|
|
|
14.6
|
|
|
|
2,470
|
|
|
|
25,827
|
|
|
|
4.6
|
|
|
|
922
|
|
Total commercial real estate
|
|
|
216,709
|
|
|
|
44.0
|
|
|
|
1,129
|
|
|
|
225,187
|
|
|
|
39.8
|
|
|
|
799
|
|
Commercial and industrial, excluding PPP
|
|
|
164,535
|
|
|
|
33.4
|
|
|
|
885
|
|
|
|
110,667
|
|
|
|
19.5
|
|
|
|
838
|
|
PPP loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
128,473
|
|
|
|
22.7
|
|
|
|
128
|
|
Total commercial
|
|
|
381,244
|
|
|
|
77.4
|
|
|
|
1,009
|
|
|
|
464,327
|
|
|
|
82.0
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
55,289
|
|
|
|
11.2
|
|
|
|
302
|
|
|
|
48,930
|
|
|
|
8.6
|
|
|
|
314
|
|
Unsecured
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
54,249
|
|
|
|
11.0
|
|
|
|
134
|
|
|
|
51,270
|
|
|
|
9.1
|
|
|
|
125
|
|
Other secured
|
|
|
1,855
|
|
|
|
0.4
|
|
|
|
36
|
|
|
|
1,567
|
|
|
|
0.3
|
|
|
|
23
|
|
Total consumer
|
|
|
111,393
|
|
|
|
22.6
|
|
|
|
174
|
|
|
|
101,767
|
|
|
|
18.0
|
|
|
|
161
|
|
Total loans
|
|
$
|
492,637
|
|
|
|
100.0
|
%
|
|
|
484
|
|
|
$
|
566,094
|
|
|
|
100.0
|
%
|
|
|
275
|
|
Excluding PPP originations, our loan origination activity was up $55.0 million in 2022 compared to 2021. We believe the increased origination activity is primarily the result of increased
business activity occurring in our marketplace as uncertainty over economic conditions with the COVID-19 pandemic has decreased.
Our loan portfolio is reviewed regularly by our senior management, our loan officers, and an internal loan review team that is independent of our loan originators and credit administration.
An administrative loan committee consisting of senior management and seasoned lending and collections personnel meets monthly to manage our internal watch list and proactively manage high risk loans.
When reasonable doubt exists concerning collectability of interest or principal of one of our loans, the loan is placed in nonaccrual status. Any interest previously accrued but not collected
is reversed and charged against current earnings.
Nonperforming assets are comprised of nonperforming loans, foreclosed assets and repossessed assets. At December 31, 2022 and 2021, nonperforming assets totaled $2.4 million. There were no
additions to other real estate owned in 2022 or in 2021. Based on the loans currently in their redemption period, we expect there to be few, if any, additions to other real estate owned in 2022. There were no sales of foreclosed and
repossessed properties in 2022. Proceeds from sales of foreclosed properties were $170,000 in 2021 resulting in a net realized gain on sale of $20,000.
Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing. As of December 31, 2022, nonperforming loans totaled $78,000, or 0.01% of
total portfolio loans, compared to $92,000, or 0.01% of total portfolio loans, at December 31, 2021.
Nonperforming loans at December 31, 2022 consisted of $78,000 of residential mortgage loans.
Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled $2.3 million at December 31, 2022 and 2021. All properties acquired through or in
lieu of foreclosure are initially transferred at their fair value less estimated costs to sell and then evaluated monthly for impairment after transfer using a lower of cost or market approach. Updated property valuations are obtained at least
annually on all foreclosed assets. On January 30, 2023, the Company sold the remaining other real estate owned property at a small gain, bringing the balance of other real estate owned to $0.
The following table shows the composition and amount of our nonperforming assets (dollars in thousands):
|
|
December 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Nonaccrual loans
|
|
$
|
78
|
|
|
$
|
91
|
|
|
$
|
533
|
|
|
$
|
203
|
|
|
$
|
1,303
|
|
Loans 90 days or more delinquent and still accruing
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Total nonperforming loans (NPLs)
|
|
|
78
|
|
|
|
92
|
|
|
|
533
|
|
|
|
203
|
|
|
|
1,304
|
|
Foreclosed assets
|
|
|
2,343
|
|
|
|
2,343
|
|
|
|
2,537
|
|
|
|
2,748
|
|
|
|
3,380
|
|
Repossessed assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total nonperforming assets (NPAs)
|
|
$
|
2,421
|
|
|
$
|
2,435
|
|
|
$
|
3,070
|
|
|
$
|
2,951
|
|
|
$
|
4,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPLs to total loans
|
|
|
0.01
|
%
|
|
|
0.01
|
%
|
|
|
0.04
|
%
|
|
|
0.01
|
%
|
|
|
0.09
|
%
|
NPAs to total assets
|
|
|
0.08
|
%
|
|
|
0.08
|
%
|
|
|
0.12
|
%
|
|
|
0.14
|
%
|
|
|
0.24
|
%
|
The following table shows the breakout of our troubled debt restructurings (“TDRs”) between performing and nonperforming at December 31, 2022 and 2021 (dollars in thousands):
|
|
December 31, 2022
|
|
|
December 31, 2021
|
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
Performing TDRs
|
|
$
|
4,121
|
|
|
$
|
2,886
|
|
|
$
|
7,007
|
|
|
$
|
4,497
|
|
|
$
|
3,024
|
|
|
$
|
7,521
|
|
Nonperforming TDRs (1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
|
|
5
|
|
Total TDRs
|
|
$
|
4,121
|
|
|
$
|
2,886
|
|
|
$
|
7,007
|
|
|
$
|
4,502
|
|
|
$
|
3,024
|
|
|
$
|
7,526
|
|
(1) |
Included in nonperforming asset table above
|
The following table further shows the composition of our TDRs over the past five years (dollars in thousands):
|
|
December 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Commercial and industrial TDRs
|
|
$
|
3,604
|
|
|
$
|
3,375
|
|
|
$
|
3,957
|
|
|
$
|
5,797
|
|
|
$
|
6,502
|
|
Commercial real estate TDRs
|
|
|
517
|
|
|
|
1,127
|
|
|
|
1,439
|
|
|
|
2,770
|
|
|
|
3,305
|
|
Consumer TDRs
|
|
|
2,886
|
|
|
|
3,024
|
|
|
|
4,049
|
|
|
|
5,140
|
|
|
|
6,346
|
|
Total TDRs
|
|
$
|
7,007
|
|
|
$
|
7,526
|
|
|
$
|
9,445
|
|
|
$
|
13,707
|
|
|
$
|
16,153
|
|
We had a total of $7.0 million and $7.5 million of loans classified as TDRs as of December 31, 2022 and 2021, respectively. These loans may have involved the restructuring of terms to allow
customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow. These may also include loans that renewed at existing contractual rates, but below market rates for comparable
credit. For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and that cash
flows will be sufficient to support the restructured debt. An analysis is also performed to determine whether the restructured loan should be on accrual status. Generally, if the loan is on accrual at the time of restructure, it will remain
on accrual after the restructuring. In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms. After six consecutive
payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status. In situations where there is a subsequent modification or renewal and the loan is brought to market terms, including a
contractual interest rate not less than a market interest rate for new debt with similar credit risk characteristics, the TDR and impaired designations may be removed.
As with other impaired loans, an allowance for loan loss is estimated for each TDR based on the most likely source of repayment for each loan. For impaired commercial real estate loans that
are collateral dependent, the allowance is computed based on the fair value of the underlying collateral, less estimated costs to sell. For impaired commercial loans where repayment is expected from cash flows from business operations, the
allowance is computed based on a discounted cash flow computation. Certain groups of TDRs, such as residential mortgages, have common characteristics and for them the allowance is computed based on a discounted cash flow computation on the
change in weighted rate for the pool. The allowance allocations for commercial TDRs where we have reduced the contractual interest rate are computed by measuring cash flows using the new payment terms discounted at the original contractual
rate.
Allowance for loan losses: Determining the appropriate level of the allowance for loan losses is highly subjective. Timely identification of risk rating
changes within the commercial loan portfolio is key to our process of establishing an appropriate allowance balance. The internal risk rating system is discussed below.
The allowance for loan losses at December 31, 2022 was $15.3 million, a decrease of $604,000, compared to $15.9 million at December 31, 2021. The balance of the allowance for loan losses was
1.30% of total portfolio loans at December 31, 2022 compared to 1.43% of total portfolio loans at December 31, 2021. The allowance for loan losses to nonperforming loan coverage ratio remained high at 19,596% at December 31, 2022 compared to
17,271% at December 31, 2021.
The following is a summary of certain key ratios regarding allowance activity and coverage.
|
|
December 31
|
|
|
|
2022
|
|
|
2021
|
|
Ratios:
|
|
|
|
|
|
|
Net charge-offs (recoveries) to average loans outstanding - Total
|
|
|
(0.05
|
)%
|
|
|
(0.04
|
)%
|
Net charge-offs (recoveries) to average loans outstanding - Commercial Loans
|
|
|
(0.05
|
)%
|
|
|
(0.05
|
)%
|
Net charge-offs (recoveries) to average loans outstanding - Residential Mortgage Loans
|
|
|
(0.02
|
)%
|
|
|
(0.01
|
)%
|
Net charge-offs (recoveries) to average loans outstanding - Consumer Loans
|
|
|
(0.07
|
)%
|
|
|
0.05
|
%
|
Nonaccrual loans to loans outstanding at year-end
|
|
|
0.01
|
%
|
|
|
0.01
|
%
|
Allowance for loan losses to loans outstanding at year-end
|
|
|
1.30
|
%
|
|
|
1.43
|
%
|
Allowance for loan losses to nonaccrual loans at year-end
|
|
|
19,596
|
%
|
|
|
17,640
|
%
|
Allowance for loan losses to nonperforming loans at year-end
|
|
|
19,596
|
%
|
|
|
17,271
|
%
|
The continued low level of net charge-offs over the last several years has had a significant effect on the historical loss component of our allowance for loan losses computation.
The table below shows the changes in these metrics over the past five years:
(Dollars in millions)
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Commercial loans
|
|
$
|
979.3
|
|
|
$
|
936.4
|
|
|
$
|
1,217.6
|
|
|
$
|
1,098.0
|
|
|
$
|
1,082.1
|
|
Nonperforming loans
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
1.3
|
|
Other real estate owned and repo assets
|
|
|
2.3
|
|
|
|
2.3
|
|
|
|
2.5
|
|
|
|
2.7
|
|
|
|
3.4
|
|
Total nonperforming assets
|
|
|
2.4
|
|
|
|
2.4
|
|
|
|
3.0
|
|
|
|
3.0
|
|
|
|
4.7
|
|
Net charge-offs (recoveries)
|
|
|
(0.5
|
)
|
|
|
(0.5
|
)
|
|
|
2.8
|
|
|
|
(0.8
|
)
|
|
|
0.2
|
|
Total delinquencies
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.6
|
|
|
|
0.4
|
|
|
|
0.9
|
|
Nonperforming loans have been low over the past several years. At December 31, 2022, we have had net loan recoveries in thirty of the past thirty-two quarters. Perhaps even more
importantly, our total delinquencies 30 days and greater have continued to be minimal, and were just $172,000 at December 31, 2022.
The provision for loan losses was a benefit of $1.1 million for 2022 compared to a benefit of $2.1 million for 2021. The provision in each period was impacted by the levels of nonperforming
loans and net charge-off/recovery experience. We had net recoveries in 2022 totaling $521,000 compared to net recoveries of $531,000 in 2021. The ratio of net charge-offs / (recoveries) to average loans was (0.05%) for 2022 compared to
(0.04%) for 2021.
We are encouraged by the low level of charge-offs over the past several years. We do, however, recognize that future charge-offs and resulting provisions for loan losses are expected to be
impacted by the timing and extent of changes in the overall economy and the real estate markets.
Our allowance for loan losses is maintained at a level believed appropriate based upon our assessment of the probable estimated losses inherent in the loan portfolio. Our methodology for
measuring the appropriate level of allowance and related provision for loan losses relies on several key elements, which include specific allowances for loans considered impaired, general allowance for commercial loans not considered impaired
based upon applying our loan rating system, and general allocations based on historical trends for homogeneous loan groups with similar risk characteristics.
Impaired loans decreased $519,000 or 7%, to $7.0 million at December 31, 2022 compared to $7.5 million at December 31, 2021. The specific allowance for impaired loans decreased $270,000 to
$295,000, or 4.2% of total impaired loans, at December 31, 2022 compared to $565,000, or 7.5% of total impaired loans, at December 31, 2021.
Specific allowances are established on individually impaired credits where we believe it is probable that a loss may be incurred. Specific allowances are determined based on discounting
estimated cash flows over the life of the loan or based on the fair value of collateral supporting the loan. For commercial real estate loans, generally appraisals are used to estimate the fair value of the collateral and determine the
appropriate specific allowance. Estimated selling costs are also considered in the estimate. When it becomes apparent that liquidation of the collateral is the only source of repayment, the collateral shortfall is charged off rather than
carried as a specific allowance.
The general allowance (referred to as “formula allowance”) allocated to commercial loans that were not considered to be impaired was based upon the internal risk grade of such loans. We use
a loan rating method based upon an eight point system. Loans are stratified between real estate secured and non-real estate secured. The real estate secured portfolio is further stratified by the type of real estate. Each stratified portfolio
is assigned a loss allocation factor. Generally, a worse grade assigned to a loan category results in a greater allocation percentage. Changes in risk grade of loans affect the amount of the allowance allocation.
The determination of our loss factors is based upon our actual loss history by loan grade and adjusted for significant factors that, in management's judgment, affect the collectability of the
portfolio as of the analysis date. We use a rolling 18 month (6 quarter) actual net charge-off history as the base for our computation for commercial loans. The 18 month period ended December 31, 2022 reflected net recoveries for most of our
loan pools. We addressed this volatility in the qualitative factor considerations applied in our allowance computation. We also considered the extended period of improved asset quality in assessing the overall qualitative component.
We also have considered the effect of COVID-19 on our loan borrowers and our local economy. While significant stimulus and mitigation efforts were expected to soften the impact, we believed
a downgrade to our economic qualitative factor was appropriate and we added 7 basis points to this qualitative factor at March 31, 2020. Additional allocations were provided in the second, third and fourth quarters of 2020. In the first
quarter of 2021, this factor was decreased by 2 basis points in recognition of improved economic conditions but additional allocations were made to other factors for a net increase of 8 basis points in the quarter. In the second quarter 2021,
we added 20 basis points to our consumer loan portfolio qualitative factors to address the risk that economic impact payments may be masking consumer delinquency and default. We maintained these qualitative factors in the third and fourth
quarters of 2021. Reflecting improvement in our local economy, in the fourth quarter of 2021 we reduced the overall economic qualitative factor by 6 basis points.
As the economy recovered in 2022 to pre-pandemic levels and losses did not occur, we determined it appropriate to reverse some of the qualitative factors allocated. In the first quarter of
2022, we removed the 20 basis point allocation on consumer loans that was added in 2021 for economic impact payments possibly masking delinquencies. We also reduced the factor for economic conditions by 3 basis points, reduced the factor for
changes in personnel by 4 basis points and added 2 basis points for the effect of rising interest rates. In the second quarter of 2022, we added 3 basis points for the effect of rising interest rates and reduced the factor for changes in
personnel by 3 basis points. In the third quarter of 2022, we reduced the factor for credit quality trends by 2 basis points, reduced the factor for loan review quality by 1 basis point, reduced the factor for changes in lending personnel by 1
basis point, reduced the factor for external conditions by 2 basis points and increased the factor for rising interest rates by 2 basis points. We increased the factor for rising interest rates by 2 basis points in the fourth quarter of 2022.
For the year, in 2022 we removed the 20 basis point allocation on consumer loans for economic impact payments, reduced economic trends by 3 basis points, reduced credit quality trends by 2
basis points, reduced loan review quality by 1 basis point, reduced changes in personnel by 8 basis points, reduced external factors by 2 basis points and increased the effect of rising interest rates by 9 basis points.
Considering the change in our qualitative factors and changes in our commercial loan portfolio balances, the general commercial loan allowance decreased $178,000 to $12.8 million at December
31, 2022 compared to $12.9 million at December 31, 2021. The qualitative component of our allowance allocated to commercial loans was $12.7 million at December 31, 2022, down from $12.9 million at December 31, 2021.
Groups of homogeneous loans, such as residential real estate and open- and closed-end consumer loans, receive allowance allocations based on loan type. A rolling 12 month (4 quarter)
historical loss experience period was applied to residential mortgage and consumer loan portfolios. As with commercial loans that are not considered impaired, the determination of the allowance allocation percentage is based principally on our
historical loss experience. These allocations are adjusted for consideration of general economic and business conditions, credit quality and delinquency trends, collateral values, and recent loss experience for these similar pools of loans.
The homogeneous loan allowance was $2.2 million at December 31, 2022 compared to $2.4 million at December 31, 2021.
As noted above, the formula allowance allocated to commercial loans that are not considered to be impaired is calculated by applying historical loss factors to outstanding loans based on the
internal risk rating of such loans. We use a loan rating method based upon an eight point system. Loans rated a 4 or better are considered of acceptable risk. Loans rated a 5 exhibit above-normal risk to the Company and warrant a greater
level of attention by management. These loans are subject to on-going review and assessment by our Administrative Loan Committee. Loans rated a 6 or worse are considered substandard, doubtful or loss, exhibit a greater relative risk of loss
to the Company based upon the rating and warrant an active workout plan administered by our Special Asset Group.
The qualitative factors assessed and used to adjust historical loss experience reflect our assessment of the impact of economic trends, delinquency and other problem loan trends, trends in
valuations supporting underlying collateral, changes in loan portfolio concentrations, effect of changes in interest rates on loan collectability, competition and changes in internal credit administration practices have on probable losses
inherent in our loan portfolio. Qualitative adjustments are inherently subjective and there can be no assurance that these adjustments have properly identified probable losses in our loan portfolio. More information regarding the subjectivity
involved in determining the estimate of the allowance for loan losses may be found in this Item 7 of this report under the heading "Critical Accounting Policies and Estimates."
The following table shows the allocation of the allowance for loan losses by portfolio type at the dates indicated.
|
|
December 31,
|
|
|
|
2022
|
|
|
2021
|
|
(Dollars in thousands)
|
|
Allowance
Amount
|
|
|
% of
Each
Category
to Total
Loans
|
|
|
Allowance
Amount
|
|
|
% of
Each
Category
to Total
Loans
|
|
Commercial and commercial real estate
|
|
$
|
12,827
|
|
|
|
84
|
%
|
|
$
|
13,256
|
|
|
|
84
|
%
|
Residential mortgage
|
|
|
1,755
|
|
|
|
11
|
|
|
|
1,836
|
|
|
|
11
|
|
Consumer
|
|
|
703
|
|
|
|
5
|
|
|
|
797
|
|
|
|
5
|
|
Total
|
|
$
|
15,285
|
|
|
|
100
|
%
|
|
$
|
15,889
|
|
|
|
100
|
%
|
The components of the allowance for loan losses were as follows:
|
|
December 31,
|
|
|
|
2022
|
|
|
2021
|
|
(Dollars in thousands)
|
|
Balance of
Loans
|
|
|
Allowance
Amount
|
|
|
Balance of
Loans
|
|
|
Allowance
Amount
|
|
Commercial and commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired with allowance recorded
|
|
$
|
812
|
|
|
$
|
75
|
|
|
$
|
3,215
|
|
|
$
|
327
|
|
Impaired with no allowance recorded
|
|
|
3,309
|
|
|
|
—
|
|
|
|
1,287
|
|
|
|
—
|
|
Loss allocation factor on non-impaired loans
|
|
|
975,198
|
|
|
|
12,751
|
|
|
|
931,856
|
|
|
|
12,929
|
|
|
|
|
979,319
|
|
|
|
12,826
|
|
|
|
936,358
|
|
|
|
13,256
|
|
Residential mortgage and consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves on troubled debt restructurings
|
|
|
2,886
|
|
|
|
220
|
|
|
|
3,024
|
|
|
|
238
|
|
Loss allocation factor
|
|
|
195,543
|
|
|
|
2,239
|
|
|
|
169,611
|
|
|
|
2,395
|
|
Total
|
|
$
|
1,177,748
|
|
|
$
|
15,285
|
|
|
$
|
1,108,993
|
|
|
$
|
15,889
|
|
With the exception of certain TDRs, impaired commercial loans at December 31, 2022 were classified as substandard or worse per our internal risk rating system. $2.7 million of residential
mortgage TDRs were associated with programs approved by the U.S. government during 2009 to minimize the number of consumer foreclosures. These loans involved the restructuring of terms on consumer mortgages to allow customers to mitigate
foreclosure by meeting a lower loan payment requirement based upon their current cash flow. Also included in this category are certain consumer home equity loans that were restructured maturing home equity lines of credit that did not qualify
for traditional term financing. We have been actively working with our customers to reduce the risk of foreclosure using these programs. Additional information regarding impaired loans at December 31, 2022 and 2021 may be found in Item 8 of
this report in Note 3 to the Consolidated Financial Statements.
Our weighted average loan grade was 3.60 at December 31, 2021 and 3.53 at December 31, 2022. The decrease of $452,000 in reserves on commercial loans for 2022 was due to a $252,000 decrease
in specific reserves on impaired loans and a $200,000 decrease in the loss allocation factor on non-impaired loans at December 31, 2022.
Of the $15.3 million allowance at December 31, 2022, 2% related to specific allocations on impaired loans, 83% related to formula allowance on commercial loans and 14% related to general
allocations for homogeneous loans. Of the $15.9 million allowance at December 31, 2021, 4% related to specific allocations on impaired loans, 81% related to formula allowance on commercial loans and 15% related to general allocations for
homogeneous loans. Of the $15.0 million total formula based allowance for loan loss allocations at December 31, 2022, $14.9 million is from general/environmental allocations and $105,000 was driven from historical experience. Of the $15.3
million total formula based allowance for loan loss allocations at December 31, 2021, $15.3 million is from general/environmental allocations and $70,000 is driven from historical experience. The above allocations are not intended to imply
limitations on usage of the allowance. The entire allowance is available for any loan losses without regard to loan type.
More information regarding steps to address elevated levels of substandard, impaired and nonperforming loans may be found in this Item 7 of this report under the heading "Portfolio Loans and
Asset Quality" above and in Item 8 of this report in Note 3 to the Consolidated Financial Statements.
We believe our commercial portfolio is adequately diversified, with our largest commercial concentrations in Real Estate, Rental and Leasing (28.0%), followed by Manufacturing (13.4%) and
Retail Trade (11.6%).
The table below breaks down our commercial loan portfolio by industry type at December 31, 2022 and identifies the percentage of loans in each type that have a pass rating within our grading
system (4 or better) and criticized rating (5 or worse) (dollars in thousands):
|
|
December 31, 2022
|
|
|
|
Total
|
|
|
Percent of
Total Loans
|
|
|
Percent Grade 4 or
Better
|
|
|
Percent Grade 5 or
Worse
|
|
Industry:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural Products
|
|
$
|
41,194
|
|
|
|
4.21
|
%
|
|
|
92.04
|
%
|
|
|
7.96
|
%
|
Mining and Oil Extraction
|
|
|
406
|
|
|
|
0.04
|
%
|
|
|
87.93
|
%
|
|
|
12.07
|
%
|
Utilities
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Construction
|
|
|
80,670
|
|
|
|
8.24
|
%
|
|
|
97.68
|
%
|
|
|
2.32
|
%
|
Manufacturing
|
|
|
131,376
|
|
|
|
13.42
|
%
|
|
|
96.55
|
%
|
|
|
3.45
|
%
|
Wholesale Trade
|
|
|
64,377
|
|
|
|
6.57
|
%
|
|
|
100.00
|
%
|
|
|
0.00
|
%
|
Retail Trade
|
|
|
113,484
|
|
|
|
11.59
|
%
|
|
|
99.95
|
%
|
|
|
0.05
|
%
|
Transportation and Warehousing
|
|
|
62,825
|
|
|
|
6.42
|
%
|
|
|
99.73
|
%
|
|
|
0.27
|
%
|
Information
|
|
|
568
|
|
|
|
0.06
|
%
|
|
|
5.99
|
%
|
|
|
94.01
|
%
|
Finance and Insurance
|
|
|
47,940
|
|
|
|
4.90
|
%
|
|
|
100.00
|
%
|
|
|
0.00
|
%
|
Real Estate and Rental and Leasing
|
|
|
274,151
|
|
|
|
27.99
|
%
|
|
|
99.95
|
%
|
|
|
0.05
|
%
|
Professional, Scientific and Technical Services
|
|
|
5,698
|
|
|
|
0.58
|
%
|
|
|
96.51
|
%
|
|
|
3.49
|
%
|
Management of Companies and Enterprises
|
|
|
7,049
|
|
|
|
0.72
|
%
|
|
|
100.00
|
%
|
|
|
0.00
|
%
|
Administrative and Support Services
|
|
|
21,703
|
|
|
|
2.22
|
%
|
|
|
97.99
|
%
|
|
|
2.01
|
%
|
Education Services
|
|
|
5,268
|
|
|
|
0.54
|
%
|
|
|
100.00
|
%
|
|
|
0.00
|
%
|
Health Care and Social Assistance
|
|
|
34,486
|
|
|
|
3.52
|
%
|
|
|
100.00
|
%
|
|
|
0.00
|
%
|
Arts, Entertainment and Recreation
|
|
|
3,675
|
|
|
|
0.38
|
%
|
|
|
91.65
|
%
|
|
|
8.35
|
%
|
Accommodations and Food Services
|
|
|
52,322
|
|
|
|
5.34
|
%
|
|
|
86.71
|
%
|
|
|
13.29
|
%
|
Other Services
|
|
|
32,127
|
|
|
|
3.28
|
%
|
|
|
100.00
|
%
|
|
|
0.00
|
%
|
Public Administration
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Private Households
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Total commercial loans
|
|
$
|
979,319
|
|
|
|
100.00
|
%
|
|
|
98.11
|
%
|
|
|
1.89
|
%
|
Although we believe our allowance for loan losses has captured the losses that are probable in our portfolio as of December 31, 2022, there can be no assurance that all losses have been
identified or that the allowance is sufficient.
Premises and Equipment: Premises and equipment totaled $40.3 million at December 31, 2022 compared to $41.8 million at December 31, 2021, down $1.5
million, as capital additions were more than offset by depreciation of current property during 2022.
Bank owned life insurance (BOLI): The Bank has purchased life insurance policies on certain officers. BOLI is recorded at its currently realizable cash
surrender value and totaled $53.3 million at December 31, 2022 compared to $52.5 million at December 31, 2021.
Deposits and Other Borrowings: Total deposits increased $37.2 million to $2.62 billion at December 31, 2022, as compared to $2.58 billion at December 31,
2021. Noninterest checking account balances decreased $51.2 million in 2022. Interest bearing demand account balances increased $24.3 million and savings and money market account balances increased $56.9 million in 2022 while our certificates
of deposit (primarily short-term) increased by $7.2 million in 2022. We believe our success in maintaining and increasing the balances of personal and business checking and savings accounts was primarily attributable to our focus on quality
customer service, the desire of customers to deal with a local bank, the convenience of our branch network and the breadth and depth of our product line.
Noninterest bearing demand accounts comprised 31% of total deposits at December 31, 2022 compared to 34% of total deposits at December 31, 2021. Because of the generally low rates paid on
interest bearing account alternatives, in recent years many of our business customers chose to keep their balances in these more liquid noninterest bearing demand account types. We started to see some shifting to higher paying interest
accounts during 2022. Interest bearing demand, money market and savings accounts comprised 64% of total deposits at December 31, 2022 and 62% at December 31, 2021. Time accounts as a percentage of total deposits were 4% at December 31, 2022
and 3% at December 31, 2021.
Borrowed funds totaled $30.0 million at December 31, 2022 comprised of $30.0 million in Federal Home Loan Bank advances. Borrowed funds totaled $85.0 million at December 31, 2021 including
$85.0 million of Federal Home Loan Bank advances. The decrease compared to December 31, 2021 was due to the FHLB exercising its put options on a $25.0 million advance carrying a rate of 0.01% and a $10.0 million advance carrying a rate of
0.45% in the second quarter of 2022. In addition, during the second quarter of 2022, we prepaid $20.0 million in FHLB advances, with interest rates ranging from 2.91% to 3.05%. Prepayment fees totaled $87,000 and were included in interest
expense in the second quarter 2022. Paying these advances off early will save us over $650,000 in annual interest expense, net of the prepayment fees incurred.
Information regarding our off-balance sheet commitments may be found in Item 8 of this report in Note 17 to the Consolidated Financial Statements.
CAPITAL RESOURCES
Total shareholders’ equity decreased by $7.0 million from December 31, 2021 to December 31, 2022. Shareholders’ equity was increased by $34.7 million of net income in 2022, partially offset
by cash dividends of $10.9 million, or $0.32 per share. Shareholders’ equity decreased by $31.3 million in 2022 as a result of a negative swing in accumulated other comprehensive income due to the effect of rising interest rates on the fair
value of our available for sale securities portfolio. As of December 31, 2022, the Bank was categorized as “well capitalized” under applicable regulatory guidelines.
Our regulatory capital ratios (on a consolidated basis) continue to significantly exceed the levels required to be categorized as “well capitalized” according to the requirements specified by
the rules implementing Basel III.
The following table shows our regulatory capital ratios (on a consolidated basis) for the past three years.
|
|
December 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Total capital to risk weighted assets
|
|
|
17.9
|
%
|
|
|
18.3
|
%
|
|
|
18.3
|
%
|
Common Equity Tier 1 to risk weighted assets
|
|
|
16.9
|
|
|
|
17.2
|
|
|
|
15.8
|
|
Tier 1 capital to risk weighted assets
|
|
|
16.9
|
|
|
|
17.2
|
|
|
|
17.1
|
|
Tier 1 capital to average assets
|
|
|
9.7
|
|
|
|
8.7
|
|
|
|
9.9
|
|
Our Board of Directors declared quarterly cash dividends to common shareholders beginning with the first quarter of 2014, and each subsequent quarter in 2014 through 2022. The declaration
and payment of future dividends to common shareholders will be considered by the Board of Directors in its discretion and will depend on a number of factors, including our financial condition and anticipated profitability.
Capital sources include, but are not limited to, additional private and public common stock offerings, preferred stock offerings and subordinated debt.
Macatawa Bank:
The Bank was categorized as "well capitalized" at December 31, 2022 and 2021 according to the requirements specified by the rules implementing Basel III. The following table shows the Bank’s
regulatory capital ratios for the past three years.
|
|
December 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Average equity to average assets
|
|
|
8.3
|
%
|
|
|
8.8
|
%
|
|
|
10.2
|
%
|
Total capital to risk weighted assets
|
|
|
17.4
|
|
|
|
17.8
|
|
|
|
17.8
|
|
Common Equity Tier 1 to risk weighted assets
|
|
|
16.4
|
|
|
|
16.7
|
|
|
|
16.7
|
|
Tier 1 capital to risk weighted assets
|
|
|
16.4
|
|
|
|
16.7
|
|
|
|
16.7
|
|
Tier 1 capital to average assets
|
|
|
9.4
|
|
|
|
8.4
|
|
|
|
9.6
|
|
LIQUIDITY
Liquidity of Macatawa Bank: The liquidity of a financial institution reflects its ability to manage a variety of sources and uses of funds. Our Consolidated
Statements of Cash Flows categorize these sources and uses into operating, investing and financing activities. We primarily focus on developing access to a variety of borrowing sources to supplement our deposit gathering activities and provide
funds for our investment and loan portfolios. Our sources of liquidity include our borrowing capacity with the Federal Reserve Bank's discount window, the Federal Home Loan Bank, federal funds purchased lines of credit and other secured
borrowing sources with our correspondent banks, loan payments by our borrowers, maturity and sales of our securities available for sale, growth of our deposits, federal funds sold and other short-term investments, and the various capital
resources discussed above.
Liquidity management involves the ability to meet the cash flow requirements of our customers. Our customers may be either borrowers with credit needs or depositors wanting to withdraw funds.
Our liquidity management involves periodic monitoring of our assets considered to be liquid and illiquid, and our funding sources considered to be core and non-core and short-term (less than 12 months) and long-term. We have established
parameters that monitor, among other items, our level of liquid assets to short-term liabilities, our level of non-core funding reliance and our level of available borrowing capacity. We maintain a diversified wholesale funding structure and
actively manage our maturing wholesale sources to reduce the risk to liquidity shortages. We have also developed a contingency funding plan to stress test our liquidity requirements arising from certain events that may trigger liquidity
shortages, such as rapid loan growth in excess of normal growth levels or the loss of deposits and other funding sources under extreme circumstances.
We maintain a non-core funding dependency ratio below our peer group average and have had no brokered deposits on our balance sheet since before December 2012. At December 31, 2022, the Bank
held $704.0 million of federal funds sold and other short-term investments as well as $495.7 million of unpledged securities available for sale. In addition, the Bank’s available borrowing capacity from correspondent banks was approximately
$307.9 million as of December 31, 2022.
In the normal course of business, we enter into certain contractual obligations, including obligations which are considered in our overall liquidity management.
In addition to normal loan funding, we also maintain liquidity to meet customer financing needs through unused lines of credit, unfunded loan commitments and standby letters of credit. The
level and fluctuation of these commitments is also considered in our overall liquidity management. At December 31, 2022, we had a total of $745.7 million in unused lines of credit, $77.4 million in unfunded loan commitments and $13.5 million
in standby letters of credit.
Liquidity of Holding Company: The primary sources of liquidity for the Company are dividends from the Bank, existing cash resources and the capital markets
if the need to raise additional capital arises. Banking regulations and the laws of the State of Michigan in which our Bank is chartered limit the amount of dividends the Bank may declare and pay to the Company in any calendar year. Under the
state law limitations, the Bank is restricted from paying dividends to the Company in excess of retained earnings. In 2021, the Bank paid dividends to the Company totaling $33.1 million. In the same period, the Company paid dividends to its
shareholders totaling $10.9 million. In 2022, the Bank paid dividends to the Company totaling $11.9 million. In the same period, the Company paid dividends to its shareholders totaling $10.9 million. The Company retained the remaining
balance in each period for general corporate purposes. At December 31, 2022, the Bank had a retained earnings balance of $106.6 million.
During 2022 and 2021, the Company received payments from the Bank totaling $6.7 million and $8.0 million, respectively, representing the Bank’s intercompany tax liability for the 2022 and
2021 tax years, respectively, in accordance with the Company’s tax allocation agreement.
The Company’s cash balance at December 31, 2022 was $8.1 million. The Company believes that it has sufficient liquidity to meet its cash flow obligations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the financial statements and future results could differ. The allowance for loan losses, other real estate owned valuation, loss contingencies and income taxes are
deemed critical due to the required level of management judgment and the use of estimates, making them particularly subject to change.
Our methodology for determining the allowance for loan losses and the related provision for loan losses is described above in the "Allowance for Loan Losses" discussion. This area of
accounting requires significant judgment due to the number of factors which can influence the collectability of a loan. Unanticipated changes in these factors could significantly change the level of the allowance for loan losses and the
related provision for loan losses. Although, based upon our internal analysis, and in our judgment, we believe that we have provided an adequate allowance for loan losses, there can be no assurance that our analysis has properly identified all
of the probable losses in our loan portfolio. As a result, we could record future provisions for loan losses that may be significantly different than the levels that we recorded in 2022.
Assets acquired through or instead of foreclosure, primarily other real estate owned, are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost
basis. New real estate appraisals are generally obtained at the time of foreclosure and are used to establish fair value. If fair value declines, a valuation allowance is recorded through expense. Estimating the initial and ongoing fair
value of these properties involves a number of factors and judgments including holding time, costs to complete, holding costs, discount rate, absorption and other factors.
Loss contingencies are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. This, too, is an accounting area that
involves significant judgment. Although, based upon our judgment, internal analysis, and consultations with legal counsel we believe that we have properly accounted for loss contingencies, future changes in the status of such contingencies
could result in a significant change in the level of contingent liabilities and a related impact to operating earnings.
Our accounting for income taxes involves the valuation of deferred tax assets and liabilities primarily associated with differences in the timing of the recognition of revenues and expenses
for financial reporting and tax purposes. At December 31, 2022, we had gross deferred tax assets of $11.9 million and gross deferred tax liabilities of $2.2 million resulting in a net deferred tax asset of $9.7 million. Accounting standards
require that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a "more likely than not" standard. With the positive results in 2022
and positive future projections, we concluded at December 31, 2022 that no valuation allowance on our net deferred tax asset was required. Changes in tax laws, changes in tax rates, changes in ownership and our future level of earnings can
impact the ultimate realization of our net deferred tax asset.