Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
Some matters discussed in this Quarterly Report on Form 10-Q may be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and therefore may involve risks, uncertainties and other factors which may cause the Company’s actual results to be materially different from the results expressed or implied by the Company’s forward-looking statements. These statements generally appear with words such as “anticipate,” “believe,” “estimate,” “may,” “intend,” and “expect.” Although management believes that the assumptions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: the credit exposure of certain loan products and other components of our business that could be impacted by the changing economic conditions; changes in monetary, fiscal or tax policy to address the changing economic conditions including interest rate policies of the Federal Reserve Board, any of which could cause us to incur additional loan losses and adversely affect our results of operations in the future; economic conditions (both generally and in the markets where the Company operates) including unemployment levels, energy prices, inflation, supply chain issues, a decline in housing prices and the risk of a recession or slowed economic growth in the United States economy; the continuing impact of the changing economic conditions on our employees and customers; increasing geopolitical instability, including the war between Russia and Ukraine; the success of our efforts to mitigate the impact of the changing economic conditions; competition from other providers of financial services offered by the Company; changes in government regulation and legislation; the impact of any failure by the U.S. government to increase the debt ceiling or any federal government shutdown; changes in interest rates and interest rate fluctuations; material unforeseen changes in the financial stability and liquidity of the Company’s credit customers; risks associated with concentrations in real estate related loans; changes in accounting standards and interpretations; changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses; the soundness of other financial institutions, including the impact from recent bank failures; and other risks as may be detailed from time to time in the Company’s filings with the Securities and Exchange Commission, all of which are difficult to predict and which may be beyond the control of the Company. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the worsening of the global business and economic environment. The Company undertakes no obligation to revise forward-looking statements to reflect events or changes after the date of this discussion or to reflect the occurrence of unanticipated events.
Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, whether as a result of new information, future developments or otherwise, except as may be required by law.
The following discussion explains the significant factors affecting the Company’s operations and financial position for the periods presented. The discussion should be read in conjunction with the Company’s financial statements and the notes related thereto which appear or that are referenced to elsewhere in this report, and with the audited consolidated financial statements and accompanying notes included in the Company’s 2022 Annual Report on Form 10-K. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.
The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Company’s financial statements. Actual results may differ from these estimates under different assumptions or conditions. This discussion and analysis includes management’s insight of the Company’s financial condition and results of operations of Oak Valley Bancorp and its subsidiary. Unless otherwise stated, the “Company” refers to the consolidated entity, Oak Valley Bancorp, while the “Bank” refers to Oak Valley Community Bank.
Introduction
Oak Valley Bancorp operates Oak Valley Community Bank as a community bank in the general commercial banking business, with our primary market encompassing the California Central Valley around Oakdale and Modesto, and the Eastern Sierras. As such, unless otherwise noted, all references are about Oak Valley Bancorp.
Oak Valley Community Bank (the “Bank”) is an insured bank under the Federal Deposit Insurance Act and is a member of the Federal Reserve. Since its formation, the Bank has provided basic banking services to individuals and business enterprises in Oakdale, California and the surrounding areas. The focus of the Bank is to offer a range of commercial banking services designed for both individuals and small to medium-sized businesses in the Central Valley and the Eastern Sierras.
The Bank offers a complement of business checking and savings accounts for its business customers. The Bank also offers commercial and real estate loans, as well as lines of credit. Real estate loans are generally of a short-term nature for both residential and commercial purposes. Longer-term real estate loans are generally made with adjustable interest rates and contain normal provisions for acceleration. In addition, the Bank offers traditional residential mortgages through a third party.
The Bank also offers other services for both individuals and businesses including online banking, remote deposit capture, merchant services, night depository, extended hours, traveler’s checks, wire transfer of funds, note collection, and automated teller machines in a national network. The Bank does not currently offer international banking or trust services although the Bank may make such services available to the Bank’s customers through financial institutions with which the Bank has correspondent banking relationships. The Bank does not offer stock transfer services, nor does it directly issue credit cards.
Critical Accounting Estimates
Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation and uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. We consider an accounting estimate to be critical to our financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, (ii) management could have applied different assumptions during the reported period, and (iii) changes in the accounting estimate are reasonably likely to occur in the future and could have a material impact on our financial statements. Management has determined the following accounting estimates and related policies to be critical:
Goodwill Impairment - The Company applies a qualitative analysis of conditions in order to determine if it is more likely than not that the carrying value is impaired. In the event that the qualitative analysis suggests that the carrying value of goodwill may be impaired, the Company uses several quantitative valuation methodologies in evaluating goodwill for impairment that includes assumptions and estimates made concerning the future earnings potential of the organization, and a market-based approach that looks at values for organizations of comparable size, structure and business model.
Estimates of fair value are based on a complex model using, among other things, estimated cash flows and industry pricing multiples. The Company tests its goodwill for impairment annually as of December 31 (the Measurement Date), and quarterly if a triggering event causes concern of a possible goodwill impairment charge. At each Measurement Date, the Company, in accordance with ASC 350-20-35-3, evaluates, based on the weight of evidence, the significance of all qualitative factors to determine whether it is more likely than not that the fair value of each of the reporting units is less than its carrying amount.
The assessment of qualitative factors at the most recent Measurement Date (December 31, 2022), indicated that it was not more likely than not that impairment existed; as a result, no further testing was performed.
Allowance for credit Losses - Credit risk is inherent in the business of lending and making commercial loans. Accounting for our allowance for credit losses involves significant judgment and assumptions by management and is based on historical data as well as reasonable and supportable forecasts of future events. At least on a quarterly basis, our management reviews the methodology and adequacy of allowance for credit losses and reports its assessment to the Board of Directors for its review and approval.
The allowance for credit losses is an estimate dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loans, qualitative factors, the valuation of problem loans and the general economic conditions in our market area. See Note 2 and Note 4 to the consolidated financial statements, and the “Provision for Credit Losses” and “Allowance for Credit Losses” sections of this discussion and analysis for more information on the establishment of the Allowance for Credit Losses and the implementation of CECL.
Income Taxes - Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled using the liability method. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
We file income tax returns in the U.S. federal jurisdiction, and the State of California. With few exceptions, we are no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years before 2018.
Fair Value Measurements - We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available for sale, derivatives, and loans held for sale, if any, are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record certain assets at fair value on a non-recurring basis, such as certain impaired loans held for investment and securities held to maturity that are other-than-temporarily impaired. These non-recurring fair value adjustments typically involve write-downs of individual assets due to application of lower-of-cost or market accounting.
We have established and documented a process for determining fair value. We maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Whenever there is no readily available market data, management uses its best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties and the application of management's judgment. As a result, if other assumptions had been used, our recorded earnings or disclosures could have been materially different from those reflected in these financial statements. For detailed information on our use of fair value measurements and our related valuation methodologies, see Note 5 to the Consolidated Financial Statements Item 1 of this report.
Overview of Results of Operations and Financial Condition
The purpose of this summary is to provide an overview of the items that management focuses on when evaluating the condition of the Company and its success in implementing its business and shareholder value strategies. The Company’s business strategy is to operate the Bank as a well-capitalized, profitable and independent community-oriented bank. The Company’s shareholder value strategy has three major objectives: (1) enhancing shareholder value; (2) making its retail banking franchise more valuable; and (3) efficiently utilizing its capital.
Management believes the following were important factors in the Company’s performance during the three-month period ended March 31, 2023:
|
• |
The Company recognized net income of $9,225,000 for the three-month period ended March 31, 2023, as compared to $2,369,000 for the same period in 2022. The first quarter net income increases were mainly due to strong growth in our loan and investment portfolios, higher yields on earning assets and a reversal of credit loss provisions. |
|
• |
The Company recognized a credit loss provision reversal of $460,000 during the three-month period ended March 31, 2023, as compared to no provisions during the same period of 2022. The reversal during 2023 was related to improvements in credit quality indicators as computed by our internal loan-risk model. |
|
• |
Net interest income increased $8,585,000 or 78.3% for the three-month period ended March 31, 2023, compared to the same period in 2022. The net interest income increase was mainly due to growth and higher yields on earning assets. |
|
• |
Non-interest income increased by $487,000 or 41.7% for the three-month period ended March 31, 2023, as compared to the same period in 2022. The increase was primarily due to fair value changes on equity securities, and a gain on sale of available-for-sale securities. |
|
• |
Non-interest expense increased by $635,000 or 7.0% for the three-month period ended March 31, 2023, as compared to the same period in 2022. The increase was primarily due to staffing increases and overhead related to servicing the growing loan and deposit portfolios. |
|
• |
Total assets decreased $27,672,000 or 1.4%, total net loans increased by $11,121,000 or 1.2% and investment securities increased by $5,187,000 or 1.0% in each case from December 31, 2022 to March 31, 2023, while deposits decreased by $45,121,000 or 2.5% for the same period. Consequently, cash and cash equivalent balances decreased by $40,230,000 or 9.4%. |
Income Summary
For the three-month period ended March 31, 2023, the Company recorded net income of $9,225,000, representing an increase of $6,856,000, as compared to the same period in 2022. Return on average assets (annualized) was 1.93% for the three-months ended March 31, 2023, as compared to 0.50% for the same period in 2022. Annualized return on average common equity was 28.36% for the three-months ended March 31, 2023, as compared to 6.84% for the same period in 2022. Net income before provisions for income taxes increased by $8,897,000 for the three-month period ended March 31, 2023, from the same period in 2022. The income statement components of these variances are as follows:
Pre-Tax Income Variance Summary:
(In thousands) |
|
Effect on Pre-Tax Income |
|
|
|
Increase (Decrease) |
|
|
|
Three Months Ended |
|
|
|
March 31, 2023 |
|
Change from 2022 to 2023 in: |
|
|
|
|
Net interest income |
|
$ |
8,585 |
|
Provision for credit losses |
|
|
460 |
|
Non-interest income |
|
|
487 |
|
Non-interest expense |
|
|
(635 |
) |
Change in net income before income taxes |
|
$ |
8,897 |
|
These variances will be explained in the discussion below.
Net Interest Income
Net interest income is the largest source of the Company’s operating income. For the three-month period ended March 31, 2023, net interest income was $19,543,000, which represents an increase of $3,476,000 or 26.1% and $3,437,000 or 9.2%, from the comparable periods in 2022. The increase was due to earning asset growth within our loan and investment portfolios, as compared to the comparable 2022 period. In addition, the FOMC rate increases that began in March 2022 have had a positive impact on earning asset yields. The net interest income increase includes a reduction in interest and fees on PPP loans from $431,000 during the first three months of 2022 to $34,000 during the same period of 2023.
The net interest margin (net interest income as a percentage of average interest earning assets) was 4.39% for the three-month period ended March 31, 2023, as compared to 2.51% for the same period in 2022. The increase in net interest margin is primarily due to the positive impact of FOMC rate increases on our earning asset yields, combined with growth of our loan and investment portfolios. The earning asset yield increased by 191 basis points for the three-month period ended March 31, 2023, as compared to the same period of 2022. The upward trend during the first quarter was due to the deployment of lower yielding cash equivalent balances into the loan and investment security portfolios and the positive impact of the recent FOMC rate increases.
The cost of funds on interest-bearing liabilities increased by 8 basis points to 0.17% for the three-month period of 2023, as compared to the same period in 2022. The current rising rate environment is beginning to have a nominal impact on our cost of funds. The Company has increased rates on certain accounts and deposit products in order to remain competitive to our peer group and to maintain current liquidity levels, which remains at a high level. Our cost of funds on total deposits during the first quarter was 0.10%, which is still relatively low and further contributed to our strong net interest margin.
The following tables show the relative impact of changes in average balances of interest earning assets and interest-bearing liabilities, and interest rates earned and paid by the Company on those assets and liabilities for the three-month periods ended March 31, 2023 and 2022:
Net Interest Analysis
|
|
Three months ended |
|
|
Three months ended |
|
|
|
March 31, 2023 |
|
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
Avg |
|
|
|
|
|
|
|
|
Avg |
|
|
|
|
|
|
Interest |
|
|
Rate/ |
|
|
|
|
|
Interest |
|
|
Rate/ |
|
(in thousands) |
|
Average |
|
|
Income / |
|
|
Yield |
|
|
Average |
|
|
Income / |
|
|
Yield |
|
|
|
Balance |
|
|
Expense |
|
|
(5) |
|
|
Balance |
|
|
Expense |
|
|
(5) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans (1) (2) |
|
$ |
918,099 |
|
|
$ |
10,491 |
|
|
|
4.63 |
% |
|
$ |
847,994 |
|
|
$ |
9,143 |
|
|
|
4.37 |
% |
Investment securities (2) |
|
|
563,495 |
|
|
|
5,766 |
|
|
|
4.15 |
% |
|
|
306,690 |
|
|
|
2,110 |
|
|
|
2.79 |
% |
Federal funds sold |
|
|
25,059 |
|
|
|
288 |
|
|
|
4.66 |
% |
|
|
24,174 |
|
|
|
10 |
|
|
|
0.17 |
% |
Interest-earning deposits |
|
|
361,600 |
|
|
|
4,112 |
|
|
|
4.61 |
% |
|
|
642,101 |
|
|
|
256 |
|
|
|
0.16 |
% |
Total interest-earning assets |
|
|
1,868,253 |
|
|
|
20,657 |
|
|
|
4.48 |
% |
|
|
1,820,959 |
|
|
|
11,519 |
|
|
|
2.57 |
% |
Total noninterest earning assets |
|
|
72,879 |
|
|
|
|
|
|
|
|
|
|
|
112,833 |
|
|
|
|
|
|
|
|
|
Total assets |
|
|
1,941,132 |
|
|
|
|
|
|
|
|
|
|
|
1,933,792 |
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning DDA |
|
|
499,108 |
|
|
|
210 |
|
|
|
0.17 |
% |
|
|
446,906 |
|
|
|
94 |
|
|
|
0.09 |
% |
Money market deposits |
|
|
402,739 |
|
|
|
195 |
|
|
|
0.20 |
% |
|
|
411,677 |
|
|
|
104 |
|
|
|
0.10 |
% |
Savings deposits |
|
|
162,340 |
|
|
|
22 |
|
|
|
0.05 |
% |
|
|
160,930 |
|
|
|
21 |
|
|
|
0.05 |
% |
Time deposits $250,000 and under |
|
|
20,000 |
|
|
|
15 |
|
|
|
0.30 |
|
|
|
22,185 |
|
|
|
14 |
|
|
|
0.26 |
% |
Time deposits over $250,000 |
|
|
15,163 |
|
|
|
10 |
|
|
|
0.27 |
% |
|
|
18,427 |
|
|
|
11 |
|
|
|
0.24 |
% |
Total interest-bearing liabilities |
|
|
1,099,350 |
|
|
|
452 |
|
|
|
0.17 |
% |
|
|
1,060,125 |
|
|
|
244 |
|
|
|
0.09 |
% |
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
|
681,089 |
|
|
|
|
|
|
|
|
|
|
|
718,256 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
28,761 |
|
|
|
|
|
|
|
|
|
|
|
15,031 |
|
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities |
|
|
709,850 |
|
|
|
|
|
|
|
|
|
|
|
733,287 |
|
|
|
|
|
|
|
|
|
Shareholders' equity |
|
|
131,932 |
|
|
|
|
|
|
|
|
|
|
|
140,380 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity |
|
$ |
1,941,132 |
|
|
|
|
|
|
|
|
|
|
$ |
1,933,792 |
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
20,205 |
|
|
|
|
|
|
|
|
|
|
$ |
11,275 |
|
|
|
|
|
Net interest spread (3) |
|
|
|
|
|
|
|
|
|
|
4.32 |
% |
|
|
|
|
|
|
|
|
|
|
2.47 |
% |
Net interest margin (4) |
|
|
|
|
|
|
|
|
|
|
4.39 |
% |
|
|
|
|
|
|
|
|
|
|
2.51 |
% |
(1) Loan fees have been included in the calculation of interest income.
(2) Yields and interest income on municipal securities and loans have been adjusted to their fully-taxable equivalents, based on a federal marginal tax rate of 21.0%.
(3) Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
(4) Represents net interest income as a percentage of average interest-earning assets.
(5) Annual interest rates are computed by dividing the interest income/expense by the number of days in the period multiplied by 365.
Shown in the following tables are the relative impacts on net interest income of changes in the average outstanding balances (volume) of earning assets and interest-bearing liabilities and the rates earned and paid by the Company on those assets and liabilities for the three-month periods ended March 31, 2023 and 2022. Changes in interest income and expense that are not attributable specifically to either rate or volume are allocated to the rate column below.
Rate / Volume Variance Analysis
|
|
For the Three Months Ended March 31, 2023, |
|
|
|
Compared to March 31, 2022 |
|
|
|
Increase (Decrease) |
|
|
|
in interest income and expense |
|
(in thousands) |
|
due to changes in: |
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans (1) (2) |
|
$ |
756 |
|
|
$ |
592 |
|
|
$ |
1,348 |
|
Investment securities (2) |
|
|
1,767 |
|
|
|
1,889 |
|
|
|
3,656 |
|
Federal funds sold |
|
|
0 |
|
|
|
278 |
|
|
|
278 |
|
Interest-earning deposits |
|
|
(111 |
) |
|
|
3,967 |
|
|
|
3,856 |
|
Total interest income |
|
$ |
2,412 |
|
|
$ |
6,726 |
|
|
$ |
9,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning DDA |
|
$ |
11 |
|
|
$ |
105 |
|
|
$ |
116 |
|
Money market deposits |
|
|
(2 |
) |
|
|
93 |
|
|
|
91 |
|
Savings deposits |
|
|
0 |
|
|
|
1 |
|
|
|
1 |
|
Time deposits $250,000 and under |
|
|
(1 |
) |
|
|
2 |
|
|
|
1 |
|
Time deposits over $250,000 |
|
|
(2 |
) |
|
|
1 |
|
|
|
(1 |
) |
Total interest expense |
|
$ |
6 |
|
|
$ |
202 |
|
|
$ |
208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
$ |
2,406 |
|
|
$ |
6,524 |
|
|
$ |
8,930 |
|
(1) Loan fees have been included in the calculation of interest income.
(2) Interest income on municipal securities and loans has been adjusted to their fully-taxable equivalents, based on a federal marginal tax rate of 21.0%.
The table above reflects an increase of $2,406,000 in net interest income due to changes in volume combined with the overall change in mix of balances and growth in the loan and investment portfolios during the first quarter of 2023, as compared to the same period of 2022. Changes in earning asset yields and rates on interest-bearing liabilities resulted in an increase of $6,524,000 to net interest income, over the same period. This increase was mainly due to the positive impact of recent FOMC rate increases on our earning asset yields, and investment security purchases throughout 2022 that had higher yields as compared to our portfolio in the first quarter of 2022.
Provision for Credit Losses
The Company makes provisions for credit losses when required to bring the total allowance for credit losses to a level deemed appropriate for the level of risk in the loan portfolio. At least quarterly, management conducts an assessment of the overall quality of the loan portfolio and general economic trends in the local market. The determination of the appropriate level for the allowance is based on that review, considering such factors as historical experience, the volume and type of lending conducted, the amount of and identified potential loss associated with specific non-performing loans, regulatory policies, general economic conditions, and other factors, including reasonable and supportable forecasts, related to the collectability of loans in the portfolio.
The Company recorded a credit loss provision reversal of $460,000 during the three-month period ended March 31, 2023, as compared to no provisions during the same period of 2022. The $460,000 reversal recorded during the first quarter of 2023 was consistent with the output of our CECL internal credit risk model, and was mainly due to improvements in various credit quality indicators that are factored into the model, as credit quality remained strong with non-accrual loans remaining at a zero balance throughout the quarter ending March 31, 2023. Management will continue to closely monitor the credit risks to our loan portfolio and may need to make qualitative adjustments depending on factors that may impact the economy and the financial condition of our borrowers.
Non-Interest Income
Non-interest income represents service charges on deposit accounts and other non-interest related charges and fees, including fees from mortgage commissions and investment service fee income. For the three-month period ended March 31, 2023, non-interest income was $1,655,000, representing an increase of $487,000 or 41.7%, compared to the same period in 2022.
The following tables show the major components of non-interest income:
(in thousands) |
|
For the Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
Service charges on deposits |
|
$ |
416 |
|
|
$ |
376 |
|
|
$ |
40 |
|
|
|
10.6 |
% |
Debit card transaction fee income |
|
|
405 |
|
|
|
413 |
|
|
|
(8 |
) |
|
|
-1.9 |
% |
Earnings on cash surrender value of life insurance |
|
|
189 |
|
|
|
182 |
|
|
|
7 |
|
|
|
3.8 |
% |
Mortgage commissions |
|
|
9 |
|
|
|
35 |
|
|
|
(26 |
) |
|
|
-74.3 |
% |
Gains on sales of available-for-sale securities |
|
|
143 |
|
|
|
0 |
|
|
|
143 |
|
|
|
0.0 |
% |
Other income |
|
|
493 |
|
|
|
162 |
|
|
|
331 |
|
|
|
204.3 |
% |
Total non-interest income |
|
$ |
1,655 |
|
|
$ |
1,168 |
|
|
$ |
487 |
|
|
|
41.7 |
% |
Service charges on deposits increased by $40,000 for the three-months ended March 31, 2023, compared to the same period in 2022. The increase was due to growth of our core customer base, which resulted in higher service fee and overdraft fee income related to servicing deposit accounts.
Debit card transaction fee income decreased by $8,000 for the three-months ended March 31, 2023, compared to the same period in 2022. The decrease is attributable to normal spending fluctuations that occur in business and consumer deposit accounts. Overall, there has been a trend of higher electronic payment methods beginning in 2020, amid the COVID-19 pandemic.
Earnings on cash surrender value of life insurance increased by $7,000 for the three-months ended March 31, 2023, compared to the same period in 2022, corresponding to higher yields earned in 2023.
Mortgage commissions decreased by $26,000 for the three-months ended March 31, 2023, as compared to the same period of 2022, as the demand for home purchases and refinancing has decreased from last year due in part to higher interest rates.
Other income increased by $331,000 for the three-month period ended March 31, 2023, as compared to the same period of 2022, mainly due to a positive change of $228,000 in the fair value of one equity security, and a gain of $143,000 on the sale of available-for-sale investment securities that was recorded during the first quarter of 2023.
Non-Interest Expense
Non-interest expense represents salaries and benefits, occupancy expenses, professional expenses, outside services, and other miscellaneous expenses necessary to conduct business.
The following tables show the major components of non-interest expenses:
(in thousands) |
|
For the Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
Salaries and employee benefits |
|
$ |
6,439 |
|
|
$ |
5,676 |
|
|
$ |
763 |
|
|
|
13.4 |
% |
Occupancy expenses |
|
|
1,187 |
|
|
|
1,035 |
|
|
|
152 |
|
|
|
14.7 |
% |
Data processing fees |
|
|
612 |
|
|
|
559 |
|
|
|
53 |
|
|
|
9.5 |
% |
Regulatory assessments (FDIC & DFPI) |
|
|
195 |
|
|
|
261 |
|
|
|
(66 |
) |
|
|
-25.3 |
% |
Other operating expenses |
|
|
1,324 |
|
|
|
1,591 |
|
|
|
(267 |
) |
|
|
-16.8 |
% |
Total non-interest expense |
|
$ |
9,757 |
|
|
$ |
9,122 |
|
|
$ |
635 |
|
|
|
7.0 |
% |
Non-interest expenses increased by $635,000 or 7.0% for the three-months ended March 31, 2023, as compared to the same period of 2022. Salaries and employee benefits increased $763,000 for the three-months ended March 31, 2023, as compared to the same period of 2022. The increase in the three-month period is due to additional staffing expense required to support the continued loan and deposit growth, including the staff at our new Roseville branch that opened in December 2022.
Occupancy expenses increased by $152,000 for the three-months ended March 31, 2023, as compared to the same period of 2022, mainly due to rent expense and general operating costs related to branch facilities, including the rent and overhead expenses related to our new Roseville branch that opened in December 2022.
Data processing fees increased by $53,000 for the three-month period ended March 31, 2023, as compared to the same period of 2022, primarily due to servicing costs on the growing number of loan and deposit accounts as well as upgrades to our online banking platform.
Federal Deposit Insurance Corporation (“FDIC”) and California Department of Financial Protection and Innovation (“DFPI”) regulatory assessments decreased by $66,000 for the three-months ended March 31, 2023, as compared to the same period in 2022. The initial base assessment rate for financial institutions varies based on the overall risk profile of the institution as defined by the FDIC and the Company’s risk profile has improved resulting in decreases in the assessment rate during 2023. The assessment rate remains at a relatively low level due to our strong credit quality, earnings and risk-based capital ratios. Management recognizes that assessments could increase further depending on deposit growth throughout the remainder of 2023, as the FDIC assessment rates are applied to average quarterly total liabilities as the primary basis.
Other expense decreased by $267,000 for the three-month period ended March 31, 2023, as compared to the same period in 2022, due to a reversal of $352,000 in undisbursed loan commitment loss provisions which was dictated credit quality factors within our CECL internal loan-risk model. Offsetting this reversal were increases in a variety of general operating expenses, which is expected given the expansion of the Company’s business portfolios.
Management anticipates that non-interest expense will continue to increase as the Company continues to grow. However, management remains committed to cost-control and efficiency, and expects to keep these increases to a minimum relative to growth.
Income Taxes
The Company recorded provisions for income taxes of $2,676,000 for the three-month period ended March 31, 2023, representing an increase of $2,041,000 compared to the provision recorded in the comparable period of 2022. The effective income tax rate on income from continuing operations was 22.5% for the three-months ended March 31, 2023, compared to 21.1% for the comparable period of 2022. These provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income, and adjusted for the effects of all permanent differences between income for tax and financial reporting purposes (such as earnings on qualified municipal securities, bank owned life insurance and certain tax-exempt loans). The disparity between the effective tax rates for the year-to-date period of 2023 as compared to 2022 is primarily due to tax credits from low-income housing projects as well as tax free-income on municipal securities and loans that comprised a larger proportion of pre-tax income in 2022 as compared to 2023.
On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which, among other things, implements a new 15% corporate alternative minimum tax for certain large corporations, a 1% excise tax on stock buybacks, and several tax incentives to promote clean energy and climate initiatives. These provisions became effective on January 1, 2023. Based on its analysis of the provisions, the Company does not expect this legislation to have a material impact on its consolidated financial statements.
Asset Quality
Non-performing assets consist of loans on non-accrual status, including loans restructured on non-accrual status, where the terms of repayment have been renegotiated resulting in a reduction or deferral of interest or principal, loans 90 days or more past due and still accruing interest and other real estate owned (“OREO”).
Loans are generally placed on non-accrual status when they become 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. The past due loans may or may not be adequately collateralized, but collection efforts are continuously pursued. Loans may be restructured by management when a borrower has experienced some changes in financial status, causing an inability to meet the original repayment terms, and where management believes the borrower will eventually overcome those circumstances and repay the loan in full. OREO consists of properties acquired by foreclosure or similar means and which management intends to offer for sale.
Non-accrual loans totaled $0 as of March 31, 2023 and December 31, 2022. At March 31, 2023 and December 31, 2022, there were no loan modifications pursuant to ASU 2022-02, and therefore there were no payment delinquencies on modified loans during the three-months ended March 31, 2023.
As of March 31, 2023 and December 31, 2022, there were no OREO properties, and there were no sales, acquisitions or fair value adjustments of OREO properties during the three-months ended March 31, 2023. During the second quarter of 2022, we sold the last remaining OREO that consisted of one property, a residential land property acquired through foreclosure that was written down to a zero balance because the public utilities have not been obtainable, therefore, rendering these land lots unmarketable at this time. That property was sold for the amount of property taxes owed to the county, therefore, we received no sales proceeds on the sale. There were no sales, acquisitions or fair value adjustments of OREO properties during the three-months ended March 31, 2022.
The following table presents information about the Bank’s non-performing assets, including asset quality ratios as of March 31, 2023 and December 31, 2022:
Non-Performing Assets
(in thousands) |
|
March 31, |
|
|
December 31, |
|
|
|
2023 |
|
|
2022 |
|
Loans in non-accrual status |
|
$ |
0 |
|
|
$ |
0 |
|
Loans past due 90 days or more and accruing |
|
|
0 |
|
|
|
0 |
|
Total non-performing loans |
|
|
0 |
|
|
|
0 |
|
Other real estate owned |
|
|
0 |
|
|
|
0 |
|
Total non-performing assets |
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
$ |
9,383 |
|
|
$ |
9,468 |
|
|
|
|
|
|
|
|
|
|
Asset quality ratios: |
|
|
|
|
|
|
|
|
Non-performing assets to total assets |
|
|
0.00 |
% |
|
|
0.00 |
% |
Non-performing loans to total loans |
|
|
0.00 |
% |
|
|
0.00 |
% |
Allowance for credit losses to total loans |
|
|
1.01 |
% |
|
|
1.03 |
% |
Allowance for credit losses to total non-performing loans |
|
NA |
|
|
NA |
|
Non-performing assets remained at $0 as of March 31, 2023 and December 31, 2022, due to strong credit quality within our loan portfolio.
Allowance for Credit Losses
Due to credit risk inherent in the lending business, the Company routinely sets aside allowances through charges to earnings. Such charges are not only made for the outstanding loan portfolio, but also for off-balance sheet items, such as commitments to extend credits or letters of credit. Charges for the outstanding loan portfolio have been credited to the allowance for credit losses, whereas charges for off-balance sheet items have been credited to the reserve for off-balance sheet items, which is presented as a component of other liabilities. The Company recorded a credit loss provision reversal of $460,000 during the three-months ended March 31, 2023, as compared to no provisions recorded during the same period of 2022.
The allowance for credit losses decreased by $85,000 to $9,383,000 as of March 31, 2023, as compared to $9,468,000 as of December 31, 2022, due to the reversal of $460,000 in credit loss provisions, a one-time CECL implementation increase of $346,000, and net loan recoveries of $29,000 during the first three months of 2023. These factors combined with the increase in the gross loan balance resulted in a decrease in the allowance for credit losses as a percentage of total loans to 1.01% as of March 31, 2023 from 1.03% as of December 31, 2022.
The Company will continue to monitor the adequacy of the allowance for credit losses and make additions to the allowance in accordance with the analysis referred to above. Because of uncertainties inherent in estimating the appropriate level of the allowance for credit losses, actual results may differ from management’s estimate of credit losses and the related allowance.
The Company makes provisions for credit losses when required to bring the total allowance for credit losses to a level deemed appropriate for the level of risk in the loan portfolio. At least quarterly, management conducts an assessment of the overall quality of the loan portfolio and general economic trends in the local market. The determination of the appropriate level for the allowance is based on that review, considering such factors as historical experience, the volume and type of lending conducted, the amount of and identified potential loss associated with specific non-performing loans, regulatory policies, general economic conditions, and other factors related to the collectability of loans in the portfolio.
Although management believes the allowance as of March 31, 2023 was adequate to absorb probable losses from any known and inherent risks in the portfolio, no assurance can be given that the adverse effect of current and future economic conditions on the Company’s service areas, or other variables, will not result in increased losses in the loan portfolio in the future.
Investment Activities
Investments are a key source of interest income. Management of the investment portfolio is set in accordance with strategies developed and overseen by the Company’s Investment Committee. Investment balances, including cash equivalents and interest-bearing deposits in other financial institutions, are subject to change over time based on the Company’s asset/liability funding needs and interest rate risk management objectives. The Company’s liquidity levels take into consideration anticipated future cash flows and all available sources of credits, and are maintained at levels management believes are appropriate to assure future flexibility in meeting anticipated funding needs.
Cash Equivalents
The Company holds federal funds sold, unpledged available-for-sale securities and salable government guaranteed loans to help meet liquidity requirements and provide temporary holdings until the funds can be otherwise deployed or invested. As of March 31, 2023, and December 31, 2022, the Company had $389,403,000 and $429,633,000, respectively, in cash and cash equivalents.
Investment Securities
Management of the investment securities portfolio focuses on providing an adequate level of liquidity and establishing an interest rate-sensitive position, while earning an adequate level of investment income without taking undue risk. Investment securities that the Company intends to hold until maturity are classified as held-to-maturity securities, and all other investment securities are classified as available-for-sale or equity securities. Currently, all of the investment securities are classified as available-for-sale except for one mutual fund classified as an equity security with a carrying value of $3,065,000 as of March 31, 2023. The carrying values of available-for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an after-tax basis as a component of other comprehensive income. The carrying values of equity securities are adjusted for unrealized gains or losses through noninterest income in the consolidated statement of income.
Management has evaluated the investment securities portfolio to determine if the impairment of any security in an unrealized loss position is temporary or other than temporary. The Company conducts a periodic review and evaluation of the securities portfolio to determine if the value of any security has declined below its carrying value. If such decline is determined to be other than temporary, the Company would adjust the carrying amount of the security by writing down the security to fair value through a charge to current period income or a charge to accumulated other comprehensive income depending on the nature of the impairment and managements intent or requirement to sell the security. Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due primarily to interest rate changes.
Deposits
Total deposits as of March 31, 2023 were $1,769,176,000, a $45,121,000 or 2.5% decrease from the deposit total of $1,814,297,000 as of December 31, 2022. Average deposits increased by $2,058,000 to $1,780,439,000 for the three-month period ended March 31, 2023 as compared to the same period in 2022. Management believes the Company attracted deposits due to the safety and soundness of the Bank and our focus on customer service.
Deposits Outstanding
|
|
March 31, |
|
|
December 31, |
|
|
Three Month Change |
|
(in thousands) |
|
2023 |
|
|
2022 |
|
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand |
|
$ |
1,188,719 |
|
|
$ |
1,202,321 |
|
|
$ |
(13,602 |
) |
|
|
(1.1% |
) |
MMDA |
|
|
389,307 |
|
|
|
405,797 |
|
|
|
(16,490 |
) |
|
|
(4.1% |
) |
Savings |
|
|
154,930 |
|
|
|
165,994 |
|
|
|
(11,064 |
) |
|
|
(6.7% |
) |
Time < $250K |
|
|
20,042 |
|
|
|
24,712 |
|
|
|
(4,670 |
) |
|
|
(18.9% |
) |
Time > $250K |
|
|
16,178 |
|
|
|
15,473 |
|
|
|
705 |
|
|
|
4.6 |
% |
|
|
$ |
1,769,176 |
|
|
$ |
1,814,297 |
|
|
$ |
(45,121 |
) |
|
|
(2.5% |
) |
Because the Company’s client base is comprised primarily of commercial and industrial accounts, individual account balances are generally higher than those of consumer-oriented banks. Four clients carry deposit balances of more than 1% of total deposits, but none had a deposit balance of more than 3% of total deposits as of March 31, 2023. Management believes that the Company’s funding concentration risk is not significant and is mitigated by the ample sources of funds the Bank has access to.
We have experienced nominal negative impacts on liquidity resulting from the recent events in the banking industry. The deposit decrease during the first quarter of 2023 was related to normal seasonal activity and some movement to higher deposit rates offered by other financial institutions. See “Liquidity and Capital Resources” section below for more information.
Since the deposit growth strategy emphasizes core deposit growth, the Company has avoided relying on brokered deposits as a consistent source of funds. The Company had no brokered deposits as of March 31, 2023 and December 31, 2022.
Borrowings
Although deposits are the primary source of funds for lending and investment activities and for general business purposes, the Company may obtain advances from the Federal Home Loan Bank (“FHLB”) as an alternative to retail deposit funds. As of March 31, 2023 and December 31, 2022, there were no outstanding FHLB advances or borrowings of any kind, as the Company continues to rely on deposit growth as its primary source of funding. See “Liquidity and Capital Resources” below for the details on the FHLB borrowings program.
Capital Ratios
The Company is regulated by the Federal Reserve Bank (“FRB”) and is subject to the securities registration and public reporting regulations of the Securities and Exchange Commission. As a California state-chartered bank, the Company’s banking subsidiary is subject to primary supervision, examination and regulation by the DFPI and the Federal Reserve Board. The Federal Reserve Board is the primary federal regulator of state member banks. The Bank is also subject to regulation by the FDIC, which insures the Bank’s deposits as permitted by law. Management is not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on the Company’s or Bank’s liquidity, capital resources, or operations.
The U.S. Basel III rules contain capital standards regarding the composition of capital, minimum capital ratios and counter-party credit risk capital requirements. The Basel III rules also include a definition of common equity Tier 1 capital and require that certain levels of such common equity Tier 1 capital be maintained. The rules also include a capital conservation buffer, which imposes a common equity requirement above the new minimum that can be depleted under stress and could result in restrictions on capital distributions and discretionary bonuses under certain circumstances, as well as a new standardized approach for calculating risk-weighted assets. Under the Basel III rules, we must maintain a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, a ratio of Tier 1 capital to risk-weighted assets of at least 6%, a ratio of total capital to risk-weighted assets of at least 8% and a minimum Tier 1 leverage ratio of 4.0%. In addition to the preceding requirements, all financial institutions subject to the Rules, including both the Company and the Bank, are required to establish a "conservation buffer," consisting of common equity Tier 1 capital, which is at least 2.5% above each of the preceding common equity Tier 1 capital ratio, the Tier 1 risk-based ratio and the total risk-based ratio. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers.
Failure to meet minimum capital requirements can trigger regulatory actions that could have a material adverse effect on the Company’s financial statements and operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that rely on quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The following tables present a comparison of our actual capital ratios to the minimum required ratios as of the dates indicated:
(in thousands) |
|
|
|
|
|
|
|
|
|
Regulatory |
|
|
Actual |
|
|
Minimum |
Capital ratios for Bank: |
|
Amount |
|
|
Ratio |
|
|
Amount |
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to Risk- Weighted Assets) |
|
$ |
170,896 |
|
|
|
13.2 |
% |
|
$ |
136,418 |
|
>10.5% |
Tier I capital (to Risk- Weighted Assets) |
|
$ |
160,772 |
|
|
|
12.4 |
% |
|
$ |
110,433 |
|
>8.5% |
Common Equity Tier 1 Capital (to Risk Weighted Assets) |
|
$ |
160,772 |
|
|
|
12.4 |
% |
|
$ |
90,945 |
|
>7.0% |
Tier I capital (to Average Assets) |
|
$ |
160,772 |
|
|
|
8.1 |
% |
|
$ |
79,077 |
|
>4.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to Risk- Weighted Assets) |
|
$ |
163,593 |
|
|
|
12.4 |
% |
|
$ |
138,578 |
|
>10.5% |
Tier I capital (to Risk- Weighted Assets) |
|
$ |
153,579 |
|
|
|
11.6 |
% |
|
$ |
112,182 |
|
>8.5% |
Common Equity Tier 1 Capital (to Risk Weighted Assets) |
|
$ |
153,579 |
|
|
|
11.6 |
% |
|
$ |
92,386 |
|
>7.0% |
Tier I capital (to Average Assets) |
|
$ |
153,579 |
|
|
|
7.6 |
% |
|
$ |
81,286 |
|
>4.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital ratios for the Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to Risk- Weighted Assets) |
|
$ |
171,184 |
|
|
|
13.2 |
% |
|
$ |
136,434 |
|
>10.5% |
Tier I capital (to Risk- Weighted Assets) |
|
$ |
161,060 |
|
|
|
12.4 |
% |
|
$ |
110,447 |
|
>8.5% |
Common Equity Tier 1 Capital (to Risk Weighted Assets) |
|
$ |
161,060 |
|
|
|
12.4 |
% |
|
$ |
90,956 |
|
>7.0% |
Tier I capital (to Average Assets) |
|
$ |
161,060 |
|
|
|
8.1 |
% |
|
$ |
79,082 |
|
>4.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to Risk- Weighted Assets) |
|
$ |
163,810 |
|
|
|
12.4 |
% |
|
$ |
138,584 |
|
>10.5% |
Tier I capital (to Risk- Weighted Assets) |
|
$ |
153,796 |
|
|
|
11.7 |
% |
|
$ |
112,187 |
|
>8.5% |
Common Equity Tier 1 Capital (to Risk Weighted Assets) |
|
$ |
153,796 |
|
|
|
11.7 |
% |
|
$ |
92,389 |
|
>7.0% |
Tier I capital (to Average Assets) |
|
$ |
153,796 |
|
|
|
7.6 |
% |
|
$ |
81,289 |
|
>4.0% |
Liquidity and Capital Resources
Material Cash Commitments
The following tables summarizes short- and long-term material cash requirements as of March 31, 2023, which we believe that we will be able to fund these obligations through cash generated from our operations and available alternative sources of funds (dollars in thousands):
|
|
Less than 1 year |
|
|
More than 1 year |
|
|
Total |
|
Operating lease obligations |
|
$ |
1,459 |
|
|
$ |
7,706 |
|
|
$ |
9,165 |
|
Supplemental retirement plans |
|
|
85 |
|
|
|
11314 |
|
|
|
11,399 |
|
Time deposit maturities |
|
|
35,104 |
|
|
|
1,116 |
|
|
|
36,220 |
|
Total |
|
$ |
36,648 |
|
|
$ |
20,136 |
|
|
$ |
56,784 |
|
Liquidity Management
Since the Company is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank. Under the California Financial Code, payment of a dividend from the Bank to the Company is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s undistributed net profits from the previous three fiscal years. The primary uses of funds for the Company are stockholder dividends, investment in the Bank and ordinary operating expenses. Management anticipates that there will be sufficient earnings at the Bank level to provide dividends to the Company to meet its funding requirements for the next twelve months.
Maintenance of adequate liquidity requires that sufficient resources be available at all times to meet the Company’s cash flow requirements. Liquidity in a banking institution is required primarily to provide for deposit withdrawals and the credit needs of its customers and to take advantage of investment opportunities as they arise. Liquidity management involves the ability to convert assets into cash or cash equivalents without incurring significant loss, and to raise cash or maintain funds without incurring excessive additional cost. For this purpose, the Company maintains a portion of funds in cash and cash equivalents, salable government guaranteed loans and securities available for sale. The Company obtains funds from the repayment and maturity of loans as well as deposit inflows, investment security maturities and paydowns, Federal funds purchased, FHLB advances, and other borrowings. The Company’s primary use of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificate of deposits, repayment of borrowings and dividends to common stockholders. The Company’s liquid assets as of March 31, 2023 were $669.7 million compared to $755.2 million as of December 31, 2022. The Company’s liquidity level measured as the percentage of liquid assets to total assets was 34.5% as of March 31, 2023, compared to 37.9% as of December 31, 2022. Liquid assets decreased during the first three months of 2023, mainly due to the decrease in deposits, loan growth, and increase in public deposit balances which require investment securities to be pledged as collateral. Management anticipates that cash and cash equivalents on hand and other sources of funds will provide adequate liquidity for operating, investing and financing needs and regulatory liquidity requirements for at least the next twelve months. Management monitors the Company’s liquidity position daily, balancing loan funding/payments with changes in deposit activity and overnight investments.
As a secondary source of liquidity, the Company relies on advances from the FHLB to supplement the supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB are typically secured by a portion of the loan portfolio. The FHLB determines limitations on the amount of advances by assigning a percentage to each eligible loan category that will count towards the borrowing capacity. As of March 31, 2023, the Company’s borrowing capacity from the FHLB was approximately $325 million and there were no outstanding advances. The Company also maintains 2 lines of credit with correspondent banks to purchase up to $70 million in federal funds, for which there were no advances as of March 31, 2023.
Off-Balance Sheet Arrangements
During the ordinary course of business, the Company provides various forms of credit lines to meet the financing needs of customers. These commitments, which represent a credit risk to us, are not represented in any form on the balance sheets.
As of March 31, 2023 and December 31, 2022, the Company had commitments to extend credit of $200.8 million and $212.4 million, respectively, which includes obligations under letters of credit of $3.1 million and $3.1 million, respectively.
The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will be used.